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I. ELECTION YEAR ISSUES

Judith E. Kindell and John Francis Reilly

1. Introduction

In a presidential election year, many exempt organizations become more active in what has

been loosely termed "political activity". Some exempt organizations use this opportunity to

encourage people to participate in the electoral process. Others increase their advocacy activity to

take advantage of the heightened awareness given to many issues during the course of a campaign.

This advocacy activity may be to raise public awareness of particular issues, to influence the passage

of legislation concerning particular issues (lobbying), or to elect candidates based upon their position

on particular issues (electioneering). The Internal Revenue Code distinguishes between these types

of activities, potentially resulting in differing tax consequences. This article focuses on the federal

tax rules applicable to exempt organizations concerning electioneering activities.

Questions frequently arise regarding the interplay of political campaign activities and

exemption from federal income tax. This article addresses many of these questions in three areas:

the prohibition on political campaign activities of IRC 501(c)(3) organizations, the taxation of

political organizations under IRC 527, and the political campaign activities of IRC 501(c)

organizations other than those described in IRC 501(c)(3).

Much has happened since the publication of this article's predecessor, "Election Year Issues,"

in the Exempt Organizations Continuing Professional Education Technical Instruction Program for

Fiscal Year 1993 (hereinafter 1993 CPE Text). A development of singular importance occurred on

July 1, 2000, when President Clinton signed Public Law 106-230, which amends the treatment of

political organizations under IRC 527. The new law, which became effective immediately, imposes

three different reporting and disclosure requirements on IRC 527 organizations: (1) an initial notice,

(2) periodic reports on contributors and expenditures, and (3) modified annual returns. Included in

this article is a description of the provisions of Public Law 106-230 and the steps that the Service

is taking to implement the law.

This article also takes into consideration comments that were generated by the 1993 CPE

Text. Of particular importance has been the "Commentary on IRS 1993 Exempt Organizations

Continuing Professional Education Technical Instruction Program Article on 'Election Year Issues,'

prepared by individual members of the Subcommittee on Political and Lobbying Activities and

Organizations of the Committee on Exempt Organizations of the Section on Taxation, American Bar

Association" (Feb. 21, 1995), reprinted in 11 Exempt Organization Tax Review 854 (Apr. 1995),

For an overview of the federal tax rules concerning political and lobbying activities by exempt organizations, see

"Appendix B: Present-Law Rules Governing Political and Lobbying Activities of Tax-exempt Organizations," Staff of

the Joint Committee on Taxation, 106th Cong. 2nd Sess., Report of Investigation of Allegations Relating to Internal

Revenue Service Handling of Tax-Exempt Organization Matters 122 (Joint Comm. Print 2000)(hereinafter 2000 Joint

Committee Report). For a detailed description of the federal tax rules applicable to lobbying activities of exempt

organizations, see "Lobbying Issues," Exempt Organizations Continuing Professional Education Technical Instruction

Program for Fiscal Year 1997 (hereinafter 1997 CPE Text).

2002 EO CPE Text

Election Year Issues

(hereinafter 1995 ABA Comments). Where we have agreed with the 1995 ABA Comments and,

where feasible, we have used such comments to update or modify treatment of issues in the 1993

CPE Text. However, some issues mentioned and positions proposed in the 1995 ABA Comments

are not discussed here because of the nature of this article. This article is a training document and,

as the introduction to all of the Exempt Organization CPE texts states: "The text is for educational

use only. It is not authority, and may not be cited as such. It may be used as a research tool, but not

as a substitute for analysis and research of citable legal authority." Consequently, where, as in some

instances, the 1995 ABA Comments request additional guidance, the Service can be responsive only

in a precedential document, and this article is not a document of that type.

Like the 1993 CPE Text, this article employs a question and answer format. A listing of the

subjects appears at the end of this article. A word of warning, though -- many questions, particularly

respecting IRC 501(c)(3) organizations and the political campaign prohibition, do not admit of a

bright-line answer. In these areas, the facts and circumstances of a particular situation will control;

therefore, some "answers" will instead consist of a description of the factors to be evaluated in

reaching a determination.

2. IRC 501(c)(3) Organizations and the Political Campaign Prohibition

A. History of the Statutes

(1) Enactment of the Prohibition

Prior to 1954, there was no statutory provision absolutely prohibiting organizations described

in the antecedents of IRC 501(c)(3) from engaging in political campaign activities.

The political

campaign prohibition does have a vague and unenacted antecedent, however. What eventually

became the Revenue Act of 1934, under which the lobbying restriction of IRC 501(c)(3) was first

enacted, at one time contained a provision extending the prohibition to "participation in partisan

politics." S. Rep. No. 73-558, 73d Cong., 2d Sess. 26 (1934). The provision, however, was deleted

in conference, so that only the lobbying restriction remained. H.R. Conf. Rep. No. 73-1385, 73d

Cong., 2d Sess. 3-4 (1934). In explaining its deletion, Representative Samuel B. Hill stated: "We

were afraid this provision was too broad." 78 Cong. Rec. 7,831 (1934).

During Senate consideration of what became the Revenue Act of 1954, Lyndon Johnson, then

Senate Minority Leader, added a floor amendment to provide that IRC 501(c)(3) organizations may

not "participate in, or intervene in (including the publishing or distributing of statements), any

political campaign on behalf of any candidate for public office." Johnson stated ". . . [t]his

amendment seeks to extend the provisions of section 501 of the House bill, denying tax-exempt

status to not only those people who influence legislation but also to those who intervene in any

For a discussion of the common law treatment of charities and political activity, see Debra Morris, "Political

Activity and Charitable Status at Common Law: In Search of Certainty," in

Political Activities: Nonprofit Speech, New

York University School of Law National Center on Philanthropy and the Law Conference

(1998) reprinted in 23 Exempt

Organization Tax Review

, 247 (Feb. 1999).

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political campaign on behalf of any candidate for public office." 100 Cong. Rec. 9,604 (1954). The

amendment was accepted; no debate or discussion took place. The Conference Report (H.R. Conf.

Rep. No. 83-2543, 83d Cong., 2d Sess. (1954)) contains no further discussion of the amendment.

There is an obvious disconnect between the language of the provision and the stated intent

of its author. The 1954 amendment prohibits political campaign activities by IRC 501(c)(3)

organizations while the provision to which it is analogized only restricts attempts to influence

legislation by those organizations. This is a knot no one has been able, or even attempted, to

untangle.

(2) Private Foundations and Electioneering Activities

In 1969, a number of provisions were enacted concerning the treatment of private

foundations. Under one provision, an initial tax in an amount equal to 10 percent of each taxable

expenditure and an additional 100 percent tax on each taxable expenditure previously taxed and not

corrected within the taxable period is imposed on the private foundation. In addition, taxes are

imposed on foundation managers who agreed to the making of the taxable expenditure. IRC 4945.

A taxable expenditure includes any amount paid or incurred by a private foundation to influence the

outcome of any specific public election or to directly or indirectly carry on any voter registration

drives, unless certain requirements are met. IRC 4945(d)(2).

Thus, due to the Tax Reform Act of 1969, a private foundation that participates in a political

campaign not only risks losing its exemption, it also is subject to tax on the amounts it expends for

such participation. Taxes on private foundation expenditures to influence the outcome of any

specific public election or to carry on voter registration drives did not seem likely when the House

Committee on Ways and Means began its hearings on private foundation activities -- the Chairman's

press release, which outlined the hearings' agenda, made no mention of this kind of activity. Tax

Reform 1969: Hearings Before the House Comm. on Ways and Means, 91st Cong., 1st Sess. 3-11

(1969) (press release of Chairman Wilbur D. Mills). However, testimony given almost at the outset

of the hearings raised the specter of private foundation involvement in the electoral process. First,

in a rather scathing manner, an incumbent congressman testified that a private foundation had been

used against him in a primary election. Id. at 213-237 (statement and testimony of Representative

John J. Rooney).

Soon thereafter, the President of the Ford Foundation became embroiled in a

lengthy and often acrimonious discussion with various Committee members over both the

Hypotheses as to why Johnson proposed enactment of the prohibition are discussed in Appendix I.

Subsequent to Representative Rooney's testimony, his primary opponent (and, oddly enough, eventual successor

in Congress) appeared before the committee and denied all of Rooney's allegations.

Id. at 1036-1056 (statement and

testimony of Frederick W. Richmond). Wherever the truth lay, however, was not critical -- Rooney's words, ". . . this

political gimmick is a threat to every officeholder, in Congress or elsewhere, who does not have access to a fat bankroll

or to a business or to a private foundation" (

id. at 213), spoke to what could happen, whether or not it actually occurred

in the particular case. The potential effect of Rooney's testimony was made manifest when the columnist Kenneth R.

Crawford devoted an entire article to the matter, predicting correctly that "[t]he tax reform bill almost certainly will

impose tighter restrictions on tax-exempt foundations, especially against political activity." "The Rooney Reform,"

Newsweek, Mar. 3, 1969, at 29.

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Foundation's involvement in an extremely controversial school decentralization experiment in

Brooklyn that included an election and the Foundation's financing of voter registration drives in

Cleveland before the election of Mayor Carl B. Stokes. Id. at 354-431 (statement and testimony of

McGeorge Bundy). To a considerable extent, those incidents seem to have impelled enactment of

IRC 4945(d)(2).

(3) Enactment of Additional Provisions

In 1987, Congress again amended the law applicable to charitable organizations, this time

specifically focusing on the prohibition on political campaign activity. Congressional concern

appears to have been triggered by two occurrences. First, in 1986, an organization then exempt

under IRC 501(c)(3), the National Endowment for the Preservation of Liberty, was reported to have

intervened in Congressional campaigns, opposing the reelection of members who had not supported

aid to the Nicaraguan Contras. Second, questions had been raised about the use of ostensibly

educational IRC 501(c)(3) organizations by politicians to promote their candidacy or potential

candidacy. After hearings held by the Subcommittee on Oversight of the Committee on Ways and

Means and after the Subcommittee made its recommendations, IRC 501(c)(3) was amended to

clarify that the prohibition on political campaign activity applied to activities in opposition to, as

well as on behalf of, any candidate for public office, in accordance with the existing interpretation

of the prohibition in the regulations.

Congress also amended IRC 504 to provide that an IRC 501(c)(3) organization that lost its

exemption due to violating the prohibition on political campaign activities may not at any time

thereafter be treated as an IRC 501(c)(4) organization. (Previous to the amendment, IRC 504 had

applied only to IRC 501(c)(3) organizations that lost their exemption due to substantial lobbying

activities.)

In addition to these amendments, Congress enacted several new provisions in 1987

concerning the political campaign prohibition for IRC 501(c)(3) organizations. The first of these

was IRC 4955, which imposes taxes on the political expenditures of IRC 501(c)(3) organizations;

its tax/correction structure and the rates imposed are identical to IRC 4945. As set forth in the

legislative history, Congress enacted IRC 4955 because it believed that the absence of any stricture

other than revocation for violation of the prohibition on political campaign activity created two

problems. One was that the penalty of revocation was disproportionate to the violation in cases

where the expenditure was small, the violation was unintentional, and the organization subsequently

had adopted procedures to assure that similar expenditures would not be made in the future. The

other was that, in some cases, revocation would be an ineffective remedy, particularly if the

IRC 501(c)(3) organization ceased operations after it diverted all of its assets to improper purposes.

Therefore, IRC 4955 applies to IRC 501(c)(3) organizations whether or not their tax-exempt status

is revoked. Congress specifically noted that the enactment of IRC 4955 did not change the

prohibition on political campaign activities of IRC 501(c)(3) organizations; it looked upon the

provision fundamentally as an additional deterrent. In addition, because Congress was concerned

that some candidates were using IRC 501(c)(3) organizations to promote their candidacy, it provided

that, for purposes of IRC 4955, political expenditures of IRC 501(c)(3) organizations include certain

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expenses of candidate-controlled organizations. H.R. Rep. No. 100-391, 100th Cong., 1st Sess.

1623-1627 (1987).

Congress also found that existing audit and enforcement procedures were not sufficient to

deter an IRC 501(c)(3) organization from flagrantly violating the political campaign prohibition.

Therefore, it enacted IRC 6852 and IRC 7409. IRC 6852 provides that if such a violation occurs,

the Service may immediately determine the amount of income and IRC 4955 tax due from the

IRC 501(c)(3) organization. IRC 7409 grants authority to the Service to seek an injunction against

an IRC 501(c)(3) organization that flagrantly violates the political campaign prohibition to prevent

further political expenditures by the organization.

B. General Issues

1. What is the political campaign

prohibition?

An organization will not qualify for tax

exemption under IRC 501(c)(3) unless it "does not

participate in, or intervene in (including the

publishing or distributing of statements), any

political campaign on behalf of (or in opposition to)

any candidate for public office."

A determination

whether an organization has participated or intervened is based upon all of the relevant facts and

circumstances.

2. What is a "candidate for public

office?"

Reg. 1.501(c)(3)-1(c)(3)(iii) and

Reg. 53.4945-3(a)(2) both limit the meaning of the

term "candidate for public office" to an individual

who offers himself, or is proposed by others, as a

contestant for an elective public office, whether

such office be national, state, or local. Since a

candidate must be a contestant for elective public office, IRC 501(c)(3) organizations are prohibited

from participating or intervening in election campaigns only. Thus, an IRC 501(c)(3) organization

is not prohibited from attempting to influence the Senate confirmation of an individual nominated

by the President to serve as federal judge since federal judges are not elected. Notice 88-76, 1988-2

C.B. 392.

3. What is a "public office?"

Neither the IRC 501(c)(3), the IRC 4945

nor the IRC 4955 regulations define the term

"public office." Nevertheless, there are criteria

available, all of which proceed from the obvious

principle that the term "public office" requires that

there be some statutory or constitutional basis for construing the office as "public." For example,

This article focuses only on the political campaign prohibition. To qualify as an organization described in

IRC 501(c)(3), the organization must also meet the other requirements of IRC 501(c)(3), including the requirements that

it be organized and operated for an exempt purpose, that there be no inurement and that it be operated for the public

rather than private benefit. For a discussion of cases involving private benefit issues, see

Appendix II.

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guidance on the issue of whether an office or position in a political party is a public office for

purposes of the IRC 501(c)(3) political campaign prohibition is found in G.C.M. 39811 (June 30,

1989). The particular position at issue in the G.C.M. was that of precinct committeeman. The

position possessed the following characteristics of a public office under state law: it was (1) created

by statute; (2) continuing; (3) not occasional or contractual; and it (4) had a fixed term of office; and

(5) required an oath of office. G.C.M. 39811 concludes that, under the relevant state law, the

position of precinct committeeman was a public office within the meaning of IRC 501(c)(3). The

factors listed in the G.C.M. should be taken into consideration in determining whether elections for

political party positions are elections for public office.

Additional guidance may be obtained from a definition in the private foundation excise tax

regulations, Reg. 53.4946-1(g)(2)(i). However, since Reg. 53.4946-1(g)(2)(i) defines public office

for a different, and more limited, purpose, it should be used with great care, particularly where

elections for offices or positions in a political party are concerned. The extent of the applicability

of Reg. 53.4946-1(g)(2)(i) is discussed in the following question and answer.

4. How should the term "public

office" be construed?

When Congress enacted IRC 4941 to

impose tax on acts of self-dealing between private

foundations and disqualified persons, it specifically

wished to include "government officials at

policymaking levels" within the self-dealing orbit.

Staff of the Joint Committee on Internal Revenue

Taxation for use of the Senate Committee on Finance, 91st Cong., 1st Sess., Summary of H.R. 13270

(Tax Reform Act of 1969) 3 (Comm. Print 1969).

Reg. 53.4946-1(g)(2)(i) defines "public office" in order to explicate a species of "government

official" that is considered a "disqualified person" for purposes of the tax; namely, persons described

in IRC 4946(c)(5) as holders of an elective or appointive public office in the executive, legislative,

or judicial branch of the government of a State, possession of the United States, or political

subdivision or other area of any of the foregoing, or the District of Columbia, that pays gross

compensation at an annual rate of $15,000 or more. In its definition, Reg. 53.4946-1(g)(2)(i) follows

expressed legislative intent and places great stress on the independent performance of policy-making

functions:

In defining the term "public office" . . . such term must be distinguished from

mere public employment. Although holding a public office is one form of public

employment, not every position in the employ of a State or other governmental

subdivision . . . constitutes "public office." Although a determination whether a

public employee holds a public office depends on the facts and circumstances of the

case, the essential element is whether a significant part of the activities of a public

employee is the independent performance of policy-making functions. . . . [S]everal

factors may be considered as indications that a position in the executive, legislative,

or judicial branch of the government of a State, . . . or political subdivision or other

area of the foregoing . . . constitutes a "public office." Among such factors to be

considered in addition to that set forth above, are that the office is created by the

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Congress, a State constitution, or the State legislature . . . and the powers conferred

on the office and the duties to be discharged by such office are defined either directly

or indirectly by the Congress, State constitution, or State legislature, or through

legislative authority.

The "independent performance of policy-making functions"/"mere public employment"

dichotomy does not help one resolve the issue of whether an office or position in a political party is

a "public office" for purposes of the prohibition on participation or intervention in a political

campaign under IRC 501(c)(3). Political party officials do not engage in "the independent

performance of policy-making functions," but they play a significant role in the electoral process.

Consequently, other facts and circumstances, such as those set forth in the remainder of the

regulation and those set forth in G.C.M. 39811, must be brought to bear on the issue.

Insofar as determining whether an executive, legislative, and judicial election involves a

"public office" for purposes of IRC 501(c)(3), Reg. 53.4946-1(g)(2)(i) has greater relevance. Facts

and circumstances prevail, there must be some governmental indication that the office is a public

office, the officeholder must be more than a mere employee -- these are principles underlying Reg.

53.4946-1(g)(2)(i) and a determination under IRC 501(c)(3) must be consistent with those principles.

(Similarly, Reg. 1.527-2(d), in discussing whether a federal, state, or local executive, legislative, or

judicial office is a public office for purposes of IRC 527, provides both that the facts and

circumstances of each case will be determinative and that "principles consistent" with those found

under Reg. 53.4946-1(g)(2) will be applied.) Even here, however, caution is advised. One must not

overemphasize "the independent performance of policy-making functions" to decide that an elective

office is not a public office simply on the basis that the office's independent policy-making functions

are too insignificant.

Accordingly, insofar as determining under IRC 501(c)(3) whether an election is an election

for a "public office," while Reg. 53.4946-1(g)(2)(i) provides some guidance, particularly where

legislative, executive, and judicial offices are concerned, it should neither be read too literally nor

be considered solely determinative. Rather, all the facts and circumstances of a particular case must

be considered to resolve the issue.

The story of "Hymie's ferryboat" bears repeating here. Hymie Schorenstein, who was Brooklyn's district leader

in the 1920's, had to deal with a complaint by one of his almost innumerable candidates that too much attention was

being paid to the top of the ticket (Governor Franklin D. Roosevelt or, in an alternative version, Mayor James J.

Walker). Mr. Schorenstein responded by talking about ferryboats: "When that big ferry from Staten Island sails into

the ferry slip, it never comes in strictly alone. It drags in all the [garbage] from the harbor behind it. Roosevelt [or

Walker] is our Staten Island ferry." It is not known, and certainly not to be presumed, that all of Mr. Schorenstein's

candidates were running for offices that involved "the independent performance of policy-making functions" as the

drafters of the self-dealing statutory and regulatory provisions understood it.

See William Safire, Safire's Political

Dictionary

317-318 (1978).

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5. What is the meaning of "offers

himself, or is proposed by

others?"

Individuals who have publicly announced

their intention to seek election to public office have

clearly offered themselves as contestants for the

office and are candidates within the meaning of

IRC 501(c)(3). However, an individual who has

not yet announced an intention to seek election to

public office may nevertheless be considered to

have offered himself or herself as a contestant for the office. See TAM 91-30-008 (Apr. 16, 1991)

for a situation where an unannounced candidate's campaign committee published material regarding

his record and mentioned his "prospective candidacy." The determination of when an individual has

taken sufficient steps prior to announcing an intention to seek election, so that he or she may be

considered to have offered himself or herself as a contestant for the office is based on the facts and

circumstances.

Similarly, others may propose an individual as a contestant for a public office, even when

the individual has announced an intention of not seeking election to the office. For example, in the

1992 New Hampshire Democratic Presidential Primary, there was a well publicized Draft Cuomo

Committee that was urging voters to elect Mario Cuomo as a write-in candidate. Despite the fact

that Governor Cuomo had indicated that he was not running for President, he was a candidate within

the meaning of IRC 501(c)(3) because he was proposed as a contestant for the office of President

by others. See Kevin Sack, Cuomo Tells Presidential Draft Group to End Campaign, N.Y. Times,

Feb. 22, 1992, at A8; James M. Perry, A Cadre of Supporters Is Refusing To Write Off Cuomo as

a Candidate, Wall St. J., Feb. 12, 1992, at A22. Therefore, in that situation, an IRC 501(c)(3)

organization could not have supported or opposed Governor Cuomo as a candidate for President

without violating the prohibition on political campaign activity.

Therefore, even if no other person or organization proposes an individual as a contestant for

an elective public office, an IRC 501(c)(3) organization may not support the individual in an election

for public office without violating the political campaign prohibition. By supporting a contestant

for an elective public office, the IRC 501(c)(3) organization is proposing the individual as a

"candidate" for the purposes of IRC 501(c)(3).

On the other hand, as the staff of the Joint Committee on Taxation noted, in a background

paper prepared for the 1987 hearings, ". . . the fact that an individual is a prominent political figure

does not make him a candidate, even if there is speculation regarding his possible future candidacy

for particular offices." Staff of the Joint Committee on Taxation, 100th Cong. 1st Sess., Lobbying

and Political Activities of Tax-exempt Organizations 14 (Joint Comm. Print 1987). In other words,

some action must be taken to make one a candidate, but the action need not be taken by the candidate

or require his consent.

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6. Can other government agency

rules be used to define

"candidate" for IRC 501(c)(3)

purposes?

In a word, no. The term "candidate" is set

forth in both the Federal Election Commission

(FEC) and Federal Communications Commission

(FCC) statutes and regulations. However, these

rules were drafted for different purposes, and their

treatments of who is a candidate do not embrace (in

fact, are antithetical to) the "offers himself, or is

proposed by others" formulation of

Reg. 1.501(c)(3)-1(c)(3)(iii) and Reg. 53.4945-3(a)(2).

With respect to the FEC, its principal purpose appears to be to find where a candidate's

money came from, to know the amount of money contributed, and to have this information disclosed

contemporaneously to the Commission. Therefore, the FEC regulations provide that an individual

becomes a candidate for federal office when the individual, or another person to whom such

individual has given his or her consent, has received contributions or made expenditures aggregating

in excess of $5,000. 11 C.F.R. § 100.3(a). Assuming that Governor Cuomo did not give his consent

to the Draft Cuomo Committee, he would not have been a candidate under the FEC regulations.

Similarly, an individual who does not accept contributions would not be considered a candidate for

FEC purposes, but would be considered a candidate under IRC 501(c)(3). Thus, when William

Proxmire did not accept contributions in his last Senatorial election campaign, he was not a

candidate for FEC purposes, but an IRC 501(c)(3) organization nevertheless would have been

prohibited from supporting or opposing him because he was a candidate under IRC 501(c)(3).

As to the FCC, it appears that the primary purpose of its regulations is to assure that all

declared candidates (and only declared candidates) have equal access to broadcasting. Consequently,

its regulations define a "legally qualified candidate" as any person who (1) has publicly announced

his or her intention to run for nomination for office, (2) is qualified under the applicable law to hold

the office, and (3) meets one of three alternative tests concerning elections and primaries,

nominations by convention or caucus, and nominations for the offices of president and vice

president. 47 C.F.R. § 73.1940(a)(1), § 76.5(g)(1). It follows, therefore, that the FCC regulations

have a purpose opposite to the Treasury regulations; while the FCC's regulations are somewhat

exclusive, Treasury's are rather inclusive.

The 1964 New Hampshire Republican primary offers a more graphic illustration. Two individuals, Paul Goldberg

and David Grindle, disappointed with the two principal Republican contenders, Senator Barry Goldwater and Governor

Nelson Rockefeller, decided to run Henry Cabot Lodge for the Republican nomination. There was only one problem:

Mr. Lodge, who was serving as Ambassador to South Vietnam, did not give his consent to the campaign. It was not

much of a problem, however: New Hampshire required no candidate authorization; in fact, anyone could file as a Lodge

candidate and there was nothing Ambassador Lodge could do to stop it. Ambassador Lodge, or more precisely

Ambassador Lodge's campaign (since he was not part of it), won the primary.

