IRS amending 501(c)(4) regs in response to political pressure

IRS getting Political!

RIA, a well tax publisher reports:

After 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.

Statutory background. 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 “primary” activity. (Reg. § 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.

Gift 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.

Earlier controversies. In 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.

Following 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 ¶ 2 07/14/2011)

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.