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On July 31, the IRS announced in
Notice 2012-52 that donors may claim charitable deductions for
their contributions to domestic disregarded LLCs that are wholly
owned and controlled by U.S. charities.
This guidance provides welcome comfort to donors and the
charities they support. Interestingly, though, the Notice
confirms deductibility only for contributions to domestic
disregarded LLCs. The Service remains silent on the issue
with respect to disregarded entities organized under foreign law,
leaving the treatment of those entities to be determined under the
existing regulations.
Background
The regulations regarding business entity classification under
section 7701 of the Code provide that a domestic single-member LLC
is presumed to be a disregarded entity unless it makes an
affirmative election to be treated separately from its
owner.1 Many foreign single-member entities are
eligible for the same treatment (though in many cases this
requires an affirmative election).2
The IRS first interpreted these rules in the exempt-organization
context in
Announcement 99-102, confirming that if the sole member of
an LLC is an organization exempt from tax under section 501(c)(3)
of the Code, then the activities of the disregarded entity are
treated as if conducted through a branch or division of the single
owner.3 Thus, any assets owned or income
received by the LLC are treated as if owned or received by the
exempt member, and the LLC's finances and operations
must be reported on the charity member's annual Form 990.
Similarly, a private foundation's grant to a disregarded,
single-member LLC that is wholly owned by a public charity is
treated as a grant to the public
charity.4
Effect of the Notice
While prior guidance gave comfort to charities and private
foundations, the IRS declined to address the deductibility of
individual or corporate gifts to charity-owned LLCs. The
applicable regulations treat disregarded entities (regardless of
their country of organization) as their owners for virtually
all federal tax purposes, and seem equally applicable for purposes
of section 170 as for other purposes already ruled upon by the
Service.5 However, the Service's refusal to
confirm that conclusion had created some uncertainty that hindered
charitable planning, particularly with respect to contributions of
real property and other assets commonly held through
special-purpose limited liability vehicles. The Notice
confirms that the straightforward application of the
disregarded entity regulations is correct for domestic disregarded
entities—those "created or organized" under
U.S. law, as the U.S. parent charities must be to receive
deductible contributions. However, it continues the
Service's silence on the parallel conclusion for foreign
disregarded entities. This distinction is remarkable because
normally the effect of disregarding an entity is to make its
parent's foreign or domestic status, rather than its own,
controlling for tax purposes.6
For foreign disregarded entities, nothing in Notice 2012-52
alters the Service's position of silence as to whether
contributions are deductible under section 170. Thus, on
balance the notice provides good news, providing a helpful
additional confirmation of deductibility in the domestic context
and leaving the treatment of contributions to foreign disregarded
entities to be determined under the existing regulations, as
before. Whether the Service will provide further
guidance with respect to contributions to foreign disregarded
entities remains to be seen.
Footnotes
1 Id. § 301.7701-3(b)(1); see also explanation
of default rules in the Instructions to IRS Form 8832, Entity
Classification Election.
2 See Treas. Reg. §§
301.7701-3(b)(2).
3 I.R.S. Announcement 99-102, 1999-43 I.R.B. 545
(Oct. 25, 1999). See also PLRs 200134025, 200150027,
and 200249014 (holding that a single-member LLC owned by a
charity is not required to file a separate exemption
application).
Douglas N. Varley, dvarley@capdale.com, 202.862.7818
Diara M. Holmes, dholmes@capdale.com, 202.862.7829
Michael W. Durham, mdurham@capdale.com, 202.862.5031
William M. Klimon, wklimon@capdale.com, 202.862.5022
Sharon W. Nokes, snokes@capdale.com, 202.862.7839
This article is designed to give general information on the
developments covered, not to serve as legal advice related to
specific situations or as a legal opinion. Counsel should be
consulted for legal advice.
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