501(c)(4) Organizations and Campaign Activity

Crossroads GPS, a conservative 501(c)(4) political arm of American Crossroads, had been the subject of an Internal Revenue Service investigation for spending millions of dollars to air a nationwide ad blaming the President for rising unemployment, the national debt and a failed $830 billion stimulus. The IRS webite states for a 501(c)(4) group to be tax-exempt it must be a “social welfare organization described in Internal Revenue Code (IRC) section 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare.” That means the group can engage in politicking, but it cannot be the majority of its activities. What brought about the IRS investigation was that Crossroads GPS has not disclosed who its donors are. Those donations are not tax-deductible, but under the tax law could be subject to a 35 percent gift tax.

As a result of a statement by the Internal Revenue Service, donors are now free to give money to Crossroads GPS to air more ads without paying the gift tax. The Internal Revenue states that it will not enforce a tax on large contributions to nonprofit advocacy groups while it studies the issue. The statement said:

Recently, questions have arisen regarding the applicability of the gift tax to contributions to 501(c)(4) organizations. The Internal Revenue Service 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.

In a memorandum referring to questions raised about the application of the gift tax to contributions to I.R.C. § 501 (c)(4) organizations and legal, administrative, and policy implications about enforcement, the Deputy Commissioner for Services and Enforcement stated that his office will work with the Office of Chief Counsel to study the issue.

The Congressional Research Service issued a 2011 report 501(c)(4) Organizations and Campaign Activity: Analysis Under Tax and Campaign Finance Laws updating its earlier 2009 CRS Report. For more, see Brooklyn Law School Library’s 10th edition of The Law of Tax-Exempt Organizations by Bruce R. Hopkins (Call #KF6449 .H665 2011) with chapters: Introduction to the law of tax-exempt organizations; Fundamentals of the law of tax-exempt organizations; Tax-exempt charitable organizations; Other tax-exempt organizations; Principal exempt organization laws.