Thursday, July 7, 2011
IRS Calls Off Gift Tax Investigation of Donors to Karl Rove's Crossroads GPS
IRS statement on applicability of gift tax on 501(c)(4) organization contributions
Recently, questions have arisen regarding the applicability of the gift tax to contributions to 501(c)(4) organizations. The Internal Revenue Service has little history to draw from in this area and the limited guidance we previously issued on this matter is almost thirty years old.
While we review the need for additional guidance or legislation, we will not use resources to pursue examinations on this issue. Any future action we take will be prospective and after notice to the public.
As we consider this issue, it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.
Memorandum from Steven Miller, Deputy Commissioner for Services & Enforcement
Questions have been raised regarding the application of gift tax to contributions to I.R.C. § 501 (c)(4) organizations. This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history. My office will be coordinating with the Office of Chief Counsel to determine whether there is a need for further guidance in this area.
Until further notice, examination resources should not be expended on this issue. It is anticipated that any future examination activity would be after the coordination described above and would be prospective only after notice to the public. Thus, the Service shoul'd not expend examination resources initiating referral's or developing audits. Accordingly, all current examinations relating to the application of gift tax to contributions to I.R.C. § 501(c)(4) organi,zations should be closed.
This directive reaffirms and expands the suspension on March 23, 2011, of such examinations by SB/SE Estate and Gift. This directive has no impact on any decision to pursue, or on the scope of, any examination of I.R.C. §§ 501 (c) and 527 organizations, incl'uding the correct application of the tax under I.R.C. § 527(f). Nor does this directive have any impact on other estate or gift tax examinations that do not involve the issue of whether gift tax applies to contributions to I.R.C. § 5011(c)(4) organizations.
- Accounting Today
- The Hill
- New York Times
- NY Times Blog
- Wall Street Journal
- Washington Examiner
Prior TaxProf Blog coverage:
- Are Contributions to 501(c)(4) Groups Subject to the Gift Tax? (Oct. 15, 2010)
- Are Contributions to American Crossroads, Other 501(c)(4) Groups Taxable Gifts? (May 11, 2011)
- NY Times: IRS Moves to Tax Contributions to 501(c)(4) Political Groups (May 13, 2011)
- IRS Denies Political influence in Gift Tax Scrutiny of 501(c)(4) Groups (May 13, 2011)
- Tobin: Application of the Gift Tax to § 501(c)(4) Organizations (May 16, 2011)
- GOP Questions IRS on Applying Gift Tax to Contributions to 501(c)(4) Groups (May 19, 2011)
- Kristan: Is the Gift Tax Law on the Side of 501(c)(4) Donors? (May 19, 2011)
- Gift Tax Seen for Wealthy Donors as IRS Probes Campaign Contributions (May 25, 2011)
- Barone, Froomkin on the IRS's Use of the Gift Tax Against § 501(c)(4) Groups (May 27, 2011)
- IRS Responds to GOP Questions on Application of Gift Tax to 501(c)(4) Groups (June 4, 2011)
- GOP Demands Answers From IRS on Gift Tax Probe of 501(c)(4) Groups (June 15, 2011)
What about IRS Field Service Advice 200037040 which holds an entity claiming to be exempt under (c)(4), social welfare, can have only a minor amount of political activity? The ruling concluded the entity could not be (c)(4) since essentially all of its activities were political. It held the entity could qualify under 527. But 527 requires the entity to register with the IRS and file disclosures of contributors. These are posted on the IRS web site. 527 says political donations are not taxable income, but only after the registration has been filed. Political contributions received before that filing are taxable income to the entity.
Posted by: Tim Larason | Jul 9, 2011 3:25:59 PM
the only indication i have seen publicly that the targeted 501(c)(4) was a right wing advocacy group was the fact that hatch and camp protested. is someone who has access to actual info about the five gift tax audits confirming the identity of the organization to which the contributions were made?
Posted by: r. willis | Jul 8, 2011 7:58:16 PM
Personally I would have no problem with the IRS investigating 501c organizations, but why only repub 501c's, and not the Soros empire. But typically Obama managed to take what might have been a good idea, investigating 501c's, and totally ruin it with cronyism and partisanship, so it ends up looking like Nixon using the IRS against political enemies. If he had started with an honest investigation of Soros, which the repubs probably would not have opposed, and only after that investigation had already caused big problems for Soros, also investigated repub leaning 501c's, the repubs would have been in no position to complain, since the Soros investigation would have set the precedent.
To any of you dems who are mad that the Rove 501c was not taken down, you know who to blame, Obama, because he would not be honest and non-partisan, and go after his own cronies first.
Posted by: richard40 | Jul 8, 2011 3:28:52 PM
"It was the first time any tax professional, either in private practice or the government, had publicly expressed an opinion that contributions to such exempt organizations were subject to the gift tax. It was a preposterous position unsupported by statute, regulation, or case law." ?????
There is a revenue ruling right on point that supports the IRS examination position.
True, it had not been enforced for many years, but hasn't there been an explosion of (c)(4)'s used for this purpose after the enactment of 527(k) in 2002?
And, yes, I am a tax lawyer.
Posted by: Marcus A. | Jul 8, 2011 1:53:27 PM
Van, where are you getting your information that "political enemies were trying to punish Rove's donors?" Do you know who the five audited donors are or which c3s they donated to?
Or are you leaping to conclusions?
