United States: IRS Confirms Deductibility Of Contributions To Domestic Disregarded Entities

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).

 4 Information Letter 2010-52 (March 15, 2010).

 5 See Treas. Reg. § 301.7701-2(c)(2).

 6 Cf., e.g., Treas. Reg. § 1.1441-1(b)(2)(iii)(B).

Marcus S. Owens, mowens@capdale.com, 202.862.5020

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.