Gift Tax and 501(c)(4)s

July 10, 2011

Authored by: Keith Kehrer

For decades there has been a risk and concern whether the IRS would seek to apply the gift tax to contributions made to a Section 501(c)(4) social welfare organization.  In May the IRS confirmed that it had sent letters to five donors who had not filed gift tax returns in connection with a contribution to a Section 501(c)(4) in order to determine if returns should have been filed and if the gifts were taxable.  Obviously, the impact of taxing contributions to Section 501(c)(4) organizations is substantial and arguably represents a deviation from “industry” practice. 

On July 7, the IRS Deputy Commissioner for Services and Enforcement announced that any current audits should be closed and that his office will be coordinating with the Office of Chief Counsel to determine whether there is a need for further guidance in this area.  Click here to read his full statement.  The IRS website was also updated on July 7 to provide “questions have arisen regarding the applicability of the gift tax to contributions to 501(c)(4) organizations. The IRS has little history to draw from in this area and the limited guidance we previously issued on this matter is almost thirty years old.  While we review the need for additional guidance or legislation, we will not use resources to pursue examinations on this issue.  Any future action we take will be prospective and after notice to the public.  As we consider this issue, it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.”

This is good news for now – and it will be interesting to see how the IRS and/or Congress handle this important issue.