Potential Gift Tax Liability for 501(c)(4) Contributions

June 14, 2011

Nancy Moriarty, Partner - Tax Services

Contributions to 501(c)(4) nonprofit organizations in excess of the annual gift tax exclusion may be subject to gift tax liability. Invoking a provision that has rarely been enforced, the Internal Revenue Service (IRS) has begun informing certain donors that their contributions may be subject to gift taxes if the donations exceeded gift tax limits.

Background

Section 501(c) of the Internal Revenue Code provides that certain types of nonprofit organizations are exempt from some federal income taxes. Corporations organized under section 501(c)(4) are generally operated exclusively for the promotion of social welfare. Unlike other nonprofits, these organizations may lobby for legislation and participate in political campaigns provided that they meet other criteria (for example, that their primary purpose is not political). The IRS declared gifts to 501(c)(4) organizations to be taxable in 1982, but that provision has been rarely enforced.

Increased Focus on Contributions to 501(c)(4) organizations

Recently, the IRS announced that it is increasing its focus on 501(c)(4), (5), and (6) organizations. Some taxpayers have received letters from the IRS inquiring about gifts made to 501(c)(4) organizations. It is unclear to what extent the IRS will begin enforcing this gift tax assessment, but those who contribute to 501(c)(4) organizations should be aware that they may face tax liability for donations that exceed gift tax limits.

In general, individuals incur gifts taxes of 35% on any amount exceeding $13,000 in a year ($26,000 for married couples). There may be alternate giving structures available to avoid gift tax liability. Anyone who is considering making a sizable donation to a 501(c)(4) organization should consider the tax implications and seek advice of a qualified tax advisor.

Although many 501(c)(4) organizations are involved in political campaign activities, the gift tax assessments include contributions made to all 501(c)(4) organizations, not just those that are politically active.

If you need more information about the tax implications of gifts to 501(c)(4) organizations, the tax advisors at Frank, Rimerman + Co. LLP are available to assist you.

Download Potential Gift Tax Liability for 501(c)(4) Contributions - June 14, 2011 Article