Thursday, October 14, 2010

Trouble for (c)(4)s?

Nonprofit organizations that meet the requirements of 501(c)(4) are not charities, but they can obtain tax exempt status.  These organizations can engage in political activity, unlike 501(c)(3)s, and for that reason are appealing to donors who want to remain anonymous.  A well-known 501(c)(4) organization is Crossroads Grassroots Policy Strategies, or Crossroads, GPS, an organization created by Karl Rove.

The Huffington Post reports today that Senator Dick Durbin of Illinois has asked the IRS to investigate Crossroads GPS.  The organization has spent $3.3 million on the Senate race in Illinois, supporting Mark Kirk's campaign against Alexi Giannoulias.  In total, Sen. Durbin states in his request to the IRS, the organization has spent nearly $20 million buying television advertising in Senate campaigns around the country.

In addition to the issue of the tax-exempt status of the organization, big donors to the organization, and to others like it, may have something else to worry about.

William Barrett's Forbes blog reports on a memo written by Ofer Lion, an LA lawyer who specializes in the laws affecting nonprofit organizations.  Mr. Lion's memo, written for his clients, explains that the Internal Revenue Code provides no gift-tax exemption for contributions to 501(c)(4) organizations.  That means not only that will the donor not receive an income tax contribution for the gift, but also that the donor may owe a gift tax on the gift, with a maximum gift tax of 35% this year increasing to 55% in 2011.  Although the donor might be able to use an annual exclusion ($13,000) and the lifetime exclusion ($1 million), reports indicate that many donors have been making multi-million dollar gifts to 501(c)(4)s this year.  The tax bills may be significant, if the IRS decides to enforce the gift tax.  Although 501(c)(4)s need not make their donor lists public, federal law requires the organizations to provide the IRS with the names of all donors of $5,000 or more.  Thus, the IRS would have a lot of information about which taxpayers to investigate.

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