Thursday, August 16, 2012
Congressional Research Service, 501(c)(4)s and the Gift Tax: Legal Analysis (R42655) (Aug. 10, 2012)
Recent media reports of donors contributing substantial amounts to tax-exempt 501(c)(4) organizations have led some to ask whether these donations are subject to the federal gift tax. The short answer is that the gift tax statutes do not contain an exemption for these donations, thus indicating they are subject to tax. While some have argued that Congress did not intend this result, there is arguably insufficient evidence of such intent. As such, it appears the stronger argument is that contributions to 501(c)(4) groups are statutorily subject to the gift tax.
However, this analysis is complicated by two issues. First, it appears the IRS, while finding that these contributions are subject to tax, has not been enforcing this position for many years. This seemed to change in 2011, when the agency confirmed it had sent letters to five 501(c)(4) donors informing them that their contributions may be subject to the gift tax. In light of the agency’s long silence on the issue, some asked whether the IRS inquiry was a politically motivated response to the growing involvement of 501(c)(4) organizations in campaign activities. The IRS denied having improper motivations, and the agency subsequently announced it was closing all examinations regarding the application of the gift tax and that any action would only be done prospectively. Thus, it appears that, for now at least, the gift tax will not be enforced on donations to 501(c)(4) groups.
Second, some have argued that while contributions to 501(c)(4) groups may be generally subject to the gift tax, those contributions made for advocacy-related purposes (e.g., issue advocacy, campaign activity, or lobbying) are exempt. Part of this argument is statutorily based, with the assertion that these types of donations may not be taxable gifts under at least three theories: (1) the donor may receive full and adequate consideration in the form of the organization’s advocacy on his or her behalf; (2) some are made within the ordinary course of business; and (3) advocacy related contributions were not the type of transfer that Congress intended the gift tax to cover. There is case law, albeit minimal, to support some of these conclusions; however, the holdings in these cases are not without controversy, and it is not clear the extent to which other courts would agree with their analysis.
Additionally, some have asserted that imposing the gift tax on advocacy-related donations would violate the donor’s First Amendment rights to freedom of speech and association. The theory is that these types of contributions are a form of speech and since an individual could not be taxed for speaking directly on an issue or candidate, that person cannot be taxed for donating to an organization that will combine contributions from like-minded people to conduct such advocacy. On the other hand, it is not clear that a court would adopt this argument since the gift tax is a generally applicable, content neutral tax and therefore arguably does not impermissibly interfere with the donor’s First Amendment rights.
(Hat Tip: Rick Hasen.)