501(c)(4) Lobbying and Political Activity Puts Donors On the Hook

May 27, 2011

The IRS is leaping into the political fray by notifying donors that their contributions to 501(c)(4)’s may be retroactively subject to gift tax.

501(c)(4)’s are organizations and civic leagues created to promote social welfare (such as AARP or NAACP). They run in a similar manner to 501(c)(3)’s with a few key distinctions. Both are nonprofit and exempt from federal income tax, but 501(c)(4)’s can engage in an unlimited amount of lobbying.  Donations to 501(c)(4)’s that are public entities may be deductible if they are used for public service but the majority of 501(c)(4) donations are not deductible.

501(c)(3)’s are required to disclose substantial contributors but 501(c)(4)’s are not which has resulted in some controversy. Many donors that wish for their political agendas to remain anonymous may contribute large sums with little to no transparency. New groups were formed once Citizens United v. Federal Election Commission, the Supreme Court ruling that struck down limits on corporate campaign spending, occurred. There seems to be many leaks sprouting in the effort to curtail corruption and the ability to buy influence.

The IRS specifically cautions that “the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax…” The agency’s 2011 work plan included expanding monitoring of political activity – especially 501(c)(4)’s “founded by party strategists and financed with large individual, corporate and labor union checks” reports politico.com. The effect may be a drop in this type of donation as the reality of the tax implications sets in. The stepped up enforcement serves as “a powerful signal to the outside groups that the regulators will be on duty during the presidential campaign season”, according to Politico.

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