Kenya JH Smith (Southern), Purposeful Ambiguity: A Case for Better Readability in State Legislation Remedy of the Nonprofit Restricted Legal responsibility Firm (as Seen by Permitted Function Provisions), 95 Tul. L. Rev. 601 (2021):
Think about your self representing a small, humble congregation of fewer than fifty individuals who have lived and worshiped in the identical rural neighborhood for over 100 years. Sparked by their religion and dedication to supply protected, first rate, and reasonably priced housing for members of the neighborhood who in any other case lack lots of the requirements many Individuals take as a right, the congregation agrees to sponsor a low-income housing tax credit score (LIHTC) growth. The deal is structured with the congregation’s participation represented by an LLC fashioned as an entirely owned subsidiary of the congregation’s longstanding nonprofit company entity. That LLC serves as one of many basic companions however has no obvious decision-making authority. These obligations are assigned to a different entity serving because the managing basic associate and to the restricted associate representing the tax credit score investor. Nevertheless, the congregation contractually agrees to function guarantor on lots of the growth’s obligations. As one may think, the congregation depends closely on specialists represented as having the requisite expertise in LIHTC developments and sensitivity to the congregation’s lack of monetary sophistication or expertise on this space to guard the congregation’s pursuits. By religion, the congregation believes it can notice this a part of its charitable mission.
All goes comparatively properly for the primary ten-to-twelve years of the event. An eighty-four-unit senior dwelling condo complicated is constructed, leased up, and operated with few operational difficulties. Throughout yr 13, a change in native tax assessors precipitates a change within the tax classification of the event from tax-exempt to being taxable as enterprise. This modification was not anticipated within the authentic underwriting of the event and triggers vital working deficits. The congregation, as guarantor, is now referred to as upon to make use of funds from its small accounts to stabilize a multimillion-dollar growth that was represented as self-sustaining.
Pushed to alleviate the congregation of this burden, you scour the varied deal factors and analysis choices supplied in underlying regulation. Your analysis reveals an obvious argument that the congregation’s LLC subsidiary complies totally with federal tax-exempt entity regulation and is correctly fashioned below state regulation. Nevertheless, in digging deeper, you’re upset to find the conflicted therapy of the nonprofit LLC in that context. The LLC continues to be interpreted as essentially a enterprise entity and never entitled to an exemption from native property taxes. Because it seems, the “any lawful function” provision supplied by regulation belies a long-standing restriction on which entities can qualify for state tax exemptions and different advantages that normally accompany nonprofit standing.
Half II of this Article discusses the essential position nonprofits play in American society. This Half additionally illuminates the extra burdens that nonprofits endure in navigating and decoding the ambiguous and inconsistent myriad of state LLC legal guidelines, significantly their function provisions and their applicability within the nonprofit context.
Half III analyzes three basic classes of state nonprofit function provisions and the way they impression the very viability of the nonprofit LLC. The primary is labeled “Ambiguous Ambivalence.” It’s by far the biggest group of states and customarily displays an absence of depth in legislative consideration of how the LLC applies within the nonprofit context. The second class, labeled “Lively Acceptance,” is represented by a small group of pioneering states (Kentucky, Minnesota, North Dakota, and Tennessee) who extra totally embrace and thoughtfully regulate the nonprofit LLC. These states incorporate advisories relating to potential tax regulation implications. Additionally they present obligatory and default provisions designed to assist nonprofit LLCs in satisfying tax-exempt entity necessities. The third class is labeled “Amorphous Antagonism” and consists of states that keep obvious, if not open, hostility to the nonprofit LLC, expressed statutorily or by judicial interpretation. These descriptive classes collectively show the variety in state regulation nonprofit LLC therapy. Additionally they manifest the complicated ambiguity dealing with nonprofit LLC advocates at a time when readability in nonprofit entity operate and governance are of paramount significance.
Half IV discusses the evolutionary trajectory of federal tax regulation nonprofit LLC therapy. This Half illustrates the nonprofit LLC’s deliberate march towards broader acceptance below federal regulation and underscores the essential and basic position that larger readability and steerage in state LLC legal guidelines may present in facilitating wider nonprofit LLC use.
https://taxprof.typepad.com/taxprof_blog/2022/02/smith-the-state-law-treatment-of-nonprofit-llcs.html
