Friday, June 10, 2011

Gift Tax and Politics Don't Mix

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Thanks to Politico, we have the news that the IRS estate and gift tax team is auditing taxpayers who have made large gifts to §501(c)(4) advocacy organizations such as American Crossroads and Priorities USA. Ofer Lion, a Los Angeles tax lawyer, has provided a redacted copy of the initial contact letter to his client from an IRS estate and gift tax attorney, announcing an audit of the taxpayer's 2008 gift tax return and stating that "the Internal Revenue Service has received information that you donated cash to [REDACTED] a IRC Section 501(c)(4) organization."  The letter goes on to state that "(d)onations to 501(c)(4) organizations are taxable gifts and your contributions in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709)."

I wish that we could all be so certain of our tax positions as this IRS attorney. In fact, it is not clear whether a transfer to a §501(c)(4) organization is a taxable gift and we can expect some pushback from the audited taxpayers. For many years, the IRS took the position that gifts to political parties and candidates in excess of the annual exclusion amount were subject to gift tax. See Rev. Rul. 59-57. But Congress didn't like this impediment to filling its campaign coffers, and in 1974 it enacted §2501(a)(4), which exempts contributions to political organizations from the gift tax.

Section 501(c)(4) entities do not qualify as political organizations and therefore are not subject to the §2501(a)(4) exemption. But donations to such organizations are often subject to a more basic exemption in that they are not disinterested transfers and therefore not a gift. The issue was addressed by the Fifth Circuit in Stern v. U.S., 436 F.2d 1327 (1971), where the court held that contributions to an independent committee that supported political candidates were not taxable gifts, because the donor had made the transfers to further her own political and economic interests. The court noted that "(t)he contributions were motivated by appellee's desire to promote a slate of candidates that would protect and advance her personal and property interests." The taxpayer who is now subject to audit would probably agree.

The IRS has stated its disagreement with Stern and has indicated that it will follow the decision only in the Fifth Circuit. See Rev. Ruls. 72-583 and 82-216. Don't be surprised to find the issue taken up in other circuits as the IRS audit program continues.

Harold W. Pskowski, Managing Editor for Estates, Gifts and Trusts

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