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Taxman cometh for big political donors?

The Internal Revenue Service is ramping up its enforcement of a tax-code provision that requires donors to pay a "gift tax" on political contributions to 501(c)4 groups. As the New York Times reported earlier today, the IRS sent letters to five donors, advising them their contributions to political advocacy groups -- like Karl Rove's Crossroads GPS -- may be subject to gift taxes.

Though the IRS has shied away from enforcing gift taxes in the past, the tax enforcement agency intends to argue political contributions to these groups are not charitable contributions -- and are thus taxable. The language explaining the difference between "charitable contributions" and gifts" is laid out in section 170(c) of the Internal Revenue Code. In IRC 170(c), the government says donations to a "corporation, trust, fund, or foundation" do not qualify as a charitable contribution if they use that money to support "any political campaign on behalf of (or in opposition to) any candidate for office." 

Unlike so-called 527 groups, which Congress exempted from restrictions limiting political activity in 2000, 501(c)4 groups are considered "social welfare organization. While the IRS permits 501(c)4 organizations to engage in both lobbying and political campaigning, the latter cannot be their primary focus. So despite their 501(c)4 status, the political activity of groups such as Crossroads and the newly formed Democratic "Priorities USA Action" fall outside the definition of entities allowed to receive a "charitable contribution."

The strict enforcement of these provisions could mean donors like Donors like David H. Koch and Hollywood producer Jeffrey Katzenberg would owe hundreds of thousands in taxes to the IRS. Section 2503(b) of the tax code provides that each donor can give $13,000 without that money being factored in the taxable gift computation. But beyond this, any gift is theoretically taxable. Just how much money donors owe would depend on the gift tax rate, determined by the IRS, and how far back the IRS will look into donor tax records. The maximum tax rate is 35% on taxable gifts.