See Charles Brereton, First in the Nation:

New Hampshire and the Premier Presidential Primary

35-51 (1987).

Senator Proxmire spent $697 in his 1976 campaign. Michael Barone et al., The Almanac of American Politics

1978

918 (1977). Spending data from elections through the 2000 Congressional elections revealed that former Senator

Proxmire and the late Representative William Natcher (who never crossed the $5,000 threshold in the 11 campaigns

he conducted after the FEC was established) have no heirs; however, many local and some state elections involve

candidates who conduct campaigns without either collecting or spending $5,000.

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To summarize, while rules of other agencies, particularly the FEC, may be helpful in

elucidating some aspects of the IRC's treatment of political campaign activities, the FEC and FCC

definitions relating to who is a candidate are of limited value in determining who is a candidate for

IRC purposes.

7. What is meant by "does not

participate in, or intervene in

(including the publishing and

distributing of statements)?"

The regulations provide that activities that

constitute participation or intervention in a political

campaign include, but are not limited to, the

publication or distribution of written or printed

statements or the making of oral statements on

behalf of or in opposition to a candidate for public

office. Reg. 1.501(c)(3)-1(c)(3)(iii). See also

Reg. 53.4945-3(a)(2). Consequently, a written or

oral endorsement of a candidate is strictly forbidden. The rating of candidates, even on a

non-partisan basis, also is prohibited. See Association of the Bar of the City of New York v.

Commissioner, 858 F.2d 876 (2d Cir. 1988), cert. denied, 490 U.S. 1030 (1989), discussed below.

Similarly, an IRC 501(c)(3) organization may not distribute partisan campaign literature, provide or

solicit financial or other forms of support to or for candidates or political organizations, or establish

political action committees (PACs). In situations where there is no explicit endorsement or partisan

activity, there is no bright-line test for determining if the IRC 501(c)(3) organization participated or

intervened in a political campaign. Instead, all the facts and circumstances must be considered.

Some of the facts and circumstances to be considered in specific situations are discussed below.

8. How does advocacy of an issue

relate to the concept of

participation or intervention in

a political campaign?

This question was presented in the

following form at the meeting of the Exempt

Organizations Committee of the ABA Tax Section,

held on February 4, 1992:

Many charitable organizations conduct mass media advocacy on issues such

as abortion rights, the environment, crime, defense spending, health care and tax

reform, during non-election periods. If certain candidates become identified with

positions on these issues during a campaign, must the organization alter its advocacy

in order to avoid the IRC 501(c)(3) electioneering prohibition? Can the charity use

the opportunity of the campaign to gain greater attention from candidates and the

public, to its issues? Suppose a pro-life political group, during a campaign, heavily

attacks pro-choice positions in TV ads, implying criticism of pro-choice incumbents.

Can a pro-choice charity pay for TV ads to respond solely on the issues, using free

air time provided by the TV station?

No situation better illustrates the principle that all the facts and circumstances must be

considered than the problem of when issue advocacy becomes participation or intervention in a

political campaign. On the one hand, the Service is not going to tell IRC 501(c)(3) organizations that

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they cannot talk about issues of morality or of social or economic problems at particular times of the

year, simply because there is a campaign occurring. As the 1995 ABA Comments state:

Nothing in Section 501(c)(3) prohibits a charity from purchasing media time

for a discussion of issues in furtherance of its exempt purposes, whether or not such

discussion coincides with an election. A charity's issue based message should be no

more limited during an election campaign than it is during any other time of the

year. The fact that candidates have aligned themselves on one or another side of an

issue should not impact a charity's ability to reach the public with a pure issue

message,

particularly in view of the fact that the candidate's position is an external

factor beyond the charity's control. The independent actions or positions of

candidates should not be imputed to exempt organizations.

In contrast to the "pure issue message" scenario set forth in the 1995 ABA Comments, an

IRC 501(c)(3) organization may avail itself of the opportunity to intervene in a political campaign

in a rather surreptitious manner. The concern is that an IRC 501(c)(3) organization may support or

oppose a particular candidate in a political campaign without specifically naming the candidate by

using code words to substitute for the candidate's name in its messages, such as "conservative,"

"liberal," "pro-life," "pro-choice," "anti-choice," "Republican," "Democrat," etc., coupled with a

discussion of the candidacy or the election. When this occurs, it is quite evident what is happening

-- an intervention is taking place. See TAM 91-17-001 (Sept. 5, 1990) for an example of coded

language constituting political campaign intervention.

Basically, a finding of campaign intervention in an issue advertisement requires more than

just a positive or negative correspondence between an organization's position and a candidate's

position. What is required is that there must be some reasonably overt indication in the

communication to the reader, viewer, or listener that the organization supports or opposes a

particular candidate (or slate of candidates) in an election; rather than being a message restricted to

an issue. As is stated in TAM 1999-07-021 (May 20, 1998), in order to violate the political

campaign prohibition, an advocacy communication "should contain some relatively clear directive

that enables the recipient to know the organization's position on a specific candidate or slate of

In a footnote, the 1995 ABA Comments state: "We are assuming an issue-oriented message without coded

candidate labels, calls to action, or other objectionable elements."

A finding of political campaign intervention from the use of coded words is consistent with the concept of

"candidate" -- the words are not tantamount to advocating support for or opposition to an entire political party, such as

"Republican," or a vague and unidentifiably large group of candidates, such as "conservative" because the sender of

the message does not intend the recipient to interpret them that way. Code words, in this context, are used with the

intent of conjuring favorable or unfavorable images -- they have pejorative or commendatory connotations. When

combined with discussions of elections, the code words also make specific candidates identifiable -- the organization

would not use up air time or newspaper space with a code word if the word was not intended to communicate to the

viewer, listener, or reader a specific elective choice. The voter in Vermont, hearing an exhortation regarding "liberal"

candidates, may not know who fits that label in Kansas, but presumably he knows who stands for what in Vermont,

which is why the code word is used in the first place. Another factor may be whether the organization has used similar

language in communications outside of a campaign or only airs such communications during campaigns. The specific

facts and circumstances of each case will determine whether an intervention in a political campaign has taken place.

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candidates." This statement was made in the context of a determination that an organization did not

participate or intervene in a political campaign when, a few days before Congressional elections, it

distributed an "I'm Fed Up With Congress" communication that also encouraged its recipients to vote

and to assure that others voted. With respect to this situation, TAM 1999-07-021 concluded as

follows:

The "I'm Fed Up With Congress" communication does not clearly indicate whether

[the organization] supports or opposes a specific candidate or slate of candidates.

While it expresses a general dissatisfaction with Congress, it does not rise to the

level expressing a position on any individual candidate or candidates. This

communication could be viewed as focusing attention on the perceived abuses of the

Congress or as a way of sending a message of disgust to members of Congress. The

fact that no statement was made on an individual's qualifications, or lack thereof, for

public office supports this view. Moreover, not all members of Congress were

candidates for office in the elections of [that year]. This communication does not

clearly support or oppose any single candidate or identifiable group of candidates

(such as by party or a geographic location). Additionally, there is no indication in

the file that the letter was sent only to specific states or congressional districts in

which congressional elections targeted by the organization were occurring. Our

determination with respect to this communication might be different if evidence in

the file indicated that the communication was aimed at a specific candidate, specific

candidates, or a specific ticket of candidates. However, the file lacks such evidence

and there is no other evidence in the file that any other facts and circumstances

existed indicating the letter was an intervention in a political campaign.

Consequently, there is insufficient evidence to conclude that this communication

constituted campaign intervention.

Therefore, the fundamental test that the Service uses to decide whether an IRC 501(c)(3)

organization has engaged in political campaign intervention while advocating an issue is whether

support for or opposition to a candidate is mentioned or indicated by a particular label used as a

stand-in for a candidate. Accordingly, the appropriate focus is on whether the organization, in fact,

is commenting on a candidate rather than speaking about an issue.

9. Is it feasible for the Service to

adopt the FEC "express

advocacy" standard?

No, it is not feasible for the Service to adopt

the FEC "express advocacy" standard to determine

when participation or intervention in a political

campaign on behalf of or in opposition to a

candidate for public office has occurred.

The FEC's "express advocacy" standard

came into being because the Supreme Court held a provision of the Federal Election Campaign Act

of 1971 (FECA) relating to contributions "to reach only funds used for communications that

expressly advocate the election or defeat of a clearly identified candidate." Buckley v. Valeo, 424

U.S. 1, 77 (1976). The FECA was subsequently amended to conform to the "express advocacy"

requirement of Buckley. 2 U.S.C. § 431(17).

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The pertinent FEC regulation, 11 C.F.R. § 100.22, provides as follows:

Expressly advocating means any communication that--(a) Uses phrases such

as "vote for the President," "re-elect your Congressman," "support the Democratic

nominee," "cast your ballot for the Republican challenger for U.S. Senate in

Georgia," "Smith for Congress," "Bill McKay in '94," "vote Pro-Life" or "vote

Pro-Choice" accompanied by a listing of clearly identified candidates described as

Pro-Life or Pro-Choice, "vote against Old Hickory," "defeat" accompanied by a

picture of one or more candidate(s), "reject the incumbent," or communications of

campaign slogan(s) or individual word(s), which in context can have no other

reasonable meaning than to urge the election or defeat of one or more clearly

identified candidate(s), such as posters, bumper stickers, advertisements, etc. which

say "Nixon's the One," "Carter '76," "Reagan/Bush" or "Mondale!"; or

(b) When taken as a whole and with limited reference to external events,

such as the proximity to the election, could only be interpreted by a reasonable person

as containing advocacy of the election or defeat of one or more clearly identified

candidate(s) because--

(1) The electoral portion of the communication is

unmistakable, unambiguous, and suggestive of only one meaning; and

(2) Reasonable minds could not differ as to whether it

encourages actions to elect or defeat one or more clearly identified

candidate(s) or encourages some other kind of action.

Several cases illustrate how inapposite are the "express advocacy" standard and the statutory

language of the IRC 501(c)(3) political campaign prohibition. In the first, Federal Election

Commission v. American Federation of State, County and Municipal Employees, 471 F. Supp. 315

(D.D.C. 1979), the issue concerned a poster that the union had published and circulated immediately

prior to the 1976 Presidential election. The poster contained a caricature of President Gerald Ford,

wearing a button stating "Pardon Me" and embracing former President Nixon. The poster also

contained a quote from a speech President Ford made while he was still Vice President: "I can say

from the bottom of my heart the President of the United States is innocent and he is right." The court

found that, although the poster did pertain to a clearly identified candidate and may have tended to

11 C.F.R. § 100.22 was promulgated in 1995. 60 Fed. Reg. 35,304 (July 6, 1995). Since that time, subsection

(b) of the regulation, which was based on the Ninth Circuit's opinion in FEC v. Furgatch, 807 F.2d 857 (1987), has been

the subject of litigation. In

Maine Right to Life Committee, Inc. v. Federal Election Commission, 914 F. Supp. 8 (D.Me.

1996),

aff'd, 98 F.3d 1 (1st Cir. 1996), cert. denied, 118 S. Ct. 52 (1997), the court ruled that subsection of the regulation

exceeded the FEC's statutory authority because it broadened the definition of express advocacy beyond the Supreme

Court's interpretation. A similar conclusion was reached in

Right to Life of Dutchess County, Inc. v. Federal Election

Commission

, 6 F. Supp. 2d 248 (S.D.N.Y. 1998). For a discussion of some recent judicial treatment of the express

advocacy standard, see Kenneth A. Gross, "Issue Advertisements: The First Amendment Is Not a Loophole," in

Political

Activities: Nonprofit Speech, New York University School of Law National Center on Philanthropy and the Law

Conference

(1998).

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influence voting, it did not contain "express advocacy" under Buckley v. Valeo. Another case,

Orloski v. Federal Election Commission, 795 F.2d 156 (D.C. Cir. 1986), concerned corporate

contributions to a picnic held immediately before an election by a "Senior Citizens Advisory

Committee" established years before by the incumbent congressional candidate. Campaign posters

were placed throughout the park, although not in the picnic area. Members of the candidate's staff

planned and attended the picnic; they distributed information on social security, as well as a "senior

citizen's report" bearing the candidate's name. No express advocacy of the election of the candidate

or the defeat of his opponent took place at the event, however; nor was there any solicitation of

contributions. Under these circumstances, the court upheld the FEC's determination that the event

was "nonpolitical," the picnic's purpose was other than to influence a federal election, and the

corporate donations were not contributions.

A more recent case is Federal Election Commission v. The Christian Coalition, 52 F. Supp.

2d 45 (D.C.D.C. 1999). At the beginning of the opinion, the court stated the issue concerning

express advocacy as follows:

The question presented is whether "express advocacy" by corporations and labor

organizations is limited to communications that use specified phrases, such as "vote

for Smith" or "support Robinson," or whether a more substantive inquiry into the

clearly intended effect of a communication is permissible. The FEC advocates a

substantive inquiry and alleges that the Coalition used general corporate funds to

expressly advocate the election or defeat of certain candidates through a speech

made by the Coalition's then-Executive Director, Ralph Reed, and by certain of the

Coalition's direct mail communications. Id. at 48.

One example of the statements at issue will suffice. Mr. Reed closed his speech, made in

January 1992 to an audience in Helena, Montana, by stating: "[V]ictory will be ours. It will be ours

here in Montana. And it will be ours all across America. ... We're going to see Pat Williams [an

incumbent member of Congress from Montana] sent bags packing back to Montana in November

of this year. And I'm going to be here to help you." Id. at 56-57.

With respect to this statement, the court concluded:

Although the implicit message is unmistakable, in explicit terms this is prophecy

rather than advocacy. Reed predicts that victory "will be" ours and that "we're

going to see" Pat Williams defeated in the November election. Neither of these verbs

expressly directs the audience to do anything; the speaker has announced that this

will come to be without any further action. Making the issue closer is Reed's final

statement that he would return "to help you." For Reed to "help" there must be some

action taking place for him to assist. However, that action -- "sending" the

candidate's "bags packing" -- comes just shy of referring to the campaigning and

voting against Pat Williams necessary to bring that about. Though the message is

clear, it requires one inferential step too many to be unequivocally considered an

explicit directive.

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Bound, as this Court is, by Buckley and MCFL [Federal Election Commission v.

Massachusetts Citizens for Life, 479 U.S. 238 (1986), another Supreme Court

"express advocacy" case)], it can only be concluded that Reed exhibited precisely the

"ingenuity and resourcefulness" in his verb choice that the Buckley Court envisioned

possible to circumvent the prohibition on express advocacy. As others have

acknowledged, results such as this appear unsatisfyingly formalistic, allowing

precisely the sort of communications Congress sought to prohibit to remain immune

from liability. [Citation omitted.] But the Supreme Court felt that the First

Amendment required a choice between a toothless provision and one with an

overbite; results such as this flow directly from that choice. Id. at 63.

The language of IRC 501(c)(3) indicates a much broader scope to the concept of participation

or intervention in a political campaign. The statute clearly states that participation or intervention

in a political campaign includes publication or distribution of statements, which denotes that

prohibited political campaign activity is not to be limited to statements. It would do violence to the

statute, not to mention over 45 years of interpretation, to adopt the "express advocacy" standard.

Therefore, the "express advocacy" standard may not be adopted for purposes of the political

campaign prohibition of IRC 501(c)(3).

10. Can activities that are

educational also result in

political intervention?

The most common question that arises in

determining whether an IRC 501(c)(3) organization

has violated the political campaign prohibition is

whether the activities constitute political

intervention or whether they are educational, one of

the purposes for which an IRC 501(c)(3)

organization may be formed. A misperception has

developed that educational and political activities are somehow mutually exclusive. Sometimes,

however, the answer is that the activity is both -- it is educational, but it also constitutes intervention

in a political campaign.

"Educational" is defined for IRC 501(c)(3) purposes as including instruction of the public

on subjects useful to the individual and beneficial to the community. While an educational

organization may advocate a particular viewpoint, it is not educational if its principal function is the

mere presentation of unsupported opinion. Examples of educational organizations include

organizations whose activities consist of presenting public discussion groups, forums, panels,

lectures, or other similar programs, which may be on radio or television. Reg. 1.501(c)(3)-1(d)(3).

One step in determining whether an activity of an IRC 501(c)(3) organization constitutes prohibited

political activity is a determination of whether it is, in fact, an educational activity, particularly when

the IRC 501(c)(3) organization advocates a particular viewpoint. Rev. Proc. 86-43, 1986-2 C.B. 729,

provides a methodology test for determining whether an activity is educational. It identifies several

factors which indicate that the method used is not educational: (1) presentation of viewpoints

unsupported by facts as a significant portion of the organization's communications; (2) distorted

facts; (3) substantial use of inflammatory and disparaging terms and conclusions based on strong

emotional feelings rather than objective evaluations; and (4) the approach used is not aimed at

developing the audience's understanding because it does not consider their background or training

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in the subject matter. The presence or absence of any of these factors is not conclusive; rather, the

determination of whether the method used is educational is based upon all the facts and

circumstances of the situation.

Activities that meet the methodology test of Rev. Proc. 86-43 may nevertheless constitute

participation or intervention in a political campaign. For example, the court in Association of the

Bar of the City of New York v. Commissioner, 858 F.2d 876 (2d Cir. 1988), cert. denied, 490 U.S.

1030 (1989), determined that the Association did not qualify as an organization described in

IRC 501(c)(3) because it participated or intervened in a political campaign. The Association's

disqualifying activity was the distribution of its ratings of candidates for elective judicial office as

"approved," "not approved" or "approved as highly qualified." The ratings were made on the basis

of a comparison of the candidate with ideal standards of competence, ability, and other qualities; they

did not involve comparisons with other candidates. The court stated that although this activity was

nonpartisan and in the public interest, it nevertheless constituted participation or intervention in a

political campaign and the Association therefore did not qualify as an IRC 501(c)(3) organization.

The Association's methodology apparently would pass muster under Rev. Proc. 86-43; it constituted

prohibited political campaign activity nonetheless because it showed a bias toward particular

candidates. For another example, see Rev. Rul. 67-71, 1967-1 C.B. 125, which discusses an

organization created to improve a public educational system. The organization selected and

supported a particular slate of candidates for the school board. The revenue ruling concludes that

the organization engaged in prohibited political campaign activity, even though the selection process

was completely objective and unbiased and was intended primarily to educate and inform the public

about the candidates.

C. Motivation and Absoluteness of the IRC 501(c)(3) Campaign Prohibition

1. What is the importance of the

organization's motivation?

In the 1993 CPE Text, the question, "[d]oes

the motivation of an organization determine

whether the political campaign prohibition has been

violated?" was answered as follows:

No, the motivation of an organization is irrelevant when determining whether

the political campaign prohibition has been violated. Rev. Rul. 76-456, 1976-2 C.B.

151, touches on this point in concluding that where an organization is involved in

upgrading the morals and ethics of political campaigning, it is nevertheless

intervening in a political campaign if it solicits candidates to sign a code of fair

campaign practices and releases the names of those candidates who sign and those

candidates who refuse to sign. As noted above, the court in Association of the Bar

of the City of New York v. Commissioner, 858 F.2d 876 (2d Cir. 1988), cert. denied,

490 U.S. 1030 (1989), upheld this view when it stated that although the Association's

activity was nonpartisan and in the public interest, it nevertheless constituted

participation or intervention in a political campaign. In explicating its conclusion,

the court made the rather wry observation: "A candidate who receives a 'not

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qualified' rating will derive little comfort from the fact that the rating may have been

made in a nonpartisan manner." Id. at 880. See also Rev. Rul. 67-71, 1967-1 C.B.

125.

No statement in the 1993 CPE Text generated so much comment. As one commentator

noted:

While the statement in the CPE Text apparently was intended to put to rest the use

of "good motives" as a defense to violation of the prohibition on campaign

intervention, it has -- ironically fueled a new debate as to whether "bad motives" are

similarly irrelevant. For these purposes, having a "good motive" means that the

activity is taken on for a demonstrably nonpartisan educational purpose. Having a

"bad motive" means that the activity, although educational in nature, also has a

partisan political purpose. Celia Roady, "Political Activities of Tax-exempt

Organizations: Federal Income Tax Rules and Restrictions," in Political Activities:

Nonprofit Speech, New York University School of Law National Center on

Philanthropy and the Law Conference (1998); reprinted in 22 Exempt Organization

Tax Review, 401, 405 (Dec. 1998).

One must remember here that the IRC 501(c)(3) political campaign prohibition solely refers

to an activity -- participation in, or intervention in (including the publishing and distributing of

statements) any political campaign on behalf of (or in opposition to) any candidate for public office.

Therefore, the resolution of the "bad motive" issue depends upon the way the activity is conducted

(the facts and circumstances) and upon any inquiry into the state of mind of the organization.

Motivation (or intent) and its relationship to the political campaign prohibition has been the subject of several

articles: Frances R. Hill, "The Role of Intent in Distinguishing Between Education and Politics," 9

Journal of Taxation

of Exempt Organizations

9 (July/Aug. 1997); Jeffery L. Yablon and Edward D. Coleman, "Intent Is Not Relevant in

Distinguishing Between Education and Politics," 9

Journal of Taxation of Exempt Organizations 156 (Jan./Feb. 1998);

Gregory L. Colvin, "Can a Section 501(c)(3) Organization Have a Political Purpose," 10

Journal of Taxation of Exempt

Organizations

40 (July/Aug. 1998); and Frances R. Hill, "Can Arguments About Subjective Intent Eliminate the Political

Prohibition Under Section 501(c)(3)?," 10

Journal of Taxation of Exempt Organizations 147 (Jan./Feb. 1999). For a

detailed discussion of recent pronouncements that touch upon the this issue, see Miriam Galston and Frances R. Hill,

"Update on Lobbying and Political Activities,"

Georgetown University Conference on Exempt Organizations (1999).

In the general context of determining exempt purpose, Walter J. Blum stated, in his landmark article "Motive,

Intent, and Purpose in Federal Income Taxation," 34

U. Chi. L. Rev. 485, 503 n. 41 (1967):

[In] determining the primary purpose of an organization that operates a business and devotes all the

income earned to furthering the functions which, standing alone, qualify the organization for tax

exemption under § 501(c)[, state] of mind considerations seem to be totally irrelevant here. While

purpose in this context conceivably could refer to the use to which all income is finally put, the

history of the governing statutory provision rules out this interpretation. Purpose could also refer

to the size and extent of the business activities compared to the size and extent of the business

activities compared to the size and extent of activities in furtherance of exempt functions, taking into

account the financial resources available for such functions. No other meaning of purpose seems

germane to the issue. (Citation omitted.)

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Fundamentally, two completely parallel lines of argument have developed. One side argues

that a determination of subjective intent (or "state of mind") has no place in determining whether the

political campaign prohibition has been violated. That, as noted above, is absolutely correct. The

other side argues that objective manifestations of intent (something far different from motive) must

be taken into consideration. That is also correct. The Second Circuit, in Association of the Bar of

the City of New York, used both of these completely nonconvergent ideas in making its decision.

Specifically, the court dismissed the Association's nonpartisan (state of mind or motive) argument;

however, the court found that the requisite objective intent (the publication of the ratings was "made

with aim toward imminent elections") and this finding was crucial.

One must approach the "bad motive" scenario in the same manner -- one must look at what

the organization was actually doing -- a conclusion based on some a priori "state of mind"

determination would be improper. The most important thing to consider in determining whether an

organization has participated or intervened in a political campaign is not the "motive" for the

activity; rather, it is the activity itself.

2. Is the prohibition absolute?

Yes, the prohibition is absolute. In United

States v. Dykema, 666 F.2d 1096, 1101 (7th Cir.

1981), the Seventh Circuit stated: "It should be

noted that exemption is lost . . . by participation in

any political campaign on behalf of any candidate

for public office. It need not form a substantial part of the organization's activities." The Second

Circuit agreed with this position when it held that an organization did not qualify as an

IRC 501(c)(3) organization because it rated judicial candidates as a very minor part of its total

activities. Association of the Bar of the City of New York v. Commissioner, 858 F.2d 876 (2d Cir.

