A group of six Republican senators has written to IRS Commissioner Doug Shulman asking about the agency’s recent move to impose gift taxes on donors to tax-exempt political advocacy organizations.

The letter, sent Wednesday by six members of the Senate Finance Committee, came amid reports that the IRS has mailed notices to at least five donors to so-called 501(c)(4) organizations saying their contributions should have been reported on a Form 709 federal gift tax return (see IRS May Tax Political Donations as Gifts).

The six senators who wrote to Shulman were led by Orrin Hatch, R-Utah, the ranking Republican member of the Senate Finance Committee. The other senators who signed the letter included Jon Kyl, R-Ariz., Pat Roberts, R-Kan., John Cornyn, R-Texas, John Thune, R-S.D., and Richard Burr R-N.C.

They asked why the IRS has for the first time in decades invoked a rarely used provision enforcing the gift tax ban on political contributions. They also requested further information about what communications the IRS has had with the White House and other executive branch agencies regarding this decision, and how it could affect First Amendment rights.

“This pattern of nonenforcement over a period of nearly three decades, coupled with the troubling issues regarding the adverse impact that enforcement might have on the exercise of constitutionally protected rights, raises important questions regarding the timing of the decision to enforce the gift tax on these contributions,” the senators wrote. “Retroactive enforcement of the gift tax in this highly politicized environment raises legitimate concerns and demands further explanation.” 

The IRS has denied any outside influence and said the letters were sent by “career civil servants” who are following a work plan established by the IRS’s Exempt Organizations Division last year to collect unpaid taxes from various types of tax-exempt organizations.

However, the senators viewed the IRS position with skepticism. “The statement by IRS spokeswoman Michelle Eldridge did not assuage these concerns and left us with only more questions,” they wrote. “According to Eldridge, ‘[a]ll of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS.’ We would expect that decisions regarding particular enforcement actions would be made by career civil servants. The more pressing question, not answered to date, is whether political appointees inside or outside the IRS were involved in any way in the decision to prioritize this category of cases.”

Their letter did not mention that the chairman of the Senate Finance Committee, Max Baucus, D-Mont., publicly wrote to Shulman at the IRS last September saying he should investigate the use of tax-exempt groups for political advocacy (see Senator Asks IRS to Probe Political Groups). Baucus asked Shulman last September to review major 501(c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity. He asked the commissioner to determine if these organizations are operating for the organization’s intended tax exempt purpose, to ensure that political activity is not the organization’s primary activity and to determine if they are acting as conduits for major donors advancing their own private interests regarding legislation or political campaigns, or are providing major donors with excess benefits.

His Republican colleagues on the committee now want Shulman to explain why the IRS is investigating the 501(c)(4) groups, however. Such groups include several organizations such as Crossroads GPS, founded by Karl Rove and Ed Gillespie, and Americans for Prosperity, funded by David Koch of Koch Industries, which helped finance the Republican gains in Congress and in state elections last November. Democrats have also begun to organize their own 501(c)(4) organizations, and they are expected to play a role in the 2012 elections, even though the tax-exempt groups are not supposed to be primarily used for political campaigns.

In their letter, Hatch and the other five senators referred to a recent New York Times article on the IRS notices. “According to that report, ‘I.R.S. Moves to Tax Gifts to Groups Active in Politics,’ May 12, 2011, the IRS is ‘invoking a provision that had rarely, if ever, been enforced,’ informing a handful of individuals that their contributions to 501(c)(4) organizations may be subject to federal gift taxes.

“As reported, the gift tax enforcement actions taken by the IRS relate to donations to 501(c)(4) organizations that the IRS has determined should be exempt from taxation,” the letter continued. “They are ‘[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare…and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.’ In spite of their legal status and administrative approval, President Obama and his White House staff have made it clear that they view these organizations with deep hostility. The President himself, in a heated political context, referred to certain 501(c)(4) organizations as ‘a threat to our democracy.’ His White House Communications Director, Dan Pfeiffer, charged that the ‘powerful interests’ supporting some of these organizations ‘are literally buying elections,’ Washington Post, October 8, 2010.”

However, the six senators contended that the applicability of gift taxes to 501(c)(4) contributions is ambiguous. “Historically, the IRS has deliberately opted against vigorous enforcement of the gift tax on 501(c)(4) contributions,” they wrote. “There are good reasons for this. First, it is unclear if contributions to these organizations are eligible for the gift tax given their gratuitous nature, and the fact that the donations are made with the expectation that the organization will work to advance the donor’s policy views. Moreover, these contributions are clearly not designed for tax planning purposes or to avoid the estate tax. Most importantly, however, enforcement of gift taxes on contributions to 501(c)(4) organizations engaged in public policy debate runs an unacceptable risk of chilling political speech, which receives the highest level of constitutional protection under the First Amendment. “

The senators asked Shulman to provide the names of any individuals at the IRS who contributed to the decision to enforce the gift tax against contributions to 501(c)(4) organizations, as well as the names of any other federal officials outside of the IRS that he had any discussions with regarding this decision. They also requested any correspondence (including phone logs, emails, written notes, or electronic documents) generated with respect to the decision to enforce the gift tax against contributions to 501(c)(4) organizations, including correspondence between IRS employees (including both career employees and political appointees), or between or among the IRS, the Department of the Treasury, the Office of the White House Counsel, the Office of the White House Press Secretary, the Office of White House Political Affairs, and the Executive Office of the President. They also asked for any correspondence with the Securities and Exchange Commission, the Federal Communications Commission, and the Federal Election Commission, along with any analysis generated, requested, or obtained by IRS regarding the First Amendment implications of applying the gift tax to 501(c)(4) contributions.

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