July 8 (Bloomberg) -- The Internal Revenue Service is dropping an inquiry involving five U.S. taxpayers who made gifts to a type of nonprofit group used in recent elections to underwrite advertising and other political expenses.
The IRS, which said yesterday it was ending the probe, had sought to determine if the five taxpayers owed gift taxes for donations to nonprofit groups organized under section 501(c)(4) of the U.S. tax code. The IRS didn’t identify the donors.
Critics of the inquiry, especially Republican lawmakers, said the scrutiny could chill political speech. While the IRS has asserted the authority to collect gift taxes from the groups, there’s little evidence it has collected the taxes over the past 30 years.
The IRS decision offers lawmakers a chance to clarify rules governing political giving, said Kip Dellinger, a Los Angeles accountant who has written about the application of gift taxes to political donations.
“There’s no doubt Congress should revisit the area of political giving and exempt organizations,” Dellinger said. “Things have changed so much in terms of the amount of money flowing into these groups.” While Republicans took a high-profile role in questioning the IRS’s investigation, both parties are concerned about such questioning of donors, he said.
IRS spokesman Frank Keith said in a telephone interview that investigations were opened by employees of the IRS gift tax division who thought there were clear violations.
After consulting with “upper management and the counsel’s office, they realized that it was not that clear-cut,” Keith said. “There are compelling arguments on both sides.”
The nonprofit groups receiving the gifts are known as social welfare organizations. They are allowed to participate in political activity as long as that isn’t their primary purpose.
Social welfare groups are attractive vehicles for political giving because they aren’t subject to contribution limits or required to disclose the identity of donors.
In the 2010 election cycle, groups backing Republican causes and candidates outspent groups that supported Democratic candidates by a 7-to-1 ratio. At least one of the donations under scrutiny was made in 2008, not 2010.
The agency’s action yesterday didn’t go far enough, said House Ways and Means Committee Chairman Dave Camp, who was among at least seven lawmakers who complained about the inquiry to the IRS after it became public in May. Six Republican members of the Senate Finance Committee questioned the IRS action separately.
‘Failed to Clarify’
Camp, a Michigan Republican, said in a statement yesterday that he remains “troubled that the IRS has failed to explain what prompted these audits in the first place.”
“Furthermore, the IRS has failed to clarify that the gift tax will not apply to future political donations,” said Camp, who said he would continue his investigation into why the IRS launched its inquiry.
Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said the IRS announcement leaves questions unanswered.
“Retroactive enforcement of the gift tax in this highly politicized environment raises legitimate concerns and demands further explanation,” Hatch said in a statement.
The IRS has maintained that politics played no role in the decision to scrutinize the gift tax donors.
“All of the decisions in this matter were made by career civil servants without regard to any outside influence,” Keith said.
In its statement yesterday, the IRS said any future action would come only after it has given public notice.
The IRS also posted a memo from Steven T. Miller, deputy commissioner for services and enforcement, outlining the agency’s reasoning for ending the probe.
“This is a difficult area with significant legal, administrative and policy implications with respect to which we have little enforcement history,” the memo said.
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