U.S. charities often form a single-member limited liability company (SMLLC) that is wholly owned and controlled by the charity and can otherwise be disregarded for federal income tax purposes. In Notice 2012-52, the IRS issued welcome news when it explained that contributions to disregarded SMLLCs will be treated as if made directly to the U.S. charity, so long as the charity is one as defined in Section 170(c)(2) of the Internal Revenue Code.
Charities prefer to use SMLLCs for a variety of purposes. An example of such a purpose is to accept a contribution of real property that may come with unexpected liabilities. The charity can protect its other assets from those liabilities by creating a SMLLC solely for the purpose of receiving the contribution and owning the real property. Charities can also use SMLLCs to operate a separate business activity of the charity that may carry unique liability.
Until now, the IRS has refused to rule on whether contributions to a SMLLC of a U.S. charity are deductible as charitable contributions. In Notice 2012-52 the IRS ruled the following:
If all other requirements of § 170 are met, the Internal Revenue Service will treat a contribution to a disregarded SMLLC that was created or organized in or under the law of the United States, a United States possession, a state, or the District of Columbia, and is wholly owned and controlled by a U.S. charity, as a charitable contribution to a branch or division of the U.S. charity.
The charity must still provide any required substantiation for the contribution. The IRS recommends that, on the substantiation of the contribution provided to the donor, the charity indicate the contribution was to a SMLLC that is wholly owned by the charity.
The Notice is effective for contributions made on or after July 31, 2012, but taxpayers can apply it to tax years beginning before July 31, 2012, but only those for which the statute of limitations limitation period under Section 6511 has not expired. A full version of the Notice can be read at Notice 2012-52.