1988), cert. denied, 490 U.S. 1030 (1989). The court rejected the organization's contention that the

substantiality requirement from the lobbying activity limitations be applied to the political campaign

activity prohibition. Citing United States v. Naftalin, 441 U.S. 768, 773 (1979), the court stated:

"The short answer [to this argument] is that Congress did not write the statute that way." Id. at 881.

The court noted that the IRC 501(c)(3) prohibition against participation or intervention in political

campaigns was added some twenty years after the statutory restriction on lobbying. Therefore, the

court concluded: "Had Congress intended the added exception to apply only to those organizations

that devote a substantial part of their activity to participation in political campaigns, it easily could

have said so. It did not." Id. at 881. Furthermore, the court noted, both houses of Congress, in their

Committee Reports on the Tax Reform Act of 1969, explicitly differentiated the scope of the two

proscriptions: "[A]lthough the present provisions of section 501(c)(3) permit some degree of

influencing legislation by a section 501(c)(3) organization, it provides that no degree of support for

an individual's candidacy is permitted." 858 F.2d at 881, citing H.R. No. 91-413, 91st Cong., 1st

Sess. 32 (1969), 1969-3 C.B. 200, 221; S. Rep. No. 91-552, 91st Cong., 1st Sess. 47 (1969), 1969-3

Similarly, in determining whether an organization's business was conducted in furtherance of an exempt

purpose, the court in

B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 357 (1978) stated: "Factors such as the

particular manner in which an organization's activities are conducted, the commercial hue of those activities, and the

existence and amount of annual or accumulated profits are relevant evidence of a forbidden predominant purpose."

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C.B. 423, 454. However, as discussed below in Section D, the enactment of the IRC 4955 excise

tax did provide for some relief in certain limited situations.

D. Excise Taxes and Flagrant Violations

(1) The IRC 4955 Excise Taxes

1. Are the IRC 4955 excise taxes

imposed in addition to or

instead of revocation?

Fundamentally, it appears that Congress

viewed the IRC 4955 taxes, not so much as an

intermediate sanction to replace revocation, but,

primarily, as an additional tax, and, secondarily, as

a sanction to apply instead of revocation in certain

limited situations. The House Budget Committee

Report (H.R. Rep. No. 100-391, 100th Cong., 1st

Sess. 1623-1624 (1987)), explains the reasons for the enactment of the excise tax provisions of

IRC 4955 as follows:

The committee believes that the penalty excise tax structure applicable under

present law if a private foundation makes a prohibited political expenditure should

also apply in the case of prohibited political expenditures made by a public charity.

As the Congress concluded in adopting the two-tier foundation excise tax

structure in 1969, the Internal Revenue Service may hesitate to revoke the exempt

status of a charitable organization for engaging in political campaign activities in

circumstances where that penalty may seem to be disproportionate - i.e., where the

expenditure was unintentional and involved only a small amount and where the

organization subsequently had adopted procedures to assure that similar

expenditures would not be made in the future, particularly where the managers

responsible for the prohibited expenditure are no longer associated with the

organization. At the same time, where an organization claiming status as a charity

engages in significant, uncorrected violations of the prohibition on political

campaign activities, revocation of exempt status may be ineffective as penalty or as

a deterrent, particularly if the organization ceases operations after it has diverted

all its assets to improper purposes.

The committee believes that the additional, two-tier excise tax structure

applicable under present law to private foundations operates in a fair and effective

manner and hence appropriately should be extended to public charities. The

adoption of the excise tax sanction does not modify the present-law rule that an

organization does not qualify for tax-exempt status as a charitable organization, and

is not eligible to receive tax-deductible contributions, unless the organization does

not participate in, or intervene in, any political campaign on behalf of or in

opposition to any candidate for public office (secs. 501(c)(3), 170(c)(2)). (Emphasis

supplied.)

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The House Budget Committee Report, therefore, specifies the situations in which Congress

intended that the Service consider utilizing the excise tax instead of revocation -- where the violation

was unintentional, involved only a small amount, and the organization had subsequently corrected

the violation and adopted procedures to assure that similar expenditures would not be made in the

future. (The House Budget Committee Report's use of "i.e.," instead of "e.g.," is significant.)

Furthermore, the legislative history points out that the enactment of IRC 4955 was not intended to

modify the political campaign activity prohibition of IRC 501(c)(3). Instead, Congress intended the

excise tax be imposed even when the IRC 501(c)(3) organization loses its tax-exempt status as a

result of the prohibited political campaign activity -- it observed that in some situations revocation

alone was ineffective as a penalty. Finally, Congress intended IRC 4955 to operate as a deterrent

-- the same penalty/deterrent motivation that underlaid enactment of the Chapter 42 taxes (one of

which was IRC 4945) on private foundations in 1969.

The 1987 enactments were intended to strengthen, not to weaken, the prohibition on political

campaign activity. As noted at the beginning of this article, at the same time that Congress enacted

IRC 4955, it enacted other provisions to strengthen the ability of the Service to enforce the political

campaign prohibition: the termination assessment provisions of IRC 6852, the injunctive provisions

of IRC 7409, and the amendment to IRC 504 to make qualification under IRC 501(c)(4) unavailable

to an organization that has lost IRC 501(c)(3) status due to political campaign activity.

Congressional intent is also reflected in the preamble to the final IRC 4955 regulations (T.D.

8628, 60 Fed. Reg. 62,209 (Dec. 5, 1995) as follows:

Another comment suggested that the regulations specify whether there were

circumstances under which conduct would result in the imposition of a tax under

section 4955 but not in revocation of exemption under section 501(c)(3). According

to the statutory language and the legislative history of section 4955, the addition of

that section to the Internal Revenue Code did not affect the substantive standards for

tax exemption under section 501(c)(3). To be exempt from income tax as an

organization described in section 501(c)(3), an organization may not intervene in

any political campaign on behalf of any candidate for public office. Consistent with

this requirement, section 4955 does not permit a de minimis amount of political

intervention. Therefore, the final regulations have not been revised. However, there

may be individual cases where, based on the facts and circumstances such as the

nature of political intervention and the measures that may have been taken by the

organization to prevent a recurrence, the IRS may exercise its discretion to impose

a tax under section 4955 but not to seek revocation of the organization's tax-exempt

status.

In summary, Congress intended the Service to impose the IRC 4955 excise tax in addition

to revocation for expenditures to intervene in a political campaign and to impose the tax instead of

revocation in the limited situations where the expenditure is unintentional, small in amount, and the

organization has adopted procedures to prevent future similar expenditures. See H.R. Rep. No.

100-391, 100th Cong., 1st Sess. 1623-1624 (1987)

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2. How is an IRC 501(c)(3)

organization taxed under

IRC 4955?

IRC 4955(a)(1) provides for an initial tax on

the organization of 10 percent of each political

expenditure. IRC 4955(b)(1) imposes an additional

tax on the organization of 100 percent of each

political expenditure previously taxed and not

corrected within the taxable period. There is no

upper limit on the tax that can be levied on the

organization.

3. How are managers of an

IRC 501(c)(3) organization

taxed under IRC 4955?

IRC 4955(a)(2) imposes a tax of 2½ percent

of the political expenditure on any organization

manager who agreed to the making of the political

expenditure. Organization managers who refused

to agree to all or part of the correction are subject to

a tax of 50 percent of the political expenditure.

Under IRC 4955(c), if more than one manager is

liable for the first or second tier tax, all are jointly and severally liable. Furthermore, IRC 4955(c)

provides that for "any 1 political expenditure," the first tier tax is capped at $5,000 and the second

tier tax is capped at $10,000.

4. What is a "political

expenditure" for purposes of

IRC 4955(d)(1)?

The term "political expenditure" is defined

in IRC 4955(d)(1) as "any amount paid or incurred

by a section 501(c)(3) organization in any

participation in, or intervention in (including the

publication or distribution of statements), any

political campaign on behalf of (or in opposition to)

any candidate for public office," tracking the

language of the prohibition in IRC 501(c)(3).

Additionally, the IRC 4955 regulations refer to the regulations under IRC 501(c)(3).

Specifically, Reg. 53.4955-1(c)(1) provides that a political expenditure for purposes of IRC 4955 is

any expenditure that would cause the organization making the expenditure to be considered an

"action" organization under Reg. 1.501(c)(3)-1(c)(3)(iii). In addition to repeating the statutory

prohibition against political campaign activity, Reg. 1.501(c)(3)-1(c)(3)(iii) provides that both direct

and indirect participation or intervention in the political campaign process will cause the

organization to be considered an action organization.

5. What is a "political

expenditure" for purposes of

IRC 4955(d)(2)?

Under IRC 4955(d)(2) certain expenditures

of candidate-controlled organizations are

considered political expenditures for the purpose of

the tax imposed by IRC 4955. A

candidate-controlled organization is an

organization formed primarily for the purpose of

promoting the candidacy or prospective candidacy

of an individual for public office or one that is effectively controlled by a candidate or prospective

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candidate and that is availed of primarily for such purposes.

According to the legislative history,

an organization is "effectively controlled" by a candidate if the candidate "has a continuing,

substantial involvement in the day-to-day operations or management of the operation." H.R. Conf.

Rep. No. 100-495, 100th Cong., 1st Sess. 1021 (1987), 1987-3 C.B. 193, 301. The expenditures of

a candidate-controlled organization that are considered political expenditures under IRC 4955(d)(2)

are as follows:

(A) Amounts paid or incurred to the candidate for speeches or other services;

(B) Travel expenses of the candidate;

or other materials for use by the candidate;

(D) Expenses of advertising, publicity and fundraising for the candidate; and

(E) Any other expense that has the primary effect of promoting public

recognition or otherwise primarily accruing to the benefit of the candidate.

6. When is an organization

effectively controlled by a

candidate or prospective

candidate?

Reg. 53.4955-1(c)(2)(i) provides that, for

purposes of IRC 4955(d)(2), an organization is

effectively controlled by a candidate or prospective

candidate only if the individual has a continuing,

substantial involvement in the day-to-day

operations or management of the organization. An

organization will not be "effectively controlled"

merely because it is affiliated with the candidate or

merely because the candidate knows the directors, officers, or employees of the organization. The

regulation further provides that the "effectively controlled" test is not met merely because the

organization carries on its research, study, or other educational activities with respect to subject

matter or issues in which the individual is interested or with which the individual is associated.

7. When is the primary purpose

of an organization promoting

the candidacy or prospective

candidacy of an individual for

public office?

Reg. 53.4955-1(c)(2)(ii) provides that, for

purposes of IRC 4955(d)(2), a determination of

whether the primary purpose of an organization is

promoting the candidacy or prospective candidacy

of an individual for public office is made on the

basis of all the facts and circumstances. The

regulation further provides that the factors to be

considered include whether the studies, surveys,

As originally proposed, a candidate-controlled organization was an organization formed, or availed of,

substantially for purposes of promoting the candidacy or potential candidacy of an individual for public office. H.R.

2942, "Tax Exempt Lobbying and Political Activities Accountability Act of 1987" (July 15, 1987). The change from

"substantially" to "primarily" was one of the few changes in the enacted version.

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materials, etc., prepared by the organization are made available only to the candidate or are made

available to the general public; and whether the organization pays for speeches or travel expenses

of several persons. In this connection, Reg. 53.4955-1(c)(2)(ii) explicitly provides that a candidate's

or prospective candidate's utilization of studies, papers, materials, etc., prepared by the organization

(such as in a speech by the candidate) is not to be considered as a factor indicating that the

organization has a purpose of promoting the candidacy or prospective candidacy of that individual

where such papers, materials, etc., are not made available only to that individual.

8. When are expenditures for

certain voter activities treated

as political expenditures?

Expenditures for voter registration, voter

turnout, or voter education constitute other

expenditures that are treated as political

expenditures under IRC 4955(d)(2)(E) only if the

expenditures violate the prohibition on political

campaign activity provided in IRC 501(c)(3). See

the discussion below in Section G concerning these

types of voter activities.

9. Does IRC 4955 affect the

political prohibition of

IRC 501(c)(3)?

No, IRC 4955 does not affect the political

prohibition of IRC 501(c)(3). Reg. 53.4955-1(a)

specifically provides that the excise taxes imposed

by IRC 4955 do not affect the standards for

exemption under IRC 501(c)(3). IRC 501(c)(3)

organizations continue to be subject to the absolute

prohibition on political campaign activity. Thus, an

organization that is subject to the IRC 4955 excise tax may also have its exempt status revoked. The

presence or absence of revocation proceedings against the organization does not affect the

application of the IRC 4955 excise tax.

10. How is IRC 4955 coordinated

with IRC 4945?

The tax/correction structure and the rates

imposed by IRC 4955 are identical to those under

IRC 4945, which imposes a tax on the taxable

expenditures of a private foundation, including

political expenditures. To avoid duplicating excise

taxes on political expenditures by private

foundations, IRC 4955(e) provides that if its taxes are imposed on a private foundation, the

expenditure is not treated as a taxable expenditure under IRC 4945.

11. How is IRC 4955 coordinated

with IRC 4958?

IRC 4958, enacted July 30, 1996,

imposes

excise taxes on excess benefit transactions

involving organizations described in IRC 501(c)(3)

(other than private foundations and some other

Taxpayer Bill of Rights 2, Pub. L. No. 104-168, 110 Stat. 1452.

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minor exceptions) and IRC 501(c)(4).

As part of the enactment of IRC 4958, IRC 4955(e) was

amended to provide that if the 4955 tax is imposed on a political expenditure, such expenditure will

not be treated as an excess benefit for purposes of IRC 4958.

12. How is the tax on organization

managers imposed?

Since the structure of IRC 4955 was based

upon the structure of IRC 4945, the IRC 4955

regulations adopt the same basic standards as those

contained in Reg. 53.4945-1(a)(2) for the

imposition of tax under IRC 4955(a)(2) on

organization managers that agree to the making of

the political expenditure. Reg. 53.4955-1(b)(1) provides that the excise tax under IRC 4955(a)(2)

will only be imposed on a manager if three conditions are met:

(1) A tax is imposed on the organization by IRC 4955(a)(1);

(2) The organization manager knows that the expenditure to which the manager

agrees is a political expenditure; and

(3) The agreement is willful and is not due to reasonable cause.

13. What is the meaning of

"organization manager" for

purposes of IRC 4955?

IRC 4955(f)(2) specifies that the term

"organization manager" on whom tax may be

imposed means any officer, director, or trustee of

the organization (or individual having similar

powers or responsibilities), or any employee of the

organization having power or authority with respect

to the expenditure. To be subject to the tax under

IRC 4955(a)(2), the manager must either be authorized to approve, or to exercise discretion in

recommending approval of, the making of the expenditure by the organization, or be a member of

a group (such as the organization's governing body) which is so authorized. Reg. 53.4955-1(b)(2)(i).

14. When is an officer of an

organization considered an

organization manager?

An officer of the organization is the person

designated as such under the organizing documents

of the organization or any person who regularly

exercises general authority to make administrative

or policy decisions on its behalf. An independent

contractor, acting as an attorney, accountant, or

other advisor, is not an officer of the organization.

Reg. 53.4955-1(b)(2)(ii). An individual is only considered an officer of the organization for

purposes of IRC 4955(f)(2)(B) if that individual is an employee within the meaning of

The IRC 4958 excise taxes apply to excess benefit transactions occurring on or after September 14, 1995. Pub.

L. 104-68, § 1311(d)(1). They do not apply, however, to any benefit arising from a transaction pursuant to any written

contract that was binding on September 13, 1995, and continued in force through the time of the transaction. Pub. L.

104-68, § 1311(d)(2).

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IRC 3121(d)(2) and only if he or she has final authority or responsibility (either officially or

effectively) with respect to the political expenditure. Reg. 53.4955-1(b)(2)(iii).

15. When has an organization

manager agreed to the political

expenditure?

Reg. 53.4955-1(b)(3) provides that an

organization manager agrees to the expenditure if

he or she "manifests approval of the expenditure

which is sufficient to constitute an exercise of the

organization manager's authority to approve, or to

exercise discretion in recommending approval of,

the making of the expenditure by the organization."

Furthermore, the regulation provides that "[t]he manifestation of approval need not be the final or

decisive approval on behalf of the organization." Therefore, the provision extends beyond the person

who gave final approval to include other managers who recommended approval.

16. When does an organization

manager know that an

expenditure is a political

expenditure?

In determining whether the organization

manager knows that an expenditure is a political

expenditure, the regulations follow Reg.

53.4945-1(a)(2)(iii) in establishing the general rule.

Reg. 53.4955-1(b)(4)(i) provides that an

organization manager is considered to have known

that the expenditure to which he or she agreed is a

political expenditure only if the following

conditions are met:

(1) The manager has actual knowledge of sufficient facts so that, based solely

upon these facts, the expenditure would be a political expenditure;

(2) The manager is aware that such an expenditure under these circumstances

may violate the provisions of federal tax law governing political

expenditures; and

(3) The manager negligently fails to make reasonable attempts to ascertain

whether the expenditure is a political expenditure, or the manager is aware

that it is a political expenditure.

The regulations also amplify this general rule by providing that, for purposes of IRC 4955,

the mere fact that an organization manager has reason to know that an expenditure is a political

expenditure does not, by itself, mean that the manager has actual knowledge that it is a political

expenditure. Nevertheless, evidence showing that the manager had reason to know is relevant in

determining whether the manager had actual knowledge. Reg. 53.4955-1(b)(4)(ii).

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Reg. 53.4955-1(b)(5) provides that an

organization manager's agreement to a political

expenditure is willful if it is voluntary, conscious,

and intentional. No motive to avoid the restrictions

of the law or the incurrence of any tax is necessary

to make an agreement willful; however, to be a

willful agreement, the manager must know that the

expenditure is a political expenditure.

Reg. 53.4955-1(b)(6) provides that an

organization manager's actions are due to

reasonable cause if the manager has exercised his

or her responsibility on behalf of the organization

with ordinary business care and prudence.

Yes, an organization manager may rely on

the advice of counsel. Reg. 53.4955-1(b)(7)

provides that an organization manager's agreement

to an expenditure is ordinarily considered not

knowing or willful and is ordinarily considered due

to reasonable cause if the manager, after full

disclosure of the factual situation to legal counsel (including house counsel) relies on the advice of

counsel expressed in a reasoned written legal opinion that an expenditure is not a political

expenditure under IRC 4955 (or that expenditures conforming to certain guidelines are not political

expenditures).

Reg. 53.4955-1(b)(7) provides that, for the

purpose of determining whether a manager

knowingly and willfully agreed to a political

expenditure, a written legal opinion is considered

reasoned even if it reaches a conclusion that is

subsequently determined to be incorrect, so long as

the opinion addresses itself to the facts and

applicable law. The following sentence of the

regulation, however, adds a cautionary note: "A written legal opinion is not considered reasoned if

it does nothing more than recite the facts and express a conclusion."

21. What if the organization

manager does not seek advice

of counsel?

The absence of advice of counsel with

respect to an expenditure, by itself, does not give

rise to any inference that an organization manager

agreed to the making of a political expenditure

knowingly, willfully, or without reasonable cause.

Reg. 53.4955-1(b)(7).

17. When is an organization

manager's agreement to a

political expenditure willful?

18. When are an organization

manager's actions considered

to be due to reasonable cause?

19. May an organization manager

rely on the advice of counsel?

20. What if a written legal opinion

reaches a conclusion

subsequently determined to be

incorrect?

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No, the advice of counsel provision does

not apply to the organization itself. Since

IRC 4955(a)(1) imposes the tax on an organization

without regard to whether its actions were willful

or due to reasonable cause, the same reasoned

written legal opinion from legal counsel that would

protect an organization manager from tax would not protect the organization from the excise tax.

Under Reg. 53.4955-1(b)(8), which

provides that IRC 7454(b) controls, the Service

bears the burden of proof with respect to whether

an organization manager knowingly and without

reasonable cause agreed to the making of a political

expenditure.

Form 4720 is used to compute and report

the IRC 4955 excise taxes. An organization liable

for tax imposed by IRC 4955(a) must file its

Form 4720 by the unextended due date for filing its

annual information return under IRC 6033 or, if the

organization is exempt from filing, the date it

would be required to file an annual information return if it were not exempt from filing. A person

whose taxable year ends on a date other than the date of the end of the organization's taxable year

must file his or her Form 4720 on or before the 15th day of the fifth month following the close of

the person's taxable year. Reg. 53.6071-1(e).

25. What if the political

expenditure was not "willful

and flagrant" and was

"corrected"?

26. What is the meaning of "willful

and flagrant"?

Reg. 53.4955-1(d) provides that, if the

organization or organization manager establishes to

the satisfaction of the Service that a political

expenditure was not "willful and flagrant" and was

"corrected," no initial (first tier) tax will be

imposed under IRC 4955(a), or the initial tax will

be refunded.

The IRC 4955 regulations contain no

definition of "willful and flagrant."

There is,

22. May an organization rely upon

advice of counsel?

23. Who bears the burden of

proof?

24. How are the IRC 4955 excise

taxes computed and reported?

The preamble to the final IRC 4955 regulations noted as follows:

One comment requested that the regulations provide more detail on the type of

behavior that would be considered flagrant under sections 6852 and 7409. Since

a determination of when a specific act or acts by an organization is flagrant

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however, a very general definition of "willful and flagrant" in Reg. 1.507-1(c)(2) for purposes of the

IRC 507 voluntary termination tax. Reg. 1.507-1(c)(2) provides that an act is deemed willful and

flagrant if it is "voluntarily, consciously, and knowingly" committed in violation of any such rule and

"appears to a reasonable man to be a gross violation...."

27. What is the meaning of

"correction" in this context?

Reg. 53.4955-1(e) provides that correction

of a political expenditure means recovering the

expenditure to the extent possible and establishing

safeguards to prevent future political expenditures.

Under Reg. 53.4955-1(e)(1) "recovery of

expenditure" means recovering part or all of the

expenditure to the extent possible, and, where full recovery cannot be accomplished, by any

additional corrective action that the Commissioner might prescribe. (The regulation further

provides, however, that the organization that made the political expenditure is not under any

obligation to attempt to recover the expenditure by legal action if the action would in all probability

not result in the satisfaction of execution on a judgment.)

28. May the taxes under IRC 4955

be abated?

If the political expenditure subject to tax

under IRC 4955 is corrected within the correction

period, IRC 4961 provides that any second tier tax

imposed with respect to that expenditure may be

abated. The amount that may be abated will

include any interest, additions to the tax, and

additional amounts also assessed. The correction period is the period beginning on the date on which

the political expenditure occurs and ending 90 days after the date of mailing a notice of deficiency

with respect to the second tier tax. IRC 4962(e).

If the organization establishes that the political expenditure was not willful and flagrant and

it is corrected within the correction period, the first tier tax may be abated, including any interest.

IRC 4962.

29. When may requests for

abatement be made?

Requests for abatement may be made during

an examination, after a 30-day letter or a 90-day

letter has been issued, in a protest of a tax due and

assessed on Form 4720, or in a request filed

(formally or informally) after the tax has been

assessed and paid. If the tax has been paid, the

request for abatement is treated as a claim, even though abatements differ fundamentally from

depends on the facts and circumstances of individual cases, the IRS and the

Treasury Department believe that, to the extent guidance is necessary on this issue,

it is better rendered in a form other than through regulations. Therefore, the final

regulations do not expand on the definition of flagrant. 60 Fed. Reg.

62,209-62,210 (Dec. 5, 1995).

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claims. (Abatement is discretionary relief from an obligation; a claim disputes the existence of an

obligation.)

Because abatement can be requested at any time, it should be considered in every case where

the IRC 4955 first tier tax has been imposed. If the facts support abatement, the tax should be abated

even if the taxpayer has not raised the issue. If the facts do not support abatement, the file should

document why.

(2) The Treatment of Flagrant Political Expenditures

1. What are the termination

assessment provisions for

flagrant political expenditures?

IRC 6852 provides that the Service may

immediately determine the amount of income and

IRC 4955 tax, for that year and the immediately

preceding tax year, due from an IRC 501(c)(3)

organization that flagrantly violates the political

campaign prohibition, which shall be immediately

due and payable. The Service will immediately

assess the tax so determined and demand payment from the organization. The determination and

assessment of the tax under IRC 6852 terminates the taxable year of the IRC 501(c)(3) organization.

2. What are the injunction

provisions for flagrant political

expenditures?

