Monday, October 29, 2012

IRS Confirms Deductibility of Donations to Certain Charity Owned LLCs

In a long awaited pronouncement, the IRS in Notice 2012-52 confirmed what tax-exempt practitioners had expected for many years: that a donation to a single member LLC that is wholly owned by a U.S. charity, where the LLC is acting as a charitable branch or division of the U.S. charity and conducting charitable activities, are tax-deductible as if the donation were made to the U.S. charity directly. Many charities use single member LLCs to isolate its activities that may expose the parent/single member owner to increased liability. For example, real estate owned by a charity is often held in a single member LLC. However, single member LLCs are also sometimes used to expand the scope of charitable services offered or to establish charitable operations in locations outside the charity’s original service area. In these situations, the LLC is really an extension of the parent/single member charity and operates much like a branch or division of the charity. Donors often develop loyalty to and wish to donate directly to the local LLC rather than to the parent charity. For many years the IRS avoided issuing guidance on whether donations to such LLCs were deductible and as a result, conservative practitioners advised donors and charities alike that, to be assured of a deduction, donations had to be made directly to the charity that was exempt under Section 501(c)(3) rather than through any single member LLC, even where the LLC was wholly owned and operated by the charity. With the issuance of this Notice, however, donations can be made directly to the LLC, as a gift to a branch or division of the charity, provided the LLC satisfies the other requirements of deductibility for charities (i.e., it is organized and operated in the U.S., it is organized and operated exclusively for charitable purposes, there is no private inurement of the earnings and it satisfies the lobbying and political campaign restrictions for 501(c)(3) organizations). The Notice states that the U.S. charity is the donee for substantiation and disclosure purposes, and the IRS encourages the charity to disclose in the acknowledgment or another statement that the LLC is wholly owned by the U.S. charity and treated by the charity as a disregarded entity (that is, the charity reports all of the LLC’s activities on its information return and does not treat it as a separate taxpayer). The Notice is effective for contributions made on or after July 31, 2012, but can also be relied on by taxpayers for prior taxable years where the statute of limitations has not yet expired (that is for prior year gifts).