The IRS had been investigating five unnamed donors who each contributed hundreds of thousands, if not millions of dollars, to certain unnamed 501(c)(4) tax-exempt organizations. The nonprofit organizations then spent this money on political advertising. This occurred during the 2010 elections, and is expected to occur in 2012 as well. The question was whether or not these donors had to pay a 35% gift tax on their donations. But it’s not really a question any longer because the IRS decided not to pursue further examinations.  Why did the IRS drop the investigation? Because they just don’t have any rules/case-law/guidance on this issue.

As part of their statement, the IRS noted that they will “review the need for additional guidance or legislation [and] it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.”

It was instant tax relief for these donors.  Tax relief, tax avoidance, whatever you want to call itthey didn’t have to pay, and they didn’t have to lift a finger in their defense. Imagine that, 3.8 million words in the tax code and the IRS is still suggesting there isn’t enough.

Said the IRS:

“Questions have been raised regarding the application of gift tax to contributions to I.R.C. § 501 (c)(4) organizations. This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history. My office will be coordinating with the Office of Chief Counsel to determine whether there is a need for further guidance in this area.

Until further notice, examination resources should not be expended on this issue. It is anticipated that any future examination activity would be after the coordination described above and would be prospective only after notice to the public. Thus, the Service should not expend examination resources initiating referrals or developing audits. Accordingly, all current examinations relating to the application of gift tax to contributions to I.R.C. § 501(c)(4) organizations should be closed.”

Click here for the official July 7th IRS memo from Steven Miller, Deputy Commissioner for Services and Enforcement.