Paul L. Caron

Thursday, May 19, 2011

Kristan: Is the Gift Tax Law on the Side of 501(c)(4) Donors?

Following up on this morning's post, GOP Questions IRS on Applying Gift Tax to Contributions to 501(c)(4) Groups, Joe Kristan asks Can Political Contributions Really be Taxable Gifts?:

The question I have is: if these are taxable gifts, why didn't anybody seem to know this until now?

It turns out that the IRS tried to tax political gifts long ago. They were shot down in Tax Court and two different circuit courts. While the IRS said in 1982 (Rev. Rul. 82-216) that it disagreed with the courts, they seem to have not pressed the issue since.

The Bittker & Lokken tax treatise talks about the 5th Circuit case that ruled direct political contributions were non-taxable ... Stern v. Unites States, 436 F.2d 1327 (5th Cir. 1971),  ...  [T]he donor got something for her money, so it wasn't a gift under the tax law. The Tax Court and the Tenth Circuit took a similar approach in the other case, Carson v. Commissioner, 71 T.C. 252 (1978), aff'd, 641 F.2d 864 (10th Cir. 1981). ...

Congress itself ordered the IRS away from direct political contributions by enacting what is now Code Section 2501(c)(4) in 1975, which prohibits gift tax assessments on "political organizations," defined by Section 527 as "...a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function." But that doesn't cover the 501(c)(4) outfits.

So while the IRS can make a case that gifts to 501(c)(4) organizations are subject to gift tax, it's by no means a slam dunk. The same considerations that the courts applied to direct political contributions apply to independent political expenditures. It certainly is hard to see how such taxing gifts would help buttress the transfer tax structure. The IRS appears to be 0 for 2 in the appeals courts on its attempts to apply gift tax to political organizations. ...  

While the IRS can cite its 1982 ruling as putting taxpayers on notice that such gifts might be taxable, their failure to press the issue for over 25 years makes their sudden interest look bad. When you consider the blatant IRS political meddling in the Roosevelt and Nixon administrations, the senators are right to be asking questions.

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I believe the "big case" in the area that the government "lost" involved a high income individual who made substantial monetary donations and thus she got what she paid for (it wasn't just given out of charity (not 501(c)(3) charity--lets stay on topic) or the like, she expect a "return" on her "investment" or a "quid pro quo")

Now, this might be well and fine gift tax logic for corporations and individuals who can donate 7 and 8 figure sums, but it does not fly for Tom, Dick, and Harry who each give $100. As to the "longstanding silence/inaction" perhaps it is the proliferation of (c)(4)'s and the fact that $1M ain't what it used to me -- it is better than $100, but it doesn't buy you a vote these days. A run for Congress can cost $50M or more. $1M is only 2% of what a candidate may need. Does someone who contributes 2% to that politician or get what they paid for (control) like that taxpayer in the Court of Appeals?

Posted by: tax guy | May 20, 2011 7:17:25 PM

For reasons that are not clear a post has brought practices of the John F. Kennedy era into this discussion of whether or not donations to 501(c)(4) organizations are subject to the gift tax and whether or not the IRS has a political motivation to pursue and enforce that position.

I fail to see how this is relevant to the nature of the initial post. That post raised the question of whether or not political contributions were subject to the gift tax, which I think further leads to the question that given the nature and purpose of a 501(c)(4) organization, can any donations to them be characterized as a "political donation". Kennedy and Nixon era actions by the IRS shed no light on the issue.

We all know what is happening here. Wealthy individuals and organizations are using the 501(c)(4) organizations to donate to partisan political causes and to escape disclosure. If this is legal, so be it; if this is not subject to the gift tax, so be it. But these are questions of tax law and can be resolved as questions of tax law. Why aren't those posting to this Forum doing that?

Posted by: Sid (real one) | May 20, 2011 1:38:58 PM

Let correct one thing in the record. The Church committee acknowledged that Kennedy (during Commissioner Caplin's tenure) targeted Conservative groups. It's also a matter of record that when Nixon attempted to use IRS against his 'enemies' (my partner in the 70s was on the list), Commissioner Walters simply put the list in a desk drawer not to see the light of day during the remainder of the Nixon Administration.

For several decades the liberal media has distorted the Watergate-era with regard to IRS activity and wholly ignored the Kennedy efforts.

Posted by: Kip Dellinger | May 20, 2011 12:08:07 PM

Just to clarify:

1. To maintain their tax-exempt status, 501(c)(4)s must be primarily engaged in "social welfare" activities, which don't include efforts to support or oppose candidates. However, 501(c)(4)s may (and do) engage in such political activities without jeopardizing their tax-exemptions.

2. The "express advocacy" / "issue advocacy" distinction is irrelevant for tax purposes. Instead, the IRS evaluates whether something is a partisan political activity ("exempt function" under IRS 527(e)) based on a review of all the relevant "facts and circumstances." Certainly express words of "vote for" or "vote against" are relevant -- probably determinative -- fact, but issue ads that seem, on balance, to be efforts to encourage people to vote for or against candidates can also constitute exempt function activity. See, e.g., Rev. Rul. 2004-6 (especially "Situation 3"). (Note that the IRS CPE chapter on Election Year Activities explicitly disclaims any possibility that the IRS could use an "express advocacy" standard for electioneering.)