IRC 7409 grants authority to the Service to

seek an injunction against an IRC 501(c)(3)

organization that flagrantly violates the political

campaign prohibition to prevent further political

expenditures by the organization. An injunction

may be sought only if three conditions are met:

(A) The organization has been notified that the Service intends to seek an

injunction if the making of political expenditures does not immediately cease;

(B) The Commissioner has personally determined that the organization has

flagrantly violated the political campaign activity prohibition; and

appropriate to prevent future political expenditures.

E. Attribution of the Acts of Individuals to IRC 501(c)(3) Organizations

1. When may the act of an

individual official be attributed

to the organization?

The prohibition on political campaign

activity applies only to IRC 501(c)(3)

organizations, not to the activities of individuals in

their private capacity. The prohibition against

political campaign activity does not prevent an

organization's officials from being involved in a

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political campaign, so long as those officials do not in any way utilize the organization's financial

resources, facilities, or personnel, and clearly and unambiguously indicate that the actions taken or

the statements made are those of the individuals and not of the organization.

On the other hand, since an IRC 501(c)(3) organization acts through individuals, sometimes

the political activity of an individual may be attributed to the organization. As in other situations

where the political campaign prohibition is concerned, the determination of whether the act of an

individual will be attributed to an IRC 501(c)(3) organization is based on the relevant facts and

circumstances. In particular, when officials of an IRC 501(c)(3) organization engage in political

activity at official functions of the organization or through the organization's official publications,

the actions of the officials are attributed to the IRC 501(c)(3) organization. Use of the IRC 501(c)(3)

organization's financial resources, facilities, or personnel is also indicative that the actions of the

individual should be attributed to the organization.

An IRC 501(c)(3) organization acts through individuals such as its officers, directors and

trustees. The officers, directors, or trustees of the organization are the ones who make the decisions

for the organization and communicate those decisions to others. Officials acting in their individual

capacity may be identified as officials of the organization so long as they make it clear that they are

acting in their individual capacity, that they are not acting on behalf of the organization, and that

their association with the organization is given for identification purposes only. If it is not made

clear that the official's association with the organization is given only for purposes of identification,

the individual's acts may be attributed to the IRC 501(c)(3) organization since the organization

typically acts through its officials. Actions and communications by the officials of the organization

that are of the same character and method as authorized acts and communications of the organization

will be attributed to the organization.

Therefore, when an official of an IRC 501(c)(3) organization endorses a candidate

somewhere other than in the organization's publications or at its official functions, and the

organization is mentioned, it should be made clear that such endorsement is being made by the

individual in his or her private capacity and not on the organization's behalf. The following language

would serve as a sufficient disclaimer: "Organization shown for identification purposes only; no

endorsement by the organization is implied." However, as stated earlier, if the endorsement occurs

in the organization's publication or at its official function, such a disclaimer is insufficient to avoid

attribution of the endorsement to the organization.

2. When may the acts of

individuals other than officials

be attributed to an

organization?

An IRC 501(c)(3) organization may also act

or communicate with others through the authorized

actions of its employees or members. There must

be real or apparent authorization by the

IRC 501(c)(3) organization of the actions of

individuals other than officials before the actions of

those individuals will be attributed to the

organization. In general, the principles of agency

will be applied to determine whether an individual engaging in political activity was acting with the

authorization of the IRC 501(c)(3) organization. See, e.g., G.C.M. 34631 (Oct. 4, 1971). The

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actions of employees within the context of their employment generally will be considered to be

authorized by the organization.

Acts of individuals that are not authorized by the IRC 501(c)(3) organization may be

attributed to the organization if it explicitly or implicitly ratifies the actions. A failure to disavow

the actions of individuals under apparent authorization from the IRC 501(c)(3) organization may be

considered a ratification of the actions. To be effective, the disavowal must be made in a timely

manner equal to the original actions. The organization must also take steps to ensure that such

unauthorized actions do not recur.

The actions of students generally are not attributed to an educational institution unless they

are undertaken at the direction of and with authorization from a school official. (Note that actions

by a person in excess of his official authority should not, as a rule, be considered those of the

organization. If the organization allows such usurpation of authority to go unchallenged, however,

it impliedly ratifies the act. See G.C.M. 34523 (June 11, 1971).) For instance, the individual

political campaign activities of students were not attributed to the university in Rev. Rul. 72-512,

1972-2 C.B. 246. Had the faculty members specified the candidates on whose behalf the students

should campaign, the actions of the students would be attributable to the university since the faculty

members act with the authorization of the university in teaching classes.

For example, in G.C.M. 39414 (Feb. 29, 1984), the political campaign activities of individual

members were attributed to an IRC 501(c)(3) organization. The organization's publication stated that

the organization would be sending members to work on the campaign, members identified

themselves as representing the organization, and officials made no effort to prevent the members'

activities.

F. Relationship of IRC 501(c)(3) Organizations with Organizations That Conduct

Political Campaign Activities

1. Can an IRC 501(c)(3)

organization establish a

political action committee

(PAC) to engage in political

campaign activity?

No, an IRC 501(c)(3) organization may not

establish a PAC to engage in political campaign

activity. When the statute governing political

organizations, IRC 527, was enacted, the Senate

Finance Committee's Report stated: "This

provision is not intended to affect in any way the

prohibition against certain exempt organizations

(e.g., sec. 501(c)(3)) engaging in 'electioneering' or

the application of the provisions of section 4945 to

private foundations." S. Rep. No. 93-1374, 93d Cong., 2d Sess. 30 (1974), 1975-1 C.B. 517, 534.

Consequently, Reg. 1.527-6(g) provides:

Section 527(f) and this section do not sanction the intervention in any political

campaign by an organization described in section 501(c) if such activity is

inconsistent with its exempt status under section 501(c). For example, an

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organization described in section 501(c)(3) is precluded from engaging in any

political campaign activities. The fact that section 527 imposes a tax on the exempt

function income (as defined in section 1.527-2(c)) expenditures of section 501(c)

organizations and permits such organizations to establish separate segregated funds

to engage in campaign activities does not sanction the participation in these

activities by section 501(c)(3) organizations.

In Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000), the court affirmed the

revocation of the IRC 501(c)(3) status of a church. The church had published advertisements in

major newspapers four days before the 1992 presidential election urging people not to vote for then

presidential-candidate Bill Clinton because of his position on certain moral issues and soliciting

tax-deductible contributions for the advertisements. In holding that the IRC 501(c)(3) prohibition

did not violate the organization's constitutional rights, the court agreed with Branch Ministries'

assertion that the church could not set up a PAC, but stated that there were other methods to achieve

the political communication goals of the church that were not supported by tax-deductible

contributions.

2. May the directors of an

IRC 501(c)(3) organization

form a PAC without it being

attributed to the IRC 501(c)(3)

organization?

This question frequently arises because the

FEC, in Advisory Opinion 1984-12 (May 31,

1984), allowed the directors of a charitable

corporation, acting in their individual capacities, to

establish a non-connected political action

committee. The opinion held that this did not

violate the FECA prohibition on corporate

involvement in elections since it was the directors

and not the charitable corporation that established

the PAC.

What was stated at the outset of the discussion of attribution bears repeating here: The

prohibition on political campaign activity applies only to IRC 501(c)(3) organizations, not to the

political campaign activities of individuals in their private capacity. The prohibition against political

campaign activity does not prevent an organization's officials from being involved in a political

campaign, so long as those officials do not in any way utilize the organization's financial resources,

facilities, or personnel, and clearly and unambiguously indicate that the actions taken or the

statements made are those of the individuals and not of the organization. Whether the individuals

are truly acting in their own capacity is an evidentiary question. Unfavorable evidence would

include any similarity of name between the IRC 501(c)(3) organization and the PAC, any excessive

overlap of directors without a convincing explanation for the situation, and any sharing of facilities.

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A number of IRC 501(c)(3) organizations

3. When will the political

have related IRC 501(c)(4) organizations that

activities of a related

conduct political campaign activities, usually

IRC 501(c)(4) organization (or

its separate segregated fund) be

through a PAC (an IRC 527(f) separate segregated

fund).

The Service must respect the separate legal

attributed to an IRC 501(c)(3)

status of entities established for a valid business

organization?

purpose unless one organization is a sham or acting

as a mere agent of the other. See Moline

Properties, Inc. v. Commissioner, 319 U.S. 436

(1943). So long as the organizations are kept

separate (with appropriate record keeping and fair market reimbursement for facilities and services),

the activities of the IRC 501(c)(4) organization or of the PAC will not jeopardize the IRC 501(c)(3)

organization's exempt status. See, e.g., PLR 2001-03-084 (Oct. 24, 2000). However, the political

campaign activities of the affiliated IRC 501(c)(4) organization, or of the PAC it establishes, should

not be an attempt to accomplish indirectly what the IRC 501(c)(3) organization could not do directly.

Facts and circumstances prevail here also.

In Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983), the Supreme

Court upheld the prohibition of substantial lobbying by IRC 501(c)(3) organizations. Taxation with

Representation of Washington ("TWR") was an organization that applied for recognition of

exemption from federal income tax as an organization described in IRC 501(c)(3), but was denied

exemption because it proposed to engage in substantial lobbying activity. TWR was the successor

to two other organizations, an IRC 501(c)(3) organization and a related IRC 501(c)(4) organization.

TWR itself would have qualified as an IRC 501(c)(4) organization. The Court noted that the two

primary differences between IRC 501(c)(3) organizations and IRC 501(c)(4) organizations are that

contributions to IRC 501(c)(3) organizations are tax-deductible while contributions to IRC 501(c)(4)

organizations are not and that IRC 501(c)(4) organizations are permitted to engage in substantial

lobbying activities to advance their exempt purposes while IRC 501(c)(3) organizations are not. The

Court stated that it was not unconstitutional for Congress to provide that tax-deductible contributions

could not be used to support substantial lobbying activities by tax-exempt organizations. The

concurring opinion expressly relied on the fact that an IRC 501(c)(3) organization could establish

a related IRC 501(c)(4) organization to conduct substantial lobbying activities. So long as the two

organizations are separately incorporated and maintain adequate records to show that tax-deductible

contributions are not used to support the substantial lobbying activities of the IRC 501(c)(4)

organization, those activities will not be attributed to the IRC 501(c)(3) organization.

The discussion that follows applies equally to other types of IRC 501(c) organizations that are permitted to engage

in some political activity without jeopardizing their exempt status, such as IRC 501(c)(5) labor organizations and

IRC 501(c)(6) business leagues. For a discussion of political campaign activities with respect to these organizations,

see Part 4. See, also, Appendix IV for brief descriptions of some of the types of affiliations possible with exempt

organizations.

For an overview of the federal tax rules concerning political and lobbying activities by exempt organizations, see

2000 Joint Committee Report. For a detailed discussion of the rules concerning exempt organizations and lobbying

activity, see 1997 CPE Text.

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A similar distinction arises concerning political campaign activities. An IRC 501(c)(4)

organization is permitted to engage in some political campaign activity while an IRC 501(c)(3)

organization is not. As in the case of substantial lobbying activities, the organizations must be

separately incorporated and maintain adequate records to ensure that tax-deductible contributions

are not used to support the political campaign activity of the IRC 501(c)(4) organization or any PAC

it establishes. In Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000), the court referred to

the concurring opinion in Regan v. Taxation with Representation of Washington and noted that

while Branch Ministries could not itself establish a PAC, it could initiate a series of steps to achieve

the desired political communication without using tax-deductible funds to support the activity.

Specifically, it could establish an IRC 501(c)(4) organization that could establish a PAC provided

the IRC 501(c)(4) organization was separately incorporated and the organizations maintained records

to show that tax-deductible contributions to the church had not been used to support the political

activities conducted by the IRC 501(c)(4) organization's PAC.

The mere fact that an IRC 501(c)(4) organization has a similar name to an IRC 501(c)(3)

organization is not sufficient to cause the activities of the IRC 501(c)(4) organization (or an IRC 527

organization established by the IRC 501(c)(4) organization) to be attributed to the IRC 501(c)(3)

organization. First, similarity of names is not always an indication that organizations are affiliated.

For example, two organizations in separate states that are interested in promoting space exploration

may adopt the name "The Yuri Gagarin Society" without being affiliated with each other.

Second, even if the organizations are affiliated, similarity in names alone does not cause the

activities of one to be attributed to the other. In Center on Corporate Responsibility, Inc. v. Schultz,

368 F.Supp. 863 (D.D.C. 1973), the court held that an organization qualified as an IRC 501(c)(3)

organization even though it had established an affiliated taxable corporation with a similar name to

carry on activities that it could not otherwise carry on itself. The court recognized that although they

had similar names, purposes, and board members, they were separate entities with separate bank

accounts and activities. The court did not attribute the activities of the taxable organization to the

non-profit organization.

Furthermore, when an organization, such as an IRC 501(c)(4) organization, establishes a

federal PAC, it is required to include its full name in the name of the PAC. See 11 C.F.R.

§ 102.14(c). If the IRC 501(c)(4) organization has also established a related IRC 501(c)(3)

organization with a similar name, the activities of the IRC 527 organization are not going to be

attributed to the IRC 501(c)(3) organization simply because the IRC 501(c)(3) organization and the

IRC 501(c)(4) organization have similar names and the name of the IRC 501(c)(4) organization is

included in the name of the PAC. There must be something more to indicate that the IRC 501(c)(3)

organization is supporting the PAC, for example, the use of the IRC 501(c)(3) organization's tangible

or intangible assets.

Situations of particular concern when an IRC 501(c)(3) organization has a related

IRC 501(c)(4) organization include those in which the two organizations share staff, facilities, or

other expenses or in which the two organizations conduct joint activities requiring an allocation of

income and expenses. Any allocation of income or expenses between the two organizations must

be carefully reviewed to ensure that the allocation method is appropriate and that the resources of

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the IRC 501(c)(3) organization are not being used to subsidize the political campaign activity of the

IRC 501(c)(4) organization or its PAC. The determination of whether the allocation method used

is appropriate is based upon the facts and circumstances. An arm's length standard must be utilized.

An IRC 501(c)(3) organization's resources include intangible assets, such as its logos,

trademarks and goodwill, that may not be used to support the political campaign activities of another

organization. The licensing of an IRC 501(c)(3) organization's logos or trademarks to an IRC 527

organization may be considered official sanction by the IRC 501(c)(3) organization of the political

activities of the IRC 527 organization. In addition, any attempt at joint fundraising should be

carefully scrutinized from the aspect of whether the IRC 501(c)(3) organization is allowing its name

or its goodwill to be used to further an activity forbidden to it. For example, if a well-known

IRC 501(c)(3) organization "jointly" sponsors a fundraising event with a lesser-known PAC, there

is a strong suspicion that the IRC 501(c)(3) organization's drawing power is being used to aid the

political intervention activities of the PAC. In this situation, there would be something more than

the mere similarity in name discussed above.

G. Particular Situations Involving the Application of Facts and Circumstances Tests

1. May an IRC 501(c)(3)

organization's publication

contain material relating to

candidates during an election

campaign?

Frequently, IRC 501(c)(3) organizations

publish periodicals, including magazines and

weekly newspapers. These periodicals contain

various stories of interest to the readership,

including discussions of various issues of

importance to the organization. During an election

campaign, news stories, by definition, may involve

reporting on a particular candidate's activities.

The fundamental distinction here is between what is news coverage and what is an attempt

through editorial policy to promote or oppose a particular candidate. Questions, of necessity, are

highly factual, but the overall focus is on the policy of the organization. What does the publication

normally do when it covers news stories? Does it have a policy of only covering particular

candidates? Does it, in fact, only cover particular candidates? Is the coverage slanted to show any

particular candidate in a favorable or unfavorable light?

For example, as the 1995 ABA Comments state:

.... Because of the highly factual nature of such determinations, this is a difficult area

in which to advise or enforce, particularly with respect to weekly or daily

publications.

Nonetheless, two poles should be distinguished: editorials favoring or opposing

certain candidates (which should always be regarded as political campaign activity)

and pure discussions of issues without endorsements or opposition to particular

candidates (which should never be seen as political campaign activity)....

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While the Service generally agrees with this, the concern is where the article moves from a

"pure discussion of issues without endorsement" to a biased discussion favoring the views of

candidates with similar views to those espoused by the organization.

2. May an IRC 501(c)(3)

organization publish "voters'

guides"?

A number of IRC 501(c)(3) organizations

publish "voters' guides." In some instances, these

publications contain the voting records of

incumbent legislators and are distributed with the

stated purpose of educating voters. In other

instances, the publications consist of candidate

questionnaires containing the responses of various

candidates to a particular office to a variety of questions posed by the organization. While there are

other types of "voters' guides," voting records and candidate questionnaires have been specifically

addressed in precedential guidance.

Although commonly referred to as "voters' guides," these activities do not always constitute

electioneering activity. In some cases, activities described as "voters' guides" may in fact be in

support of the legislative activities of the organization. In other situations, "voters' guides" may be

published to encourage participation in the electoral process. However, there are "voters' guides"

that constitute participation or intervention in a political campaign on behalf or in opposition to a

candidate for public office. The following questions address the factors considered with respect to

voting records and candidate questionnaires. Similar facts and circumstances should be considered

when determining whether other types of "voters' guides" violate the political campaign prohibition.

3. What are the rules relating to

publication of legislators'

voting records?

These "voters' guides" publications contain

the voting records of incumbent legislators. They

may be distributed with the stated purpose of

educating voters or they may be distributed for

purposes unrelated to a campaign (for example,

lobbying). Some of the facts and circumstances

that have been considered in determining whether

the publication of these voters' guides constitutes prohibited political campaign activity include

whether the incumbents are identified as candidates; whether the incumbents' positions are compared

to the positions of other candidates or the organization's position; the timing, extent, and manner in

which the voters' guide is distributed; and the breadth or narrowness of the issues presented in the

voters' guide.

An IRC 501(c)(3) organization that annually prepared a compilation of voting records of all

members of Congress on major legislation involving a wide range of subjects and made it generally

available to the public was not participating or intervening in a political campaign. The compilation

contained no editorial opinion and its contents and structure did not indicate approval or disapproval

of any members or their voting records. Rev. Rul. 78-248, 1978-1 C.B. 154, Situation 1. On the

other hand, an IRC 501(c)(3) organization that compiled the voting records of incumbents on

selected land conservation issues of importance to the organization and distributed the compilation

widely among the electorate during an election campaign did participate or intervene in a political

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campaign. Although the guide contained no express statements in support of or in opposition to any

candidate, the organization concentrated on a narrow range of issues in the voters' guide and widely

distributed it among the electorate during an election campaign, which indicated that its purpose was

not nonpartisan voter education. Rev. Rul. 78-248, 1978-1 C.B. 154, Situation 4.

Rev. Rul. 80-282, 1980-2 C.B. 178, discusses a situation where an IRC 501(c)(3)

organization intended to publish a summary of the voting records of all incumbent members of

Congress on selected legislative issues of importance to the organization. The summary would be

published as soon as was practicable after the close of the congressional session in a regular issue

of its monthly newsletter, which would be distributed to the usual subscribers. The newsletter would

indicate the organization's position on the issues and the summary would indicate whether each

legislator voted in accordance with the organization's position on each issue. The newsletter was

politically nonpartisan and would not contain any reference to or mention of any political campaigns,

elections, or candidates or any statements expressly or impliedly endorsing or rejecting any

incumbent as a candidate for public office. In addition, no mention would be made of an individual's

overall qualification for public office, the newsletter would not compare candidates who might be

competing with the incumbent for public office, and the newsletter would point out the limitation

of judging the qualifications of an incumbent on the basis of a few selected votes. The summary

would contain the voting records of all incumbents and would not identify candidates for reelection

as such. The publication of the voting records would not be geared to the timing of any federal

election and distribution would not be targeted toward particular areas in which elections were

occurring. The ruling holds that the organization was not participating or intervening in a campaign

within the meaning of IRC 501(c)(3), even though the organization indicated whether the votes of

the incumbents agreed with its position. The critical factors here were that the timing and

distribution of the newsletter indicated its publication was not aimed at any elections and the

newsletter did not identify which of the incumbents were candidates for reelection.

4. What are the rules relating to

candidate questionnaires?

Another "voters' guide" activity of

IRC 501(c)(3) organizations that may qualify as

educational is the publication of candidate

questionnaires. These questionnaires, the results of

which are distributed to the voting public, typically

consist of candidates' responses to questions posed

by the organization. Some of the facts and circumstances considered in determining whether the

publication of the questionnaire constitutes prohibited political campaign activity are as follows:

(A) Whether the questionnaire is sent to all candidates;

(B) Whether all responses are published;

The range of issues criterion is contextual -- if the office being contested has a limited function, for example, a

seat on a school board, the range of issues is limited to what is relevant to that office.

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(D) Whether the questions indicate a bias toward the organization's preferred

answer;

(E) Whether the responses are compared to the organization's positions on the

issues; and

(F) Whether the responses are published as received without editing by the

organization.

Rev. Rul. 78-248, 1978-1 C.B. 154, Situation 2, describes an IRC 501(c)(3) organization that

solicited from all candidates for governor a brief statement of the candidate's position on a wide

variety of issues. The results then were published in a voters' guide made generally available to the

public. The issues were selected by the organization solely on the basis of their interest and

importance to the electorate as a whole and neither the questionnaire nor the voters' guide, in content

or structure, evidenced a bias or preference with respect to the views of any candidate or group of

candidates. The revenue ruling holds that the organization had not participated or intervened in a

political campaign within the meaning of IRC 501(c)(3). On the other hand, an IRC 501(c)(3)

organization that published a voters' guide based on responses from candidates to a questionnaire

did participate or intervene in a political campaign when the questions to the candidates evidenced

a bias on certain issues. Rev. Rul. 78-248, 1978-1 C.B. 154, Situation 3.

5. May voter education material

prepared by a candidate,

political party, or PAC be

distributed by a IRC 501(c)(3)

organization?

6. What are the rules relating to

public forums for candidates?

No. Voter education material prepared by

a candidate, political party, or PAC should not be

distributed by a IRC 501(c)(3) organization since,

as the 1995 ABA Comments note, "such material is

prepared and distributed for the purpose of

improving or diminishing a candidate's prospects to

be elected."

Public forums involving candidates for

public office may qualify as exempt educational

activities. However, if the forum is operated to

show a bias for or against any candidate, then the

The 1995 ABA Comments make the following statement regarding candidate questionnaires:

We recommend that the IRS address a common situation, namely, when not every candidate responds

to the questionnaire. A charity should be able to publish the answers if at least two candidates

respond, if the charity takes steps to remind the nonresponding candidates of the deadline for their

answers, and if the charity does not cast an unfavorable light on the lack of response. However, if

only one candidate from the entire field responds, the questionnaire should not be published.

As discussed above, the test is a facts and circumstances test. In every situation, the Service must look to all

of the relevant facts and circumstances, including those such as the ones suggested in the 1995 ABA Comments.

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forum would be prohibited activity as it would constitute an intervention or participation in a

political campaign.

An IRC 501(c)(3) organization that operated a noncommercial broadcasting station

presenting religious, educational, and public interest programs did not participate in political

campaigns within the meaning of IRC 501(c)(3) when it made free air time available to all legally

qualified candidates in accordance with the requirements of the Federal Communications Act of

1934. The organization made reasonable amounts of air time available without charge to all legally

qualified candidates on an equal basis. Before and after each broadcast, the station made a statement

indicating that the views expressed were those of the candidate, and not of the station; that the station

endorsed no candidate; that the presentation was made as a public service; and that equal

opportunities would be presented to all legally qualified candidates for the same public office to

present their views. Rev. Rul. 74-574, 1974-2 C.B. 160.

Rev. Rul. 86-95, 1986-2 C.B. 73, describes public forums involving qualified congressional

candidates that were sponsored by an IRC 501(c)(3) organization and holds that the conduct of these

forums does not constitute participation or intervention in any political campaign within the meaning

of IRC 501(c)(3). In that instance, the following facts and circumstances were considered:

(A) All legally qualified candidates were invited;

(B) The questions were prepared and presented by an independent nonpartisan

panel;

(D) Each candidate had an equal opportunity to present his or her views on the

issues discussed; and

(E) The moderator did not comment on the questions or otherwise make

comments that implied approval or disapproval of any of the candidates.

However, the revenue ruling indicates that the presence or absence of any of these factors in

similar situations is not determinative -- they would need to be considered in light of all of the

surrounding factors in any particular case.

An IRC 501(c)(3) organization may hold a debate during the primary election season that is

limited to legally qualified candidates for the nomination of a particular political party. In Fulani v.

