IRS Confirms that Contributions Directly to a Single Member LLC Wholly Owned by an Exempt Organization Are Deductible

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By David I. Kempler, Esq. and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC

On July 31, 2012, the IRS issued Notice 2012-52, which confirmed that a charitable contribution to a single member limited liability company (SMLLC) that is wholly owned by an organization exempt from income tax under §170(c)(2), and classified as a disregarded entity for federal income tax purposes, will be treated as a contribution to a branch or division of the exempt organization. Therefore, a contribution made to an SMLLC will be deductible under §170(a) to the same extent as a contribution made directly to its sole member, the exempt organization. While the IRS had previously recognized in Announcement 99-102 that an SMLLC could be disregarded and treated as part of an exempt organization for purposes of reporting on Form 990, Return of Organization Exempt From Income Tax, and other income tax issues, this Notice cleared up uncertainty regarding donations made directly to the SMLLC.

Generally, under Regs. §301.7701-2(c)(2)(i), a business entity that has a single owner and does not elect to be treated as a corporation under Regs. §301.7701-2(b) is disregarded for federal tax purposes as an entity separate from its owner. Regs. §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." Announcement 99-102 clarified that 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. However, under Regs. §301.7701-2(c)(2)(iv) and (v), for employment and certain excise tax purposes, the disregarded entity is treated as an entity separate from its owner.

The Notice provided that it was effective for contributions made on or after July 31, 2012, but that it could also be relied on by donors for taxable years for which the statute of limitations for refund or credit were still open. To avoid unnecessary IRS inquiries into the charitable acknowledgments issued by an SMLLC, the IRS encouraged exempt organizations to disclose in that acknowledgement that the SMLLC is wholly owned by its parent charitable organization and is treated by such organization as a disregarded entity.

Exempt organizations may elect to form an SMLLC in order to isolate risks within a separate legal entity, while avoiding the need to file a separate Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or file a separate Form 990. For example, an exempt organization may want to hold a piece of real property in an SMLLC in order to isolate environmental or other business liability. By clarifying that a charitable deduction will be available for direct contributions to the SMLLC, the Notice eliminated any need to make the contribution to the parent exempt organization for contribution to the SMLLC. This is particularly beneficial with respect to donations of real property where a donation to the parent exempt organization would put that organization in the chain of title.

For more information, in the Tax Management Portfolios, see Kirschten & Freitag, 863 T.M., Charitable Contributions: Income Tax Aspects, Borden, 480 T.M., Real Estate Transactions by Tax-Exempt Entities, and in Tax Practice Series, see ¶2390, Charitable Contributions: Requirements for Deduction. 

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