The IRS recently released an Information Letter (2010-0052) regarding the tax treatment of a single-member limited liability company (SMLLC) the sole member of which is a public charity.  The IRS confirmed the well-accepted position that a SMLLC is a “compontent part” of the exempt member which must treat the operations of the SMLLC as a branch or division.  The IRS went on to confirm that the SMLLC “receives the benefit of its owner’s tax-exempt status, including exemption from federal income tax, federal unemployment tax, and other federal taxes where applicable” but noted that a SMLLC is subject to certain federal excise taxes and employment taxes. 

The IRS also confirmed that a grant from a private foundation to a SMLLC the sole member of which is a public charity would be treated as a qualifying distirbution  and not a taxable expenditure, and expenditure responsibility generally will not have to be exercised by the private foundation.  The

Corporate and family sponsored charitable organizations typically qualify as private foundations because most of their support is provided by the sponsoring corporation or family. Under these circumstances, sponsoring corporations and individuals often limit their donations to cash contributions since the deduction for contributions of appreciated property to a private foundation is generally limited to the cost basis in the property. If the private foundation can qualify as a “conduit” foundation in the year of contribution, however, the amount of the charitable deduction with respect to a donation of appreciated property may equal the fair market value of such property, assuming there is no depreciation recapture with respect to the property.

A private foundation can qualify as a conduit foundation if it (a) satisfies the minimum distribution requirements for the current and all prior years and (b) makes additional distributions in an amount equal to

The Form 990 was substantially revised in 2008.  To allow charities time to prepare, only charities with gross receipts ≥ $1 million, or total assets ≥ $2.5 million, were required to file the new Form 990 in 2008 (small and medium sized charities were required to file Form 990-N and Form 990-EZ, respectively).  The filing thresholds were reduced for 2009, and for the 2010 tax year and beyond, were further reduced and are established as follows:

• Form 990 – Gross receipts ≥ $200,000, or total assets ≥ $500,000
• Form 990-EZ – Gross receipts < $200,000, and total assets < $500,000
• Form 990-N – Gross receipts normally ≤$50,000

As a result of these filing thresholds, many medium-sized charities must now prepare to file the new Form 990 in 2010.  The new Form 990 will require such charities to gather and disclose substantially greater information than before.  We strongly recommend that medium-sized charities become familiar with the new Form 990 now

The new Form 990 now requires a tax-exempt organization to disclose whether it has adopted certain governance policies, including conflict of interest, whistle-blower, document retention, and joint venture policies, to name a few.  Although governance policies are not legally required, it is generally accepted that adopting and following governance policies increases the likelihood of compliance with federal and state law and the identification and solution of potential issues.  Despite the pressure an organization’s board may be under to adopt policies, however, it is important that an organization does not merely adopt policies in order to respond positively to the Form 990 questions.  Mere adoption of a policy, without more, is generally worse than having no policy.

Before 2006, small charities with less than $25,000 of annual gross receipts were not required to file Form 990.  After 2006, small charities are required to file Form 990-N (e-Postcard).   Failure to file Form 990-N for three consecutive years generally results in loss of tax-exempt status.  As of May 17, 2010, calendar year small charities that have not filed Form 990-N for the 2007 through 2009 tax years are in jeopardy of losing their tax-exempt status.   We suspect several thousands of small charities are currently in jeopardy of losing tax-exempt status for failure to file Form 990-N.

The IRS recently announced, however, that  it will do what it can to help small charities avoid losing their tax-exempt status.   Although the IRS has not clarified this statement, it is possible this statement means the IRS will not automatically revoke the tax-exempt status of every late filer.  If your small charity still has not filed, it is advisable to file Form 990-N as soon

Joint ventures between Section 501(c)(3) organizations and for-profit parties are becoming more and more common.  The attached memorandum (which may be obtained by clicking the link below) provides a brief overview of tax issues related to joint ventures between tax-exempt and for profit entities:

Structuring Joint Ventures