Charitable organizations exempt under §501(c)(3) that own real property may open themselves up to liability associated with such property (particularly from environmental and tort factors). In order to shield the charity from such liability, they may form a separate entity to hold real property. A common strategy employed by charities is to form a limited liability company (LLC) to acquire, develop and hold real property.
Similar to a corporation, an LLC provides its owners (referred to as members) with limited liability protection. Generally, its members are not held personally liable for the debts and obligations of the LLC. In contrast to a C corporation, it has the advantage of no double tax. That is, any profits the LLC earns are only taxed to the members, not first to the LLC and then to the members. Note though, that an LLC must file its own tax return in order to show its yearly profits and losses.
Interesting issues arise when a charity-owned LLC has only a single member. First, by default, such LLC is treated as a “disregarded entity” for tax purposes, meaning that it is tax exempt because its sole member is tax exempt. Additionally, the disregarded entity is not required to file a tax return. This is because the Internal Revenue Service (IRS) considers all of its monetary activities one with the charity (see Treasury Regulation section 301.7701-2(a) for more information). Alternatively, the single member charity-owned LLC may elect to have separate tax exempt status from its member by filing its own exemption application (Form 1023).
One problem with a single member charity-owned disregarded LLC arises when an individual taxpayer chooses to make a donation to the LLC: does she receive a tax deduction for her charitable contribution or not? The IRS has not yet ruled on this specific issue. At the moment, charities in this position can ask for a private letter ruling, create another supporting organization with exempt status to receive the contribution, or have the gift donated to the charity itself. Where the contribution is one of real property, the latter option does not address the charity’s desire to insulate itself from liability. Thus, at the moment there are no simple solutions to what could be a very simple problem until the IRS rules on this subject.
You can read more about this issue on GiftLaw Pro’s website here.
- Taleen Alexander