League of Women Voters Education Fund, 882 F.2d 621 (2d Cir. 1989), the court held that the

League of Women Voters Education Fund, an IRC 501(c)(3) organization, did not violate the

political campaign prohibition when it did not invite Dr. Lenora B. Fulani to participate in any of

three debates that it sponsored. Two of the three debates were between candidates for the

Democratic nomination for President, while the third was between candidates for the Republican

nomination. Dr. Fulani was an independent and minor party candidate for the office of President.

She was refused an invitation to participate because she was not seeking either the Democratic or

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Republican nomination. The court noted the distinction between primary and general elections and

indicated that the purpose of the debates was to educate voters about the candidates seeking the

Democratic or Republican nomination. Since Dr. Fulani was not seeking either nomination, the

failure to invite her to participate in the debates did not constitute participation or intervention in a

political campaign.

Many times, the number of legally qualified candidates for a particular office is so large that

an IRC 501(c)(3) organization may determine that holding a debate to which all legally qualified

candidates were invited would be impractical and would not further the educational purposes of the

organization. For example, in 1996, more than 280 people declared themselves to be candidates for

the office of President, while for the 2000 election, over 250 people declared themselves to be

candidates for the Presidency.

The FEC regulations provide that an IRC 501(c)(3) organization

may stage nonpartisan candidate debates, the structure of which is left to the discretion of the

organization, provided that such debates include at least two candidates and are nonpartisan in that

they do not promote or advance one candidate over another. 11 C.F.R. § 110.13. In determining

whether an IRC 501(c)(3) organization participates or intervenes in a political campaign when it

holds a candidate debate to which not all legally qualified candidates are invited, all the facts and

circumstances must be considered, including the following:

(A) Whether inviting all legally qualified candidates is impractical;

(B) Whether the organization adopted reasonable, objective criteria for

determining which candidates to invite;

candidates; and

(D) Whether other factors, such as those discussed in Rev. Rul. 86-95, indicate

that the debate was conducted in a neutral, nonpartisan manner.

This criteria was applied in TAM 96-35-003 (Apr. 19, 1996) when an organization conducted

a candidate forum to which it invited the two major party candidates for the office along with up to

four candidates who had reached a 15 percent share of popular support as reflected in at least one

recognized credible and independent state-wide poll. The Service determined that this method

ensured a meaningful field of candidates for worthwhile forums while taking into account the

organization's limited space and time. Thus, when the organization conducted the forum on this

Dr. Fulani and her campaign committee were denied standing to sue when they brought suits challenging the

tax-exempt status of the League of Women Voters Education Fund with regard to its sponsorship of the 1992

Democratic Presidential Primary Debate (

Fulani v. Bentsen, 35 F.3d 49 (2d Cir. 1994)) and of the Commission on

Presidential Debates with regard to its sponsorship of the 1988 Presidential Debates (

Fulani v. Brady, 935 F.2d 1324

(D.C. Cir. 1991), cert. denied, 502 U.S. 1048 (1992)) and the 1992 Presidential Debates (Fulani v. Bentsen, 862 F.Supp.

1140 (S.D.N.Y. 1994)).

Of those declared candidates, only 48 in the 1996 election and 53 in the 2000 election met the FEC definition of

candidate. See

Section B for a discussion of the FEC definition of candidate.

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basis and published the results without any candidate ratings, it did not intervene in the political

campaign on behalf of or in opposition to any candidate for public office. However, when the

organization published a final report of the forum which contained participants' ratings of the

candidates, it did intervene in the political campaign.

7. To what extent may campaign

literature be distributed at

candidate forums?

Care must be exercised here. If all

candidates appear at the forum to speak, it would

be appropriate to permit all candidates to distribute

campaign literature. Absent that circumstance, it

would be imprudent to permit such distribution.

8. What is the significance of

whether an advocacy

communication focuses on a

broad or narrow set of issues?

As noted above in question 3, Situation 4 of

Rev. Rul. 78-248 holds that an organization

violated the political campaign prohibition of

IRC 501(c)(3) because it widely distributed

candidates' voting records on a narrow range of

issues of importance to the organization during an

election campaign. Similarly, as also noted above,

Rev. Rul. 86-95 identifies the breadth of issues as

relevant in concluding that a candidate forum did not violate the political campaign prohibition. It

is our understanding that many IRC 501(c)(3) organizations have interpreted these holdings to mean

that groups interested in a relatively narrow issue or set of issues have less latitude in conducting

what would otherwise be considered advocacy activities (as opposed to political campaign) activities

during an election campaign because a narrow issue focus could be construed as per se evidence of

a political campaign purpose.

It is important to recognize that activities such as the publication of voting records may not

constitute prohibited political campaign activity for different reasons. In one situation, the activity

may not violate the political campaign prohibition because it is, in fact, not related to the campaign.

For example, it may actually constitute a lobbying effort. In other situations, the IRC 501(c)(3)

organization is engaged in the exempt activity of encouraging people to participate in the electoral

process. As discussed in G.C.M. 34233 (Dec. 3, 1969), a candidate for public office would be

concerned with a broad range of issues. When the IRC 501(c)(3) organization encourages people

to participate in the electoral process by providing information about individuals as candidates, it is

important that the information provided address that broad range of issues and not be biased in favor

or in opposition to any candidate. As previously noted, the scope of the issues is determined by the

nature of the public office sought by the candidate.

With respect to other types of activities, a narrow issue focus, standing alone, is not evidence

that an IRC 501(c)(3) organization's advocacy or public education efforts are biased for or against

a particular candidate. (Likewise, a broad issue focus is no guarantee that an advocacy campaign

necessarily lacks an impermissible electoral purpose. As noted above, voting record reports covering

a fairly diverse set of specific issues can be biased if the issues are presented in a way to highlight

similarities -- or dissimilarities -- between a candidate's record and the organization's known agenda.)

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Therefore, the real difficulty presented by advocacy communications on a specific topic

during an election campaign is not the narrow issue focus, per se, but the risk that the

communication invites its audience to compare a candidate's positions with the organization's own

views. For example, a voter guide by an environmental organization that reports votes by incumbent

candidates on environmental legislation implicitly asks readers to measure candidates' records

against the organization's pro-environmental position. In other words, the communication, in effect,

is commenting on the candidates rather than merely addressing an issue. By contrast, an issue

advertisement that focused on the same environmental issues but that did not refer to candidates,

either explicitly or by the use of code words would not present the same concern. However, where

the narrow issue involved is a key issue generally considered to be a high profile issue separating the

candidates in a specific election, an advertisement during that election campaign would be closely

scrutinized to determine whether the organization is intervening in a campaign.

To summarize, advocacy activity during an election campaign does not necessarily violate

the political campaign prohibition merely because it concerns a relatively narrow issue.

Consequently, IRC 501(c)(3) organizations with a narrow policy focus need not curtail their regular

advocacy activities during an election campaign.

9. What facts and circumstances

would tend to show that an

advocacy communication, in

fact, served a bona fide

nonelectoral purpose?

While, as noted above, all facts and

circumstances are relevant in determining whether

the political campaign prohibition has been

violated, the following kinds of facts are among

those that would tend to show that an advocacy

communication, in fact, served a bona fide

nonelectoral purpose, such as grassroots lobbying

or public education:

(1) A preexisting commitment to promoting awareness of the issue

outside the election context;

(2) Statements by officers or directors (including board resolutions)

indicating the organization's nonelectoral purpose and intent not to

endorse or oppose any particular candidate or party;

(3) Records of research and analysis by the organization consistent with

its asserted nonelectoral purpose, for example, studies showing a low

level of public awareness of an issue, thus indicating a need for public

education on the issue; and

(4) Where appropriate, explicit, credible public disclaimers of any

endorsement (positive or negative) of any candidate during the

conduct of the activity.

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(5) The content of the communication being limited to the substance of

the issue and avoiding any characterization of persons who favor or

oppose the organization's position on the issue.

10. What are the rules relating to

IRC 501(c)(3) organizations

that operate broadcast

stations?

In general, an IRC 501(c)(3) organization

that operates a noncommercial broadcast station

will not be considered to have participated or

intervened in a political campaign if it complies

with FCC regulations concerning access to air time

by candidates. Noncommercial broadcast stations

are prohibited from supporting or opposing

candidates for public office. 47 U.S.C. § 399.

They are also prohibited from broadcasting in exchange for remuneration messages or other

materials that are intended to support or oppose any candidate for political office. 47 U.S.C. § 399b.

An IRC 501(c)(3) organization that operates a noncommercial broadcast station is not required to

permit the use of its facilities by any legally qualified candidate for any public office. However, if

an organization permits a legally qualified candidate for any public office to use a broadcasting

station, it must give all other legally qualified candidates for that office an equal opportunity to use

the broadcasting station. For these purposes, use of the broadcasting station does not include the

"[a]ppearance by a legally qualified candidate on any -- (1) bona fide newscast, (2) bona fide news

interview, (3) bona fide news documentary (if the appearance of the candidate is incidental to the

presentation of the subject or subjects covered by the news documentary), or (4) on-the-spot

coverage of bona fide news events (including but not limited to political conventions and activities

incidental thereto)." 47 U.S.C. § 315(a). In applying these rules, a broadcasting station is not

required to invite all legally qualified candidates for a particular office to appear on the same

program.

Rev. Rul. 74-574, 1974-2 C.B. 160, describes an IRC 501(c)(3) organization that operated

a noncommercial broadcasting station presenting religious, educational, and public interest

programs. In accordance with the requirements of the Federal Communications Act of 1934, the

organization made reasonable amounts of air time available without charge to all legally qualified

candidates on an equal basis. Before and after each broadcast, the station made a statement

indicating that the views expressed were those of the candidate and not of the station; that the station

endorsed no candidate; that the presentation was made as a public service; and that equal

opportunities would be presented to all legally qualified candidates for the same public office to

present their views. The ruling holds that the organization did not participate in political campaigns

within the meaning of IRC 501(c)(3) when it made free air time available to all legally qualified

candidates.

11. What are the rules relating to

colleges and universities?

As IRC 501(c)(3) organizations, colleges

and universities are prohibited from participating or

intervening in any political campaign on behalf of

or in opposition to a candidate for public office. In

order to constitute participation or intervention in

a political campaign, however, the political activity

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must be that of the college or university and not the individual activity of its faculty, staff, or

students.

Rev. Rul. 72-512, 1972-2 C.B. 246, describes a university that provided a political science

course to acquaint students with the basic techniques of effective participation in the electoral

process. The course was open to all students and consisted of several weeks of classroom work

followed by two weeks in which the student was excused from class to participate in the political

campaign of a candidate chosen by the student. The student was required to spend between 60 and

80 hours on campaign work and write a paper evaluating the experience. The university did not

influence the choice of candidates and was reimbursed or paid for any services or facilities provided

to the students for use in connection with the campaigns. The ruling holds that the university was

not participating in political campaigns within the meaning of IRC 501(c)(3). Since the extent and

manner of student participation in the real political process was reasonably germane to the course

of instruction, the fact that the course was part of the university's curriculum and that university

facilities and staff were employed in its conduct did not cause the political activity of the individual

students to be attributed to the university.

Similarly, a university that provided office space and financial support for the publication of

a student newspaper and made available several professors to serve as advisors to the staff was not

participating in a political campaign within the meaning of IRC 501(c)(3) when the student

newspaper published students' editorials on political matters. The newspaper provided training for

students in various aspects of newspaper publication (including editorial policy) and was distributed

primarily to students of the university. Editorial policy was determined by the student editors and

not by the university or the faculty advisors. A statement on the editorial page clearly indicated that

the views expressed were those of the students and not of the university. The political activities of

the student editors were not attributed to the university despite the university's provision of support

to the newspaper. Rev. Rul. 72-513, 1972-2 C.B. 246.

Colleges and universities frequently make facilities available to student groups and others.

Whether the provision of facilities to a group for the conduct of political campaign activities will

constitute participation or intervention in a political campaign by the college or university will

depend upon all the facts and circumstances, including whether the facilities are provided on the

same basis that the facilities are provided to other non-political groups and whether the facilities are

made available on an equal basis to similar groups.

12. In general, what are the rules

pertaining to voter

registration?

An IRC 501(c)(3) organization may conduct

a voter registration or get-out-the-vote drive

without being considered to participate or intervene

in a political campaign so long as it is conducted in

a nonpartisan manner. (There are, however, special

rules pertaining to private foundations -- these are

discussed in the question and answer immediately

below.) The determination of whether the drive is conducted in a nonpartisan manner is based upon

all the facts and circumstances. Some factors that might be considered in determining whether an

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IRC 501(c)(3) organization is participating or intervening in a political campaign when it conducts

a voter registration or get-out-the-vote drive include the following:

(1) Whether no candidate is named or depicted or all candidates for a particular Federal

office are named or depicted without favoring any candidate over any other in the

voter registration or get-out-the-vote drive communication;

(2) Whether the communication names no political party except that for identifying the

political party affiliation of all candidates named or depicted;

(3) Whether the communication is limited to urging acts such as voting and registering

and to describing the hours and places of registration and voting;

(4) Whether all voter registration and get-out-the-vote drive services are made available

without regard to the voter's political preference.

Other facts and circumstances may also be considered.

13. May an IRC 501(c)(3)

organization use voter

registration lists to identify

unregistered voters?

Yes, an IRC 501(c)(3) organization may use

voter registration lists to identify unregistered

voters. However, it should not use the list to target

voters who are registered as belonging to one party

or another.

14. What are the special voter

registration rules that pertain

to private foundations?

Under IRC 4945(d)(2), amounts paid or

incurred by a private foundation to influence the

outcome of any specific public election or to carry

on, directly or indirectly, any voter registration

drives are taxable expenditures subject to tax under

IRC 4945, unless such amounts are paid or incurred

by an organization described in IRC 4945(f).

Reg. 53.4945-3(a)(2) provides that activities considered to constitute political campaign

participation or intervention include, but are not limited to --

(A) Publishing or distributing written or printed statements or making oral

statements on behalf of or in opposition to a candidate;

(B) Paying salaries or expenses of campaign workers; and

For one commentator's discussion of "impermissible selection criteria," see Milton Cerny, "Campaigns, Candidates

and Charities: Guideposts for All Charitable Institutions,"

New York University's Nineteenth Conference on Tax

Planning for 501(c)(3) Organizations

, 5 (1991).

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limited to the geographic area covered by the campaign.

However, a private foundation may distribute amounts for voter registration drives, or make

grants for voter registration drives to other organizations, and the amounts will not be considered

taxable expenditures, if the following requirements, described in IRC 4945(f) and Reg.

53.4945-3(b)(1), are met:

(A) The voter registration drive expenditures must be made by an IRC 501(c)(3)

organization;

(B) The organization's activities are nonpartisan, are not confined to one specific

election period, and are carried on in five or more states;

active conduct of its exempt purpose activities;

(D) The IRC 501(c)(3) organization must receive no more than half of its support

from gross investment income and at least 85 percent of its support other than

gross investment income must be from exempt organizations, the general

public, and governmental units, with no more than 25 percent of its support

received from any one exempt organization; and

(E) The contributions to the organization for voter registration drives may not be

subject to conditions that they may be used only in specified locations or only

for one specific election period.

An organization that believes it can meet these requirements may seek an advance ruling to

that effect. Reg. 53.4945-3(b)(4). See, e.g., PLR 92-23-050 (Mar. 10, 1992) (organization

promoting voting rights of homeless meets criteria for classification as organization described in

IRC 4945(f)).

15. May an IRC 501(c)(3)

organization invite candidates

to speak at its events?

An IRC 501(c)(3) organization may invite

a candidate to speak at its events without being

considered to have participated or intervened in a

political campaign depending upon the facts and

circumstances of the invitation. Candidates may be

invited to speak at an event of an IRC 501(c)(3)

organization either in their capacity as a candidate

or in their individual capacity other than as a candidate. The facts and circumstances to be

considered are dependent upon the capacity in which the candidate is invited to speak.

When a candidate is invited to speak at an event in his or her capacity as a candidate, the

IRC 501(c)(3) organization may be considered to have participated or intervened in a political

campaign unless it takes steps to ensure that there is no indication of support of or opposition to the

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candidate by the organization. One step that an IRC 501(c)(3) organization should take is to state

explicitly that it does not support or oppose the candidate when the candidate is introduced and in

any communications concerning the candidate's attendance at the event. Additionally, absolutely

no political fundraising should occur at the event. Other factors to be considered include those

discussed in the public forum cases, although the circumstances should be reviewed more carefully

when the candidates are not participating in the same event. Those factors are the following:

(A) Whether all legally qualified candidates were invited;

(B) Whether questions for the candidate were prepared and presented by an

independent nonpartisan panel;

issues of interest to the public;

(D) Whether each candidate was given an equal opportunity to present his or her

views on the issues discussed; and

(E) Whether a moderator commented on the questions or otherwise made

comments that implied approval or disapproval of any of the candidates.

In determining whether candidates are given an equal opportunity to participate, the nature

of the event to which each candidate is invited should be considered in addition to the manner of

presentation. An IRC 501(c)(3) organization that invites one candidate to speak at its main banquet

of the year and invites an opposing candidate to speak at a sparsely attended general meeting will

likely be found to have violated the political campaign prohibition, even if the manner of

presentation for both speakers is otherwise neutral. Similarly, an IRC 501(c)(3) organization that

invites two opposing candidates to speak at its events with the knowledge and expectation that one

will not accept the invitation because of well-known opposing viewpoints may not be considered to

have provided an equal opportunity to all candidates.

Candidates may also be invited to speak at events by IRC 501(c)(3) organizations in their

capacity other than as a candidate. Many candidates are public figures for reasons other than their

candidacy. For instance, a number of candidates either currently hold or formerly held public office

or may be experts in a non-political field. A candidate also might be a public figure as a result of

a prior career, such as an acting, military, legal, or public service career. When a candidate is invited

to speak at an event in a capacity other than as a candidate, it is not necessary for the IRC 501(c)(3)

organization to provide equal access to all candidates. However, the IRC 501(c)(3) organization

must ensure that the candidate speaks only in the other capacity and not as a candidate, that no

mention is made of the individual's candidacy at the event, and that no campaign activity occurs in

connection with the candidate's attendance at the event. In addition, all communications regarding

the candidate's attendance at the event should clearly indicate the capacity in which the candidate is

acting and should not mention the individual's candidacy. Even if the candidate does not engage in

any campaign activity at the event, if the primary purpose for the invitation to the candidate is to

provide public exposure for the candidate, the IRC 501(c)(3) organization may be participating or

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intervening in a political campaign. If the invitation to the candidate otherwise qualifies, the mere

payment of customary and usual honoraria to the candidate should not cause the IRC 501(c)(3)

organization to violate the political campaign prohibition. However, when the payment of honoraria

is intended to support the speaker's campaign, then the IRC 501(c)(3) organization will have violated

the political campaign prohibition. The determination of whether the IRC 501(c)(3) organization

has participated or intervened in a political campaign will be based on all the facts and circumstances

of the particular situation.

16. May an IRC 501(c)(3)

organization violate the

prohibition through its

fundraising attempts?

When the facts and circumstances indicate

that an IRC 501(c)(3) organization has participated

or intervened in a political campaign on behalf of

or in opposition to any candidate for public office,

the context in which it has intervened is irrelevant.

For example, fundraising letters that intervene in a

campaign constitute prohibited intervention even if

the activities funded by the letters do not result in

campaign intervention. TAM 96-09-007 (Dec. 6, 1995) analyzes the situation of an organization that

funded voter registration drives conducted by another organization. There is no indication in the

memorandum that the actual voter registration drives violated the political campaign prohibition.

However, the organization sent fundraising letters that evidenced clear bias for and against particular

candidates in certain closely run election campaigns. The organization argued that it had simply

been trying to give a sense of urgency so as to generate more contributions. The Service determined

that the organization had nevertheless intervened on behalf of and in opposition to those candidates,

regardless of its motivation for doing so. See also TAM 2000-44-038 (July 24, 2000).

17. May an IRC 501(c)(3)

organization violate the

prohibition through its

activities on the Internet?

When an IRC 501(c)(3) organization uses

the Internet to conduct its activities, for example by

sending email messages or by having a web site, it

may not intervene in or participate in any political

campaign on behalf of or in opposition to any

candidate for public office. As with other activities

of the IRC 501(c)(3) organization, the

determination of whether an organization has

violated the prohibition depends on all of the relevant facts and circumstances. The Service has

published Announcement 2000-84, 2000-42 I.R.B. 385, requesting comments on the need for

additional guidance clarifying the facts and circumstances to be considered in applying the tax laws

to organizations that engage in activities on the Internet, including whether the organization has

violated the political campaign prohibition.

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H. Situations Involving Business Activities

1. What are the general rules

concerning business activities

in relationship to the concept of

participation or intervention in

a political campaign?

The question of whether an activity

constitutes participation or intervention in a

political campaign may also arise in the context of

a business activity of the IRC 501(c)(3)

organization, such as the selling or renting of

mailing lists or the acceptance of paid political

advertising. In this context, some of the factors to

be considered in determining whether the

IRC 501(c)(3) organization has engaged in

prohibited political campaign activity are the following:

(A) Whether the activity is realistically available to all candidates on an equal basis;

(B) Whether the activity is available only to candidates and not to the general public; and

conducted for the first time for the candidate.

Ultimately, what the Service is looking for here is a track record. Is this truly the kind of

activity or service that the organization has offered before and continues to offer on a nonpartisan

basis? Does it truly hold itself out as providing these services to other organizations? To other

candidates? Has it done so in the past? While a first time attempt to provide an activity or service

of the type under discussion does not necessarily characterize it as prohibited political campaign

activity, the more recent the institution of the activity or service, the lower the Service's comfort level

is going to be. In addition, other facts and circumstances, such as what the relationship is between

the organization and the candidate for whom the work is being performed and whether the fee

charged for the services is truly set at a fair market rate, should be considered in determining whether

the IRC 501(c)(3) organization has violated the political campaign prohibition.

2. May an IRC 501(c)(3)

organization sell or rent its

mailing list to candidates?

An IRC 501(c)(3) organization that

regularly sells or rents its mailing list to other

organizations will not violate the political

campaign prohibition if it sells or rents the list to a

candidate on the same terms the list is sold or

rented to others, provided the list is equally

available to all other candidates on the same terms.

On the other hand, an IRC 501(c)(3) organization that sells or rents its mailing list to certain

candidates, without making it available to all other candidates, will violate the political campaign

prohibition. In determining whether the mailing list is equally available to all other candidates, it

must be shown that all candidates were afforded a reasonable opportunity to acquire the list. To

ensure the list is equally available to all candidates, an IRC 501(c)(3) organization should inform the

candidates of the availability of the list. If the organization has never previously rented its mailing

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list, the value assigned to the mailing list must be given extra scrutiny to ensure that the fee charged

is a fair market rate.

3. May an IRC 501(c)(3)

organization accept paid

political advertising for its

publication?

A number of IRC 501(c)(3) organizations

accept paid advertising for their publications. An

IRC 501(c)(3) organization that accepts paid

political advertising may not be violating the

political campaign prohibition if it accepts the

advertisement on the same basis as other

non-political advertising, provided the

advertisement is identified as paid political

advertising, the organization expressly states that it does not endorse the candidate, and advertising

is available to all candidates on an equal basis. In determining whether advertising is available to

all candidates on an equal basis, consideration should be given to the manner in which the

advertising is solicited. For example, an IRC 501(c)(3) organization may not be making advertising

in its publication available to all candidates on an equal basis when it expressly solicits advertising

from certain candidates that support its views and merely indicates that it would accept advertising

from other candidates without soliciting advertising from them or otherwise informing them that

such advertising opportunities are available. The manner of presentation of the paid political

advertisement also should be considered in determining whether the organization has violated the

political campaign prohibition.

Although paid political advertising may not constitute participation or intervention in a

political campaign, it will generate unrelated business taxable income for the IRC 501(c)(3)

organization. While the Supreme Court did not expressly adopt a per se rule that advertising was

an unrelated business, it indicated that advertising was an unrelated business except in the extremely

rare case in which the organization could demonstrate that its advertising policy was explicitly

designed to further its exempt purpose. United States v. American College of Physicians, 475 U.S.

834 (1986). Since political campaign activity is prohibited, the acceptance of paid political

advertising would not further the exempt purpose of an IRC 501(c)(3) organization.

4. May an IRC 501(c)(3)

organization make loans to

political organizations?

