The IRS’s abrupt about-face on examining donors to 501(c)(4) political organizations about their gift tax liability seems to have brought the initiative to an end for now.

Ofer Lion, a tax lawyer with Mitchell Silberberg & Knupp in Los Angeles who brought the IRS enforcement initiative to light, was pleased with the IRS’s decision to stop the examinations after they started without warning (see IRS Suspends Gift Tax Examinations of Political Donors). “I think it’s the appropriate response,” he said in an interview last week. “Instead of sending out letters to just five different donors, they should have taken up some public discussion and debate and issued some public guidance. That’s what should have happened, and that’s what they say will be their path going forward.”

Lion specializes in tax-exempt organizations. Last fall, after seeing numerous media reports of multimillion-dollar contributions to 501(c)(4) tax-exempt organizations, he sent an alert to all of his firm’s clients effectively warning them that there was some chance that their political donations might be subject to the gift tax.

“That had been the IRS position for many years, although it had not been enforced,” he said. “My thinking was that with all of this media attention on all of these very large donations to the 501(c)(4)’s, that the time would soon come that the IRS would start to enforce it again. That did come to pass, and the backlash against the IRS for doing it, and for doing it after 30 years, basically by surprise, without any sort of public notice, without any discussion of the issue, without—from what anyone could tell— revisiting changes in the law and Supreme Court cases that had come down in the past 30 years, they went ahead and started to enforce it, and only initially at least with five different taxpayers.”

Lion declined to say if any of his firm’s clients had received the letters from the IRS, and which political organizations they might have donated to. However, the protests against the IRS letters mainly came from Republican lawmakers, such as House Ways and Means Committee Chairman Dave Camp, R-Mich., and the Republican members of the Senate Finance Committee, including ranking member Orrin Hatch, R-Utah. Indeed, donations to 501(c)(4) organizations like Crossroads GPS and Americans for Prosperity apparently helped elect Republican lawmakers to Congress and state houses around the country last November, although Democrats are also beginning to set up such groups for the next election cycle. Unlike the more traditional Section 527 groups, tax-exempt 501(c)(4) groups, which are also named after the relevant section of the Tax Code, don’t need to report the names of their donors.

The IRS found itself in the middle of a political firestorm and decided to let the lawmakers in Congress fight it out for themselves.

“After a lot of griping from the media and members of Congress from both sides of the aisle, this latest statement from the IRS came out and basically they have backed down, and this issue is now back in the box, where it will remain indefinitely,” said Lion. “It does not look like the IRS has any interest in taking up this fight right now.”

Lion said he thinks that the matter will be in a “holding pattern through the next election cycle.”

“In 2012, this is not going to be an issue,” he added. “It’s tough for me to see a point in which the IRS would think this is a good idea to raise. What I think they smartly did in issuing this statement was effectively say that this is an issue for Congress to take up and they should decide one way or the other, as opposed to letting the IRS sort of sit on it and try to take a position, it should be made clear through the legislative process. But with today’s divided House and Senate it doesn’t look likely that there will be any movement on this. We could be in the wait-and-see phase for a decade or more.”