IRS Targets Donors to Politically Engaged Nonprofits

By Zachary Newkirk on May 11, 2011

The Internal Revenue Service is beginning to enforce taxes on gifts to 501(c)(4) organizations, a move that could significantly affect the world of money in politics.

Various 501(c)(4) nonprofit groups such as the the American Action Network and Crossroads Grassroots Policy Strategies have poured millions of dollars into federal election campaigns, even though they are not, by law, supposed to have a primary purpose of engaging in political activity.

Donors to these groups are anonymous, and gifts to political groups are typically not taxable. But the IRS has begun taking a closer look at taxing these donors, according to Ben Smith of Politico.

“Gifts to other political organizations are not taxable under federal law, and lawyers informally say many donors do not typically pay the gift tax — which may run as high as 35 percent, mirroring income tax rates — for contributions to 501(c)(4)s,” Smith reports.

A spike in spending by 501(c)(4) nonprofit groups occurred last year in the wake of the U.S. Supreme Court’s decision in Citizens United v. Federal Election Commission. That decision allowed all 501(c)(4) nonprofit organizations to use contributions from corporations to fund political messages at any time of the election cycle. Previously, 501(c)(4) nonprofit organizations were barred from using corporate money for broadcast advertisements that mentioned a federal candidate within 30 days of a primary election or 60 days of a general election.

The Citizens United ruling also granted corporations the ability to use their treasuries to fund political advertisements that expressly advocate for or against candidates, spending that is legally known as independent expenditures.

OpenSecrets Blog recently published a report on how the Citizens United decision has “profoundly affected the nation’s political landscape.”

In this report, Center for Responsive Politics researcher Spencer MacColl noted that groups that do not disclose their donors rose from 1 percent of all spending by outside groups to 47 percent between the 2006 election cycle and the 2010 election cycle.

But this trajectory could change further thanks to the IRS.

For one, anonymous donors may be deterred to contribute to a group that requires a 35 percent gift tax and disclosure to the IRS.

Smith notes that the question of “whether these (c)4 gifts should actually be taxable could be subject to litigation.” If the anonymous donors take the issue to court, they would lose their anonymity.

Donors to political groups that are registered with the IRS under section 527 of U.S. tax law — such as political action committees, candidate committees and super PACS — do not have to pay taxes on their contributions, but they must disclose their name and contribution if they give more than $200.

Because of the new IRS enforcement, donors to groups registered with the IRS under section 501(c)(4) of U.S. tax law would have to pay a tax on their gift to remain anonymous.

Contributors weighing gifts to to these two types of groups may now have to choose between the lesser of the two “evils” of disclosure or paying taxes.

In March, OpenSecrets Blog reporter Michael Beckel reported that Trevor Potter, president of the Campaign Legal Center, predicted, “‘I think it is unlikely that the IRS is going to be the government agency that cuts through the Gordian knot of disclosure’ adding that any penalty might just be paying an excise tax, not additional disclosure.

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