While the surge in 501(c)(4)s that led to the current IRS scandal is widely attributable to Citizens United, it was a very deliberate IRS action – the decision to exempt donations to 501(c)(4)s from gift tax – that was equally responsible for the unprecedented spending by 501(c)(4)s in the 2012 election.
This paper describes the history of the gift tax as applied to donations to 501(c)(4)s, discusses the policy implications, and then proposes a legislative solution.
First, under a "disclosure or tax" rule, donations to a tax-exempt organization that engages in any substantial amount of lobbying or campaigning would be exempt from gift tax only if the organization discloses the name of the donor in accordance with the rules in section 527.
Second, any organization that engages in any substantial amount of lobbying or campaigning would be taxable on all its investment income.
And finally, appreciated property donated to any organization that engages in a substantial amount of lobbying or campaigning would be treated as sold.
The effect of these provisions would be an extension of the section 527 rules to organizations that substantially lobby or campaign, except that (i) any organization that substantially lobbies or campaigns would be subject to tax on all of its investment income (and not only the lesser of investment income and the amount spent on campaigning, as is the case today under section 527(f)), and (ii) the organization could keep the name of a donor anonymous if the donor were willing to be subject to gift tax.