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Contributions To Single-Member LLCs Of Charitable Entities
August 28, 2012
IRS Notice 2012-52 Explained
There is good tax news for U.S. charitable organizations that are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. On July 31, 2012, the Internal Revenue Service released IRS Notice 2012-52, providing long-awaited confirmation that a charitable contribution to a limited liability company that is (1) wholly-owned by a U.S. Section 501(c)(3) charitable organization, and (2) classified as a disregarded entity for federal income tax purposes (a “single-member LLC” or “SMLLC”), will be treated as a contribution to an unincorporated branch or division of the charitable organization. In other words, a donation to the SMLLC will be treated, for federal income tax purposes, as a donation directly to the charitable organization.
In Notice 2012-52 the IRS has advised that, in to avoid unnecessary inquiries by the IRS, a 501(c)(3) charitable organization that owns an SMLLC should disclose, either in the organization’s written acknowledgment of charitable donations to the SMLLC or in another statement, that the SMLLC is wholly-owned by the charitable organization and is treated by the charity as a disregarded entity for federal income tax purposes. Section 170 of the Internal Revenue Code, which sets forth the rules governing the deductibility for federal income tax purposes of contributions to 501(c)(3) charitable organizations, will apply to a contribution made to the SMLLC as though the contribution had been made directly to the charitable organization.
IRS Notice 2012-52 may provide additional flexibility to any 501(c)(3) charitable organization that is seeking greater legal liability protection by allowing the organization to segregate a particular activity in a single-member LLC owned by the charitable organization. For example, a charitable organization that owns and operates both a school and a summer camp may be able to have the summer camp owned by a separate SMLLC in order to shield each activity from the liabilities of the other.
Despite the favorable federal income tax treatment, described above, of an SMLLC owned by a 501(c)(3) charitable organization, it is important to note that some states consider SMLLCs that are disregarded for federal income tax purposes to be “real” entities separate from their owners (and not disregarded) for purposes of state income or other taxes. Proper tax planning should be sought to ensure all tax implications are considered.
In addition, although not explicitly stated in Notice 2012-52, the mere existence of Notice 2012-52 presumes that the activities conducted by the SMLLC would be treated as conducted directly by the charitable organization that owns the SMLLC. As such, any analysis of whether the charitable organization is itself engaged in the conduct of an unrelated trade or business generating unrelated business taxable income (“UBTI”) should be made as if the charitable organization were directly engaged in the conduct of any trade or business conducted by the SMLLC.
If you have any questions or need additional information regarding this, please contact Ira Deitsch.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2012 Posternak Blankstein & Lund LLP. All rights reserved.