The IRS has finally confirmed that a contribution to a disregarded single member LLC ("SMLLC") wholly owned by a U.S. charity that otherwise qualifies under Section 170 of the Internal Revenue Code will be treated as a charitable contribution to a branch or division of the charity. Notice 2012-52 (below) makes clear that a donor to such an LLC may potentially take a deduction for the gift. This guidance is effective for contributions made on or after July 31, 2012 but may be relied on by donors for taxable years for which the statute of limitations for refunds or credits under IRC Section 6511 has not expired.
There are several reasons why a charity might want to form a disregarded SMLLC including to house a set of exempt activities with different management needs and/or a different risk profile from the charity without having to file an application for exempt status (Form 1023) or separate annual information returns (Forms 990). Keeping possible liabilities resulting from the activities of the SMLLC separate from the charity may be an important risk management strategy behind the creation of such structure.
Charitable Contributions to Domestic Disregarded Entities
This notice provides guidance on the deductibility of contributions to domestic single-member limited liability companies that are wholly owned and controlled by organizations described in § 170(c)(2) of the Internal Revenue Code (U.S. charities) and for federal tax purposes are disregarded as entities separate from their owners under § 301.7701-2(c)(2)(i) of the Procedure and Administration Regulations (SMLLCs).
Section 170(a) allows as a deduction any charitable contribution, as defined in § 170(c). Section 170(c)(2) in part defines the term "charitable contribution" as a contribution or gift to or for the use of a corporation, trust, or community chest, fund, or foundation–
(A) Created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States;
(B) Organized and operated exclusively for specified purposes, including religious, charitable, scientific, literary or educational purposes;
(C) No part of the net earnings of which inures to the benefit of any private shareholder or individual; and
(D) Which is not disqualified for tax exemption under § 501(c)(3) by reason of attempting to influence legislation or participating in a political campaign.
Section 170(b) prescribes limitations on the maximum amount deductible as a charitable contribution.
Generally, a business entity that has a single owner and is not a corporation under § 301.7701-2(b) is disregarded for federal tax purposes as an entity separate from its owner (disregarded entity). See § 301.7701-2(c)(2)(i). Section 301.7701-2(a) provides that “if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.” A business entity (including a disregarded entity) is domestic if it is created or organized within the United States, or under the law of the United States or of any state. See § 301.7701-5(a). A U.S. charity that wholly owns a disregarded entity must treat the operations and finances of the disregarded entity as its own for tax and information reporting purposes. See Ann. 99- 102, 1999-2 C.B. 545. However, for employment and certain excise tax purposes, an entity that is disregarded as separate from its owner for any purpose under § 301.7701- 2 is treated as an entity separate from its owner. See § 301.7701-2(c)(2)(iv) and (v).
CONTRIBUTIONS TO DOMESTIC SMLLCs
If all other requirements of § 170 are met, the Internal Revenue Service will treat a contribution to a disregarded SMLLC that was created or organized in or under the law of the United States, a United States possession, a state, or the District of Columbia, and is wholly owned and controlled by a U.S. charity, as a charitable contribution to a branch or division of the U.S. charity. The U.S. charity is the donee organization for purposes of the substantiation and disclosure required by §§ 170(f) and 6115. To 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. The limitations of § 170(b) apply as though the gift were made to the U.S. charity.
This 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.
The principal author of this notice is Susan J. Kassell of the Office of the Associate Chief Counsel (Income Tax & Accounting). For further information concerning this notice, contact Ms. Kassell at (202) 622-5020 (not a toll-free call).
Additional IRS Resources
Limited Liability Companies as Exempt Organizations Update, 2001 EO CPE Text
Limited Liability Companies as Exempt Organizations, 2000 EO CPE Text
Limited Liability Company Reference Guide Sheet
Instructions for Limited Liability Company Reference Guide Sheet