Effective December 31, 2012, Congress passed The American Tax Relief Act of 2012 (the “Act”) to avoid the fiscal cliff and President Obama is expected to sign the bill into law. The full text may be obtained by clicking here. In a Chronicle of Philanthropy article (which may be obtained by clicking here), Doug Donovan writes that the Act may hurt charitable giving in light of the fact the Act “reinstates a provision eliminated in 2010 that reduces itemized deductions by 3 percent of the amount that household income exceeds $300,000.” Mr. Donovan goes on to explain that “[w]rite-offs grow more limited the more taxable income a person has and could reduce the value of deductions by up to 80 percent for the highest-income taxpayers, according to the Tax Policy Center.” (more…)
Tax practitioners have long believed that donations could be made to single member LLCs wholly owned by section 501(c)(3) organizations on the theory that, for tax purposes, the donation was treated as made to the charity and not the LLC. In long awaited guidance, the IRS has finally agreed in Notice 2012-52. The analysis in the notice is not surprising, and is in fact, exactly what tax practitioners have been arguing ever since disregarded entities came into existence.
Generally, a business entity that has a single owner and that is not a corporation is treated as disregarded as an entity separate from its owner. These “business entities” are typically limited liability companies. If an entity is disregarded, its operations and activities are treated in the same manner as a sole proprietorship, branch, or division of the owner, and the owner generally reports all income, loss, deductions, and credits on its own tax return. Thus, any contribution to a disregarded entity would be reported on the owner’s return as a contribution. Practitioners believed that this result meant that the donor was treated as contributing to the charitable organization, rather than the LLC, and was thus entitled to a charitable contribution deduction. Prior to the recent guidance, the IRS was unwilling to agree or disagree with this position.
On July 31, however, the IRS finally ruled that donations to a domestic single member LLC whose sole owner is a section 501(c)(3) organization will be treated as donations to a branch of the 501(c)(3) organization. Accordingly, donors will be entitled to a charitable contribution deduction. The IRS has also asked, but not required, that charities disclose in a acknowledgment or other statement to the donor that the single member LLC is wholly owned by a charity and treated by the charity as disregarded.
I’ve noticed a trend in our estate planning practice — an increasing interest in establishing private non-operating foundations. This is interesting given the advantage that donor-advised funds provide over foundations, most notably the reduced administrative burdens on a family who opts for donor-advised funds over foundations. There are also extremely well run donor-advised funds to pick from, funds with great track records and high customer satisfaction ratings. So what is the reasoning? I think it stems from a desire of a parent to teach philanthropy to their children, grandchildren, and possibly great-grandchildren. Family members are typically on the board of directors of the foundation so they are forced to come together and make decisions about how grants are made. The hope is having family members convening in one place and spending time discussing charitable gifts will provide a springboard for other charitable giving. Even though the foundation document typically provides family members with fairly easily methods of terminating the foundation, at least a vehicle is in place for family philanthropy that can last generations.