The IRS made it clear in Notice 2012-52 that a charitable contribution made by a donor to a disregarded single member limited liability company (SMLLC) owned 100% by a charity or 501(c)(3) organization, would be treated as a contribution to the charity. While the IRS had previously recognized in Announcement 99-102 that an SMLLC could be disregarded and treated as part of a the parent organization for reporting and other income tax purposes, it had been unclear whether deductible donations could be made directly to the SMLLC. The Notice can be used as support, not only for deducting contributions made on or after the date of the Notice in 2012, but also as support for deductions made in prior years.
By clarifying that a deduction could be taken for a contribution made directly to the SMLLC, the Notice eliminated the need to make the contribution to the parent. As a result, donations of real property with environmental or other risks no longer need to be made to the parent, and the parent’s name no longer needs to show up in the chain of title. Exempt organizations should seriously consider setting up an SMLLC in order to isolate risks within a separate legal entity, while avoiding the need for the SMLLC to apply for separate tax-exempt status or file separate annual reports.
The federal treatment of an SMLLC has been adopted by most states as well. For example, most states have established that for state income tax purposes, the income and expenses of a single-member LLC which is treated as a disregarded entity will be included and reported as part of the income and expense of the parent. What has been less clear is whether this disregarded LLC treatment applies to state property taxes as well. Some state have made it clear that real property held by an SMLLC which is owned and controlled by a charity will be exempt from real property tax. In other states it is less clear.
In Ohio under ORC section 5709.12, the focus is on the use the property is put to, not the character of the owner itself that determines whether the property is exempt from property tax. There is no specific language in ORC section 5709.12 or the Ohio Administrative Code that specifically exempts property held by an SMLLC owned by a charity from property tax. After discussions with representatives of the Ohio Department of Taxation, the Montgomery County Auditor’s Office and the Ohio Attorney General’s Office, we were advised by the OAG’s office that the separate existence of the SMLLC should be ignored and the determination of property tax exemption should focus on the charitable use of the property by the charity. If you operate a charity and are interested in setting up an SMLLC to hold real estate, please give one of our business and tax attorneys a call at 937-223-1130 or Jsenney@pselaw.com.
AND ONE MORE THING. In a recent blog, we wrote about new SEC Rule 506(c), and how crowdfunding techniques can now be used to attract equity funding for business start-ups from accredited investors. The definition of “accredited investors” includes married couples who have combined income and net worth over certain thresholds. The U.S. Supreme Court’s June 2013 decision recognizing same-sex marriage for federal tax purposes has prompted requests for the SEC to update the definition of “accredited investor” to include all married couples, regardless of sexual orientation. If you would like more information about crowdfunding, private placement security offerings or treatment of same-sex couples for federal income tax purposes, please call or email me at 937-223-1130 or Jsenney@pselaw.com.