Politics

501(c)(4) Donations: So Bad They Tax Them Twice

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As Mike Riggs noted the other day, the IRS is investigating at least five donors to 501(c)(4) organizations, asking whether their contributions were subject to the gift tax. The New York Times made this development its lead story today, emphasizing the possible impact on political spending during the 2012 election season (and including the obligatory reference to Citizens United):

Big donors like David H. Koch and George Soros could owe taxes on their millions of dollars in contributions to nonprofit advocacy groups that are playing an increasing role in American politics….

The timing of the agency's moves, as the 2012 election cycle gets under way, is prompting some tax law and campaign finance experts to question whether the I.R.S. could be sending a signal in an effort to curtail big donations.

But the Times never addresses a question that must have been on the minds of at least some readers: What the hell is a gift tax? Does the IRS, having taxed someone's income once, really expect him to hand over another chunk of it simply because he chooses to give it to someone instead of spending it on a new car, a home theater system, or a European vacation? Yes, officially it does. In practice, only wealthy people end up owing gift taxes, which are aimed at preventing them from avoiding estate taxes (another form of double taxation) by giving away their property before they die. But many people of more modest means are theoretically required to report gifts so the IRS can keep track of them.

What counts as a "gift"? Per the IRS, "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return." That includes not only cash but "any property" that is given away or sold for less than its "fair market value" as well as interest-free or reduced-interest loans. When is a gift taxable? "The general rule is that any gift is a taxable gift," the IRS says. "However, there are many exceptions to this rule." It notes that "the laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code."

If you give to a qualified charity, the donation is not subject to the gift tax. (In fact, it is tax-deductible, reducing your taxable income.) Gifts to spouses, payments for another person's tuition or medical expenses, and "gifts to a political organization for its use" are "generally" not subject to the gift tax. In most other cases, gifts, including gifts to your children or grandchildren, are subject to an annual limit per recipient, currently $13,000. Above that threshold, they are taxable. But there is also a "lifetime exclusion" of $5 million, meaning you can rack up that amount in taxable gifts before you actually have to pay taxes on them. That's why only the rich need to worry about paying the tax, although everyone is supposed to be reporting gifts that count toward the lifetime limit.

The exclusion for  "political organizations" includes 527 groups, which Congress specifically exempted in 2000, but not 501(c)(4) "social welfare organizations," which are tax-exempt but permitted to engage in lobbying and political campaigning, as long as the latter is not their primary focus. Unlike donations to 501(c)(3) organizations, whose political activity is subject to stricter limits, donations to 501(c)(4) groups are not tax deductible. In fact, assuming the IRS is serious about enforcing the gift tax,  contributions to these organizations could be taxed twice. That's assuming the contribution exceeds $13,000 and the donor has hit his $5 million lifetime limit, which will probably be the case for anyone with a decent-sized fortune who is trying to minimize the taxes on his estate.

Addendum: In the comments, Alan Vanneman says the gift tax is not double taxation, because "if someone gives you money, dude, that's income," "so you pay tax on it." The gift tax is incurred by the donor, not the recipient. If George Soros gives $100,000 to Priorities USA, say, he's the one who owes any applicable gift tax.

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  1. Double tax, my ass. If someone gives you money, dude, that’s income. So you pay tax on it. It’s not a tax on them, it’s a tax on you. If you buy a car, guess what, it’s income to the person who sells it to you, and they pay tax on it. If you hire a plumber to fix your pipes, and you pay him money, that’s income to him, and he pays tax on it.

    1. Except that gift tax typically applies to the donor, not the donee (absent a specific arrangement to the contrary). It gets even more fun when you throw in the added twist of gifts to or from US nonresidents.

      1. Oops, Sullum’s all over that in the addendum. That’s something a lot of people are confused about when it comes to gift tax, perhaps because it makes no fucking sense.

        1. It makes sense when you realize that the government is just screwing you for having wealth (and not having the good sense to hide it better).

        2. It does make sense. If you remember tht the feds come up with this absurdity to fix a loophole in another bad policy, i.e. the estate tax.

    2. Hey Alan, you should really stick to reviewing movies, because at least you’re just awful at that, and not just absolutely wrong instead.

      OOPS

  2. Since you only hold your property in fief, it is logical that the Suzerin demand tribute when you transfer it.

    1. Have you no consideration for the additional paperwork required to keep track of all that property when you peasants keep shifting it around?

  3. The gift tax exists in order to prevent tax avoision* from estate taxes.

    * Which sounds like a word invented by the 3 Stooges.

    1. Blech, should have read more closely before posting. Silly me.

    2. And the estate tax counts as double taxation as well.

      1. Sometimes it does, sometimes it doesn’t. Many people die with 401k account balances, large portions of which haven’t previously been subject to income tax. And lots of people die owning life insurance policies, the proceeds of which will not be subject to income taxation.

