Big 501(c)(4) Donations May Be Subject to a Big Gift Tax

Interesting new development in the shadowy world of 501(c)(4) spending. Forbes is reporting that a Los Angeles tax lawyer is advising clients that their contributions to 501(c)(4) groups could be subject to a weighty 35 percent “federal gift tax”:

In a memo, Ofer Lion, a lawyer with Mitchell Silberberg & Knupp who specializes in nonprofit organizations,  writes that unlike contributions to certain other political organizations, there is no gift-tax exemption written into federal law for contributions to 501(c)(4)’s, which the IRS officially classifies as social-welfare organizations but also are often used for lobbying. And that, he says, raises the possibility that down the road the Internal Revenue Service might come calling for the tax, plus interest, plus penalties. “The IRS may well find irresistible the potential revenue to be raised from assessing gift taxes on 501(c)(4) contributors,” writes Lion.

Not every contribution qualifies for a gift tax — married couples, for instance, can give $26,000 a year to as many recipients as they want without incurring a tax, and individual taxpayers also enjoy a lifetime exemption of $1 million before incurring a tax. But if reports of multi-million dollar contributions by wealthy individuals to some 501(c)(4)s are correct, they would easily be surpassing the threshold and could be dissuaded by the tax from giving more.

Spokesmen for Crossroads GPS, a popular outside group spending heavily on behalf of Republicans this midterm cycle, and even the IRS, for that matter, appeared flummoxed by questions regarding a possible gift tax liability for contributions to 501(c)(4) groups. It’s not everyday the IRS responds by saying, “That’s an interesting issue,” and asking for more time to look into the matter. To be continued, it seems.