Charitable Contributions of Real Property (but Without the Real Problems) - The LLC Solution
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Diane Plant is a real estate broker and a savvy investor. Over the past twenty years, Diane has made a fortune investing in undeveloped commercial property. She generally will seek out and buy land on the outer limits of potentially high growth areas. Once the growth expands to her property, Diane will lease the land to incoming businesses, such as grocery stores and gas stations. This strategy has been wonderfully rewarding and successful. However, Diane is now nearing retirement and wants to transition out of her career. She, therefore, has decided to start selling her land holdings. Diane realizes the sale of her investments will produce a very large capital gains tax. Therefore, she would be very interested in options that would reduce her upcoming tax liability.
Recently, a local charity's gift planner approached Diane about making a large gift to support a capital campaign. The gift planner informed Diane a large gift would produce a generous charitable deduction that could be used to offset her capital gains liability.
Diane is excited about this idea. She could greatly reduce her taxes and substantially help her favorite charity. In fact, she has the perfect property in mind to give. It is a two-acre lot in the heart of the city that has been used as a gas station for the past 15 years. It is worth approximately $500,000. Although excited about the size of the gift, the gift planner is nevertheless worried about the potential liability (i.e., environmental problems and premises liability) associated with accepting the property.
How can Diane contribute the land to her favorite charity, yet provide liability protection for the charity?
In a typical outright gift of real estate to charity, charity must take title to the property. Accordingly, charity will sell the property as soon as possible. However, charity will now be in the chain of title. Therefore, any environmental problems, for instance, arising from the property could subject the charity to liability.
Instead, the local charity could establish a single member LLC to solve this dilemma. The charity would not be the manager of the LLC, but would have the power to appoint and remove managers. Consequently, charity would appoint Diane to be manager of the LLC. However, she would serve without compensation.
After creation of the LLC, Diane would transfer the gas station to the LLC. Diane, as sole manager of the LLC, would then sell the property to a new buyer. Once the property is sold, Diane would no longer need to serve as the LLC manager. In addition, the LLC would have $500,000 of cash (minus selling costs) that would be distributed to charity. But more importantly, charity would never be in the chain of title with respect to the real property. Therefore, charity would benefit from the gift without exposing itself to potential future liability.
In addition, Diane would bypass all the gain from the sale of the land. In order to produce a charitable income tax deduction, Diane must transfer the property to a qualified charity. In this case, the LLC is the entity receiving the gas station not the local charity. However, the LLC does not need to qualify as a 501(c)(3) for Diane's contribution to be deductible. The LLC may elect not to be treated as separate from its sole member - the local charity. Therefore, property owned or transferred to the LLC will be treated as property owned or transferred to the local charity for tax purposes. Consequently, Diane's charitable deduction should equal the fair market value of the property (i.e., $500,000).
In the end, the LLC option was an overwhelmingly successful solution. Charity was able to receive its much-desired gift but without the worry and liability associated with owning a gas station. Furthermore, Diane was able to make a substantial gift to her favorite charity while offsetting many of the capital gains realized from her other land sales.
Editor's Note: This Case Study follows the reasoning and law as provided in PLR 200150027. While letter rulings are good indications of the Service's position, they may not be relied on as precedent.
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