IRS emails suggest scheme to subject political contributions to the gift tax

In a WSJ Capital Journal article, John  McKinnon reports that the IRS emails produced after the IRS amazingly “found” the lost Lois Lerner harddrives contains a treasure of information showing how the IRS was internally scheming to harm Americans.  The latest uncovered scheme involves an exchange of emails where the IRS was planning to subject political donations over the “gift tax” exemption amount ($14,000 for year 2014).  This is yet further evidence that the IRS sought to suppress taxpayer use of tax-exempt organizations for political speech.

The internal emails from 2011 “demonstrate that the IRS sought to use the gift tax as one part of a larger effort to crack down on the political speech” of conservative tax-exempt groups, said Rep. Darrell Issa (R., Calif.), the chairman of the House Oversight and Government Reform Committee.

The separate IRS effort to impose gift tax on big donors to tax-exempt organizations has gotten less attention than other IRS abuses. Gifts to 501(c)(4) organizations may be made anonymously, protecting the free speech rights of donors, consistent with the First Amendment of the U.S. Constitution.  Imposing a gift tax on donations to such groups could discourage donations and limit free speech.  IRS audits of donors to such tax-exempt entities came to light around May, 2011. At the time, the IRS had sent audit notices to a handful of donors. Word quickly spread among lawyers who handle gift tax matters, because the IRS effort was unusual. The agency generally hadn’t sought to impose the gift tax on donations to tax-exempt groups in at least 20 years, perhaps longer, following an unfavorable court ruling and changes in the law by Congress, according to lawyers and IRS documents.  The news prompted a brief outcry from GOP lawmakers, and the agency quickly abandoned the audit effort.  The Wall Street Journal later reported that all the donors who received audit notices had contributed to a now-defunct conservative entity called Freedom’s Watch. It was formed in 2007 to defend former President George W. Bush ’s policy in Iraq, but the group also spent about $10.7 million on issue ads in 2008, including in special elections for House seats in Louisiana and Mississippi. Then IRS commissioner, Doug Shulman, denied at the time that the IRS was making a broad effort to assess gift tax on donors to such tax-exempt groups, which are formed under section 501(c)(4) of the tax code. Mr. Shulman said in a May 2011 letter to lawmakers that the audits were initiated by a single IRS employee and were “not part of any broader effort to look at donations” to these organizations.  The new report from GOP lawmakers says that “although the IRS denied any broader attempt to tax gifts to 501(c)(4) groups, “internal documents suggest otherwise.” It notes that in May 2011, an attorney in the IRS chief counsel’s office wrote to his superiors that the “plan is to elevate the issue of asserting gift tax on donors to 501(c)(4) organizations,” and seek a decision from the commissioner and the IRS chief counsel.

The basis for the argument that larger donations should be subject to the gift tax?  In a mid-2011 memo disclosed by GOP lawmakers, a lawyer in the chief counsel’s office concluded that because there is no specific exemption, “a contribution to [a 501(c)(4)] organization is subject to gift tax.”  This rationale is both laughable and dangerous, and taxpayers must pay attention to the IRS and the use by any part of the government apparatus to limit guaranteed liberties.  Some pay less attention until their ox gets gored.