After more than a decade of uncertainty, the IRS has finally come around to ruling that charitable donations made to the wholly owned and controlled limited liability company (“LLC”) of a single qualified U.S. charity under Section 170(c)(2) of the Internal Revenue Code (“IRC”) will qualify under IRC Section 170 for the charitable income tax deduction. (Notice 2012-52.) Previously, the IRS had cast doubt on that issue by publicly stating that it was not certain that was the case.
Since many charities have come to use wholly owned LLC entities as part of their overall structure, this recent clarification should be welcomed by many. Advisers frequently recommend formation of wholly owned LLC entities for charities to hold donated real estate or other assets. Real estate is a particularly attractive asset to hold in a separate LLC, since that structure can limit liabilities, including environmental liabilities, from impacting other assets owned by the charity. With the notice, this structure becomes easier to accomplish, because contributions of real property (or other assets) can be made directly to a charity-owned LLC without compromising the donor’s charitable deduction.
The notice does not impact any other requirements for such contributions, including the need for donors to obtain a “qualified appraisal” (if applicable), the need for the charity to provide a contemporaneous written acknowledgment of the donation (which should reference the parent charity), or the need for the donor to meet all the other requirements of Section 170. Under the notice, the parent charity will be considered the donee organization for purposes of the substantiation and disclosure requirements of IRC Sections 170(f) and 6115, and the limitations of IRC Section 170(b) will apply as though the gift were made to the U.S. charity.
The notice is effective for contributions made on or after July 31, 2012. But taxpayers may rely on the notice before its effective date for taxable years for which the period of limitation on refund or credit under IRC Section 6511 has not expired.