Donors to nonprofit groups that are spending millions of dollars on political ads this election season have escaped public scrutiny because their contributions don’t have to be disclosed. But can they escape a hefty tax bite?
That’s a question raised by lawyers familiar with nonprofit tax law and by at least one group that advocates for public financing of elections.
At issue is whether contributors to politically active tax-exempt nonprofit organizations - many of them donating hundreds of thousands and even millions of dollars - have to pay the 35 percent gift tax on their donations. It is a murky area of the law, and the Internal Revenue Service has not offered any instruction.
But the question adds yet another dimension to what has become a dominant theme in this election season: the role of outside groups, mainly allied with Republicans, that have weighed in with ads attacking Democrats in Senate and House contests across the country.
“It’s a matter of where the absence of guidance from the IRS means more gasoline on the fire,” said Marcus Owens, former director of the IRS exempt-organizations division.
Campaign Money Watch, a project of Public Campaign Action Fund, has announced plans this week to send letters to five Republican-allied groups that are incorporated as nonprofits under Section 501 (c)(4) of the tax code and to the U.S. Chamber of Commerce, asking whether they advise their donors to pay the gift tax.
“I don’t think these organizations want to be on record helping their donors get away with not paying taxes,” David Donnelly, the director of Campaign Money Watch, said Sunday.
The groups targeted by the letter in addition to the chamber are Crossroads Grassroots Policy Strategies, formed this year with help from GOP guru Karl Rove, the American Action Network, Americans for Prosperity, Americans for Job Security and the American Future Fund. The groups collectively have been raising and spending millions of dollars to help defeat Democratic candidates.
“In the universe of 501 (c)(4)s, we are a speck compared to the older and much larger groups like AARP, the NRA, the NAACP or the LCV,” Crossroads spokesman Jonathan Collegio said, referring to, among others, the National Rifle Association and the League of Conservation Voters. “Folks truly interested in the implications of tax law on nonprofits should be first sending their letters in the direction of older and bigger groups, unless they want this to look like a crass partisan stunt two weeks before an election.”
The burden for paying the tax does not fall on the organizations, but with the donors.
Under the law, gifts greater than $13,000 - or $26,000 per couple - are taxable at a 35 percent rate. That means a $1 million gift carries a $350,000 tax with it. Gifts to spouses or tuition or medical care payments made on behalf of someone else are exempt.
The tax also does not apply to contributions to political parties or political organizations known as “527” groups, named for the section of the tax code that covers them. Those groups must report their contributions to the Federal Election Commission.
Groups covered under section 501(c)(4) of the tax code, however, don’t have to report to the FEC; they also must dedicate a majority of their activities to functions that are not related to elections.
The law is opaque regarding donors to those groups. Whether a contribution qualifies as a gift has much to do with a donor’s intentions and whether the donor gets some type of consideration in return. If he or she does get a consideration, then the donation might not qualify as a gift.
“The issue is whether if I give $1 million to Karl Rove and tell him to buy ads across the country, is that a gift or am I giving him a task and paying him to do it?” Mr. Owens said.
That places the donation in something of a gray zone. If the gift gets nothing in return, then it’s taxable. If it’s too specific about where political ads should be placed, then it could trigger disclosure to the Federal Election Commission.
“There is this rock-and-a-hard-place thing going on,” Mr. Donnelly said.
Attention to the gift tax issue blossomed over the weekend after the Web site of Forbes magazine cited a memorandum from a California tax lawyer to his clients warning contributors about the tax implications of donating to tax-exempt nonprofit groups. The lawyer, Ofer Lion, also teaches on tax exemption issues at the University of California at Los Angeles Law School.
The memo began to spread among liberal blogs, pushed by activists eager to give donors to anti-Democratic groups something to think about before making a contribution.
The American Bar Association urged the IRS to resolve the issue in 2004.
“This lack of clarity has led to a situation in which some donors pay the tax while others do not,” a committee of the ABA observed. “Many taxpayers and their advisors have not even recognized the potential applicability of the gift tax as an issue.”
Some 501(c)(4) groups, such as the National Association for the Advancement of Colored People, do warn their donors about tax implications.
Asked what a lawyer should advise a client making such contributions, Mr. Owens, the former IRS official, said: “I guess the first question is, ’How well do you like to sleep at night?’ “
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