  4. Its tiem for the rich to pay there fare share!

  5. Wasn’t there just barely almost an entire thread about how Alan gets all the commenter love from the staff?

  6. The gift tax is incurred by the donor, not the recipient.

    I thought it was one or the other

  7. It notes that “the laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code.”

    [shudder]

    1. Worse than Daedalus’ worst nightmares.

    2. It’s not particularly complicated. The estate tax is essentially a tax on net worth at death, which isn’t all that difficult to figure. And, of course, almost no one pays estate tax at this point in time. Maybe 1/5 of 1% of US residents who die this year will owe an estate tax, if that.

      It does get complicated when you are talking about sophisticated gift and estate tax planning, with things like the GST tax.

  8. Karl Rove gave an interview on Fox about the possibility of taxing political donations. His conclusion was the the guy who leaked the story is a democrat who had a previous version last year, and he is trying to discourage conservative political donations

  9. And in a SHOCKING turn of events, the NY Times commentators LOVE this idea. Especially if it goes after religious organizations.

    God, y’know, I know, like, and respect some liberals. But I read shit on the NY Times comments section, and even I, who support a small and efficient social saftey net (yes, I’ll turn in my libertarian card at the next meeting. In my perfect world, that’s unnecessary, but in the real world, I doubt people would support a non-government social safety net, so I figure we should have the most efficient, smallest, best one possible), want the entire government to blow up to hear their howls of rage. I guess the one thing that pisses me off so much is that they believe that people are either a) truly, deeply liberal or b) being tricked by evil corporations.

    I’m for small government, but at least I admit that I can see why a lot of intelligent, thoughtful people wouldn’t support it. I disagree with them, but I don’t think that they are stupid, or bad people. I wish my political opponents would do the same.

    1. Does the proposal include a tax on political endorsements, by the column inch?

      Yeah, right.

  10. Actually, the combined gift and estate tax scheme is a wealth transfer tax, while the income tax is a tax on income. They sit parallel to each other. On the state level, there can be an inheritance tax.

    View lifetime gifts as a layaway plan for your estate. You have a combined gift and estate exemption, but to the extent you use exemptions during life, you have less exemption at death.

    Why have I squandered my life in the tax code?

    1. “Actually, the combined gift and estate tax scheme is a wealth transfer tax, while the income tax is a tax on income”

      But that wealth consists of accumulations of residual income left after a chunk had already been siphoned off for income taxes. So it is still double taxation to take another chunk of it via gift and estate taxes.

  11. Hey! The gift tax saved Andy Dufresne’s life!

    If you don’t support the gift tax you want innocent men to be tossed off of prison license plate factory roofs!

    1. Andy Dufrene escaped from Shawshank prison in 1963. He heard that they had changed the tax code, and figured that with a lower tax rate, it was time to get busy living, or get busy dying.

  12. I can’t see any reason to limit this to 501(c)(4)s. The logic would appear to apply to any contribution to any person or organization.

    Including 501(c)(3)s. “Yes, Mr. Philanthropist, your donation to the Obama Fund for Widows and Orphans is deductible against your income tax. It is, however, nonetheless a gift, and subject to the gift tax.”

  13. In most other cases, gifts, including gifts to your children or grandchildren, are subject to an annual limit per recipient, currently $13,000.

    I ponied up about $20,000 for my daughter’s college tuition, room, and board last year. Should I be filling out a gift tax return, and counting $7,000 against my lifetime exclusion?

    1. Probably not. There’s an exception for education and medical expenses paid directly to the provider. So, if you wrote a check directly to the college, there’s no reduction of your lifetime exclusion.

  14. “…the gift tax is not double taxation, because “if someone gives you money, dude, that’s income,” “so you pay tax on it.”

    Even if it isn’t double taxation, it’s still ludicrous.

    Flipping the question on its head, if taxing people for giving you something is ludicrous, how much worse is it to tax people for the money they’ve actually earned?

    Let’s get rid of the income tax already.

  15. Addendum: In the comments, Alan Vanneman says the gift tax is not double taxation, because “if someone gives you money, dude, that’s income, so you pay tax on it.” The gift tax is incurred by the donor, not the recipient.

    In the language of the Dark Lord and Master, … countable unearned income is the appropriate nomenclature.

    They tax *both* motherfuckers, fool!!! THE GREAT BEAST IS NEVER SATED!!

  16. “If George Soros gives $100,000 to Priorities USA, say, he’s the one who owes any applicable gift tax.”

    But if the gift giver doesn’t pay it then the IRS can go after the recipient.

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  18. Hmmmmm; if I support my extended family, providing food, shelter, insurance, etc., isn’t that a gift (especially if I support someone I don’t care for, e.g., in-laws)? Should I therefore be subject to the gift tax for the transfer of wealth? What makes one transfer of economic resources a taxable gift, while another is not? If I give my child $20,000 in cash, it’s taxable; if I give her $20,000 in dribs and drabs of support over the course of a year it’s not?

    1. Or am I simply being naive in looking for sense and consistency in a system predicated on coercion? “Badges? We don’t need no steenkin’ badges!”

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