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Report: Gift Taxes Apply to Some Super PAC-Linked Groups

The Congressional Research Service released a report this week indicating that existing gift tax statutes can apply to contributions made to offshoots of super PACs that are spending millions of dollars to influence state and national elections.

The IRS had, for a brief period last year, begun enforcing an oft-ignored tax on contributions to 501(c)(4) organizations, creating potentially large gift tax liabilities for donors who wrote big checks to nonprofit advocacy groups during the past and current election cycles.

News reports in Roll Call and other publications prompted some Members of Congress, including Republicans on the Senate Finance Committee, to question whether the decision to enforce the long-overlooked tax was politically motivated. Several months later, the IRS said it had suspended its examination of possible gift taxes owed on prior contributions.

“The gift tax statutes do not contain an exemption for these donations, thus indicating they are subject to tax. While some have argued that Congress did not intend this result, there is arguably insufficient evidence of such intent,” Congressional Research Service attorneys said in an Aug. 10 report.

The report then cast doubt on the strength of three main arguments that have been made for why, though contributions to 501(c)(4) groups are subject to the gift tax generally, money given for advocacy purposes specifically is exempt.

“There is case law, albeit minimal, to support some of these conclusions; however, the holdings in these cases are not without controversy, and it is not clear the extent to which other courts would agree with their analysis,” the report’s authors said.

The Congressional Research Service is a nonpartisan legislative branch agency tasked with providing Congress with requested research.

As Roll Call has reported in the past, 501(c)(4) political advocacy groups proliferated during the past election cycle, often working in tandem with “super PACs” to drop millions of dollars on political advertisements. Unlike their charitable 501(c)(3) counterparts – which are barred from political activity – and 527 political organizations – which have heightened disclosure requirements – 501(c)(4) groups can shield donors’ identities yet still participate in campaign activity as long as it’s not the organization’s primary purpose, making them attractive vehicles for wealthy donors to dump money into political campaigns.

The super PAC American Crossroads, conceived by former Republican National Committee Chairman Ed Gillespie – now an adviser to presumed Republican presidential nominee Mitt Romney – and former Bush strategist Karl Rove, for example, is a 527 organization that operates with an affiliated 501(c)(4) group called Crossroads GPS. The super PAC formed by two former members of the Obama White House, Priorities USA Action, is a 527 organization that works in conjunction with the 501(c)(4) group Priorities USA.

Groups that support both parties are expected to raise hundreds of millions of dollars for 501(c)(4) groups this election cycle after a January 2010 Supreme Court decision rolled back limits on corporate and union spending in elections.

Campaign finance experts and attorneys told Roll Call at the time of the IRS review that unless Congress rewrites the tax code to create another gift tax exclusion, as it did with money given to 527 organizations, the only recourse for donors under review would be to contest the IRS audit in court.

“One of the things that is most interesting is that if the donors choose to contest it then they’ll no longer be anonymous, which is interesting considering that the whole benefit to giving [to] these organizations is that you’ll remain anonymous,” said Lisa Gilbert of the consumer advocacy group Public Citizen, which has a registered 501(c)(4) division.

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