May 11, 2011
Is IRS Now Enforcing Gift Tax on Donations to 501(c)(4)s?
As previously blogged back in October 2010, Politico reports that IRS enforcement of gift tax rules could impact donors to 501(c)(4) organizations, including those that were used as political vehicles in recent elections. Ben Smith of Politico writes:
"It appears that the IRS Estate and Gift Tax team has also started paying attention to 501(c)(4) organizations," a Los Angeles tax lawyer who has followed the issue closely, Ofer Lion, wrote in a memo to clients today.
Gifts to other political organizations are not taxable under federal law, and lawyers informally say many donors do not typically pay the gift tax -- which may run as high as 35%, mirroring income tax rates -- for contributions to 501(c)4s.
The IRS focus would only apply to quite large donors: the first $13,000 annually are exempt. The rest of the contributions, however, reduce a donor's lifetime tax exemption, which stands currently at $5 million but stands to drop to $1 million in 2013, a fact which would mean a donor's heirs lose substantially more to estate taxes, including potentially a "clawback" of money that's already been given away back into the taxable estate.
Now the Republican donors who gave generously to Crossroads GPS and other groups last cycle may find themselves on the hook for substantial back taxes. And Democrats contemplating contributions to Priorities USA, the new pro-Obama c4, may face similar questions.
Lion quotes the 2011 Workplan of the IRS Exempt Organizations Division on the intensifying IRS interest: "[i]n recent years, our examination program has concentrated on section 501(c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations."
Lion also forwarded to POLITICO a letter from the IRS to a client whose identity has been redacted:
"The Internal Revenue Service has received information that you donated cash to [REDACTED], an IRC Section 501(c)(4) organization," the agent wrote to a donor. "Donations to 501(c)(4) organizations are taxable gifts and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709)."
The question of whether these (c)4 gifts should actually be taxable could be subject to litigation. But the reason for the emergence of (c)4 gifts presents a bit of a trap for donors: If they go to court to fight for the right to avoid taxation on their anonymous gifts, they will compromise their anonymity. Alternately, they may be forced to pay a hefty premium to remain anonymous.
(Hat tip: TaxProf Blog)
At the ABA Tax Meetings in Washington, D.C. last week, IRS and Treasury exempt organizations' officials could not comment on whether there is a specific compliance initiative with respect to gift tax on donations to 501(c)(4) organizations.
As previously blogged in November 2010, Ellen Aprill (Loyola-L.A.) has written a memo for the Election Law Blog explaining how donations to section 501(c)(4) organizations to fund express advocacy or electioneering communications generally may avoid both the gift tax under federal tax law and public disclosure under federal election law.
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