Saturday, July 9, 2011

IRS Ends Gift Tax Probes of Non-Profit Groups

On  July 7  the IRS said that it would stop its examinations of tax-exempt 501(c)(4) organizations. The IRS had quite recently been reviewing donors to these organizations for compliance with gift tax return requirements.

There is some uncertainty in the tax literature whether contributions to these organizations would be considered “gifts.” If so, and depending on the amount, there could be a gift tax return requirement. Now, when I say uncertainty, I mean that there is a classroom argument to be made. The IRS has not pursued this matter for nigh near 30 years, so it is not something that has concerned many practitioners.

The classic charity is a 501(c)(3). We are talking about (c)(4)’s, which are “social welfare” organizations. The idea is that the organization promotes the common good, although that common good can be targeted to a certain slice of the population. The AARP, for example, is a 501(c)(4), and that slice is people over age 50. A (c)(4) can even lobby, as long as it is not the primary thing the (c)(4) does. A (c)(3)  cannot go as far with lobbying as a (c)(4) can.

The big difference? Donations to a(c)(3) are deductible on your income tax return. Donations to a (c)(4) are not.

Let’s fast forward. What has changed? Well, in the last election cycle the (c)(4)s raised seven times as much money for Republican causes than for Democrat causes.

Then the IRS announced that it wanted to “look into” the (c)(4)s.

Republicans in both the House and Senate immediately questioned why the IRS was going there.

While the IRS statement is welcome, lawmakers want to find out what, if any, political muscle was used. The IRS says there was none. Republicans of course are highly skeptical.

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