Charities and donors now have a new option for structuring charitable gifts. The structure, approved in recent IRS guidance, will be particularly useful for gifts of assets such as real property that may have liabilities associated with them.
A charity may be happy to receive a gift of real property, but it generally will not wish to accept the property directly because of the risk of environmental liabilities. A simple way to address this risk is for the charity to form a single-member limited liability company (LLC) and have the donor make the gift to the LLC. This structure has rarely been used, however, because of questions regarding the donor’s ability to claim a charitable contribution deduction for the gift to the LLC. The IRS declined for more than a decade to confirm that a donor to a charity’s LLC could take a deduction.
Charities and donors instead addressed the needs for both protection from liability and certainty regarding the deduction through a variety of work-arounds. For example, the donor could contribute the property to an LLC and then contribute the interest in the LLC to the charity so that the charity would never hold the property directly. This required the donor to engage in two transactions to make the gift, however, and could raise questions as to whether the deduction for the contribution of the LLC interest is the same as for the real property itself.
New IRS guidance confirms that a donor may deduct a gift to a charity’s LLC. IRS Notice 2012-52 provides that the donor may deduct a contribution made to a single-member LLC in which the sole member is a domestic charity (i.e., one formed in the U.S.) that is eligible to receive deductible charitable contributions. The IRS will treat the gift as a contribution to a branch or division of the charity. The LLC must be a “disregarded entity,” which means that it must not make an election to be treated as a corporation for federal tax purposes, and the LLC must not have more than one member.
All the usual requirements for claiming a charitable contribution deduction will apply to such gifts, as well as the normal annual limits on deductions. The donor must obtain written substantiation of the contribution, and in the case of gifts of property will generally need a qualified appraisal.
The charity should provide the written acknowledgement to the donor in the charity’s name, rather than the LLC’s name. The Notice encourages the charity to explain in the written acknowledgement that the LLC is owned by the charity and that it is a disregarded entity for tax purposes, in order to avoid “unnecessary inquiries” by the IRS.
The single-member LLC structure offers charities a streamlined approach to accepting contributions and grants in contexts beyond gifts of real estate. Under guidance issued in 2010, the IRS will treat a grant from a private foundation to a single-member LLC in which the sole member is a charity as a grant to the charity. As a result, if the charity is a qualified foundation grant recipient, then the LLC will be as well.
It may be more attractive for a charity to create a single-member LLC rather than a separate nonprofit corporation to engage in fundraising activities or to hold investment or endowment assets. The LLC structure will often be more cost-effective and efficient than forming a new nonprofit corporation, because the LLC will not be required to apply to the IRS for Section 501(c)(3) status. The new structure will likely have wide-ranging applications for charities.