Would taxation of donations to nonprofit organizations with political purposes deter large donors? Wealth managers and their clients may soon find out. The New York Times reported Friday that the IRS is looking into donations in 2008 by five unidentified "donors," telling them via letters that "their contributions may be subject to gift taxes depending on whether the donations exceeded limits under the tax laws." The article points out that this IRS rule "had rarely, if ever, been enforced."
The article notes two large groups, Crossroads GPS and Americans for Prosperity, 501(c)(4) nonprofit organization backed by prominent conservatives, "were heavily involved in politicking, spurring campaign finance watchdogs to complain that they were flouting election and nonprofit laws."
Tracey Bolotnick, an attorney at Hurwit & Associates in Newton, Mass., and general counsel to the Fund for the Public Interest, told AdvisorOne that "the whole thing seems a little crazy," because "the 501(c)(4) was never gift-tax exempt; 501(c)(3)s are gift-tax exempt, so are 527s, except," if they primarily do political work.
"The (c)(4)s can do political work so long as it doesn't comprise the majority of the organization's work," Bolotnick adds. Some interpret that to mean if 51% is expenditures to lobbyists and 49% is electoral work then it would mean it was tax exempt, but based on expenditures, Bolotnick says many more would say it had to be "60-40%."
There is a lot of capital flowing to politically active outside groups that do not have to report who their donors are. According to OpenSecrets.org, which states it is a non-partisan nonprofit group whose mission is to "inform…empower…and advocate for a transparent and responsive government," spending for the "2010 election cycle," by the 101 groups they track that do not have to "disclose their donors," totaled $136.9 million. Their breakdown showed that conservative groups outspent liberal groups by about 10 to 1: $121.4 million was spent by "conservative" groups, $12.3 million by "liberal" groups and $3.2 million by "other" groups.
These are just the totals for the groups that are not required to disclose their donors. Not including "campaign contributions," and "lobbying expenditures," the OpenSecrets.org website showed that "outside groups spent $489,289,288 during the 2010 election cycle to run ads, make phone calls, distribute literature and engage in other activities to sway the electorate about candidates and issues." Of that amount, "organizations not directly affiliated with political parties," spent "$304,679,091," up from "$68,852,502" in the 2006 election cycle.
The Supreme Court ruled in January 2010 to allow "corporations and unions to make such expenditures from their treasuries directly and through other organizations. The decision allows such activity to take place without complete or immediate disclosure of who funds such communications," according to OpenSecrets.org.