An IRC 501(c)(3) organization that makes

a loan to a political organization has violated the

political campaign prohibition. While an

IRC 501(c)(3) may invest its money and earn

interest, it may not do so in a manner that

constitutes participation or intervention in a

political campaign. Making funds available to a

political organization supports the political activities of the organization. Similarly, guaranteeing

a loan to a political organization would violate the political campaign prohibition as the resources

of the IRC 501(c)(3) organization would be used to support political activities. For example, see

TAM 98-12-001 (Aug. 21, 1996), where the Service determined that an organization that had made

a loan to a political organization had violated the political campaign prohibition of IRC 501(c)(3)

and was subject to the excise tax under IRC 4955.

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I. Charity/PAC Matching Programs

1. What is a Charity/PAC

matching program?

Charity/PAC matching programs have been

described in several opinions issued by the FEC.

(See, e.g., FEC Advisory Opinion 1989-7, June 30,

1989.) Typically, such a program allows corporate

employees to designate an IRC 501(c)(3)

organization as the recipient of a contribution equal

to the sum of the contributions that the employee made to the corporation's affiliated PAC in the

previous year. The program generally excludes all IRC 501(c)(3) organizations that provide any

benefits in return for contributions. Several FEC opinions conclude that the matching of affiliated

PAC contributions with charitable donations is not a means of exchanging treasury funds for

voluntary contributions, which is prohibited by 11 C.F.R. § 114.5(b). Rather, it is a permissible

solicitation expense under 2 U.S.C. § 441b(b)(2). The taxation of Charity-PAC matching programs

was discussed in G.C.M. 39877 (Aug. 27, 1992).

2. Do employees recognize income

from and take a charitable

deduction for Charity/PAC

matching program grants?

A Charity/PAC matching program grant to

an IRC 501(c)(3) organization should not be

recharacterized as payment of compensation to the

employee, and a subsequent payment by the

employee to the IRC 501(c)(3) organization.

In Rev. Rul. 79-121, 1979-1 C.B. 61, a

government official received an honorarium for

making a speech to a professional society. The ruling concludes that the payment must be included

in the official's gross income, even though the official requested that the payment be transferred to

an IRC 501(c)(3) organization. The ruling also holds that the official, rather than the professional

society, is entitled to a deduction under IRC 170 with respect to that amount.

However, under Rev. Rul. 67-137, 1967-1 C.B. 63, the right of certain employees to

designate IRC 501(c)(3) organizations to which their employer will make contributions is not income

to the employee. Furthermore, the contribution is deductible by the corporation to the extent

provided by IRC 170. The rationale for not treating the employee's right to designate charitable

recipients as compensation is that "[t]he employees are merely performing administrative duties for

the corporation by suggesting specific qualified recipient organizations."

In a related area, Rev. Rul. 79-9, 1979-1 C.B. 125, which explains the acquiescence of the

Service in Knott v. Commissioner, 67 T.C. 681 (1977), holds that a charitable contribution by a

corporation is not taxable as a dividend to the corporation's controlling shareholders (in spite of

shareholder control over the selection of the charitable donee), unless property or an economic

benefit is received by the controlling shareholders or their families.

The conclusion drawn from a comparison of these rulings is that, when an IRC 501(c)(3)

organization is designated to be the recipient of a payment by a person providing services for the

payor, the payment is not treated as compensation unless it is in return for specific and identifiable

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services, so that the payment represents a mere assignment of income. In Rev. Rul. 79-121, the

amount paid to the charitable organization was clearly payment for specific and identifiable services.

Therefore, the ruling was correct in treating that amount as having been paid to the service provider

and then transferred to the IRC 501(c)(3) organization. However, in Rev. Rul. 67-137, the amount

paid to the IRC 501(c)(3) organization by designation of the employee is not payment for services

by the employee. Furthermore, the employee received no economic benefit as a result of the

payment to the IRC 501(c)(3) organization.

The facts and circumstances of the Charity/PAC matching program are more similar to the

circumstances of Rev. Rul. 67-137 and Rev. Rul. 79-9 than to the circumstances of Rev. Rul.

79-121. The amount paid to the IRC 501(c)(3) organization designated by the employee is not a

payment for services performed by the employee. Furthermore, the employees do not receive either

property or an economic benefit as a result of the contribution. See G.C.M. 39877 (Aug. 27, 1992).

3. Is a corporation permitted to

take a charitable deduction for

Charity/PAC matching

program grants?

No. IRC 170(a) provides that a deduction

is allowed for any charitable contribution, payment

of which is made within the taxable year.

"Charitable contribution" is defined as a

contribution or gift to or for the use of a charitable

donee. It is settled that a transfer does not qualify

as a contribution or gift unless it is made without

receipt or expectation of a financial or economic

benefit commensurate with the money or property transferred. See, e.g., Rev. Rul. 67-246, 1967-2

C.B. 104; Rev. Rul. 76-185, 1976-1 C.B. 60. This principle has been reaffirmed by the Supreme

Court in two opinions, United States v. American Bar Endowment, 477 U.S. 105 (1986), and

Hernandez v. Commissioner, 490 U.S. 680 (1989). In American Bar Endowment, the Supreme

Court noted that, "[a] payment of money generally cannot constitute a charitable contribution if the

contributor expects a substantial benefit in return." 477 U.S. at 116. The Court applied a test in

which a contribution was deductible (1) to the extent that the contribution exceeds the market value

of the benefit received, and (2) if it was made with the intention of making a gift.

The same principle was applied in Hernandez. In Hernandez, the Court held that certain

payments to the Church of Scientology were not eligible for a charitable deduction under IRC 170

because there was a quid pro quo for the claimed "contribution". In determining that a quid pro quo

existed, the Court focused strongly on the external features of the transaction. The Court noted that

looking at the external factors had the advantage of obviating the need to determine the motivations

of individual taxpayers. The external factors indicating a quid pro quo included the existence of an

identifiable benefit; fixed price schedules calibrated to sessions of particular length or sophistication;

and the fact that the church barred the provision of benefits for free.

Applying this principle to the Charity/PAC matching program situation, the corporation

making the payment to the IRC 501(c)(3) organization in return for payments to its affiliated PAC

is not making a "contribution" or "gift" within the meaning of IRC 170 because it receives a

substantial benefit in return. A PAC is organized to promote the interests of its sponsor. A major

role of a PAC is to make contributions to political candidates, which the corporate sponsor is

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prohibited by law from doing. Therefore, a contribution to a corporation's affiliated PAC is a benefit

to that corporation. This benefit is received in return for the contribution the corporation agrees to

make to the IRC 501(c)(3) organizations designated by the employee. Furthermore, as in Hernandez,

the external features of the transaction also indicate the existence of a quid pro quo: there is an

identifiable benefit, the benefit is fixed, and increases or decreases depending upon the amount of

the contribution. See G.C.M. 39877 (Aug. 27, 1992).

4. Could a Charity/PAC

matching program adversely

affect the IRC 501(c)(3)

organization's exempt status?

As long as the IRC 501(c)(3) organization

is a passive recipient of the corporate contributions

and does not play any part in the solicitation of the

PAC funds, the Charity/PAC matching program

will not affect its exempt status.

3. Political Organizations Under IRC 527

A. History of the Statute

(1) Situation Prior to Enactment

Prior to the enactment of IRC 527, there were no statutory provisions that dealt with the tax

status of political organizations, such as political parties, campaign committees, and PACs. Rev.

Proc. 68-19, 1968-1 C.B. 810, provided that political funds were generally not taxable income to the

candidate on whose behalf they were collected, but it did not address the tax treatment of the political

organization that collected the funds. However, as an administrative practice, the Service did not

require political organizations to file returns and pay tax.

In Announcement 73-84, 1973-2 C.B. 461, the Service determined that since no

IRC provisions provided for the tax-exempt status of political organizations, the investment income

of political organizations, including interest, dividends, and capital gains, was subject to tax. The

announcement stated that the Service would not enforce the taxation of political organizations until

Congress had considered the problem. The content of Announcement 73-84 was restated in a

reliance document, Rev. Rul. 74-21, 1974-1 C.B. 14, (modified and clarified in Rev. Rul. 74-475,

1974-2 C.B. 22). Rev. Rul. 74-21 noted the exemption provisions of IRC 501 and stated as follows:

An organization that is organized and operated exclusively to engage in activities the

purpose of which is to influence the nomination or election of individuals to public

office is not one of the organizations that may be exempt from the Federal income tax

for purposes described in section 501. Nor is such an organization one covered

under any other provision of the Code as exempt from the Federal income tax. There

is no judicial decision holding that such an organization is exempt from tax.

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Rev. Rul. 74-21 then provided that political organizations would be taxed on a prospective

basis on their interest, dividends, and capital gains from sales of securities. Political organizations

subject to tax were required to file Form 1120.

(2) Enactment of the Statute

Congress' consideration resulted in the enactment of IRC 527 in 1975, effective for tax years

beginning after December 31, 1974. This provision provides for the taxation of political

organizations. The definition of a political organization in IRC 527 is similar to the description

contained in Rev. Rul 74-21 -- the main differences being that the statute sets forth "primary" rather

than "exclusive" organizational and operational tests and that the range of activities the organizations

may seek to influence includes "selection" and "appointment" of individuals to public office as well

as nominations and elections.

The thrust of IRC 527 is to subject political organizations to tax on income other than

contributions, dues, and fundraising income used for political campaign purposes. For all other

purposes, they are considered organizations exempt from federal income tax. IRC 527 also provides

that a newsletter fund may qualify for the same tax treatment as a political organization if certain

requirements are met. In addition, IRC 501(c) organizations that expend any money for political

activity may be subject to tax under IRC 527.

(3) The 1981 and 1988 Amendments

In 1981, IRC 527 was amended to provide more favorable tax treatment to the principal

campaign committees of candidates for Congress and, in 1988, Congress further amended IRC 527

to provide that the exempt function of a political organization includes making expenditures relating

to a public office if such expenditures would be allowable as a deduction under IRC 162(a) had the

officeholder made the expenditure. The 1988 amendment is effective for tax years beginning after

December 31, 1986.

(4) The 2000 Amendments

In 2000, there was a great deal of concern resulting from differing treatment under the FECA

and Internal Revenue laws. As discussed above, the FECA "express advocacy" standard for political

activity is more limited than "participation in a political campaign" for purposes of IRC 501(c)(3).

Similarly, the IRC 527 definition of political organizations as those directly or indirectly accepting

contributions or making expenditures, to influence or attempt to influence the selection, nomination,

election or appointment of an individual to a federal, state, or local public office or office in a

political organization is broader than the FEC "express advocacy" standard. As a result,

organizations were formed under IRC 527 for the purpose of influencing elections without engaging

in "express advocacy" and so claimed not to be subject to FEC reporting and disclosure

requirements. See Appendix III for a more detailed description of this situation.

Because of concern over a possible proliferation of organizations attempting to influence

elections that claimed not to be subject to any reporting or disclosure rules under the FECA, Public

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Law 106-230 was enacted on July 1, 2000. The new law, which became effective immediately,

created a reporting regime for IRC 527 organizations. In order to be treated as a tax-exempt

organization, the new law requires IRC 527 organizations to provide a notice of status, periodically

report contributions and expenditures, and file annual information returns as well as tax returns. The

new law does not affect any period prior to July 1, 2000. Prior law with respect to IRC 527 status

is unchanged. In addition to creating the new forms necessary to comply with the new requirements,

the Service provided guidance in the form of questions and answers concerning the application of

the new reporting and disclosure requirements. Rev. Rul. 2000-49, 2000-44 I.R.B. 430

(Oct. 30, 2000). While the provisions of this ruling are addressed in the general discussion of

IRC 527, the revenue ruling is separately set forth in Appendix III.

B. Tax Treatment of Political Organizations

The provisions of IRC 527 apply only to

"political organizations" as defined in

IRC 527(e)(1). IRC 527(e)(1) provides that "the

term 'political organization' means 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, or both, for an exempt function."

("Exempt function," a term that will be discussed in greater detail below, generally means, in the

context of IRC 527, influencing or attempting to influence the selection, nomination, election or

appointment of an individual to a federal, state, or local public office or office in a political

organization. IRC 527(e)(2).)

A political committee, association, fund, or

other organization must meet both the

organizational test of Reg. 1.527-2(a)(2) and the

operational test of Reg. 1.527-2(a)(3) to be subject

to tax only as a political organization under

IRC 527. It may also need to file a notice of status

under IRC 527(i).

No, a political organization does not need to

be established as a corporation, trust, or

association. Under Reg. 1.527-2(a)(2), a political

organization meets the organizational test if it can

demonstrate that it was organized for the primary

purpose of carrying on exempt function activities as

defined in IRC 527. The regulation specifically

states that the organization does not need to be

formally chartered or established as a corporation, trust, or association. A separate bank account in

which political campaign funds are deposited and disbursed only for political campaign expenses

1. What organizations are

covered by the provisions of

IRC 527?

2. What must an organization do

to be subject to federal income

tax only as a political

organization under IRC 527?

3. Does the political organization

need to be established as a

corporation, trust, or

association?

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can qualify as a political organization. Rev. Rul. 79-11, 1979-1 C.B. 207. Therefore, a political

organization does not need to have any formal organizational document, such as articles of

incorporation.

4. How does a political

organization without any

formal organizational

document satisfy the

organizational test?

Where the political organization has no

formal organizational documents (for example,

where it is merely a bank account), the required

statement of purposes may be inferred from

statements of the members of the organization at

the time of its formation that they intend to operate

the organization primarily to carry on exempt

function activities. Reg. 1.527-2(a)(2). Federal or

state initial registration filings (for example,

Statement of Organization, FEC Form 1) made by the organization under applicable election laws,

also can serve as evidence that the entity meets the organizational test.

5. May an organization that is

formally organized with broad

and ambiguous powers meet

the organizational test?

As discussed above, the organizational test

for IRC 527 is less strict than the organizational test

for IRC 501(c)(3). When the purposes of the

organization as set out in its organizing documents

are broad and ambiguous with respect to whether

the primary purpose of the organization is to carry

on exempt function activities under IRC 527, all of

the facts and circumstances, including oral and

written statements and the actual operation of the organization, may be considered to determine the

organization's primary purpose. See, e.g., FSA 2000-37-040 (June 19, 2000).

6. How does a political

organization satisfy the

operational test?

covered in detail below, in Section E).

7. Must a political organization

operate in accordance with

normal corporate formalities?

To satisfy the operational test, the

organization's primary activities must be exempt

function activities as defined in IRC 527. The

organization may engage in activities that are not

exempt function activities, but these may not be its

primary activities. Reg. 1.527-2(a)(3). (The topic

of the effect of nonexempt function expenditures is

No. Reg. 1.527-2(a)(3) specifically

provides that it is not necessary that a political

organization operate in accordance with normal

corporate formalities as ordinarily established in

bylaws or under state law to satisfy the operational

test.

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Election Year Issues

8. Must a political organization

have its own Employer

Identification Number ("EIN")

even if it has no employees?

A political organization must file a

Form SS-4 to get an Employer Identification

Number ("EIN"), even if it does not have any

employees. If it does not apply for its own EIN and

uses the Social Security Number or EIN of another

person or organization (for example, the candidate's

social security number), then its income may be

wrongly attributed to the other person or

organization, generating adverse tax consequences with respect to that person or organization.

9. What is the tax treatment of a

political organization under

IRC 527?

Pursuant to IRC 527(a), a political

organization is exempt from federal income tax

except as provided in IRC 527. The tax imposed

by IRC 527 on the political organization is

calculated by multiplying the political organization

taxable income by the highest rate of tax specified

in IRC 11(b). IRC 527(b)(1).

If the political organization has net capital gain income, then its tax is the lesser of (1) the

tax calculated under IRC 527(b)(1), or (2) the sum of the tax calculated under IRC 527(b)(1) on its

non-capital gain income and the capital gains tax determined under IRC 1201(a). IRC 527(b)(2).

Principal campaign committees are discussed later in this article. Their tax is determined by

applying the graduated rates of IRC 11(b) rather than the highest rate.

10. Is a political organization

required to apply for

recognition of tax exemption?

No. A political organization does not need

to apply for recognition of its exemption from

federal income tax. On occasion, however,

organizations have filed letter ruling requests for a

determination that they qualify for treatment as a

political organization under IRC 527. See the

discussion of some recent rulings in Appendix III.

No specific form is required; however, the applicable user fee must be paid. However, in order to

be treated as tax-exempt, some political organizations are required to give notice to the Service that

they are IRC 527 organizations. IRC 527(i).

11. Is a political organization

required to give notice that it is

an IRC 527 organization?

A political organization may be required to

give notice electronically and in writing to the

Service that it is a political organization described

in IRC 527, in order to be treated as tax-exempt.

IRC 527(i)(1)(A); Rev. Rul. 2000-49, Q&A-1.

This notice must be transmitted to the Service

within 24 hours of establishment of the

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Election Year Issues

organization.

IRC 527(i); Rev. Rul. 2000-49, Q&A-8. The organization provides notice to the

Service by filing Form 8871, Political Organization Notice of Section 527 Status. Rev. Rul.

2000-49, Q&A-2.

12. Are all political organizations

required to file the notice?

Not all political organizations are required

to file the notice. Under IRC 527(i)(5) and

IRC 527(i)(6), the following three types of

organizations are not required to file the Form 8871

notice:

(a) Organizations that are required to report under the FECA as a

political committee;

(b) Organizations that reasonably anticipate that they will not have gross

receipts of $25,000 or more for any taxable year; and

IRC 527(f)(1) because they have made an "exempt function"

expenditure.

All other political organizations, including state and local candidate committees, are required

to file the notice in order to be treated as tax-exempt. IRC 527(i)(5); IRC 527(i)(6); Rev. Rul.

2000-49, Q&A-3.

13. Is a political organization

required to file Form 8871 if it

does not know whether it will

have annual gross receipts of

$25,000 or more for any

taxable year?

A newly established political organization

is not required to file Form 8871 if it reasonably

anticipates that its annual gross receipts will be less

than $25,000 for its first six taxable years.

IRC 527(i)(5). However, if an organization that

had not previously filed Form 8871 due to this

exception does, in fact, have annual gross receipts

of $25,000 or more for any taxable year, in order

for it to be treated as tax-exempt, it is required to

file Form 8871 within 30 days of receiving

$25,000. Rev. Rul. 2000-49, Q&A-4.

14. Is an IRC 527(f)(3) separate

segregated fund required to file

Form 8871?

An IRC 501(c) organization that is not

prohibited from participating in political campaign

activity has the option of conducting the activity

itself or setting up a separate segregated fund. (See

discussion of separate segregated funds of

IRC 501(c) organizations below, in Part 4.) If the

Organizations in existence before July 30, 2000, were required to file Form 8871 both electronically and in writing

by July 31, 2000, unless they meet one of the exceptions for filing. Notice 2000-36, 2000-33 I.R.B. 173.

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IRC 501(c) organization conducts the activity itself, it is subject to tax under IRC 527(f)(1) on the

lesser of its investment income or the amount of its political expenditures, but it is not required to

file Form 8871 pursuant to IRC 527(i)(5)(A). If the IRC 501(c) organization establishes a separate

segregated fund, the fund is treated as a separate political organization under IRC 527(f)(3) and does

not qualify for the exception under IRC 527(i)(5)(A). Therefore, unless it meets one of the other

exceptions discussed above in question 12, the separate segregated fund is required to file Form 8871

in order to be treated as tax-exempt. IRC 527(i)(5); Rev. Rul. 2000-49, Q&A-5.

15. Is an organization that finances

both federal and non-federal

election activity required to file

the Form 8871 notice?

As a general rule, any political organization

(whether or not separately incorporated) that is

organized and operated primarily for an exempt

function under IRC 527(e)(2) must file Form 8871

unless it meets one of the exceptions discussed

above in question 12, one of which is being

required to report under the FECA as a political

committee. An organization that finances election

activity (within the meaning of the FECA) for both federal and non-federal elections may establish

a political committee to receive contributions and make expenditures for both federal and

non-federal election activity. In that case, the organization must register as a political committee and

comply with the FECA contribution limitations and reporting requirements. 11 C.F.R.

§ 102.5(a)(1)(ii). Such an organization is, therefore, not required to file Form 8871.

If, however, the organization sets up separate accounts to conduct its federal election activity

and its non-federal election activity, the federal account is treated as a separate political committee

that is required to register and report under the FECA. 11 C.F.R. § 102.5(a)(1)(i). The treatment

of the federal account as a separate committee is consistent with the organizational requirements for

political organizations under IRC 527, as discussed above. Accordingly, the separate federal account

is not required to file Form 8871. However, a separate non-federal account is not required to register

and report under the FECA as a political committee. Therefore, in order to be treated as tax-exempt,

a separate non-federal account that is described in IRC 527(e)(1) is required to file Form 8871.

IRC 527(i)(6); Rev. Rul. 2000-49, Q&A-6.

16. Are political organizations that

are required to report to state

or local election agencies

excepted from the notice

requirement?

IRC 527(i) does not except political

organizations that file reports with state or local

election agencies from the notice of status

requirement. Therefore, unless the political

organization meets one of the exceptions discussed

above in question 12, it must file Form 8871 with

the Service in order to be treated as tax-exempt.

Rev. Rul. 2000-49, Q&A-7.

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17. How must Form 8871 be filed?

The Form 8871 must be filed both

electronically and in writing. IRC 527(i)(1)(A).

Thus, an IRC 527 organization subject to the notice

requirement must file as follows:

(a) Electronically via the Internal Revenue Service Internet Web Site at

www.irs.gov./polorgs, and

(b) In writing by sending a signed copy of Form 8871 to the Internal Revenue Service

Center, Ogden, UT 84201.

An organization may fill in and print out the form from the IRS Web Site.

Rev. Rul. 2000-49, Q&A-9.

18. What information must be

provided in the Form 8871?

The organization must provide in the notice

its name and address (including any business

address, if different) and electronic mailing

address; its purpose; the names and addresses of its

officers, highly compensated employees, contact

person, custodian of records, and members of its

Board of Directors; and the name and address of, and relationship to, any related entities (within the

meaning of IRC 168(h)(4)). IRC 527(i)(3); Rev. Rul. 2000-49, Q&A-11.

19. What is a "related entity" for

this purpose?

For purposes of the Form 8871 filing

requirements, an entity is a "related entity" if it is a

"related entity" within the meaning of

IRC 168(h)(4). Thus, it is a "related entity" under

the following circumstances:

(a) The organization and that entity have (A) significant common purposes and

substantial common membership or (B) substantial common direction or control

(either directly or indirectly); or

(b) Either the organization or that entity owns (directly or through one or more entities)

at least a 50 percent capital or profits interest in the other. For this purpose, all

entities that are defined as related entities under (a) above must be treated as a single

entity. Rev. Rul. 2000-49, Q&A-13.

20. What are "highly compensated

employees" for this purpose?

Highly compensated employees for this

purpose are the five employees (other than officers

and directors) who are expected to have the highest

annual compensation over $50,000. Compensation

includes both cash and noncash amounts, whether

paid currently or deferred, for the 12-month period

that began with the date the organization was formed (if the organization was formed after June 30,

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2000). If the organization was already in existence on June 30, 2000, it must use the accounting

period that includes July 1, 2000. Rev. Rul. 2000-49, Q&A-14.

21. What is the effect of failing to

file the notice?

Until an organization that is required to file

Form 8871 in order to be tax-exempt does so, its

taxable income includes its exempt function

income, minus any deductions directly connected

with the productions of that income. IRC 527(i)(4).

As discussed below in Section E, exempt function

income includes contributions, membership dues, and proceeds from political fundraising to the

extent that the amounts are segregated for use in influencing nominations and for public office or

similar activities.

For purposes of computing its taxable income, the organization may not deduct its exempt

function expenditures because IRC 162(e) denies a deduction for political campaign expenditures.

Rev. Rul. 2000-49, Q&A-15. The taxable income and tax are otherwise computed as discussed

below in Section E.

22. Are transfers to political

organizations that fail to file

Form 8871 subject to the gift

tax?

IRC 2501(a)(5) provides that the gift tax

does not apply to transfers of money or other

property to political organizations within the

meaning of IRC 527(e)(1). Therefore, transfers to

an organization described in IRC 527(e)(1) are not

subject to the gift tax, regardless of whether the

organization has filed Form 8871.

Rev. Rul. 2000-49, Q&A-18.

