The push-back against big money in elections has taken a turn toward the serious. According to Ben Smith at Politico, the Internal Revenue Service has started to enforce a tax on gifts to non-profit 501(c)(4) organizations. Named after their governing section of the tax code, 501(c)(4)’s have been responsible for for a significant spike in anonymous (and often misleading) attacks over the last five years.
The scrutiny will impact very large donors to these organizations. Here’s why. Current tax law allows anyone to give up to $13,000 annually to whoever they chose. Any gift over that $13,000 annually gets deducted away from an individual’s lifetime gift tax exemption, which currently stands at $5 million. This lifetime exemption is likely to drop to $1 million in 2013, which would mean that a donor’s heirs would lose a lot of money to estate taxes and face the possibility of a “clawback” of money that has already been given away back into the taxable estate.
And these donations are currently not under any other reporting or disclosure requirements which means they can be made anonymously. It’s the combination these two factors that made Swift Boating both possible and legal.
For years it’s been an open secret that many donors to 501(c)(4)s do not typically pay the gift tax on these contributions, which can be as high as 35% in some instances. Instead they treat them as gifts to political organizations rather than non-profits. Gifts to other political organizations are not currently taxed.
The issue of whether or not 501(c)(4) gifts should be taxed or not is arguably an open question of law which means this move is likely to be challenged in court. That is, if the donor does not mind shedding anonymity to file a lawsuit. Otherwise donating to your favorite smear campaign just got a lot more expensive since avoiding the gift tax on that donation could land you in jail.
This is a good move regardless of your political affiliation. Smear campaigns are equal opportunity political destroyers. The health and sustainability of our democracy depends on a transparent electoral process, and that transparency has been under steady attack for years. The lethal combination of large anonymous political gifts with no donor disclosure requirements has funneled misinformation, further corrupting our politicians and our political process. While this move alone wont fix the problem, it does take a strong first step in re-leveling the field.
photo courtesy of TracyO via Flickr