Tax exemption

House quietly passes tax exemption for megadonors 

Major contributors like the Kock brothers and Tom Steyer would get a break on gift taxes to secretive non-profit groups.

By Kenneth P. Vogel and Hillary Flynn

The House on Wednesday with little fanfare passed legislation that would protect major donors like the Kock brothers and Tom Steyer from having to pay gift taxes on huge donations to secret money political groups.

The legislation, which now heads to the Senate, is seen by fundraising operatives as removing one of the few remaining potential obstacles to unfettered big-money spending by nonprofit groups registered under a section of the Tax Code — 501(c) — that allows them to shield their donors’ identities.

Critics decry such groups as corrupting, but they have played an increasingly prominent role in recent elections, and they’re expected to spend huge sums in 2016.

And, while fundraising operatives say most donors do not pay taxes on their donations to so-called 501(c) groups, the law is somewhat ambiguous on whether gift taxes could be assessed. That’s left donors fearing that such gifts could bring scrutiny from the Internal Revenue Service — which, in fact, has launched probes of major groups’ donors in recent years to determine whether they improperly avoided paying gift taxes.

There’s no such concern about donations to party and campaign committees and PACs, which are registered under section 527 of the code. That section explicitly exempts donations from gift taxes, but there’s a tradeoff: It also requires the disclosure of donor names and contribution amounts.

The bill that passed Wednesday would make clear that the gift tax does not apply to groups registered under sections 501(c)4, (c)5 or (c)6. That covers a wide swath of organizations including everything from the Karl Rove-conceived Crossroads GPS and the Tom Steyer-funded NextGen Climate (both of which are registered under section 501(c)4 of the Tax Code) to major labor unions (501(c)5) to the Kock brothers-backed Freedom Partners Chamber of Commerce (501(c)6).

A coalition of conservative and liberal nonprofit groups and their lawyers on Wednesday sent a letter to members of the House supporting the bill. It asserted that the “application of the gift tax to 501(c)(4) donors raises serious constitutional questions, and threatens to hamstring smaller or start-up citizens’ groups.”

Elizabeth Kingsley, an attorney at Harmon, Curran, Spielberg & Eisenberg, who signed the letter, said the bill merely evens the playing field for donors. She said the ambiguity around the gift tax question put cautious donors at a disadvantage, and benefited those more comfortable taking aggressive positions.

“If the law is clear everyone knows what the rules are and can follow them, and I think that’s a better situation,” Kingsley says.

The bill was part of a package of measures aimed at clamping down on IRS abuses in the wake of the agency’s targeting of conservative tea party groups. The gift tax bill was proposed by Rep. Peter Roskam (R.-Ill.), the chairman of Ways and Means subcommittee that oversees the IRS, but it had bipartisan support and passed on a voice vote.

Democrats who supported the bill said it merely clarified an area of the law that has not really been enforced.

“The bill codifies existing IRS practice,” said a spokesman for Sander Levin (D-Mich.), ranking member on the House Way and Means Committee, which approved this bill last month. “Right now, for contributions to 501(c)(3)s and 527s, the gift tax does not apply, and there is a moratorium applied to the gift tax on 501(c)(4) donations.”

But Democrats are not unified in their support for the bill.

Some believe it deprives their side of ammunition to use against Republicans in 2016, while also easing the way for more secret-money political spending by conservative billionaires like the industrialist brothers Charles and David Kock and the Las Vegas casino magnate Sheldon Adelson.

They and other conservative donors have more aggressively embraced such spending through groups like the Crossroads GPS, Freedom Partners and the Kock-Backed Americans for Prosperity (also registered under section 501(c)4 of the code).

Liberal billionaires such as the financiers Steyer and George Soros have similarly funded politically active 501(c) groups such as NextGen Climate and Media Matters for America. But unlike Republicans, Democrats up to and including President Barack Obama and Senate Democratic leader Harry Reid have sought to make an issue of secret-money conservative spending, with Reid explicitly and repeatedly blasting the Koch brothers from the floor of the Senate.

Former Secretary of State Hillary Clinton, the leading Democratic presidential candidate, seemed to pick up the charge this week, saying “We need to fix our dysfunctional political system and get unaccountable money out of it once and for all — even if it takes a constitutional amendment.”

Had Democrats opposed Roskam’s bill, or at least forced a roll call vote, it would have given them a cudgel to attack Republicans who supported it, operatives said Thursday.

Senate Majority Leader Mitch McConnell didn’t comment on the specific bills in the IRS package, but he said this week “we’ll take a look at the bill[s] in the near future,” according to The Wall Street Journal.

Conservatives seem more united in support of the bill, partly because they feel the IRS has disproportionately scrutinized 501(c) groups and donors on their side.

James Davis, a spokesman for Freedom Partners, said the bill “would prevent political targeting by the federal government which is a response to the very real threat we’ve witnessed over the past few years. Regardless of political affiliation, Americans are rightly concerned about partisan-Washington bureaucrats targeting and penalizing individuals due to their beliefs.”

The highest profile IRS gift tax inquiry did in fact target a big-money conservative group called Freedom’s Watch, which was backed by Adelson and spent heavily supporting President George W. Bush’s military surge in Iraq.

Donors to 501(c)4 groups objected to audits into their past donations saying they came out of the blue, and arguing the law was so vague it was unclear whether the gift tax even applied.

The IRS suspended such audits in 2011, choosing to let Congress decide whether these donations were subject to the gift tax. When the agency announced the halt on these audits it said, “This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history.” Former IRS Commissioner Steven Miller’s office said it would “be coordinating with the Office of Chief Counsel to determine whether there is a need for further guidance in this area.”