Tuesday, November 9, 2021
Last month the IRS issued Notice 2021-56, providing the first formal guidance regarding under what conditions limited liability companies can qualify for tax exemption under section 501(a) because they are described in section 501(c)(3). The guidance is generally consistent with previous, informal guidance, found in now twenty year old continuing professional education articles (first published in the 2000 EO CPE text and updated in the 2001 EO CPE text).
More specifically, the Notice imposes the following requirements:
3.02 Required provisions of LLC articles of organization and operating agreement
Except as set forth in section 3.04 of this notice, the IRS will issue a determination letter recognizing an LLC as exempt from tax and described in section 501(c)(3) only if both the LLC’s articles of organization and its operating agreement each include:
(1) Provisions requiring that each member of the LLC be either (i) an organization described in section 501(c)(3) and exempt from taxation under section 501(a) or (ii) a governmental unit described in section 170(c)(1) (or wholly-owned instrumentality of such a governmental unit).
(2) Express charitable purposes and charitable dissolution provisions in compliance with § 1.501(c)(3)-1(b)(1) and (4).
(3) The express chapter 42 compliance provisions described in section 508(e)(1), if the LLC is a private foundation.
(4) An acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its section 501(c)(3) status) in the event that one or more members cease to be section 501(c)(3) organizations or governmental units (or wholly-owned instrumentalities thereof).
3.03 Representation on enforceability
The LLC must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable.
3.04 States with limitations on articles provisions
If an LLC is formed under a state LLC law that prohibits the addition of provisions to articles of organization other than certain specific provisions required by the state LLC law, the requirements of section 3.02 of this notice will be deemed satisfied if the LLC’s operating agreement includes the provisions set forth in section 3.02 of this notice and if the articles of organization and operating agreement do not include any inconsistent provisions.
The Notice also asks for public comments on a variety of issues, mostly relating to the effects of variations in state laws relating to limited liability companies. The deadline for comments in February 6, 2022.
The Notice does not address what conditions would apply to an LLC seeking to qualify for exemption by being described in other paragraphs of section 501(c).