Tag Archives: irs

IRS Finally Moves on Advocacy Gifts and Taxes: Pike’s Analysis

Tegucigalpa    aa-Koch-brothers-David-left-Charles-rightThe front page of the times indicated that both George Soros and the Koch brothers, the Daddy Warbucks of the right and the left, were among a small handful asked to defend their gifts to advocacy 501c4 organizations and why they should be not be required to pay 35% gift taxes. After 30 years, the mouse seems to have finally roared.

I reached out for an expert in this area, Drummond Pike, the founder and former CEO of the Tides family of philanthropic organization to quickly pen an analysis of what this means and why it is important. Today in a special on-line offering on the Social Policy website (www.socialpolicy.org) and the Paladin Partners site (www.paladinpartners.org), Drummond offers the insight of what this really means, and in “Better than a Trifecta,” he makes the case that perhaps the corporations will be the only big winners.

Here’s Drummond’s cut on this critical issue affecting non-profits, politics, and a lot more inthis crucial season:

Better than a Trifecta!

Today’s NYT article about IRS interest in pursuing gift taxes on contributions from individuals to “advocacy” 501 c/4 organizations, such as Americans for Prosperity or Crossroads GPS, both decidedly conservative, completes the ascent of corporate interests to dominance in our political system. Written by Stephanie Strom, normally the ambulance chaser of journalists focused on nonprofits, this article reports on the surprising news that the IRS is finally considering enforcing a tax it declared in 1982 to apply to contributions from individuals to 501 c/4 advocacy groups like the NRA, NARAL, and the Sierra Club, organizations whose “primary purpose” cannot be electoral, but rather legislative and policy. Non-primary purpose activities CAN support or oppose candidates but must remain below 49% of total expenditures; under recent rulings, this has permitted large anonymous contributions for what are essentially independent expenditure campaigns for or against candidates.

The end result: contributions to this category of advocacy organizations, that can be made anonymously, may now (after 29 years of silence from the IRS) be subject to a 35% gift tax. The work around, however, is pretty simple: give to a 527 organizations that can do elections work but contributions to which are not subject to tax by statute. The rub, of course, is that contributions to 527’s are reportable. No more silent manipulation of the process.

But wait a minute…what about corporations? The hotly debated “Citizens United” decision issued last year by the Supreme Court reasoned that because the law had evolved to treat corporations as “persons” in certain ways, they were entitled to free speech, and under prior Court decisions, “speech” meant the ability to spend money in politics, including the ability to make anonymous contributions to 501 c/4’s.

But this is where it gets interesting. Corporations are treated as persons in only some ways. The tax system doesn’t treat corporations as people in other regards, so they aren’t subject to gift tax. Thus, the effect is that, now, untaxed anonymous political giving shall be the exclusive domain of corporations. Ta Da!!

That the Roberts Court is turning into the most activist Court in modern memory comes as no secret. But it is remarkable how quickly their well-chosen decisions are advancing the agenda of the free market, anti-government business interests. This is likely just the beginning – tilting the odds yet again in favor of corporate power and against individual rights and liberties. And looking into the near-term future, one has to like those odds for Republicans. The Tea Party folks are the wildcards, but somehow I’m not optimistic that they will unravel the unholy alliance between Big Business and the social conservatives. Meanwhile, get ready for one of the worst campaign seasons ever, fueled especially by anonymously given corporate contributions.

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H&R Block, HSBC, & the end of RALs

57334671TB002_Last_Minute_TNew Orleans Refund Anticipation Loans or RALs are a product that have preyed on lower income worker families since their inception and promotion by the big tax preparers, H&R Block, Jackson-Hewitt, and Liberty, as well as smaller fry who could get access to credit.  Negotiating with these companies could get depressing when I worked with the teams of ACORN members who the ACORN Financial Justice Center when better disclosure meant looking at a rate package that would be between 220 and 250% annualized.  There was never anything good about the products no matter what they were called, but their heartbeat was the desperate need of many families to have the money the few days quicker than it could be obtained from the IRS on an electronic or mail filing.

In a significant concession HSBC, the main lender to the large preparers, announced that it was departing the business in what they described to me, and I reported in Citizen Wealth, as “reputational” concerns.  Despite the fact that they were making almost $200M per year from this business, there was no way to disguise its predatory nature.  JP Morgan-Chase was another big player in a session where they were conceding that they would lower rates, asked me sarcastically if we thought it would be “better if they got out of the business,” to which we answered “yes!”  Santa Barbara Trust was the last major lender still hanging in the business.  HSBC has assured us that they were on a step down, transitional contract, which would pull them completely out of the business with H&R Block by the end of 2009 while they dropped other companies immediately.

Given that background, I was both disappointed and delighted to read the news from H&R Block that they were scrambling to replace HSBC as their lender and credit source for RALs for the 2011 tax season.  This should not have been a surprise to them, but it was a surprise to me to see that HSBC had continued to stand behind the RALs in 2011, long after they had assured me that they would be out of the business completely.  Clearly in the last 2 ½ years since I left ACORN the organization had taken its eye off of the target and the consequences had not been good for lower income working families who are dependent on professional preparers.  That is disappointing.

Delightful was seeing that the IRS finally did the right thing after having been an enabler to this thievery for so many years and eliminated a code this last summer that allowed tax preparers to know whether or not the likelihood was good that the filer would receive their entire refund sufficiently to cover the charges and fees being larded on by the preparers.  The IRS was effectively doing a low grade “credit check” for the preparers.  Disgusting!  Once they did that the Office of the Controller of the Currency (OCC), one of the many federal bank regulators, issued a determination barring HSBC and the like from such lending by classifying it now as too risky, despite a last minute contract extension that Block (after filing suit against HSBC for reneging on the contract) had negotiated with HSBC for the 2011 season where Block would cover all HSBC losses.  Finally the federales did the right thing!

Though this may be the death knell for RALs, which are a loan with interest, against the sums, some of the other predatory schemes will still survive.  Block announced that it would continue to fund refund anticipation checks, which are more like advances, through its own bank, the H&R Block Bank.

These predatory operations have been crack cocaine for the big-time preparers for years, so it will take some time and effort to cut the heads off of theses snakes, but at least more of the tails are now going.

Thanks to Eileen A.J. Connelly and David Pitt, AP personal finance writers for a great story on these developments!

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