IRS Moves to Tax Contributions to 501(c)(4) Groups Active in Politics

June 9, 2011

The IRS has invoked a provision that had rarely, if ever, been enforced to inform big donors to 501(c)(4) advocacy groups that their donations may be subject to gift taxes of 35% on any donation exceeding the annual gift tax exemption of $13,000 per individual or $26,000 for couples filing joint returns. Many of the contributions, reported to be in the millions, may have exceeded the donor’s lifetime gift exclusion. In a May 13, 2011, statement, the IRS said that it “has opened up examination of five donors who had not filed gift tax returns to determine if the donations were taxable gifts and if a gift tax return should have been filed.”

Initially, the IRS said that these examinations were started by employees of the Estate and Gift Tax unit at the IRS. Questions were raised by individuals and a congressional letter dated May 18 from several key Republican senators who alluded to the partisan nature of these examinations and whether these donations were really “gratuitous” or used to advance policy views the donors support.

In response to the concerns raised by the Republican senators, IRS Commissioner Douglas Shulman said in a May 31 letter that the examinations were the result of an “internal” referral by an IRS employee, there was no involvement by any political appointee, inside or outside of the agency, and that he had no conversations with anyone outside the IRS regarding enforcement strategy for this category of cases. He further said that the audits were part of a noncompliance project and not connected to a broader separate project looking at political and other activities of 501(c)(4) organizations. Shulman denied that the IRS enforcement policy on 501(c)(4) organizations is influenced by political considerations stating, “this agency is apolitical and nonpartisan. That is the core value of the agency and one which I take very seriously.”

Background to this Brouhaha

The IRS has attempted to apply the federal gift tax under IRC section 2501(a) to amounts contributed to campaign funds of candidates for certain political offices and to amounts expended directly on their behalf. In only two reported cases decided over 30 years ago, the IRS attempted to assert the gift tax to these donations. See Carson v. Commissioner 71 T.C. 352 (1978) and Stern v. United States, 436 F.2d. 1357 (5 thCir. 1971). The courts held that the gift tax did not apply to amounts contributed directly on behalf of candidates. In 1982, the IRS issued a public acquiescence to the result reached in these cases. Rev. Rul. 82-216, 1982-2 C.B. 220, held that the IRS would no longer contend that the gift tax applies to contributions made to or on behalf of organizations described in section 527(e)(1). However, the IRS also indicated that it continues to maintain that gratuitous transfers to “persons other than organizations described in section 527(e) are subject to the gift tax absent any specific statute to the contrary.”

In the 29 years since the Rev. Rul. 82- 216 was issued, there are no published IRS positions in which the rationale in this Rev. Rul. was applied to 501(c)(4) organizations or other 501(c) organizations.

A Change in Enforcement Policy or the Specter of an Obama Enemies’ List?

The congressional letter questions the retroactive enforcement of the gift tax in a highly politicized environment noting that President “Obama and the White House have made it clear they view section 501(c)(4)s with deep hostility and that the (White House) Staff fear their ability to influence an election.” The last comment evidently was in reference to the 2008 election and the Supreme Court decision in Citizen United v. FEC that ruled corporations may spend unlimited amounts of money supporting or opposing political candidates for office as long as they do so independently of candidates and political parties. This decision encouraged funding of a number of 501(c)(4) advocacy organizations that support specific candidates. Under the IRS Code and Regulations, 501(c)(4) organizations can participate in electoral activity as long as the activity is not the “primary activity” of the organization.

What makes this matter very interesting is Commissioner Shulman’s defense of the IRS and the reason for the current examinations, i.e., “the agency is apolitical and nonpartisan,” with no involvement by any political appointee inside or outside of the agency. This was a direct response to the congressional letter inquiring whether outside sources had influenced the initiation of the examinations.

The congressional letter was a not so subtle reference to “President Nixon’s Enemies List” that identified specific individuals and organizations for IRS Audit that were at odds with the administration’s policy on Vietnam, the cities, the environment and many other social welfare issues during his second campaign for election. Fortunately, the IRS did not then succumb to those pressures and hopefully as indicated by Commissioner Shulman’s statement that the present IRS would not be directed by outside forces to initiate partisan audits.

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