3. "Express advocacy" is a concept from federal election law and was introduced by the Supreme Court in Buckley v. Valeo as one measure of the scope of speech regulable under the First Amendment. There have been continuous battles over what constitutes "express advocacy," but, at a minimum, it is reference to a candidate combined with the so-called "magic words," such a "vote for," "vote against," "support," "oppose," "elect," "defeat," etc. Previously corporations (even nonprofit corporations) and unions were prohibited from using general treasury funds to pay for express advocacy in support of or opposition to federal candidates. However, in the wake of the SpeechNow and Citizens United decisions, corporations and unions may raise and spend unlimited funds for express advocacy, provided they do so independently of (i.e. not in "coordination" with) candidates and political parties.

Oh, and Kip, your hysteria about some supposed IRS conspiracy to take action against the political activity of conservative organizations doesn't stand up under reasoned analysis. There's been hardly any IRS enforcement (of 501(c)(3) campaign intervention; of political "private benefit"; or certainly of political giving and the gift tax) against either side, but what there has been has hit both liberal and conservative groups. (And Newt's charity, you'll recall, got off.)

Posted by: John Pomeranz | May 20, 2011 9:05:39 AM

501(c)(4) groups don't engage in express advocacy (vote for, vote against) but, instead, engage in 'issue advocacy' (tell your Congressman to or not to). But 501(c)(4) groups have also long been used to ballot initiatives in places like California because 527 only applies organizations engaged in electing people to political office.

An initiative committe did gain 527 status by ruling in a case where the issue was so connected to a politician seeking office that the two were indistinguishable, but it's not common.
Eventually, it was the Democrats that made the first, big use of (c)(4) orgs in the 2006 election cycle and primarily as a vehicle that could replace the soft money elimination of McCain-Feingold campaign finance reform. The (c)(4) could engage in issue advocacy and thus avoid the FEC limitations on contributions. That donors need not be disclosed was an ancillary benefit.

Amusingly, the big flap about Citizens United is that corporations (and unions, too) can now give unlimited amounts and the gift tax issue doesn't even reach them - which may not bode well under a constitutional free speech argument that imposing a gift tax on an individual is a constitutionally impermissable restriction on the free speech opportunities of individual.

As for IRS behavior, the fact it is organized around one of the most powerful public employee unions in the country and in view of the leaks about the White House plan to force federal contractors to disclose all political contributions, it looks like the gift tax letters are politically motivated whether specifically done so or just with passing nod from the White House.

The IRS has a very suspect history in this area - including an acknowledgement by the Post-Watergate "Church" committee that the IRS "ideological orgins" project was directly aimed at conservative groups in the early 1960s - and the Church committee specifically stated that a few liberal groups were targeted for window dressing purpose - as may be the case here with the speculation George Soros was a target.

Note, as well, the the Service targeted Paula Jones' Legal Defense Fund for examination in the late 90s and gave Clinton's a free pass (the issue being the payment of one's legal bills by another is income the subject of the legal bills). Lee Shepphard and I gave them a road map on Clinton in Tax Notes and IRS still stuck its head in the sand.

The same was true with an 501(c)(3) group Vote Now '96 that raised a ton of politcal money for the Democrats that ended up disguised as charitable donations to a non-partisan voter registration organization. Again, the IRS didn't lift a finger -even given a road map in Tax Notes and Accouting Today.

But, of course, the Service did go after Newt Gringrich's charitable and related non-profits.

Let's just be polite and say that from all appearances over many years, the IRS's enforcement activities at intersection of Politic and Money appears to be a bit 'uneven.'

Posted by: Kip Dellinger | May 20, 2011 1:13:17 AM

The rich want the politicians they contributed to via 501(c)(4) to keep their (the donors') names and amounts given secret. If the rich had to give through 527, then we'd know who gave what to whom. But neither the politicians nor the donors want that info to be public. I am sure that Congress will find a way to keep their large donors happy, and anonymous, and the politicians will be happy with all they money they'll get by keeping things secret.

527 be damned! 501(c)(4) full steam ahead!

Posted by: tax guy | May 19, 2011 5:34:58 PM

This is a very good analysis, but misses the key point.

The 501(c)(4)groups are not supposed to be pursuing a political interest, so that gifts to them are technically not political contributions. If that argument is made, the supporters may win the battle and lose the war, that is, by characterizing their "gifts" as political contributions they may avoid the gift tax, but void the tax status of the 501(c)(4) entity.

Posted by: Sid (real one) | May 19, 2011 4:27:00 PM

Actually Tim, it was the Eisenhower administration which got the ball rolling on this issue back in 1959 with Rev. Rul. 59-57. Yeah I know, must have been a Chicago Commissioner.

I find refreshing the rationale of the cases such as Stern that held that there was no gift because the taxpayer got full and fair value for her gift, a politician who would do her bidding and protect her financial interests. Now all we need to hope for is similarly candid judges.

Posted by: Bill | May 19, 2011 1:59:33 PM

No one should be surprised. It is the Chicago way of doing business.

Posted by: Tim Kelly | May 19, 2011 12:16:12 PM