The Issue
The IRS defines a gift as "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return" and donors of such gifts are generally responsible for paying a federal gift tax.
The IRS did not specifically exempt donations to 501(c)(4) organizations from gift tax liability in a 1982 Revenue Ruling and have not issued further guidance, despite requests from tax experts and advisors about the importance of providing much needed clarity in this area. Donations to 501(c)(3) organizations are not subject to gift tax.
The laws on the federal gift tax are considered to be some of the most complicated in the Internal Revenue Code. Read more about the rules.
Latest News
The Congressional Research Service (CRS) released a report August 13 that provides legal analysis of whether contributions to section 501(c)(4) organizations are subject to the gift tax. The report noted that the treatment of these contributions is complicated by the Internal Revenue Service's (IRS) lack of enforcement and the possible exemption of contributions that are made for advocacy-related purposes. CRS also indicated that recent media reports of large donations to some 501(c)(4) organizations have led to questions about the application of the gift tax to the donations.
Background
In 1982, the IRS indicated in Revenue Ruling 820- 216 that gift tax liability would not be asserted for donations to groups formed under Section 527(e) of the Internal Revenue Code, but did not specifically exempt donations to 501(c)4 organizations. Since 1982, IRS had not issued further guidance for 501(c)4s, despite requests from tax experts and advisors.
In May 2011, the IRS confirmed that it was examining donations to one or more 501(c)4 organizations to determine whether the donors should have paid federal gift tax on the donations. Many tax advisors were caught off guard by the IRS’s 2011 investigation, and Members of Congress and attorneys for the anonymous donors subsequently wrote letters to the Treasury Department, demanding that the audits be terminated and that the IRS immediately issue clarifying guidance on the application of federal gift tax rules to 501(c)4 donations.
On July 7, 2011, the IRS Deputy Commissioner for Services and Enforcement announced that the audits had been halted and that the IRS would determine whether there is a need for further guidance. In a public statement on its website, the IRS announced that it would not use resources to pursue examinations on this issue “while we review the need for additional guidance or legislation” and that “any future action we take will be prospective and after notice to the public.”
