Forbes reported recently that tax lawyer Ofer Lion has been advising clients that contributions to 501(c)(4) organizations may be subject to gift tax.1 That means that Trevor Rees-Jones, who donated $2 million to Rove's American Crossroads 501(c)(4), would owe $700,000 in tax. That'd be a pretty spicy meatball if tax were assessed. Does he owe it?
There are three different levels of analysis at work here: the "thin" statutory argument, the structural argument, and the "thick" statutory argument.
Thin Statutory Argument
By thin statutory argument, I mean simply a plain-language reading of the code without being informed by the broader field and history of property and gift law.2 The gift tax applies to any gift, whether "in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible."3 Somewhat weirdly, the code doesn't define "gift"; instead, there are several specific exceptions, two of which are relevant here. At 26 USC 2522(a)(2), the code excludes charitable contributions from tax on gifts:
In computing taxable gifts for the calendar year, there shall be allowed as a deduction in the case of a citizen or resident the amount of all gifts made during such year to or for the use of corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes....
The code also excludes contributions to 527s, which are political organizations that have heightened disclosure requirements. 26 USC 2501(4):
[The tax on gifts] shall not apply to the transfer of money or other property to a political organization (within the meaning of section 527 (e)(1)) for the use of such organization.
And that's it as far as relevant exclusions from gift tax are concerned.4 Since gifts to 501(c)(4)s aren't excluded from taxable gifts, under a plain language reading of the tax code they should be taxed.
Structural Argument
While the gift tax is its own chapter of the Internal Revenue Code, conceptually it serves to backstop the estate tax. While lexicographically they're somewhat distinct, they're structurally interwoven with one another. IOW, we don't want people evading the tax on estates by gifting all their assets during their lifetimes, so we established the gift tax in order to protect the estate tax and prevent frustration of its purpose. In reading the gift tax code, we should look to the purposes and concepts of the estate tax code. Importantly, the estate tax only permits deductions for gifts to 501(c)(3) organizations, and does not provide deductions for gifts to 501(c)(4) or 527 organizations. This is, in turn, broadly consistent with the income tax code: the ability to deduct is an act of "legislative grace" (as courts frequently note) and something we will only permit to encourage public policy goals. In the absence of deductibility in the estate tax context, no deduction should be permitted in the gift tax context unless there has been specific authorization (as is the case with gifts to 527 organizations). If a gift can't be deducted for the estate tax, it can't be deducted for the gift tax unless Congress specifically states otherwise.
Thick Statutory Argument
Somewhat puzzlingly, the gift tax code nowhere defines "gift." What this has meant in practice is that Congress has punted to the IRS and the courts to fill in the definitional gaps at the margins. While the Sixth Circuit once noted that "the statute does not use the term "gift" in the common-law sense, but in a more colloquial sense," it is inevitable that common law definitions and decisions will be used when courts are uncertain how to shape definition. Stern v Commissioner is one such case: between 1959 and 1960, Edith Stern contributed $44,600 to political organizations. The IRS audited, assessed gift tax, and Stern appealed. In finding that the contributions were not gifts, the court wrote:
Mrs. Stern was making an economic investment that she believed would have a direct and favorable effect upon her property holdings and business interests in New Orleans and Louisiana. These factors, in conjunction with the undisputed findings of the lower court that the expenditures were bona fide, at arms length and free from donative intent, lead us, in light of what we have said above, to the conclusion that the expenditures satisfy the spirit of the Regulations and are to be considered as made for an adequate and full consideration
Two things in that passage are key: first, one of the determinative factors is that the contributions were in an important sense self-interested, the upshot of which is that they were "free of donative intent." In the common law of property, a gift is a "gratuitous transfer" made with "donative intent."5 IOW, I have to have given you something for nothing and had to have intended to do so. Somewhat weirdly - and wrongly, I think - the expectation that the donor has self-interest as motive defeats the characterization of the transfer as a gift. Secondly, note the reference to the "spirit" of the law: that's always a tell that a court is overriding the plain language of the law.
That case is later accepted by the IRS in General Counsel Memo 38930:
In the Tax Court, the Commissioner argued that the taxpayer received no consideration reducible to money or money's worth for the funds transferred for the benefit of the candidates and that such transfers were taxable gifts. Rejecting that argument, the Tax Court, with thirteen of its sixteen judges concurring, stated that campaign contributions, like those before us, when considered in light of the history and purpose of the gift tax, are simply not "gifts" within the meaning of the gift tax law. Although the holding in Stern, supra , supports and is consistent with the result we reach herein we prefer to rest our holding on these broader grounds. The history of the gift tax clearly demonstrates that it was intended to back stop the estate tax to impose a tax on inter vivos dispositions to beneficiaries under circumstances that are akin to dispositions generally made at death. A campaign contribution is simply not: a transfer that avoids the death tax.
These cases are what ultimately led Congress to enact the exclusion for gifts to 527 organizations. Proponents of taxation would note that, in doing so, Congress set up a scheme: you can either submit to tax or submit to the heightened disclosure requirements of 527 organizations. Opponents would note two things: the reasoning in Stern etal and adopted by the IRS remains the same, and that political contributions to 501(c)(4) organizations simply aren't donative transfers. The further, and better, argument is that the IRS has never levied gift tax on gifts to 501(c)(4)s and that any attempt to do so now without notice to taxpayers would constitute an abridgment of due process.
So where does that leave us? Like so much in tax law, well, we can't really say for sure. Unsatisfying conclusion, I know.
1 Here's the pdf of Lion's memo.
2 The thin/thick distinction should be familiar to philosophy buffs. With thin concepts, we read them as regular words whose meanings can be divined by reference to everyday use. With thick concepts, there is a hypertextual element at work: the term pulls in other senses from deeper associations and longer histories.
3 26 USC 2511
4 Actually, gifts to 527s are excluded from the definition of taxable gifts, while gifts to charities are deductions from taxable gifts, but this is just a technical difference. In substance, the provisions are identical in that neither are taxed.
5 Here's the SCOTUS in Commissioner v Wemys: "A donative intent followed by a donative act is essential to constitute a gift."