IRS gift tax move could hit new anonymous groups

The Internal Revenue Service appears to have begun to enforce a tax on gifts to the non-profit organizations that were a key vehicle for anonymous politics in the last five years and had promised to play a large role in the presidential cycle, a move which could reshape the place of money in politics in 2012.

"It appears that the IRS Estate and Gift Tax team has also started paying attention to 501(c)(4) organizations," a Los Angeles tax lawyer who has followed the issue closely, Ofer Lion, wrote in a memo to clients today.

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%, mirroring income tax rates -- for contributions to 501(c)4s.

The IRS focus would only apply to quite large donors: the first $13,000 annually are exempt. The rest of the contributions, however, reduce a donor's lifetime tax exemption, which stands currently at $5 million but stands to drop to $1 million in 2013, a fact which would mean a donor's heirs lose substantially more to estate taxes, including potentially a "clawback" of money that's already been given away back into the taxable estate.

Now the Republican donors who gave generously to Crossroads GPS and other groups last cycle may find themselves on the hook for substantial back taxes. And Democrats contemplating contributions to Priorities USA, the new pro-Obama c4, may face similar questions.

Lion quotes the 2011 Workplan of the IRS Exempt Organizations Division on the intensifying IRS interest: "[i]n recent years, our examination program has concentrated on section 501(c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations."

Lion also forwarded to POLITICO a letter from the IRS to a client whose identity has been redacted:

"The Internal Revenue Service has received information that you donated cash to [REDACTED], an IRC Section 501(c)(4) organization," the agent wrote to a donor. "Donations to 501(c)(4) organizations are taxable gifts and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709)."

The question of whether these (c)4 gifts should actually be taxable could be subject to litigation. But the reason for the emergence of (c)4 gifts presents a bit of a trap for donors: If they go to court to fight for the right to avoid taxation on their anonymous gifts, they will compromise their anonymity. Alternately, they may be forced to pay a hefty premium to remain anonymous.

"[C]ontributors wishing to remain anonymous may feel the need to pay sizable gift tax assessments rather than challenge the tax in open court, and on the public record," Lion wrote.

"They may end up having to calculate the value of that anonymity," he added in an email.

And all those ads attacking out-of-control taxes and deficits, meanwhile, may wind up doing their own small part to fill the U.S. Treasury.