TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, May 11, 2011

Are Contributions to American Crossroads, Priorities USA & Other 501(c)(4) Groups Taxable Gifts?

Following up on my prior post, Are Contributions to 501(c)(4) Groups Subject to the Gift Tax?: Politico, IRS Gift Tax Move Could Hit New Anonymous Groups:

The IRS appears to have begun to enforce a tax on gifts to the non-profit organizations that were a key vehicle for anonymous politics in the last five years and had promised to play a large role in the presidential cycle, a move which could reshape the place of money in politics in 2012. "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)(4)s. ...

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 Action, the new pro-Obama c4, may face similar questions. ...

Lion also forwarded to POLITICO a letter from the IRS to a client whose identity has been redacted:

"The IRS 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.

Daily Kos, IRS to go HARD after American Crossroads/Priorities USA

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I'm not surprised, in Rev. Rul. 82-216, 1982-2 C.B. 220, the IRS said as much:

The Service continues to maintain that gratuitous transfers to persons other than organizations described in section 527(e) of the Code are subject to the gift tax absent any specific statute to the contrary, even though the transfers may be motivated by a desire to advance the donor's own social, political or charitable goals. See, for example, section 2522(a) which limits the charitable gift tax deduction otherwise available for transfers to charitable organizations to only those organizations that have not been disqualified for exemption under section 501(c)(3) by reason of attempting to influence legislation and that do not participate in political campaigns.

Its an easy thing to audit, since the contributors names appears on Form 990 and any gift over the annual exclusion is suspect.

I'd argue that its just a contribution like any other contribution to a corporation. The contributor buys access or somesuch non-amortizable intangible and a purchase is not a taxable event.

Posted by: Guy in the Veal Calf Office | May 11, 2011 4:40:12 PM