More On Tax Planningfrom The Advisor's Professional Library
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- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
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.
The U.S. Chamber of Commerce is the largest lobbying group OpenSecrets.org tracked that didn’t have to disclose its donors. It spent almost $33 million to support Republican candidates.
The “conservative-leaning PAC and 501 (c)(4) “Americans for Prosperity,” spent $1,322,000 in the 2010 election cycle, according the OpenSecrets.org website. The group, which is not required to disclose donations, spent it all on “electioneering communications.” Americans for Prosperity, which is a successor to “Citizens for a Sound Economy, founded with the financial support of libertarian billionaire businessmen David and Charles Koch, “ according to OpenSecrets.org, used its electioneering communications to target “45 different candidates—primarily Democrats who were cast in a negative light.” The Americans for Prosperity website states that gifts are not tax-deductible.
Crossroads Grassroots Policy Strategies, or “Crossroads GPS,” is another conservative group, mentioned by The New York Times article as connected with “Republican strategist Karl Rove.” It spent $17,122,446. Most of that, $15,184,029, was used against Democratic candidates, with $1 million going to “electioneering communications” and $480,000 to support Republicans, according to OpenSecrets.org.
The Crossroads GPS website states: “There are no limits on the amounts that may be contributed to Crossroads GPS by an individual, corporation, union, or trade association,” but says it will not accept money from “foreign entities.” Donors who contribute more than $5,000 are disclosed to the IRS, but the IRS will not make those names public, it states.
Bolotnick said, “Contributions to Crossroads GPS are not deductible as charitable contributions for federal income tax purposes, and do not count against an individual's $115,500 biennial aggregate contribution limit under federal campaign finance law.
“As a major donor you want your money put to the most effective use,” so you’d ask: “’Who can do the work? Do they have to disclose me?’” Bolotnick explains. “Some feel the 527 exemption should apply to (c)(4)s.”
“Another theory” espoused by some “in the gift tax” world, is that “a donation to a (c)(4) with the expectation of work being done in exchange is not a gift but a fee for service, so no gift tax,” she says. Donors like the (c)(4) for the “anonymity,” Bolotnick notes.