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<DIV class=timestamp>May 12, 2011</DIV>
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<H1><NYT_HEADLINE type=" " version="1.0">I.R.S. Moves to Tax Gifts to Groups
Active in Politics</NYT_HEADLINE></H1><NYT_BYLINE>
<H6 class=byline>By <A class=meta-per title="More Articles by Stephanie Strom"
href="http://topics.nytimes.com/top/reference/timestopics/people/s/stephanie_strom/index.html?inline=nyt-per"
rel=author>STEPHANIE STROM</A></H6></NYT_BYLINE><NYT_TEXT>
<DIV id=articleBody><NYT_CORRECTION_TOP></NYT_CORRECTION_TOP>
<P>Big donors like <A class=meta-per title="More articles about David H. Koch."
href="http://topics.nytimes.com/top/reference/timestopics/people/k/david_h_koch/index.html?inline=nyt-per">David
H. Koch</A> and <A class=meta-per title="More articles about George Soros."
href="http://topics.nytimes.com/top/reference/timestopics/people/s/george_soros/index.html?inline=nyt-per">George
Soros</A> could owe taxes on their millions of dollars in contributions to
nonprofit advocacy groups that are playing an increasing role in American
politics. </P>
<P>Invoking a provision that had rarely, if ever, been enforced, the <A
class=meta-org title="More articles about the Internal Revenue Service."
href="http://topics.nytimes.com/top/reference/timestopics/organizations/i/internal_revenue_service/index.html?inline=nyt-org">Internal
Revenue Service</A> said it had sent letters to five donors, who were not
identified, informing them that their contributions may be subject to gift taxes
depending on whether the donations exceeded limits under the tax laws. </P>
<P>These advocacy groups have been drawing more scrutiny, from President Obama
as well as others, as they have proliferated and funneled vast sums of money in
support of campaigns and causes, without having to publicly disclose their
donors. </P>
<P>During the midterm cycle, for example, groups like <A
title="The site for the group." href="http://www.crossroadsgps.org/">Crossroads
GPS</A>, which has ties to the Republican strategist <A class=meta-per
title="More articles about Karl Rove."
href="http://topics.nytimes.com/top/reference/timestopics/people/r/karl_rove/index.html?inline=nyt-per">Karl
Rove</A>, and <A title="The site for the group."
href="http://www.americansforprosperity.org/">Americans for Prosperity</A>,
backed by Mr. Koch and his brother Charles, were heavily involved in
politicking, spurring campaign finance watchdogs to complain that they were
flouting election and nonprofit laws. </P>
<P>Spokesmen for the Koch brothers and for Mr. Soros would not comment as to
whether they had paid gift taxes on these types of donations, or whether they
had received letters from the I.R.S. </P>
<P>These organizations were established as nonprofit corporations under a
section of the tax law, 501(c)(4), and the rules governing them say their
primary purpose cannot be political. </P>
<P>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. </P>
<P>“There are a whole heck of a lot of people misusing (c)(4) groups as a means
of getting around campaign finance regulations, and we lack a coherent system of
laws to deal with that,” said Donald B. Tobin, <A
title="A paper by Mr. Tobin on taxable entities."
href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020421">a legal
expert</A> on campaign finance and tax laws at the Moritz College of Law at Ohio
State University. “Now here’s a stick, frankly, that says there are consequences
for doing that.” </P>
<P>In a statement released Thursday, Michelle L. Eldridge, a spokeswoman for the
I.R.S., said that the inquiries were initiated by agency employees, not White
House or other Obama administration officials, “as part of their increased
efforts in the area of nonfiling of gift and <A class=meta-classifier
title="More articles about estate planning."
href="http://topics.nytimes.com/your-money/planning/estate-planning/index.html?inline=nyt-classifier">estate
tax</A> returns.” </P>
<P>The letters informed donors that investigations had been opened to determine
why a gift tax form had not been filed, and requested that donors submit records
of all donations in the year 2008, according to a redacted copy obtained by The
New York Times. </P>
<P>While tax lawyers who learned of the investigations have been issuing
warnings to clients of potential trouble on a broader scale, the I.R.S.
