February 25, 2024

I.R.S. Moves to Tax Gifts to Groups Active in Politics

The Internal Revenue Service confirmed on Thursday that it had sent letters to five donors, who were not identified, informing them that their contributions may be subject to gift taxes.

These groups have been drawing more and more criticism, from President Obama as well as others, as they have proliferated and funneled vast sums of money in support of campaigns and causes, without having to publicly disclose their donors. During the midterm cycle, for example, groups like Crossroads GPS, which has ties to the Republican strategist Karl Rove, and Americans for Prosperity, backed by Mr. Koch and his brother Charles, were heavily involved in politicking, spurring campaign finance watchdogs to complain that they were largely unregulated and flouting election and nonprofit laws.

The organizations in question were established as nonprofit corporations under a section of the tax law, 501(c)(4), and the rules governing them say their primary purpose cannot be political. Unlike contributions to charities, however, donations to these groups have always been subject to a gift tax. But tax experts and campaign finance experts say the I.R.S. had not enforced that rule, until now.

The timing of the agency’s moves, as the 2012 election cycle gets under way, is prompting some tax law and campaign finance experts to question whether the I.R.S. could be sending a signal about big campaign donations to these groups in an effort to curtail them.

“There are a whole heck of a lot of people misusing (c)(4) groups as a means of getting around campaign finance regulations, and we lack a coherent system of laws to deal with that,” said Donald B. Tobin, a legal expert on the intersection of campaign finance and tax laws at the Moritz College of Law at Ohio State University. “Now here’s a stick, frankly, that says there are consequences for doing that.”

In a statement released Thursday afternoon, Michelle L. Eldridge, a spokeswoman for the I.R.S., said that the inquiries were initiated by agency employees, not Obama administration officials, “as part of their increased efforts in the area of nonfiling of gift and estate tax returns.”

And while tax lawyers who learned of the investigations have been issuing warnings to clients of potential trouble on a broader scale, the I.R.S. statement denied casting a wider net: “These examinations are not part of a broader effort looking at donations to 501(c)4s.”

The White House would not comment.

  If the I.R.S. were to enforce the tax rule broadly, experts are sensing that it could act as a counterweight to tamp down donations on one side, as another anticipated set of big corporate, union and like-minded political contributions flood campaigns through the barriers lifted by last year’s Supreme Court ruling in the Citizens United case.

Both major political parties and candidates have benefited from these types of organizations, but the Republican groups grew in force and size after the 2008 election, partly in recognition of Mr. Obama’s proficiency at fund-raising. For example, Mr. Rove’s group, one of the best known from the 2010 midterm cycle, raised $70 million. Americans for Prosperity, a libertarian group that provides a training ground for Tea Party activists and is opposed to many of President Obama’s policies, has been generously financed by David Koch, a billionaire.

But Democrats have embraced the model, too. Bill Burton, Mr. Obama’s former deputy press secretary, has been skewered by critics of these groups for announcing last month the creation of Priorities USA Action to help Democrats. In 2009 and 2010, Mr. Soros, the billionaire investor, donated more than $12 million to advocacy groups working on a variety of issues.

Whether Mr. Soros and other prominent donors have paid taxes on their contributions to such groups is unknown. A spokesman for Mr. Soros declined to comment. Representatives of the Kochs did not respond.

In general, individuals incur gift taxes of 35 percent on any amount exceeding $13,000 in a single year, while couples have to pay taxes after donating $26,000. Currently, there is a lifetime exemption that covers $5 million in gifts — which is scheduled to be reduced to $1 million in 2013 — but tax experts say many wealthy donors are likely to have already used that benefit in their estate plans.

The I.R.S. definitively declared these gifts taxable in 1982, but that rule has rarely been enforced, tax lawyers said. “That was their last word on it, so these letters just look like a sort of trap for the unwary, which is not fair,” said Ofer Lion, a lawyer who has written about the issue.

Last December, after the 2010 midterm elections, the I.R.S. division that oversees tax-exempt organizations did say that this year it would pay closer attention to them and to labor unions and business associations like the U.S. Chamber of Commerce, which also were more politically active than in the past.

But officials of that division who attended a meeting of the American Bar Association’s subcommittee on political and lobbying organizations last Friday were surprised to find out that their colleagues in the estate and gift tax unit, typically regarded as a backwater at the agency, also had an increased interest, according to lawyers who were there.

“I don’t know how extensive this effort is, but I have one such client and I’ve spoken with others with clients who have received similar letters,” said Gregory L. Colvin, a lawyer specializing in nonprofit law. Ellen P. Aprill, a law professor at Loyola Law School in Los Angeles, noted that the gift tax division also had been asking states to provide records of property transfers between family members. “It could just be part of a general enforcement of the gift tax that is catching some of these donors,” Ms. Aprill said.

Other groups rarely entice gifts big enough to subject their donors to the gift tax, which is why many of them have established affiliated charities. Charities, unlike almost all other tax-exempt organizations, offer their donors a tax deduction and so attract the largest gifts.

Big donations to a previously popular category, the largely unregulated 527 groups that were influential in the 2004 election cycle, are not subject to the gift tax. “Congress specifically exempted donors to 527 organizations from the gift tax in 2000, but it didn’t exempt contributions to (c)(4) groups because there wasn’t an issue at the time,” said Alan P. Dye, a lawyer who represents a number of conservative advocacy groups. “Citizens United has now made it an issue, and I think it’s going to be really interesting to see how this plays out in Congress or the courts.”

In the meantime, Marcus S. Owens, a lawyer who represents nonprofits and who formerly headed the I.R.S. division that oversees tax-exempt organizations, predicted that the tax agency’s moves would be watched warily by contributors. “The lack of clarity and the potential for not-insignificant taxation on these gifts will cause many of the biggest donors to think twice,” he warned.

Article source: http://feeds.nytimes.com/click.phdo?i=24cd5ad4f1075ab9177ee819003e9c9c

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