Several years ago, the IRS issued Notice 2012-52, 2012-35 IRB 317 which provides that contributions made to a domestic limited liability company (an “LLC”) that is wholly owned by a domestic charity are deductible assuming all of the other requirements of IRC Section 170 are met. Before this Notice was issued, it was uncertain whether contributions to such entities were deductible under IRC Section 170 because the IRS had refused to rule that a contribution made to a single-member LLC owned by an IRC Section 501(c)(3) organization/charity would qualify for a charitable deduction even though logic indicated that such a contribution should clearly qualify. For federal tax purposes, a single-member LLC is disregarded as an entity and treated as a division of its single member. Therefore, it seemed logical that a contribution to a single-member LLC wholly owned by a charity would be treated as a contribution to that charity and therefore, would be deductible under IRC Section 170.
Now that the IRS has clarified the deductibility of contributions to an LLC wholly owned by a charity, charities may start using single-member LLCs as a planning tool for potential contributions. The planning opportunity that most readily comes to mind involves a prospective donor who wishes to contribute real estate to a charity. In this case, the recipient-charity likely will not want to directly own the real estate due to the associated risks and liabilities of owning real estate. Due to the issuance of Notice 2012-52, the charity may now form an LLC where the charity is the sole member to receive the donation of the real estate and any other assets related to the real estate. By having the LLC hold the real estate, the charity’s assets should not be exposed to any potential liability that may subsequently arise from the real estate; only the LLC’s assets should be exposed to such liability. As discussed above, the single-member LLC will be disregarded and treated as a division of the charity for federal tax purposes, and therefore, the LLC will not have to apply for a separate tax-exemption and its activities will be reported by the charity on its Form 990 Return.
The use of a single-member LLC is a good planning tool for charities in many different situations but it is especially useful for those charities with prospective donors of real estate. The use of a single-member LLC will allow the donor to deduct his real estate contribution while limiting the charity’s risks and liabilities associated with holding that real estate.