August 27, 2012
Help From the IRS - Direct LLC Gifts Approved!
For a while now, many of us have thought that a donor should get a charitable deduction for a gift made directly to a single member LLC (SMLLC) that is wholly owned by an organization eligible to receive deductible contributions. After all, the tax law treats the SMLLC as a disregarded entity and attributes its tax attributes up to the single member. Why shouldn't the contribution be deemed made to the parent?
While this is the logical result, the IRS has heretofore been hesistant to confirm it in writing. This has been a source of some consternation for charities, especially those faced with the prospect of high value commercial real estate gifts. Those charities certainly would love to take those gifts directly into a SMLLC and stay out of the chain of title, but donors are understandibly hesitant when their tax advisors say, "Well, you ought to get a deduction... but we can't be sure."
Happily, we now have IRS Notice 2012-52 (July 31, 2012), which states that a gift to a domestic SMLLC will be treated as "a charitable contribution to a branch or division of the U.S. charity." In an extra present, the IRS indicates that the Notice is effective for "charitable contributions made on or after July 31, 2012. However, taxpayers may rely on this notice prior to its effective date for taxable years for which the period of limitation on refund or credit under § 6511 has not expired."
One note of interest in the Notice is the discussion of substantiation. The charity/member is treated as the donee organization for purposes of the substantiation rules under Section 170(f), including the written acknowledgement rules. This means that the charity/member is supposed to send the "you've received no goods or services" letter to the donor. The IRS goes on to state: "[t]o avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity." This got me to thinking - part of the reason for using the SMLLC in the first place is to get the charity itself out of the chain of title for liability protection purposes. Would the IRS accept the following acknowledgement on the letterhead of the SMLLC?
Thank you for your donation of expensive commercial real estate that formerly held a dry cleaner and a gas station. You've received no goods and services in return for your donation. Please note that for federal income tax purposes, your donation is treated as having been made directly to Charity. LLC is a a single member limited liability company that is wholly owned by Charity and is treated as a disregarded entity for federal tax purposes. Consult your tax advisor for further details.
Charity, in its capacity as the sole member of LLC
From the language of the Notice, I'm not sure that would acceptable - would it need to be on the Charity's letterhead? Signed by Charity in its individual capacity? I'd be curious to know how others would handle this.
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While this clarifies some cases; especially for individual donors. It is not clear if this ruling has any affect upon foundation distribution standards. Would a grant to support an LLC require expenditure responsibility? What if the LLC is wholly owned by multiple 501 (c) (3) public charities? The tax rules are essentially the same for multiple owners of an LLC and for single owners. And very often, an LLC is used for projects that are cooperative efforts of multiple charities.
Posted by: Ken Ristine | Aug 31, 2012 9:01:45 AM