The IRS confirmed May 13 that it is examining donations to one or more Section 501(c)(4) organizations to determine whether the donors should have paid the federal gift tax on the donations. The development has shocked some tax lawyers, who have been advising clients for decades that donations to 501(c)(4) "social welfare" groupsincluding those that get involved in political and issue-advocacy campaignsroutinely are not subject to the gift tax.
Stay tuned. If the IRS takes the position that the donations are taxable gifts, there will surely be a battle that will spill into the Federal courts. Donations to 501(c)(4)s are not characterized by the "disinterested generosity" that is required of a gift for transfer tax (estate and gift tax) purposes.
Internal Revenue Code Section 501(c)(4) exempts from tax "civic leagues...operated exclusively for the promotion of social welfare...." High profile Section 501(c)(4)s include Crossroads GPS, an organization that opposes President Obama's agenda and became a force as a fundraising juggernaut in the 2010 elections. Others include Priorities USA; Americans For Tax Reform; and Americans For Prosperity, a group fronting special interests started by oil billionaire David Koch. People For The American Way is a prominent left wing 501(c)(4).