Paul L. Caron

Friday, October 15, 2010

Forbes: Are Contributions to 501(c)(4) Groups Subject to the Gift Tax?

Forbes, Hey, Secret Big Political Donor, Don’t Forget The 35% Gift Tax, by William P. Barrett:

In the run-up to next month’s elections, a big and controversial development has been the ability of tycoons to make unlimited political donations without any public disclosure whatsoever. This is done by giving the money to certain 501(c)(4) organizations–so-named for the tax-code provision establishing their status. Right now the best-known 501(c)(4) is Crossroads Grassroots Policy Strategies, or Grassroots GPS,  set up by conservative political operative Karl Rove.

The Grassroots GPS Web site makes clear that such contributions are not deductible by the donor from personal federal income taxes. But that may not be the whole story from a tax perspective. A Los Angeles tax lawyer is telling clients such gifts could be subject to the federal gift tax, which is a hefty 35% this year but is scheduled to rise to a weightier 55% on January 1.

In a memo, Ofer Lion, a lawyer with Mitchell Silberberg & Knupp who specializes in nonprofit organizations, writes that unlike contributions to certain other political organizations, there is no gift-tax exemption written into federal law for contributions to 501(c)(4)’s, which the IRS officially classifies as social-welfare organizations but also are often used for lobbying. And that, he says, raises the possibility that down the road the IRS might come calling for the tax, plus interest, plus penalties. “The IRS may well find irresistible the potential revenue to be raised from assessing gift taxes on 501(c)(4) contributors,” writes Lion.

A spokesman for Crossroads GPS, which is based in Washington, D.C., said Thursday he had never heard anything about a possible gift tax liability on 501(c)(4) contributions until Forbes called, and did not know if his organization had a written legal opinion specifying why there would be no liability for its donors. ...

But if news reports are correct,  well-heeled individuals are making multi-million donations to 501(c)(4)s, which would blow through any yearly or lifetime exemptions. It’s also not hard to imagine that the level of giving by tax-averse moguls might go way down if the threat of a gift-tax liability is not negated. ...

Lion writes that there is no indication now the IRS intends to collect the gift tax on 501(c)(4) contributions, and that there might be First Amendment issue if it tried.  But he notes the agency wouldn’t have a difficult research task. While there is no public disclosure of donors to a 501(c)(4)–a presumed part of the appeal for many–federal law requires 501(c)(4)’s to reveal to the IRS the names of all donors of $5,000 and up. The easy-to-use lists would be a “treasure trove” for the IRS, Lion declares.

Although I have not seen Mr. Lion's memo, he is certainly correct that the § 2501(a)(4) gift tax exclusion for contributions to political organizations does not apply to transfers to § 501(c)(4) groups like Crossroads GPS.  But as we note in the Teacher's Manual accompanying our casebook (Federal Wealth Transfer Taxation (Foundation Press, 6th ed. 2009)), these types of political contributions should not be subject to the gift tax in any event because of the lack of true donative intent on the part of the contributors as developed in the case law prior to the enactment of § 2501(a)(4). See also Kip Dellinger, Gift Tax on Political Contributions? A Lousy Idea!, 78 Tax Notes 621 (1998).

Update #1:  Mr. Lion's memo is here.  (Mr. Lion (UCLA Law ’02) is teaching Tax-Exempt Organizations as an adjunct at UCLA this Spring.)

Update #2:

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If the IRS did try to collect, wouldn't the recipient be required to pay? Also, if the 501(c)(4) is a corporation, wouldn't the IRS be limited to collecting from the remaining corporate assets? For a group established with the purpose of funding one election cycle, it would seem that there would be few assets left to collect after the election.

Posted by: Never Took Tax | Oct 15, 2010 12:10:14 PM

For an extensive discussion of this issue, see Barbara Rhomberg, The Law Remains Unsettled on Gift Taxation of Section 501(c)(4) Contributions, 15 Taxation of Exempts (available at

Posted by: Lloyd Mayer | Oct 15, 2010 5:06:25 AM