Contributions to 501(c)(4) Organizations

As organizations and individuals gear up for the 2012 election season, those making substantial contributions to social welfare organizations must be aware that those contributions may be subject to the gift tax. IRC Section 501(c) provides a list of the different exempt organizations. Pursuant to IRC Section 501(c)(4) an exempt organization includes an organization organized and operated to promote social welfare. The primary advantage of achieving tax-exempt status under IRC Section 501(c)(4) is that the organization is not subject to the tight restrictions on political activities that apply to IRC Section 501(c)(3) organizations. These organizations are also popular independent campaign vehicles because contributions are not subject to disclosure.  Historically the IRS has not enforced the gift tax in regards to donations to 501(c)(4) organizations.  Recently however, the IRS has taken action to inform several individuals that their contributions to 501(c)(4) organizations might be subject to gift tax.

Because of the historical inaction by the IRS to enforce the gift tax and the potential affect on First Amendment rights, the IRS is essentially stirring up a hornets' nest with this enforcement action.  On May 18, 2011 members of the Senate Finance Committee sent a letter to IRS Commissioner Douglas Shulman requesting information about the IRS' decision, including whether the White House was involved in the decision and how the action could affect First Amendment rights.  The letter specifically notes that subjecting contributions to 501(c)(4) organizations engaged in public policy debate to the gift tax runs an unacceptable risk of chilling political speech. The IRS had indicated that this enforcement action was made without any outside influence, but the past 25 years of lack of enforcement makes this recent action look suspicious. 

Due to the large number of individuals and organizations that make contributions to 501(c)(4) organizations it is likely that the IRS will tread lightly when bringing these enforcement actions.  Nevertheless when making future contributions to these organizations, contributors must consider that there are possible gift tax consequences.

RELATED LINKS: For further information, see

1-23 Planning Tax-Exempt Organizations Sec 23.02

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