Charitable LLCs and the Partial Interest Rule
The Service is warning taxpayers about what it considers an abusive charitable deduction transaction. From IRS Notice IR-2024-304, Dec. 4, 2024
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In the “Charitable LLCs” scheme, promoters create documents establishing the LLC for a fee. They then assist in the transfer of the taxpayer’s assets to the LLC and create documents that purport to transfer membership units in the LLC to a charity. The promoter might supply an appraisal supporting the valuation for the claimed gift and might even provide a list of charities willing to accept the membership units or identify a single charity that will accept the donation.
Promoters might incorrectly advise clients that they can retain control and legally access the cash or other assets transferred to the LLC for their own personal use after the donation. Promoters might also execute an “exit strategy” for taxpayers to buy back their contributions at a significantly discounted price after a period of time. Generally, taxpayers cannot deduct a charitable contribution of less than their entire interest in property, and retaining rights to control the donated interests or buy back assets will disqualify the transaction as a deductible charitable contribution.
Taxpayers should be wary of any scheme that involves transferring assets to an LLC, followed by the “donation” of a majority percentage of nonvoting, nonmanaging, membership units to a charity as a “charitable contribution” while the taxpayer retains control over and access to the assets. A valid charitable contribution requires the taxpayer give control over the donated assets to the charity.
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Hmmmm. I am not so sure about this one, at least to the extent disallowance is based on the partial interest rule. If a taxpayer donates nonvoting corporate stock, hasn’t the taxpayer donated an entire interest? There must be case law on it and if there is, why should the outcome differ when the taxpayer donates nonvoting/managing LLC units? In the circumstances described in the Notice the value ought to be very low — or maybe not if there is an income stream — but that’s a different issue from whether the gift is of a partial interest in property.
I should get a life.
darryll k. jones