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The IRS seemingly is making good on its intentto broaden its scrutiny of finances in nonprofits beyond (c)3s, and already senators have expressed concern over the agency’s efforts.
Several senators have queried the IRS on the reasons and timing behind raising the specter of possibly applying the gift tax to donations to association groups, specifically (c)4s.
The senators – all Republican and all members of the Senate Finance Committee – sent a letter to the IRS last week seeking information regarding the agency’s decision to start applying the gift tax to donations. The New York Times reported earlier that several donors received letters informing them monetary gifts to certain groups might be taxable. The law permitting this taxhas been on the books for quite some time, but has rarely, if ever, been applied.
This tax is designed to prevent avoidance of the estate tax, according to Ronald M. Jacobs, Esq., of the Venable law firm’s DC office. “In other words, people cannot give away their money before they die to avoid the estate tax. It seems unlikely that an individual would give to a 501(c)(4) for that purpose. Rather, they give to advance a social or political agenda. It is for this reason that application of the gift tax to contributions to 501(c)(4) organizations is questionable or at least controversial.”
The senators said in their letter, “This pattern of nonenforcement over a period of nearly three decades, coupled with the troubling issues regarding the adverse impact that enforcement might have on the exercise of constitutionally protected rights, raises important questions regarding the timing of the decision to enforce the gift tax on these contributions. Retroactive enforcement of the gift tax in this highly politicized environment raises legitimate concerns and demands further explanation.”
The senators are Orrin G. Hatch (UT), Jon Kyl (AZ), Pat Roberts (KS), John Cornyn (TX), John Thune (SD) and Richard Burr (NC).
They question whether political appointees had anything to do with making this type of case a priority for the IRS. The senators are asking for the names of people involved in the decision to enforce the gift tax on contributions to (c)4s, as well as any documentation, including correspondence between the agency and the White House.
An IRS statement says the decision to apply the gift tax came from “career civil servants without influence from anyone outside of the IRS.”
“Ultimately there is little that an association can do in this situation, other than warn the donor about the tax implications or suggest that there may be other giving strategies to reduce the tax burdens,” Jacobs said.
For (c)6s, there is no exemption from the gift tax, but businesses can take deduct payments as ordinary business expenses as long as the payments are not for lobbying or political purposes, Jacobs said. Individuals often can deduct memberships in (c)6 associations as business expenses, but the IRS may scrutinize large contributions.
“In essence, this is a tax on anonymity,” Jacobs said. “A donor can give to a ‘super PAC,’ which has no contribution limits, but the contributions will be disclosed to the Federal Election Commission. An organization can set up a 527 committee - perhaps affiliated with a 501(c)(4) - and not register it with the FEC, but the organization will have to file disclosures with the IRS. If a (c)4 takes contributions - for any purpose - the donors will be subject to the gift tax of 35%, with a $13,000 annual deduction.”