Gift Tax on Transfers to Section 501(c)(4) Organizations ABA Tax/RPTE Joint Fall Meeting Denver, Colorado October 21, 2011 Preliminary Matter: Why are 501(c)(4)s hot?
2008 Elections Contribution Limits Disclosure of Contributions Gift Tax on Donors Primary n- Electoral Purpose Issue Ads Indep. Expenditures (Express Advocacy) Political Contribs. (inc. coordination) 501(c)(3)s 501(c)(4)s (?) Soft 527s Federal PACS 2012 Elections Contribution Limits Disclosure of Contributions Gift Tax on Donors Primary n- Electoral Purpose Issue Ads Indep. Expenditures (Express Advocacy) Political Contribs. (inc. coordination) 501(c)(3)s 501(c)(4)s * Soft 527s Federal PACS IE-Only PACs
So, why are 501(c)(4)s the hot political vehicle in 2012? They can make unlimited independent expenditures in federal elections They can receive unlimited donations from any source They (generally) need not disclose the source of their donations And now their donors don t owe gift tax New! New! But 501(c)(4)s still have to engage primarily in nonpartisan social welfare (IE-Only PACs generally engage exclusively in electoral activity) Both 501(c)(4)s and IE-Only PACs must avoid coordination with candidates Early cases no gift tax deduction for organizations that would today be c4s
Faulkner v. CIR (BTA 1940) Gift tax on transfer to Birth Control League of Mass. Legislative activities prevented organization from qualifying as charity and thus for gift tax deduction for transfers to charities. DuPont v U.S. (D. Del. 951) Gift tax on transfer to National Economic Council Purpose to preserve private enterprise, private property and private initiative Activities included attempts to influence legislation
Quotations from DuPont Plaintiff received no direct and personal consideration for the transfer which may be reduced to a money value. Any consideration or benefit was one enjoyed by every citizen of the country. In dicta, taxpayer s transfer described as somewhat analogous to transfer to political party. Blaine v. Commissioner (T.C. 1954) Transfers to Foundation for World Government Found to be social welfare org, not charity, because of political objective. Thus, no gift tax deduction.
Next set of precedents involves political organizations, prior to exclusion of sec. 2501(a) Rev. Rul. 1959-1 Transfers to political organizations above annual exclusion subject to gift tax analysis or explanation
Stern v U.S. (5 th Cir. 1971) Mrs. Stern transfers funds to group organized as informal finance committee D. Ct. finds transfer not motivated by affection, respect, but to protect her own interests and used to purchase goods and services. D. Ct. and Appellate Court find transfers bona fide, at arms length and free from donative intent. IRS Reaction to Stern RR 72-583: Will follow only in 5th Cir. RR 72-355: Asserts that it has been position of IRS since enactment of present gift tax that contributions to political campaign are subject to gift tax.
Carson v. CIR (10 th Cir. 1981) Transfers to various election campaigns 10 th Cir. says campaign contributions are not gifts within meaning of gift tax. Chabot s Carson dissent in TC Decision makes charitable contribution deduction superfluous at best Repeals amendment to gift tax charitable contribution deduction that required no campaign intervention statutory provision justifies exemption for these contributions. Compares to DuPont
IRS reaction to Carson RR 82-216 Acquiesces in result in Carson In light of Stern and Carson and enactment of sec. 2501(a)(4), IRS no longer would contend that gifts to political committees are subject to gift tax, no matter when made. But IRS did not accept rationale of decisions Gratuitous transfers to persons other than those excluded by statute subject to gift tax even if transfers motivated by desire to advance donors own social, political, or charitable goals. RR 82-216 con t
Post RR 82-216: A long silence Just how long ago was 1982? January: The Commodore 64 8-bit home computer debuts at the Winter Consumer Electronics Show May: Cal Ripken, Jr. plays his first MLB game (of an eventual record-breaking 2,632 games) June: E.T. the Extra-Terrestrial is released August: Michael Jackson s Thriller is released
In other words it s been a while. What s happened since 1982? Between 1983 and 2003, the IRS said
Anecdotally, we know that Since 1982 Some contributors used workarounds (payment for services, other documentation of consideration) Some contributors paid the tax Some contributors reported their payments on their Forms 709 but paid no tax What s happened since 1982? Between 2003 and 2004, the IRS said
2003 & 2004 Articles Barbara Rhomberg, Taxation of Exempts The Law Remains Unsettled on Gift Taxation of Section 501(c)(4) Contributions (September/ October 2003) Constitutional Issues Cloud the Gift Taxation of Section 501(c)(4) Contributions (January/February 2004) What s happened since 1982? In 2004, the IRS said
2004 ABA EO Tax Force In May 2004, the ABA Exempt Organizations Committee s Task Force on Section 501(c)(4) and Politics: Proposed several topics for IRS study, including c4s & gift tax Suggested that IRS pursue the following factual determinations: Extent of taxpayer awareness of gift tax Extent of taxpayer gift reporting compliance More on the 2004 Task Force Proposed that IRS study the following legal issues: Whether contributions to c4s for lobbying, political, or other public policy advocacy activities meet requirements for taxation Whether contributions to c4s for general support meet requirements for taxation Whether application of gift tax on contributions to c4s in support of lobbying, political, or other public policy advocacy activities may be subject to constitutional objections 1 st Amendment freedoms of association and expression 14 th Amendment right to equal protection
Between 2004 and 2011, the EO bar has occasionally posed c4/gift tax questions to IRS reps at meetings like this one: Is the IRS enforcing the gift tax on such donations? Will the IRS look at public records disclosing such contributions to determine whether gift tax has been paid? The IRS response has been
2009 Congressional Research Service Report 501(c)(4) Organizations and Campaign Activity: Analysis Under Tax and Campaign Finance Laws Raised many of the same issues as the 2004 ABA Task Force Selected quotations from CSR Report It is not entirely clear whether contributions to c4s] are subject to the federal gift tax. There is no statutory provision that exempts contributions to [c4s] from the gift tax. The IRS takes the position that donations to [c4s] are subject to the gift tax, although it is not clear the extent to which the agency enforces it. It has been suggested that applying the gift tax to donations made to advocacy organization could violate the donor s First Amendment rights and raise equal protection concerns due to the favorable treatment afforded donations made to other types of tax-exempt organizations.
