The IRS Begins Assessing Gift Taxes on Donations to 501(c)(4) Tax Exempts

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May 10, 2011; Source: Politico | To find out what the IRS is doing, you have to pay attention to what tax lawyers are telling their clients. According to Los Angeles tax lawyer Ofer Lion, the IRS has begun notifying donors to 501(c)(4) organizations that their donations are subject to the gift tax.

The IRS is actually looking back some years and indicating that it will seek back taxes. The gift tax rates mirror income tax rates and therefore could run as high as 35 percent. Some donors could choose to litigate the IRS’s new interest in taxing donations to 501(c)(4)s, perhaps challenging why the IRS suddenly woke up to its ability to assess gift taxes against donations long past.

But part of the attractiveness of (c)(4)s for political donors is that their contributions to (c)(4)s are anonymous – secret – compared to the disclosure required on donations to political parties and political action committees. Litigation would mean sacrificing donors’ anonymity.

Political movers and shakers like Karl Rove whose Crossroads GPS played an outsized role in the 2010 election cycle are probably nonplussed. They probably hadn’t told their donors that they would face a 35 percent federal gift tax hit. A spokesperson for Rove’s (c)(4) said that he hadn’t heard anything about this from the IRS or anyone else until contacted for a comment by Forbes.

It is easy to imagine the political fallout. There have long been suspicions on the left and right that the IRS gets used as a political tool. With the past year’s largely Democratic criticisms of Republican-oriented 501(c)(4)s, conservatives might be expected to charge that this is a political strategy to deter contributions to their most successful political fundraising tools. Someone will probably identify Ofer Lion as a Barack Obama supporter in 2008 as he was.

The Republican budgets in Congress call for cutting the IRS budget and its staffing, though that attempt largely meant to cripple the IRS role in health care reform. Watch the IRS become even more visible as a battleground between Democrats and Republicans, in this case, with donations to 501(c)(4)s as the cause of the conflict.—Rick Cohen