7.27.11 Political Organizations

Tax on Political Organizations

  1. IRC 527 provides tax treatment for political organizations.

    1. Generally, political organizations are treated as exempt organizations, although not IRC 501(c) or (d) organizations.

    2. Income such as contributions and dues is not taxed if segregated for use only for an IRC 527 exempt function.

    3. Investment income of a political organization, such as interest income, is subject to tax.

Political Organizations

  1. "Political organization" is a party, committee, association, fund, or other organization (whether or not incorporated), organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures for an "exempt function."

Organizational Test

  1. Articles of organization of a political organization must provide that its primary purpose is to carry on one or more "exempt functions." Since a political organization need not have a formal charter, consideration is given to the intent of the members when it is formed. This is a facts and circumstances test.

Operational Test

  1. IRC 527 requires a political organization’s primary activities be "exempt function" activities.

    1. A political organization may conduct activities that are unrelated to its "exempt function" if these are not its primary activities.

    2. Although a political organization may engage in a certain portion of non-exempt activities, income from such activities may be taxable.

  2. Political organizations can continue to qualify under IRC 527 between elections even though not supporting a particular candidate, if the organization is engaged in activities that are related to and support the "selection process."

    1. An organization established for a single campaign can continue to qualify as a political organization after the election to wind up its affairs as long as its primary activities are "exempt function" activities.

Exempt Function

  1. "Exempt function" includes all activities that are directly related to and support the process of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individuals or electors are selected, nominated, elected, or appointed (the "selection process" ). Whether an expenditure is for an exempt purpose depends on all the facts and circumstances.

    1. Expenditures that are not directly related to influencing or attempting to influence the "selection process," but are necessary to support the directly related activities, may also be expenditures for an "exempt function."

    2. "Exempt function" includes activities furthering the termination a political organization’s existence.

    3. Illegal expenditures are not "exempt function" expenditures even though made in connection with the "selection process."

    4. Whether a particular office is a "public office" depends upon facts and circumstances. Apply Reg. 53.4946–1(g)(2) principles in determining this.

IRC 501(c) Organizations

  1. IRC 527(f) provides an IRC 501(c) organization is subject to tax if it spends any amount for an "exempt function."

    1. IRC 501(c) organizations are taxed under IRC 527 only on their political expenditures or their net investment income, whichever is less.

    2. IRC 527(f)(3) provides IRC 501(c) organizations may create a "separate segregated fund" taxed as a political organization and avoid the application of IRC 527(f).

  2. When political activity is not inconsistent with an IRC 501(c) organization’s exempt status. IRC 527 does not affect the prohibition against political activity by IRC 501 (c)(3) organizations or the application of IRC 4945 to private foundations.

Directly Related Expenses

  1. IRC 527 "exempt function" expenditures of an IRC 501(c) organization include all expenditures that are directly related to the "selection process."

    1. An expenditure may be considered for an "exempt function" whether it is made directly or through another organization. However, an IRC 501(c) organization that takes "reasonable steps" when it transfers funds to an individual or organization to ensure that the transferee does not use the funds transferred for an "exempt function" will not be absolutely liable under IRC 527(f), even if the transferee eventually uses the funds for political activities. Whether an organization has taken "reasonable steps" depends upon all facts and circumstances.

Indirect or FEC Allowed Expenses

  1. Regs. 1.527–6(b)(2) and (3) have been reserved with regard to the treatment of certain indirect expenses and expenditures by a corporation with a connected political action committee that are permissible under Federal Election Campaign Act (FECA). Until final regulations are issued on the treatment of these expenditures, these items are not to be treated as exempt function expenditures when made by IRC 501(c) organizations. Final regulations, if adverse, will be applied prospectively.

Exclusions from Exempt Function

  1. Expenditures directly related to the appearance of IRC 501(c) organizations before legislative bodies in response to a written request for the purpose of influencing the appointment or confirmation of an individual to a public office are not exempt function expenditures. Reg. 1.527–6(b)(4).

  2. Expenditures for nonpartisan activities are not exempt function expenditures. Such activities include voter registration drives and "get out the vote" campaigns. Such activities must not be specifically identified with any candidate or political party. Reg. 1.527–6(b)(5).

Segregated Funds

  1. An IRC 501(c) organization can set up a separate segregated fund, as defined in Reg. 1.527–2(b) and IRC 527(f)(3), that will be treated as an independent "political organization" . The earnings and expenditure made by the separate fund will not be attributed to the IRC 501(c) organization.

  2. An IRC 501(c) organization may solicit contributions or membership dues for a separate segregated fund or organization. The transfer of such funds to the separate organization will not be treated as an expenditure for an "exempt function" if the transfer is made promptly after receipt and directly to the separate segregated fund. Reg. 1.527–6(f). A transfer is made promptly and directly if the following conditions are met:

    1. The procedures followed satisfy applicable federal or state campaign law and regulations;

    2. The IRC 501(c) organization maintains adequate records to show that amounts transferred were political contributions and dues and not investment income; and

    3. The political contributions and dues were not used to earn investment income for the IRC 501(c) organization.

Filing Requirements

  1. Political organizations and IRC 501(c) organizations that have net taxable income under IRC 527 are required to file Form 1120–POL, U.S. Income Tax Return for Certain Political Organizations.