(Bloomberg) In an unforeseen announcement last week, the Internal Revenue Service stated that it has officially halted any consideration of enforcing gift taxes on large contributions made to nonprofit political advocacy groups. The decision came as a shock to many as reports of an initial probe surfaced just last May when IRS officials sent letters to five specific donors notifying them that their contributions to such groups were subject to federal gift taxes of up to 35%.
News of the potential tax had set off a flurry of speculation that the IRS might be cracking down on what has become an increasingly popular form of campaign advertisement funding. In fact, according to data compiled by the Center for Responsive Politics, nonprofit groups, many of them 501(c)4s, disclosed nearly $300 million in spending on the 2010 midterm election campaigns.
Although advocacy nonprofits have existed for years, Derek Willis explains in his blog for the New York Times that they have been greater investigated since the Supreme Court decided in 2010 to lower barriers to corporate spending on political campaigns following the Citizens United case. In fact, “The I.R.S. clarified the applicability of the gift tax to contributions to such groups in a 1982 ruling, but media reports and tax experts have noted that enforcement has been rare,” and after the case in late 2010, the agency announced that it would give 501(c)(4) groups greater scrutiny in the future,” he continues.
Some have questioned the timing of the gift tax proposition as the 2012 presidential election looms and speculated whether its sudden consideration is due to pressure from the White House. Kelly Philip Erb for Forbes importantly emphasizes in her blog, “It doesn’t take a genius to figure out that the majority of those dollars appear to have been directed to organizations supporting candidates who ultimately won seats in 2010.” She continues, “And that makes a number of folks, including key Congressional officials, wonder whether the investigation into those contributions was politically motivated.”
While entirely denying such accusations, IRS Deputy Commissioner for Services and Enforcement, Steven T. Miller, hinted in a memo on the agency’s website that while suspended, the investigation has not been fully terminated and may continue at a later time. He cautions, however, that “this is a difficult area with significant legal, administrative and policy implications with respect to which we have little enforcement history.”