statement denied casting a wider net, “These examinations are not part of a
broader effort looking at donations to 501(c)(4)’s.” </P>
<P>The White House would not comment. Some members of Congress have been asking
the I.R.S. to investigate the tax-exempt status of these groups, too, although
lawmakers have also cautioned that since the Nixon years, the agency has been
strictly prohibited from what could be considered politically motivated
inquiries. </P>
<P>Still, experts are sensing that the message being sent may deter large
donations to these groups, at a time when big corporate, union and like-minded
political contributions are expected to flood the election cycle through the
barriers lifted by last year’s <A title="The article on that ruling."
href="http://www.nytimes.com/2010/01/22/us/politics/22scotus.html">Supreme Court
ruling</A> in the Citizens United case. </P>
<P>Both major political parties and candidates have benefited from these types
of organizations, but the Republican groups grew in force and size after the
2008 election, partly in recognition of Mr. Obama’s proficiency at fund-raising.
For example, Mr. Rove’s group, one of the best known from the 2010 midterm
cycle, raised $70 million. Americans for Prosperity, a libertarian group that is
opposed to many of President Obama’s policies, has been generously financed by
David Koch. </P>
<P>Democrats have embraced the model, too. Bill Burton, Mr. Obama’s former
deputy press secretary, was skewered by critics of these groups for creating <A
title="The site for the group."
href="http://www.prioritiesusaaction.org/">Priorities USA Action</A> to help
Democrats. In 2009 and 2010, Mr. Soros, the billionaire investor, donated more
than $12 million to advocacy groups. </P>
<P>In general, individuals incur gift taxes of 35 percent on any amount
exceeding $13,000 in a year, with a limit for couples of $26,000. A lifetime
exemption covers $5 million in gifts — to be reduced to $1 million in 2013 — but
experts say many wealthy donors are likely to have used that in their estate
plans. </P>
<P>The I.R.S. definitively declared these gifts taxable in 1982. “That was their
last word on it, so these letters just look like a sort of trap for the unwary,
which is not fair,” said Ofer Lion, a lawyer who has written about the issue.
</P>
<P>In December, after the 2010 midterm elections, officials with the I.R.S.
division that oversees tax-exempt organizations indicated it would pay closer
attention. </P>
<P>But at a meeting of an American Bar Association subcommittee last Friday,
they were surprised to learn that their colleagues in the estate and gift tax
unit also had an increased interest, according to lawyers who were there. </P>
<P>“I don’t know how extensive this effort is, but I have one such client and
I’ve spoken with others with clients who have received similar letters,” said
Gregory L. Colvin, a lawyer specializing in nonprofit law. </P>
<P>Other groups rarely receive donations big enough to incur the gift tax, which
is why many of them have established affiliated charities. Charities, unlike
almost all other tax-exempt organizations, offer their donors a tax deduction
and so attract large gifts. </P>
<P>Big donations to the largely unregulated 527 groups that were influential in
the 2004 election cycle are not subject to the gift tax. “Congress specifically
exempted donors to 527 organizations from the gift tax in 2000, but it didn’t
exempt contributions to (c)(4) groups because there wasn’t an issue at the
time,” said Alan P. Dye, a lawyer who represents a number of conservative
advocacy groups. Now that the Citizens United case permits big donors like
corporations and unions to spend money in elections, Mr. Dye added, “I think
it’s going to be really interesting to see how this plays out in Congress or the
courts.” </P>
<P>In the meantime, Marcus S. Owens, a lawyer who represents nonprofits and who
formerly headed the I.R.S. division that oversees tax-exempt organizations,
predicted that the tax agency’s moves would be watched warily by contributors.
“The lack of clarity and the potential for not-insignificant taxation on these
gifts will cause many of the biggest donors to think twice,” he warned.
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