IRS getting Political!
RIA, a well tax publisher reports:
a brief hiatus from the public eye, the controversy surrounding Code Sec.
501(c)(4) social welfare organizations has returned as the November elections
near. In a strongly worded letter to Commissioner Shulman, a group of Senate
Republicans questioned whether IRS had already begun amending the Code Sec.
501(c)(4) regs and cautioned IRS against short-circuiting its deliberative
process with regard to this highly political issue.
Under Code Sec. 501(c)(4), civic leagues or organizations not organized for
profit but operated exclusively for the promotion of social welfare are exempt
from income taxation if no part of their earnings inures to the benefit of any
private shareholder or individual and no substantial part of the organization's
activities consists of providing commercial-type insurance. These organizations
may engage in political campaign activities on behalf of or in opposition to
candidates for public office. However, in order to retain its tax-exempt status,
an organization must ensure that political campaign activities do not constitute
its â€œprimaryâ€ activity. (Reg. Â§ 1.501(c)(4)-1(a)(2)(i);Rev Rul 81-95,
1981-1 CB 332 ) Many practitioners have interpreted this as allowing a Code Sec.
501(c)(4) organization to spend up to 49% of its total expenditures on campaign
activities without jeopardizing its exempt status.
tax is generally imposed on the transfer of money or other property by gift.
(Code Sec. 2501(a)) However, there's no gift tax on a transfer to a political
organization within the meaning of Code Sec. 527(e)(1). (Code Sec. 2501(a)(4))
Gifts to social welfare organizations do not qualify for the exclusion for
political organizations under Code Sec. 2501(a)(4) or the deduction for
charitable gifts under Code Sec. 2522, and are thus arguably subject to gift
tax. However, IRS's enforcement in this area has been described by practitioners
as lax, if not nonexistent.
2011, it was reported that IRS was examining five donors who made transfers to
Code Sec. 501(c)(4) social welfare organizations without reporting them as
taxable gifts. Such transfers have proliferated in the wake of the 2010 Supreme
Court decision in Citizens United v. Federal Election Commission (FEC), (2010)
130 S Ct 876.
questions regarding whether IRS's inquiry was politically motivated, and
Commissioner Shulman's assurances that it was not, IRS formally ended its probe
and stated that further guidance was required. (See Weekly Alert Â¶ 2
What this Means to Charities. The IRS is being used as a tool by the Executive Branch under President Obama to prevent charities from taking political position advertisements. Even though donations are not deductible to the giver, the IRS approach is to attack the donors by making their gifts taxable. This will discourage donations to independent groups - particularly those supporting Tea Party and Conservative/libertarian causes.