C. Segregated Funds of Political Organizations

1. What requirements does

IRC 527 impose?

In addition to being organized and operated

primarily for exempt function purposes, the

political organization must also satisfy the

"segregated fund" requirement of IRC 527(c)(3).

2. What is a "segregated fund"

and what is its purpose?

Reg. 1.527-2(b)(1) defines a "segregated

fund" as "a fund which is established and

maintained by a political organization or individual

separate from the assets of the organization or the

personal assets of the individual." The regulation

further states as follows:

The purpose of such a fund must be to receive and segregate exempt function income

(and earnings on such income) for use only for an exempt function or for an activity

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Election Year Issues

necessary to fulfill an exempt function. Accordingly, the amounts in the fund must

be dedicated for use only for an exempt function. Thus expenditures for the

establishment or administration of a political organization or the solicitation of

political contributions may be made from the segregated fund, if necessary to fulfill

an exempt function. The fund must be clearly identified and established for the

purposes intended.

3. May a savings or checking

account be a segregated fund?

Yes, a segregated fund may be no more than

a savings or checking account. This is specifically

permitted by Reg. 1.527-2(b)(1).

4. Is there a record keeping

requirement for a segregated

fund?

Yes. Reg 1.527-2(b)(2) provides that the

organization or individual maintaining a segregated

fund must keep records that are adequate to verify

receipts and disbursements of the fund and identify

the exempt function activity for which each

expenditure is made. Inability to substantiate that

a payment was made for an exempt function

purpose will result in the payment being classified as a non-exempt purpose expenditure. See, e.g.,

TAM 94-09-003 (Feb. 26, 1993). Conversely, showing that an expenditure was made for goods or

services used exclusively for exempt purposes will establish the relationship.

TAM 93-20-002 (Jan. 14, 1993), analyzes several different types of expenditures made by

a political organization. In some of these expenditures, the presence or absence of documentation

was the critical factor. For example, the payment of annual membership dues for a dinner club were

classified as exempt function expenditures because the organization could document that

membership in the club was maintained solely for political campaign purposes. On the other hand,

no part of annual fees that the organization paid for credit cards was treated as an exempt function

expenditure because the organization did not pro-rate the amount of the fee based upon the use of

the cards for exempt and nonexempt purposes.

D. Exempt Function Activities of Political Organizations

1. What is the "exempt function"

of a political organization?

IRC 527(e)(2) defines "exempt function" as

"the function 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

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Election Year Issues

Vice-Presidential electors, whether or not such individual or electors are selected, nominated,

elected, or appointed."

Reg. 1.527-2(c)(1) uses the term "the

selection process" to encapsulate what is

contemplated by "exempt function, as it pertains to

the selection, nomination, election, or appointment

of an individual to public office. Promoting the

nomination of an individual for an elective public

office in a primary election, or in a meeting or caucus of a political party, is an exempt function

activity, as it is part of the selection process. Reg. 1.527-2(a)(1).

For taxable years beginning after December

31, 1986, the exempt function of a political

organization also includes making expenditures

relating to a public office that would be allowable

as a deduction under IRC 162(a) if incurred by the

office holder. IRC 527(e)(2).

To determine whether an activity is part of

an IRC 527 organization's exempt function, one

must examine all relevant facts and circumstances

to determine the relationship between the activity

and the statutory definition of "exempt function."

The regulations divide exempt function activities

(expenditures) into "directly related expenses"

(Reg. 1.527-2(c)(1)) and "indirect expenses" (Reg. 1.527-2(c)(2)).

IRC 527(e)(4) provides that the term

"expenditures" has the meaning given in

IRC 271(b)(3). IRC 271(b)(3) definition of

expenditures inclusively lists "a payment,

distribution, loan, advance, deposit, or gift, of

money, or anything of value and includes a contract

promise or agreement to make an expenditure,

whether or not legally enforceable."

Reg. 1.527-2(d) provides that the facts and circumstances of each case determine whether a particular Federal,

State, or local office is a "public office," and that principles consistent with those found under Reg. 53.4946-1(g)(2)

(relating to the definition of public office) will be applied.

In Announcement 88-114, 1988-37 I.R.B. 26, the Service proposed to characterize attempting to influence the

confirmation of a federal judge as an exempt function activity for purposes of IRC 527(e)(2) and requested comments

on the proposed position. (For background, see G.C.M. 39694 (Feb. 3, 1988).) No final determination of this issue has

been made.

397

2. What is the meaning of "the

selection process?"

3. May payment of an office

holder's expenses be an exempt

function expenditure?

4. When is an activity is part of

an organization's "exempt

function?"

5. What is the meaning of the

term "expenditures" for

purposes of IRC 527?

Election Year Issues

6. What are expenditures that are

directly related to an

individual's campaign for

public office?

Generally, these expenditures include

anything that supports the individual's campaign.

Therefore, travel, lodging, food and similar

expenses of a candidate and the candidate's spouse

for campaign-related travel are considered to be for

an exempt function. Similarly, expenditures for

attending a testimonial dinner to aid a campaign

effort or expenditures for voice and speech lessons

to improve a candidate's skills are for an exempt function. Reg. 1.527-2(c)(5).

7. Must the individual be an

announced candidate for a

public office?

No. Reg. 1.527-2(c)(1) provides that it is

not necessary for the individual to be an announced

candidate for the office; whether he or she ever

becomes a candidate is, in fact, not crucial. One

illustration of the application of these principles is

found in PLR 82-43-142 (July 28, 1982), where an

organization supporting an individual who was

"testing the waters" for a possible presidential bid qualified for treatment as an IRC 527 organization,

even though it was not required to file with the FEC. Another is found in TAM 93-20-002 (Jan. 14,

1993), where the organization was maintained on behalf of a former member of the U.S. House of

Representatives for a possible campaign for the U.S. Senate, although the individual did not run for

election during the period at issue and ultimately did not run for the Senate seat.

8. Do the activities need to be

related to the particular

candidate's or office holder's

own campaign?

No. That activities need not seek to

influence a particular candidate's or office holder's

own campaign is illustrated by Rev. Rul. 79-12,

1979-1 C.B. 208. In that ruling, the payment of the

expenses of an elected legislator to attend a

political party's convention as a delegate by the

legislator's campaign committee from a prior

election is held to be an exempt function activity

because it involves the selection process. Similarly, the payment of expenses for voter research,

public opinion polls, and voter canvasses on behalf of a candidate is an exempt function activity,

even when the funds expended were contributed to the organization in connection with the

candidate's campaign for a different public office. Rev. Rul. 79-13, 1979-1 C.B. 208. Furthermore,

expenditures for seminars and conferences that are intended to generate support for candidates with

political philosophies in harmony with that of an IRC 527 organization are also for an exempt

function. See Reg. 1.527-2(c)(5)(viii).

Consequently, the common practice whereby a candidate or officeholder uses funds

accumulated in his or her campaign committee to make contributions to support other candidates for

public office is an exempt function activity.

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Election Year Issues

Yes. Expenditures for an election night

party for political campaign workers are "an

inherent part of, and the traditional public

culmination of, the selection process;" therefore,

these are exempt function expenditures. Rev. Rul.

87-119, 1987-2 C.B. 151, Q&A 1.

Yes. Cash awards to campaign workers

after an election are for an exempt function if the

amount given each worker is reasonable,

considering the exempt function services the

worker rendered and the amount of other

compensation, if any, already paid. Rev. Rul.

87-119, 1987-2 C.B. 151, Q&A 2.

Yes. Reg. 1.527-2(c)(5)(vii) exemplifies

this position in stating that expenditures by an

IRC 527 organization between elections to train

staff members for the next election, draft party

rules, implement party reform proposals, and

sponsor a party convention are for an exempt

function.

Under the proper circumstances, payment of

a salary to a candidate for the candidate's services

to the campaign committee may constitute an

exempt function expenditure. For example, in

TAM 95-16-006 (Jan. 10, 1995), which concluded

that payment to the candidate was an exempt

function expenditure, the candidate worked over 80

hours per week for the campaign, performing services substantially similar to those he had performed

in his pre-campaign employment. He was paid a reasonable salary for those services, amounting to

37 percent of the amount he earned from his regular employment and 60 percent of the amount he

would earn if elected to public office; therefore the TAM, understandably enough, found the amount

"commensurate with the services provided." The TAM also states that the amounts paid to the

candidate must be treated as salary in the organization's books and records. In the situation under

consideration in the TAM, while there was no written employment contract, the campaign committee

appropriately reported the salary paid to the candidate as wages on Form W-2 and he reported the

payments as income on his individual tax return. Accordingly, as the services he performed

supported the campaign selection process, the amounts paid were reasonable, and were reported as

salary, the payments constituted an exempt function expenditure.

A different situation, however, is presented when a campaign committee makes payments

for the personal benefit of a candidate that are not paid as compensation and are not treated as

9. Can election night

expenditures be related to the

exempt function of the

organization?

10. May cash awards be paid to

campaign workers after an

election?

11. Can expenditures for activities

between elections be related to

the organization's exempt

function?

12. May payment of a salary to a

candidate constitute an exempt

function expenditure?

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Election Year Issues

compensation by the organization. In that case, as will be discussed in greater detail later, the

amounts paid are not exempt function expenditures, although they are considered to be income to

the candidate in accordance with Reg. 1.527-5(a)(1).

13. Could payment of a spouse's

expenses be considered an

exempt function activity?

Yes, payment of a spouse's expenses in

connection with a political campaign may be

considered an exempt function activity so long as

there is a nexus established between the spouse's

activity and the exempt function of attempting to

influence the selection, nomination, election or

appointment of an individual to public office. Reg.

1.527-2(c)(5)(ii), Example (2). See, e.g., TAM 93-20-002 (Jan. 14, 1993).

14. Are terminating expenditures

considered to be exempt

function expenditures?

Yes, an activity that is in furtherance of the

process of terminating an IRC 527 organization's

existence is an exempt function activity.

Reg. 1.527-2(c)(3). For example, where an

organization is established to further a single

campaign, its post-campaign activities of paying

campaign debts, winding up the campaign, and

putting its records in order are for an exempt function.

15. Is there a time requirement

imposed for the termination of

a political organization?

There is no specific time requirement

imposed for terminating the activities of a political

organization. Instead, since a candidate may take

considerable time to decide whether he or she will

run again, a rule of reason applies. As discussed

below, in Section E, excess funds of a political

organization must be transferred within a

reasonable period of time in accordance with IRC 527(d) or held in reasonable anticipation of future

exempt function use, or they will be treated as expended for the personal use of the person having

control of the funds.

16. Would sponsorship of a

nonpartisan educational

workshop be an exempt

function activity?

A political organization's sponsorship of a

nonpartisan educational workshop that is not

intended to influence or attempt to influence the

selection process is not an exempt function activity.

The determinative factor here is that the

organization is not attempting to affect any

individual's selection. Reg. 1.527-(a)(3). (For a

discussion of the effect of nonexempt function

expenditures, see Section E, below.)

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Election Year Issues

17. Are expenditures to support or

oppose a referendum or

initiative measure an exempt

function activity?

Generally, expenditures to support or

oppose a referendum or initiative measure are not

for an exempt function activity, since this activity

generally does not further the purpose of

influencing or attempting to influence the selection

process. Instead, such expenditures typically

constitute lobbying. The legislative history of

IRC 527 treats ballot measures as outside the

purview of exempt function activity. In addition to the fact that the statute refers to "selection, . . .

of any individual" and the regulations refer to "the selection process", the accompanying Committee

Report, S. Rep. No. 93-1357, 93d Cong. 2d Sess. 27 (1974), 1975-1 C.B. 517, 532, stated, in

discussing the primary activities test, that "a qualified organization could support the enactment or

defeat of a ballot proposition, as well as support or oppose a candidate, if the latter activity was not

its primary activity"). (As with the previous Question and Answer, for a discussion of the effect of

nonexempt function expenditures, see Section E.)

In a particular case, however, ballot measure expenditures may be for an exempt function

activity, if their primary purpose is to influence or attempt to influence the selection process. For

example, a legislative candidate's campaign committee may make expenditures to oppose a ballot

initiative that would re-apportion legislative districts in a manner detrimental to the candidate's

re-election effort. Since the expenditures are made for the primary purpose of influencing or

attempting to influence the individual's election to public office, they are for an exempt function

activity.

For example, in TAM 91-30-008 (Apr. 16, 1991), a gubernatorial candidate's committee

funded a direct mail campaign to promote a statewide nonbinding referendum on fiscal

responsibility. The material prominently displayed the candidate's name and picture and identified

him as a leader on the issue. However, it did not specifically mention his candidacy since, at the

time the material was mailed, he had not announced his bid for governor. The TAM concludes that

the expenditures were exempt function expenditures for purposes of IRC 527(e)(2), noting that (1)

an activity possibly constituting grass roots lobbying for other IRC purposes does not preclude it

from being treated as an IRC 527 exempt function expenditure, and (2) in this case, the mailing both

disclosed the candidate's name, picture, and political philosophy to the public and identified him as

a potential candidate for governor on the issue of fiscal responsibility.

Conversely, in TAM 92-44-003 (Apr. 15, 1992), an organization was established to promote

the passage of a municipal tax by referendum. The organization did not engage in any activities to

attempt to influence the selection process. It was simply engaging in lobbying activities to encourage

voters to approve the municipal tax rate. As a result, it did not qualify as a political organization

under IRC 527.

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Election Year Issues

18. What is the proper tax status

for a ballot measure

committee?

Expenditures to support or oppose

initiatives, referenda, etc., generally are considered

to be lobbying expenditures rather than political

campaign activity. An IRC 501(c) organization

may engage in lobbying activity, although there are

limits on the amount of lobbying that an

IRC 501(c)(3) organization may do.

Consequently, a ballot measure committee (an organization formed specifically to support

or oppose an initiative or referendum measure) cannot qualify to be treated under the provisions of

either IRC 527 or IRC 501(c)(3), but may, in the appropriate case, qualify for tax exempt status

under other subparagraphs of IRC 501(c), for example, IRC 501(c)(4), IRC 501(c)(5), or

IRC 501(c)(6). Besides otherwise meeting the requirements of the relevant subparagraph of

IRC 501(c), the organization must file an annual information return (Form 990).

19. What are expenditures that are

indirectly related to the exempt

function?

Expenditures that are necessary to support

the directly related activities of a political

organization are indirectly related to its exempt

function. Examples of expenditures that are

considered necessary to support the activities of a

political organization are those attributable to

overhead, record keeping, and fundraising.

Reg. 1.527-2(c)(2).

In some cases, an organization that does not make any directly related expenditures can still

qualify as a political organization under IRC 527. G.C.M. 39178 (Dec. 3, 1983), for example,

describes an organization that was formed by and controlled by a political organization for the

purpose of constructing, owning, and operating a building to house the headquarters of the political

organization. The G.C.M. concludes that the controlled organization qualifies as a political

organization because its expenditures were necessary to support the directly related activities of the

controlling organization.

The Service is considering whether to develop an administrative procedure to expedite recognition of exempt

status for organizations organized and operated solely to function as a ballot measure committee under laws

administered by an elections commission or similar agency in a particular state that circumscribe the committee's

functioning in a manner consistent with IRC 501(c)(4). If adopted, the procedure would make it easier for these

essentially short-term organizations to satisfy the Service's need to have records regarding their existence.

G.C.M. 39178 also notes that if the lessor organization rented office space in the headquarters building to an entity

that was engaged in activities unrelated to the lessor's exempt function, such rent would not constitute exempt function

activity. Instead, the income would be considered to be derived from a taxable trade or business.

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Election Year Issues

20. Does an organization opposing

an individual's campaign for

office qualify as a political

organization?

The word "influence" in IRC 527(e)(1)

embraces both support and opposition. Therefore,

an organization organized and operated to oppose

an individual's nomination, selection, election, or

appointment to public office, etc., may qualify as an

IRC 527 political organization.

E. Taxable and Exempt Function Income of Political Organizations

1. What are the general rules

used to determine whether

income received by a political

organization is taxable?

IRC 527(c)(1) defines "political

organization taxable income" (or "taxable income")

as an amount equal to the organization's gross

income (excluding exempt function income) over

deductions directly allowed by the Code that are

directly connected with producing gross income

(excluding exempt function income), computed

with the modifications provided in IRC 527(c)(2).

(See question 10, below, for the definition of "exempt function income.")

IRC 527(c)(2) provides three modifications:

(A) A specific deduction of $100 is provided. IRC 527(c)(2)(A).

("Newsletter funds," however, may not take the $100 deduction.

"Newsletter funds" are discussed in Section H, below.)

(B) No net operating loss deduction under IRC 172 is allowed.

IRC 527(c)(2)(B).

available to taxable corporations under part VIII of subchapter B of

the Code (IRC 241-249) are not allowed. IRC 527(c)(2)(C).

Note that illegal expenditures and expenditures for non-exempt function activities that

directly or indirectly benefit the political organization financially are also subject to tax and must be

reported as political organization taxable income on line 9 of Form 1120-POL. These two types of

expenditures are discussed later in this section.

2. Is interest on state or local

bonds excluded in determining

gross income?

Yes, interest on state or local bonds, within

the meaning of IRC 103, is excluded in determining

gross income under IRC 527(c)(1). The definition

of gross income under IRC 61 and the exclusions

from gross income thus defined apply in

determining gross income under IRC 527(c)(1)

also.

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3. How are capital gains and

losses treated?

Special provisions apply to the taxation of

capital gains. IRC 527(b)(2). If a political

organization has net capital gain for a taxable year,

it may, if this results in a lower tax, compute its tax

on its capital gain under IRC 1201(a).

IRC 527(b)(2)(A). Further, Reg. 1.527-4(b)

provides that if an organization has a net capital loss, the rules of IRC 1211(a) and 1212(a) apply.

Therefore, capital losses are allowed only to the extent of capital gains; furthermore, net capital

losses may be carried back for three and forward for five years.

4. When are expenses,

depreciation, and similar items

deductible?

Reg. 1.527-4(c)(1) provides that expenses,

depreciation, and similar items are deductible only

if they satisfy both of the following requirements:

(A) They must qualify as deductions allowed under Chapter 1; and

(B) They must be "directly connected" with producing political

organization taxable income.

5. When is an item "directly

connected" with producing

political organization taxable

income?

To be "directly connected," a deduction

item must have a proximate and primary

relationship to producing taxable income and have

been incurred in producing such income.

Reg. 1.527-4(c)(2). If an item is attributable solely

to producing taxable income, it is allowed under

IRC 527. For example, Rev. Rul. 85-115, 1985-2

C.B. 172, holds that where state income taxes that

a political organization paid on non-exempt function income were attributable solely to items of

taxable income, they bore a "proximate and primary relationship" with producing that income. Since

IRC 164 provides a deduction for such taxes in the year paid or accrued, they were allowed as a

deduction under IRC 527(c)(1) in the year paid.

Whether the requisite relationship exists depends on all relevant facts and circumstances.

(Compare the rules pertaining to computation of the unrelated business income tax,

Reg. 1.512(a)-1(a) and (b).)

6. What happens when facilities

or personnel are used both for

exempt function and taxable

purposes?

Where facilities or personnel are used both

for exempt function and taxable purposes,

deductions relating to that use must be allocated

between exempt function and taxable income.

Reg. 1.527-4(c)(3) requires that such an allocation

be "on a reasonable and consistent basis." Time

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spent on exempt function and taxable activities is a permitted basis for allocating salaries of

personnel, for example. (Compare the principles of allocation relating to dual use of facilities or

personnel set forth in Reg. 1.512(a)-1(c).)

7. Are indirect expenses

deductible?

No, indirect expenses are not deductible.

The legislative history states: "Indirect expenses

(such as general administrative expenses) are not to

be allowed as deductions, since it is expected that

these amounts will be relatively small and

eliminating these deductions will greatly simplify

tax calculations." S. Rep. No. 93-1374, 93d Cong., 2d Sess. 29 (1974), 1975-1 C.B. 517, 533.

8. When is a political

organization required to file

Form 1120-POL?

Prior to 2000, a political organization was

required to file Form 1120-POL if its gross income,

after taking its directly connected deductions but

before applying the specific $100 deduction, was

greater than $100. In explaining the specific $100

deduction, the Senate Finance Committee Report

states: "As a result, a political organization is not

subject to tax and is not required to file a return unless its gross income exceeds its directly

connected deductions by more than $100." S. Rep. No. 93-1374, 93d Cong., 2d Sess. 29 (1974),

1975-1 C.B. 517, 533. However, for taxable years beginning after June 30, 2000, a political

organization will also be required to file Form 1120-POL even if it has no taxable income if its gross

receipts are $25,000 or more in any taxable year. Thus, organizations that always have gross receipts

of less than $25,000 and whose taxable income does not exceed the $100 specific deduction will still

not be required to file the form. IRC 6012(a)(6); Rev. Rul. 2000-49, Q&A-43. However, some

IRC 527 organizations file Form 1120-POL even when it is not required to start the statute of

limitations period running.

9. What are the rules regarding

assessment and collection of

IRC 527 taxes?

Taxes imposed by IRC 527 are imposed

under Subchapter A of the Code so all provisions of

the Code and regulations that apply to Subchapter

A taxes apply to assessment and collection of

IRC 527 taxes. Therefore, political organizations

subject to tax under IRC 527 are subject to the

provisions, including penalties, for corporations

generally. However, political organizations are not subject to the requirements of IRC 6655(g)(3)

regarding estimated tax payments. See Reg. 1.527-8(a).

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10. What is a political

organization's "exempt

function income?"

Receipts of a political organization must

meet two requirements to be considered exempt

function income. First, they must be amounts

received by the political organization from one of

the following four sources:

(1) A contribution of money or other property (IRC 527(c)(3)(A));

(2) Membership dues, fees, or assessments from a member of the political

organization (IRC 527(c)(3)(B));

(3) Proceeds from a political fundraising or entertainment event or from the sale

of political campaign materials, which are not received in the ordinary course

of any trade or business (IRC 527(c)(3)(C)); or

(4) Proceeds from conducting bingo games that are defined in IRC 513(f)(2)

(IRC 527(c)(3)(D)).

Thus, investment income, or income from a trade or business (such as renting excess office

space to an unrelated organization), of a political organization is not exempt function income.

Amounts received by a political organization in exchange for its promise to exercise political

influence on the payor's behalf or in exchange for some other quid pro quo are likewise not exempt

function income. Rev. Rul. 75-103, 1975-1 C.B. 17.

Second, receipts must be set aside in a segregated fund to be considered exempt function

income. IRC 527(c)(3). Reg. 1.527-2(b)(1).

11. What is a "contribution of

money or other property?"

Under IRC 527(e)(3) and Reg. 1.527-3(b),

"contribution" has the same meaning as that given

in IRC 271(b)(2) (relating to political organization

bad debts). IRC 271(b)(2) provides that the term

includes a gift, subscription, loan, advance, or

deposit of money or anything of value, and includes

a contract, promise, or agreement to make a contribution, whether or not it is legally enforceable.

Generally, therefore, money or other property, whether solicited personally, by mail, or through

advertising, qualifies as a contribution. Additionally, funds received under a personal income tax

return "checkoff" provision (IRC 9001-9042) or similar campaign financing provisions are treated

as contributions.

The legislative history indicates that exempt function income may be received indirectly as

well as directly. In discussing the qualification of political organizations, the Senate Finance

Committee Report states: "An organization may qualify as a political organization if it indirectly

receives or expends money for campaign purposes. For example, if a national organization receives

political contributions directly through local organizations, it would be indirectly accepting

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contributions and would qualify under the bill." S. Rep. No. 93-1357, 93d Cong., 2nd Sess. 22

(1974), 1975-1 C.B. 517, 532 (emphasis supplied). The language of IRC 527(e)(1), in defining the

"political organizations" with which IRC 527 is concerned, similarly indicates that indirect

contributions are a permissible form of exempt function income. IRC 527(e)(1) defines the exempt

purpose of a political organization as "directly or indirectly accepting contributions or making

expenditures . . . for an exempt function" (emphasis supplied).

G.C.M. 39178 (Mar. 6, 1984), relies on the above quoted passage from the Senate Report in

concluding that an organization that constructed, owned, and operated a building to house the

headquarters of the IRC 527 organizations that controlled it received "exempt function income" from

sharing expenses of the buildings with the related organizations. Therefore, the payments from other

IRC 527 organizations for shared expenses were indirect contributions to the organization.