Posted by: Marketplace | Jul 8, 2011 12:49:40 PM
@ Rove getting any deduction at all is a joke
Posted by: Van | Jul 7, 2011 9:36:47 PM
Donations to 501(c)(4) organizations are not eligible for charitable deductions. The treatment of charitable contributions is distinctly different from that of gifts. That's why political enemies were trying to punish Rove's donors by making them subject to gift taxes. If 501(c)(4)s become subject to gift taxes, it will have implications across the ideological spectrum, organizations such as Planned Parenthood typically form adjunct 501(c)(4)s to handle their political advocacy. That's likely why the IRS was encouraged to back off.
Posted by: obladioblada | Jul 8, 2011 8:45:02 AM
My understanding is that this is not about the Koch brothers or Soros getting a tax deduction. Political contributions are already non-deductable. The issue is whether the contribution should be defined as a gift and subject to the gift tax. The gift tax is part of the estate tax. It is intended to prevent the wealthy from avoiding the estate (inheritance) tax by giving away their wealth before they die.
Posted by: JD in IL | Jul 8, 2011 7:58:59 AM
For all of those reading this who are not tax lawyers, the reason Republican Congressmen protested over IRS investigations of 501(c)(4) organizations was because it was in the context of a gift tax audit. It was the first time any tax professional, either in private practice or the government, had publicly expressed an opinion that contributions to such exempt organizations were subject to the gift tax. It was a preposterous position unsupported by statute, regulation, or case law. It was also idiotic that the Obama political officers within the IRS would think tax professionals would not see it as the blatant political play it was.
Posted by: TexEcon | Jul 8, 2011 7:33:23 AM
Apparently it's dawned on the IRS that the Democrats might not be in charge after next year, and the Republicans are going to be in a vengeful mood.
Posted by: John Stephens | Jul 8, 2011 7:28:17 AM
People keep complaining about how this was politically motivated, but no one has cited any evidence. The identities of the five audited donors aren't public knowledge, nor are the 501(c)(4)s that they donated to.
Posted by: Marketplace | Jul 8, 2011 7:18:40 AM
I do think it is fair that they will not pursue investigations until they decide some guidelines and announce them to the public. Going only after what appear to be conservative political organizations when there are liberal organizations doing the same was pretty stupid and looks politically motivated and likely was. As far as I am concerned, contributions to organizations that are used for political purposes shouldn't be deductible.
Posted by: Laddy | Jul 8, 2011 6:35:59 AM
Please folks, this isn't about republicans or democrats. Have you ever worked at the IRS? I have, many years and many different parts, both in the field, Counsel and headquarters, starting low and working my way up to a relatively high (SES) level.
This is not about which organizations the IRS field office(s) chose to go after (first), this is about how the IRS headquarters and Counsel no longer stand up to political pressures.
The IRS is no longer an independent agency that administers the Code evenly against all. It gives favorable treatment to the well-connected.
Posted by: Marcus | Jul 8, 2011 6:06:11 AM
An excellent example of how politics invades IRS decision-making. For every one, public example, there are many others that few know about. Implementing a 5-year term for the IRS commissioner did not end this problem.
Posted by: Marcus | Jul 8, 2011 5:23:27 AM
If you'd bothered to actually *READ THE FOOKIN LINK* you'd realize that this isn't about Rove getting a tax deduction, it's about folks like the Koch Brothers and George Soros getting tax deductions for giving money to "charities" that are basically political organizations.
The interesting question is why the IRS was investigating Rove/Crossroads and Koch/American Prospects donors, but not (or at least not clearly) going after Soros funded organizations, and if they were why the NY Times didn't mention those as prominently as the Republican side.
Well, for values of interesting that mean not very because we already know why.
Did Bush also abuse the IRS the way Obama and Clinton did (the NRA basically set aside office space for their IRS investigator, at least according to inside sources).
Posted by: Antistotle | Jul 8, 2011 5:02:12 AM
But of course, Liz and Van have no problem with SEIU or George Soros spending all the money they want, even if it comes from trading to wreck economies and currencies right before elections.... or with a President who provably raised 1/3+ of his cash through illegal donations by disabling the standard verification checks on his campaign website.
Posted by: SDN | Jul 8, 2011 5:00:09 AM
Personally, I am disgusted.
The comments by Hatch & Camp that state that these 501(c)(4)s will be free from undue political influence is such crap...the fact that (c)(4)s are created to 'indirectly' exert political influence should be free from political influence? I'm sorry, but that's just bullshit.
I work inside the beltway, and I am embarrassed by this.
Posted by: Prof D | Jul 8, 2011 4:49:42 AM
I suspect it dawned on them that there are more Democrat 501(c)(4)'s than Republican ones.
Posted by: axelhose | Jul 8, 2011 4:03:55 AM
Typical. IRS has no backbone. Never has, Never will.
Rove getting any deduction at all is a joke
Posted by: Van | Jul 7, 2011 6:36:47 PM
Wow. The hypocrisy here is pretty blatant. The country's broke, but don't even think about looking into the practices of people spending billions to influence lawmakers and elections to make sure they're paying what they owe.
Posted by: Liz | Jul 7, 2011 5:36:54 PM
i had not heard crossroads identified as the target. is there confirmation of this?
Posted by: r. willis | Jul 7, 2011 5:21:53 PM
Thanks for your unsubstantiated finger pointing about "cronyism," but where is your actual evidence that the audits were politically motivated? Have you considered reading further than the headline?
Posted by: Marketplace | Jul 11, 2011 6:31:23 AM