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Donors Want Clarification From Treasury on Political Nonprofit Gift Taxes

A group of anonymous political donors asked the Treasury Department on Monday to clarify whether gift taxes are owed on donations made to nonprofit organizations that are tax exempt but not charitable in mission.

The request follows the Internal Revenue Service’s announcement last month that it would drop ongoing audits of prior contributions made to 501(c)(4) organizations until it determined “whether there is a need for further guidance” as to whether political donors could owe back taxes on money given to the type of nonprofit advocacy groups that are poised to be influential in the 2012 elections.

“The reason for this request, and the sense of urgency behind it, is to resolve confusion created by a publicly-released memorandum,” Caplin & Drysdale attorney Marcus Owens wrote on behalf of four clients he described in an interview as “politically active” but “not wealthy.”

“Contrary to the implications of the July 7 memorandum, the official IRS position on the application of the gift tax to gifts to section 501(c)(4) organizations was clear until the July 7 memorandum was issued.”

Owens said his clients became concerned that the IRS was pressured to drop its audit of prior 501(c)(4) donations after Republican members of the Senate Finance Committee and the House Ways & Means Committee requested information in May about the agency’s enforcement of the oft-ignored tax.

At that time, media reports that the IRS had begun examining prior 501(c)(4) contributions prompted GOP Sens. Orrin Hatch (Utah), Jon Kyl (Ariz.), Pat Roberts (Kan.), John Cornyn (Texas), John Thune (S.D.) and Richard Burr (N.C.) to ask Commissioner Douglas Shulman to provide the names of the IRS employees involved in the decision to review the donations, as well as related correspondence between the agency and the executive branch by the end of May.

In July, IRS Deputy Commissioner Steven Miller said the agency would suspend its inquiry into whether the gift tax could be applied to past contributions to 501(c)(4) organizations because it “is a difficult area with significant legal, administrative and policy implications with respect to which we have little enforcement history.”

But Owens said that isn’t the case. There is a joint 1982 ruling issued by the IRS and the Treasury Department and subsequent court cases that have established that the gift tax applies to money given to 501(c)(4) entities, Owens said.

“My clients are concerned because it seems apparent from the narrow, partisan, source of the public Congressional protestations of the IRS audits that the five donors may likely have also been significant donors to Republican causes,” Owens wrote. The “termination of their audits, without any guidance being provided to other, similarly situated, taxpayers suggests a politically-motivated action by the IRS, if only in the form of a misguided effort to avoid controversy.”

At press time the Treasury Department had not yet responded to a request for comment.

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