Campaign Finance Alert: IRS Investigating Donations to 501(c)(4)

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On May 13, 2011, the Internal Revenue Service (IRS) confirmed that it is examining records of five taxpayers who have made donations to one or more 501(c)(4) social welfare organizations to determine whether the donations are subject to the federal gift tax. News of the investigation has caused concern among social welfare organizations and their donors across the country as the outcome of the review could have a significant impact on them.

What is the gift tax?

The gift tax is a tax imposed at a current, maximum rate of 35% on all gifts above a certain threshold level. The IRS defines "gift" broadly to include the transfer of any property (including money) for less than fair value. The tax must be paid by the donor, not the recipient. Historically, the gift tax has been used in coordination with the estate tax so that taxpayers cannot avoid paying estate tax by simply gifting their wealth before they die, but the IRS has taken the position that the gift tax applies to a much broader category of transfers. The Internal Revenue Code specifically exempts certain transfers from the gift tax, including contributions to 501(c)(3) organizations and to Section 527 political organizations.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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