Then things got interesting January 2010: U.S. Supreme Court in Citizens United lifts ban on independent expenditures by c4s in federal elections Throughout 2010: alleged surge in contributions to c4s to fund federal candidates in midterm elections (even Forbes noticed) October 14, 2010: Mitchell Silberberg & Knuff / Ofer Lion client alert: Potential Gift Tax Liability for Election Year Contributions to 501(c)(4) Social Welfare (Political?) Organizations Forbes article, Hey, Secret Big Political Donor, Don t Forget the 35% Gift Tax (citing Lion s client alert)
very interesting. Spring 2011: Rumors swirl regarding possible IRS gift tax audits of c4 donors May 6, 2011, ABA Tax Section meeting: Redacted c4 donor audit letter circulated Also at May meeting: EO practitioners ask IRS representatives to comment on audit letter IRS EO reps deny any knowledge; suggest E> unit acted independently May 13: NY Times article IRS Moves to Tax Gifts to Groups Active in Politics Congress weighs in May 18: U.S. Senate Finance Committee letter to Commissioner Shulman Inquires about political motivations for audits Shulman denies any such motivation June 3: U.S. House Ways and Means Committee letter to Commissioner Shulman Similar to Senate Finance inquiry Followed by similar IRS denial
2011 continued Throughout June: A flurry of client alerts, EO press deliberations, and c4 coalition building And then July 7, 2011
Reaction? (mostly) So are we done?
t quite. The legal questions are still open. Let s discuss. Gift Tax Applies to Transfers to c4s Statutory arguments Early cases as precedents Degree to which Stern and Carson are applicable precedents When is there a quid pro quo, a transfer for consideration? Degree of deference afforded RR 82-216
Gift Tax Applies con t Structure of the gift tax Availability of exemption if transfer to political organization. History of sec. 2501(a)(4) Availability of deduction if transfer to charitable organization that does not intervene in campaign Gift tax as back-up to income tax Transfer of appreciated property Who is to make policy decisions? Gift Tax Applies con t Constitutional arguments Supreme Court campaign finance precedents not applicable Broad-based tax precedents are applicable Particular deference given to tax categories Rational relation test is all that is required unless aimed a particular content, etc. Subsidy for First Amendment activity not required
t all c4 support is created equal Several types of c4 contributions on spectrum of gift -likeness unrestricted general support earmarked for lobbying activity earmarked for candidate campaign intervention payment for services provided by c4 to payor more like a gift less like a gift Different arguments for gift taxability of each Existing law does not require gift taxation of c4 contributions Statutory & judicial arguments Full & fair consideration Ordinary course of business Congressional intent Natural objects of one s bounty Gift tax as backstop to estate tax Constitutional arguments 1 st Amendment rights of association and expression 14 th Amendment right to equal protection of the laws
Gift tax should not apply to many (if any) c4 contributions For all the reasons from prior slide plus Policy arguments Similar to equal protection claim: If a c4 can do anything a c3 or 527 can do (assuming social welfare primary purpose), and not much more, then c3 c4 527 what activity is the gift tax taxing & why? It s Congress call If contributions to social welfare organizations are to be taxed in same was as gifts from Great Aunt Sally shouldn t Congress make that decision? Other concerns with abuse of c4s should be dealt with directly Concerns about anonymous c4 giving or abuse of primary purpose restriction are not gift tax issues Greater donor disclosure for contributions intended and/or used for candidate campaign intervention may be considered Stricter, explicit primary purpose standard may curtail excessive political activity of c4s Better definition of political intervention (versus issue advocacy) needed