12. What are "membership dues, a

membership fee or assessment

from a member of a political

organization?"

Reg. 1.527-3(c) provides that amounts

denominated as "membership dues" or "fees" are

not exempt function income if received in

consideration for services, goods, or other items of

value. However, filing fees that an individual pays

directly or indirectly to a political party to run as a

candidate in the party primary or in the general

election as a party candidate, are exempt function

income. For example, some states require certain office holders to pay a percentage of their first

year's salary for the office to the state as a filing or "qualifying" fee or party assessment; the state

then transfers the amount to the party. The transferred amount is exempt function income, as are

amounts that the individual pays directly to the party as a filing fee. Id.

13. What are "proceeds from

political fundraising or

entertainment events or sale of

political campaign materials,

which are not received in the

ordinary course of any trade or

business?"

To generate exempt function income, a

fundraising event must be "political in nature" and

"not carried on in the ordinary course of a trade or

business." Reg. 1.527-3(d)(1). Whether an event

is "political in nature" depends on all relevant facts

and circumstances. One factor to be considered is

the extent that the event is related to a political

activity aside from the organization's need for

income or funds. Originally, proposed regulations

would have adopted a "substantially related" test

similar to the test contained in IRC 513(a) and the

applicable regulations. This approach was rejected in favor of the above formulation, providing that

the relationship to political activity is only one relevant factor. See T.D. 7744, 1981-1 C.B. 360,

361.

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Whether a fundraising event is carried on

"in the ordinary course of a trade or business"

depends on all relevant facts and circumstances.

Reg. 1.527-3(d)(2). Relevant factors include the

activity's frequency, the manner in which it is

conducted, and the span of time over which it is

carried out. (Compare Reg. 1.513-1(c)(1), which

discusses when a trade or business is "regularly carried on" for purposes of applying the unrelated

business income tax.) In general, proceeds from "casual, sporadic" fundraising are not received in

the ordinary course of a trade or business.

Under IRC 527(c)(3)(C), proceeds from the sale of political campaign materials are exempt

function income if the sale is not in the ordinary course of a trade or business (see

Reg. 1.527-3(d)(2)), and is related to exempt function activity aside from the organizations need for

income or funds. Reg. 1.527-3(e). Items sold may include political memorabilia, bumper stickers,

buttons, hats, shirts, posters, stationery, jewelry, or cookbooks, where identified as relating to the

distribution of political literature or organizing voters to vote for a candidate.

These provisions were applied in Rev. Rul. 80-103, 1980-1 C.B. 120, where a political

organization sold reproductions of an original work of art, not of a political nature, that the artist had

donated to it. The reproductions were sold over a period of several months through an art gallery,

to which the organization had paid a fee. The sales were made solely for fundraising purposes; they

were not related to the organization's political activity aside from its need for funds. Nor, because

of the length of the sale period, could the sales be characterized as "casual" and "sporadic." See

Reg. 1.527-3(d)(2). Therefore, Rev. Rul. 80-103 holds that the proceeds were not exempt function

income.

Under the relevant statutory and regulatory

provisions (IRC 527(c)(3)(D), IRC 513(f)(2), and

Reg. 1.513-5(d)), the bingo game must not be

ordinarily conducted on a commercial basis and the

activity must not violate any state law. These

provisions apply solely to bingo; other games of

chance, including, but not limited to, keno games,

dice games, card games and lotteries, are excluded.

As noted in a memorandum dated

December 1, 1999, from the Director, Exempt

Organizations Division to the Regional Chief

Compliance Officers, proceeds from the sale of

raffle tickets are not one of the specified types of

income that may be excluded from gross income of

a political organization. Therefore, to be exempt

function income it must meet the requirements of one of the types of income specified in

IRC 527(c)(3).

14. When is a fundraising event is

carried on "in the ordinary

course of a trade or business?"

15. What is the meaning of

"proceeds from conducting

bingo games that are defined in

IRC 513(f)(2)?"

16. Are proceeds from the sale of

raffle tickets exempt function

income?

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Election Year Issues

17. Are proceeds from the sale of

raffle tickets contributions?

Proceeds from the sale of raffle tickets are

not contributions under IRC 527(c)(3)(A). The

purchase of a raffle ticket has been viewed by the

Service as the purchase of an item for value rather

than as a charitable contribution. Rev. Rul. 67-246,

1967-2 C.B. 104, specifically provides that

amounts paid for chances to participate in raffles, lotteries, or similar drawings or to participate in

puzzle or other contests for valuable prizes are not charitable contributions. In Rev. Rul. 83-130,

1983-2 C.B. 148, the Service explained that taxpayers who purchased raffle tickets from a charity

"received a chance to win a valuable prize and, therefore, received full consideration for their

payments."

A similar principle was applied to raffle tickets purchased from political organizations under

former IRC 24 (formerly IRC 41). Until repealed in 1986, IRC 24 allowed an individual to claim

a tax credit for all "political contributions" and "newsletter fund contributions." In Rev. Rul. 72-411,

1972-2 C.B. 5, the Service determined that "an amount paid for a chance to participate in a raffle,

lottery, or a similar drawing for valuable prizes is not a contribution or a gift. Such an amount is

merely the purchase price of an item of value - the chance to win a valuable prize." While IRC 24

has been repealed, the principle that the purchase of a raffle ticket is the purchase price of an item

for value is still valid and is applicable to political contributions under IRC 527.

18. Are proceeds from the sale of

raffle tickets membership dues,

fees or assessments?

Proceeds from the sale of raffle tickets are

not membership dues, fees or assessments. As

discussed in the previous question, proceeds from

the sale of raffle tickets are proceeds from the

purchase of an item for value. Reg. 1.527-3(c)

provides that amounts denominated as

"membership dues" or "fees" are not exempt

function income if received in consideration for services, goods, or other items of value.

19. Are proceeds from the sale of

raffle tickets income from a

political fundraising or

entertainment event?

Reg. 1.527-3(d)(1) provides that amounts

received from fundraising and entertainment events

are eligible for treatment as exempt function

income if the events are political in nature and not

carried on in the ordinary course of a trade or

business. Whether an event is "political" in nature

depends on all facts and circumstances. One factor

that indicates an event is a political event is the

extent to which the event is related to a political activity aside from the need of the organization for

income or funds.

Where there is no evidence that the sale of raffle tickets is closely related to a political event,

it is hard to conclude that it constitutes exempt function income. For example, where the drawing

is to be held at the annual meeting of a related non-IRC 527 organization; the tickets are sold over

a period of several months by telephone and through the mail; the only reference to an event is on

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Election Year Issues

the back of the raffle ticket and merely indicates the date, time, and location of the drawing; the

raffle tickets do not constitute admission tickets to the annual meeting; there is no expectation or

requirement that ticket holders will attend the annual meeting at which the drawing occurs; and the

annual meeting is not political in nature, the raffle proceeds are not exempt function income. See,

e.g., TAM 98-47-006 (Aug. 11, 1998).

On the other hand, not all raffle proceeds are nonexempt function income. Proceeds of raffle

tickets sold in the context of a political event may constitute exempt function income, even though

the proceeds in the above example are not.

Proceeds from the sale of raffle tickets do

not qualify as proceeds from conducting bingo

games under IRC 527(c)(3)(D). As discussed

previously, IRC 527(c)(3)(D) applies solely to

bingo income. Other games of chance, including

raffles, are excluded.

Yes, a political organization may receive

exempt function income indirectly. Both the

legislative history and administrative interpretations

accept that where an IRC 527 transfers exempt

function income it has received from denominated

sources to a second organization, the political

contribution character of such amounts passes

through so that it can be characterized as exempt function income to the second organization. See

S. Rep. 1357, 93d Cong. 2d Sess. 22 (1974), 1975-1 C.B. 517, 532; G.C.M. 39178 (Mar. 6, 1984);

PLR 83-16-079 (Jan. 18, 1983).

During a tax year, if a political organization

makes an insubstantial amount of expenditures

from a segregated fund for non-exempt function

activities, there are no income tax consequences to

the organization. Reg. 1.527-2(b)(1). The only

exceptions to this general rule are when the

expenditure is illegal or for an illegal activity, or

the expenditure directly or indirectly financially

benefits the political organization. The regulations

specifically provide for those two types of expenditures to be included in the gross income of the

political organization, even when insubstantial in amount. Reg. 1.527-5(a). If non-exempt function

expenditures in a tax year are more than insubstantial, however, the fund is not treated as a

segregated fund for that year. Reg. 1.527-2(b)(1). If the fund is not treated as a segregated fund for

a tax year, then all amounts set aside in that fund during such year are included in gross income with

no exclusion available for exempt function income since the receipts were not properly segregated

for the year. Thus, all amounts the political organization receives during the year that it placed in

that fund, less available deductions, will constitute taxable income to it.

20. Are proceeds from the sale of

raffle tickets bingo income?

21. May a political organization

receive exempt function income

indirectly?

22. What is the tax effect of using

amounts from a "segregated

fund" to make expenditures

for non-exempt function

activities?

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Election Year Issues

If an organization makes more than an insubstantial amount of expenditures for non-exempt

function activities from a segregated fund in more than one year, the facts and circumstances may

indicate that the fund was never a segregated fund. Reg. 1.527-2(b)(1). In that case, the exclusion

from gross income for exempt function income would not be available for the political organization

in prior years.

23. What amount of expenditures

is more than insubstantial?

The Service has not developed a bright-line

test for determining what is a more than an

insubstantial amount of non-exempt function

expenditures. Law developed under the "no

substantial part" test that pertains to lobbying by

charitable organizations provides some guidance,

however.

One frequently cited decision held that lobbying activities constituting five percent of total

activities of an organization were not substantial. Seasongood v. Commissioner, 227 F.2d 907 (6th

Cir. 1955). In Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert. denied, 419 U.S. 1107

(1975), the court held that lobbying activities constituting between 16.6 percent and 20.5 percent of

total expenditures were substantial. (The figures varied with the years involved and the method of

calculation.)

24. What effect do substantial

non-exempt function

expenditures have on the

exempt status of a political

organization?

As noted above, IRC 527(e)(1) defines a

political organization as being organized and

operated primarily for the purpose of directly or

indirectly accepting contributions or making

expenditures, or both, for an exempt function, and

Reg. 1.527-2(a)(3) provides that a political

organization may engage in non-exempt function

activity, provided the activity is not primary.

Therefore, the demise of a political organization's

segregated fund because of substantial non-exempt function expenditures would not necessarily have

an adverse tax effect on any other segregated funds maintained by the political organization or on

the political organization's status under IRC 527 (assuming it had income in other segregated funds),

so long as, after taking all facts and circumstances into account, the political organization's exempt

function activities were primary. If the political organization's non-exempt function activities were

primary, however, it would lose its tax status under IRC 527.

25. How is an organization taxed

that loses its exempt status

under IRC 527?

An organization that loses its exempt status

under IRC 527 is subject to federal income tax

under general tax principles. Depending on the

organization's structure, it may be subject to tax as

a corporation (see Rev. Rul. 74-21, 1974-1 C.B.

14), or as a trust (see Rev. Rul. 74-23, 1974-1 C.B.

17). However, a political organization that is not

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treated as tax-exempt because it failed to file a required Form 8871 will be taxed in accordance with

IRC 527(i)(4). (See the discussion in Section B, above.)

26. What is the tax effect of

making expenditures that are

illegal?

Expenditures that are illegal, or for an

activity that is judicially determined to be illegal,

are never considered to be for exempt function

activities. Reg. 1.527-2(c)(4). Thus, if such

expenditures are more than insubstantial, the fund

will not be considered a segregated fund for the

taxable year. In addition, the amount of such

expenditures is included in the political organization's taxable income for the year in which they are

made, even where the amount of the organization's expenditures for non-exempt function activities

is not substantial (so as to cause all receipts of that segregated fund during relevant periods not to

be exempt function income). Reg. 1.527-5(a)(2). However, amounts will not be included in political

organization taxable income more than once (that is, because they were not properly segregated and

because they were expended illegally or for an illegal activity). The prohibition on illegal

expenditures is intended to apply to criminal activities and not to violations of civil law, regulation,

or administrative rule.

It should be noted Reg. 1.527-5(a)(2) specifically provides that expenses incurred in defense

of suits against the political organization are not treated as taxable income to it. Similarly, voluntary

reimbursement to the participants in the (alleged) illegal activity for similar expenses incurred by

them are not taxable to the organization if it can demonstrate that such payments do not constitute

a part of the inducement to engage in the illegal activity or part of the agreed upon compensation

therefor. However, if the organization entered into an agreement with the participants to defray such

expenses as part of the inducement, such payments would be treated as an expenditure for an illegal

activity.

27. What is the tax effect of

making non-exempt function

expenditures that financially

benefit the political

organization?

Expenditures for non-exempt function

activities that directly or indirectly financially

benefit a political organization (for example, the

purchase of an office building for the production of

income), will result in the fund not being

considered a segregated fund for the taxable year if

such expenditures are more than insubstantial. In

addition, the amount of such expenditures is

included in the political organization's taxable

income for the year in which they are made, even where the amount of the organization's

expenditures for non-exempt function activities is not substantial (so as to cause all amounts received

during relevant periods not to be exempt function income). Reg. 1.527-5(a)(1). Amounts will not

be included in political organization taxable income more than once, however (that is, because they

were not properly segregated and because they were expended for an activity financially benefiting

the organization).

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Reg. 1.527-5(a)(1) contains specific examples of when a political organization's expenditures

on facilities or equipment will and will not be included in its taxable income. It provides that if the

organization expends exempt function income for making an improvement or addition to its

facilities, or for equipment, that is not necessary for or used in carrying out an exempt function, the

amount of the expenditure will be included in the political organization's taxable income. It proceeds

to state, however, that if a political organization expends exempt function income to make ordinary

and necessary repairs on the facilities it uses in conducting its exempt function, such amounts will

not be included in its taxable income.

28. How are loans made by a

political organization treated?

Loans made by a political organization are

"expenditures" of the organization. IRC 217(b)(3).

The treatment of a particular loan depends on

whether it is for an exempt function activity.

29. Are transfers to other

organizations allowable?

Yes, transfers to other organizations may be

allowable exempt function expenditures.

IRC 527(d) specifies certain situations where a

political organization's transfers to other

organizations are not treated as amounts expended

for the personal use of the candidate or any other

person; instead, they are treated as exempt function expenditures. The allowable transfers are as

follows:

(A) Contributions to or for the use of another IRC 527 political

organization or newsletter fund;

(B) Contributions to or for the use of any tax-exempt public charity that

is described in IRC 509(a)(1) or (2); and

of any State or local government.

IRC 527(d) specifically provides, however, that no deduction will be allowed for transferred

amounts. See also Reg. 1.527-5(b). Furthermore, this provision does not apply to any amount

transferred in satisfaction of a liability of the candidate or other person. For example, an amount

paid to the general fund of the U.S. Treasury in satisfaction of the candidate's tax liability will be

included in the candidate's gross income and is not an exempt function expenditure.

Reg. 1.527-5(a)(1).

30. What is "to or for the use of" a

tax-exempt public charity?

As discussed above, IRC 527(d)(2) provides

that amounts contributed "to or for the use of" an

organization exempt from tax under IRC 501(a)

and described in IRC 509(a)(1) or 509(a)(2) will

not be considered diverted for the personal benefit

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of any individual. See also Reg. 1.527-5(b)(2). IRC 509(a) provides that an organization described

in IRC 501(c)(3) is a private foundation unless it meets one of four tests, including those set forth

in IRC 509(a)(1) and 509(a)(2).

For example, in PLR 94-25-032, a private foundation requested a ruling that contributions

to it from campaign committees would be considered "for the use of" organizations meeting the

requirements of IRC 527(d)(2). As a private foundation, it did not meet these requirements itself.

However, it had been formed to make contributions to colleges or universities to fund scholarships

for students who need or deserve monetary assistance to further their education and to make

contributions to other organizations recognized as public charities under IRC 501(c)(3) and

IRC 509(a)(1). Similarly, upon dissolution, its assets would be distributed to an organization

described in IRC 501(c)(3) and IRC 509(a)(1). Under the law of the state in which the private

foundation was incorporated, it was considered a charitable trust and the Attorney General, as well

as any other person with a sufficient special interest under a liberal standing rule, may bring an action

to enforce proper administration of the charitable trust.

Under IRC 170(c), a deduction is allowed for contributions "to or for the use of" certain

enumerated organizations, including charitable organizations. In that context, the Supreme Court

has stated that "a gift or contribution is 'for the use of' a qualified organization when it is held in a

legally enforceable trust for the qualified organization or in a similar legal arrangement." Davis v.

United States, 495 U.S. 472, 485 (1990). The Court stated further:

A defining characteristic of a trust arrangement is that the beneficiary has the legal

power to enforce the trustee's duty to comply with the terms of the trust. See, e.g.,

3 W. Fratcher, Scott on Trusts § 200 (4th ed. 1988); 1 Restatement of Trusts § 200

(1935). A qualified beneficiary of a bona fide trust for charitable purposes would

have both the incentive and legal authority to ensure that donated funds are properly

used. If the trust contributes funds to a range of charitable organizations so that no

single beneficiary could enforce its terms, the trustee's duty can be enforced by the

Attorney General under the laws of most States. See 4A W. Fratcher, Scott on Trusts

§ 391 (4th ed. 1989); G. Bogert, Trusts and Trustees § 411 (2d ed. 1977). Id. at 483.

Applying these principles to the identical language in IRC 527(d)(2), PLR 94-25-032 held

that a contribution by a political organization will be considered "for the use of" an organization

meeting the requirements of IRC 527(d)(2) if it is held in a legally enforceable trust or similar legal

arrangement. In this situation, although the organization may contribute its funds to a number of

organizations, it is legally required to distribute it only to organizations described in IRC 501(c)(3)

and IRC 509(a)(1); that requirement may be enforced by the Attorney General of the state in which

the private foundation was incorporated. Accordingly, contributions to that private foundation will

be considered "for the use of" organizations described in IRC 527(d)(2).

Although contributions to that private foundation would qualify under IRC 527(d)(2),

contributions to many private foundations would not. In PLR 94-25-032, the organization's activities

were strictly limited to making contributions to organizations that qualified under IRC 527(d)(2).

In many cases, private foundations are not so limited. They frequently carry on their own charitable

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programs or they may be formed to contribute to IRC 501(c)(3) organizations, without regard to the

their private foundation status. In addition, whether particular provisions in a foundation's governing

instrument create an enforceable charitable trust or similar arrangement is a question of state law;

provisions such as those present in PLR 94-25-032 might not create an enforceable trust arrangement

under the laws of a different state. In those cases, contributions to the private foundation would not

qualify as "for the use of" organizations meeting the requirements of IRC 527(d)(2).

Under the principles discussed in this ruling, a contribution by a political organization to an

IRC 501(c)(3) organization that is not a private foundation because it is described in IRC 509(a)(3)

may sometimes be considered "for the use of" an organization meeting the requirements of

IRC 527(d)(2). An IRC 509(a)(3) organization is required to operate for the exclusive benefit of one

or more specified IRC 509(a)(1) or IRC 509(a)(2) organizations and must be operated, supervised,

or controlled by or in connection with one or more of those organizations. If, under state law, such

an organization is considered a charitable trust or similar arrangement, the amounts contributed to

the IRC 509(a)(3) organization would qualify under IRC 527(d)(2).

31. When will an individual

receive gross income as a result

of expenditures by a political

organization?

As indicated in the response to the previous

question, the general principle here is that amounts

expended by the political organization for an

exempt function, as defined in IRC 527(e)(2), are

not income to the individual on whose behalf such

expenditures are made. Thus, for example, a

political organization may reimburse an individual's

actual expenses for travel to political fundraising

events; such amounts are expenditures for an exempt function and therefore are not income to the

individual. Reg. 1.527-2(c)(5)(i) and 5(a)(1).

The opposite result is reached, however, where a political organization makes expenditures

for non-exempt function activities, using amounts in its segregated fund, to an individual for his or

her personal use. In that case, the individual on whose behalf the expenditures are made will be in

receipt of income, in the amount of the expenditure, for the taxable year in which the amount is

received.

32. What determines whether a

payment is made for "personal

use?"

Reg. 1.527-5(a)(1) provides that amounts

are expended for the personal use of an individual

where a direct or indirect financial benefit accrues

to such individual. "Personal use" is not limited to

direct financial benefit, but includes (for example)

the benefit an individual derives from directing

funds to a third party. See Estate of Geiger v.

Commissioner, 352 F.2d 221 (8th Cir. 1965).

Note that whether an individual benefiting from such expenditures receives taxable income

depends on general income tax principles, that is, whether such amounts are includable in the

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individual's gross income pursuant to IRC 61 and whether an exclusion (for example, as a gift under

IRC 102), is available for such amounts.

33. Is repayment of a loan from a

candidate to a political

organization included in the

candidate's gross income?

If the loan is properly documented and

otherwise treated as a loan, repayment of the loan

will not be treated as an expenditure by the political

organization for the benefit of the candidate, and

the repayment will not be includable in the

candidate's gross income under IRC 527(d). See,

e.g., PLR 81-17-207 (Jan. 30, 1981). (The PLR

also concludes that the political organization may

pay interest on the loan from the candidate, and such interest will be includable in the candidate's

gross income.)

34. How are excess campaign

funds treated?

Reg. 1.527-5(c)(1) provides that excess

campaign funds (funds controlled by a political

organization or other person after a campaign) are

treated as expended for the personal use of the

person having control of the ultimate use of the

funds except to the extent that the political

organization does either of the following:

(A) The excess funds are transferred within a reasonable period of time in

accordance with IRC 527(d) (contributed to or for the use of another IRC 527

political organization or newsletter fund; contributed to or for the use of an

IRC 509(a)(1) or (2) public charity; or deposited in the general fund of the

U.S. Treasury or in the general fund of a State or local government); or

(B) The excess funds are held in reasonable anticipation of use by the political

organization for future exempt functions.

Therefore, a political organization's expenditure of excess campaign funds from one

campaign to pay expenses of the candidate's campaign for a second office are for an exempt function

and do not result in income to the candidate. Rev. Rul. 79-13, 1979-1 C.B. 208. Similarly, an

elected legislator may expend surplus campaign funds to defray expenses of attending a political

convention, an exempt function activity, without receiving taxable income. Rev. Rul. 79-12, 1979-1

C.B. 208.

Reg. 1.527-5(c)(2) provides that if the individual controlling the funds dies, the income will

be included as part of the decedent's gross estate unless the funds are transferred to the organizations

or funds described above within a reasonable period of time or unless the decedent provided for such

a transfer.

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35. What is a "reasonable period

of time for transfer of excess

campaign funds" or

"reasonable anticipation of use

for future exempt functions?"

The determination of what is a reasonable

period of time for transfer of excess campaign

funds or reasonable anticipation of use for future

exempt functions is based on the facts and

circumstances of the particular situation. Some of

the facts and circumstances to be considered are

(1) whether there are outstanding expenses

remaining from the previous election, (2) whether

the candidate has announced an intention to seek

election in the future, and (3) the uses to which the excess campaign funds are currently being put.

For example, a reasonable period of time for a campaign committee to retain excess campaign funds

used to service a debt to an unrelated third party would be the period of debt service. Similarly, a

reasonable anticipation of use for future exempt functions exists when the candidate has announced

an intention to seek reelection. On the other hand, excess campaign funds that are unreasonably

retained when there are no outstanding debts from a previous election and the candidate has

announced an intention not to seek election to public office will be treated as expended for the

personal use of the person having control of the ultimate use of the funds. Reg. 1.527-5(c)(1).

36. What is the tax effect of using

funds, other than segregated

funds, to make non-exempt

function expenditures?

Non-segregated funds are included in the

organization's taxable income when received.

IRC 527(c)(1). The only additional tax effect

resulting from making an expenditure of

non-segregated funds may be a deduction from

taxable income (where a deduction is available

under IRC 527(c)).

F. Reporting and Disclosure Requirements

(1) Periodic Reporting Requirements

1. What are the periodic

reporting requirements

imposed upon political

organizations?

A political organization may be required to

periodically report on Form 8872 contributions to

the organization and expenditures made by the

organization. IRC 527(j); Rev. Rul. 2000-49,

Q&A-21 & Q&A-22.

2. What triggers the requirement

to file periodic reports on

Form 8872?

Accepting contributions or making

expenditures for an exempt function under IRC 527

during a calendar year triggers the requirement to

file periodic reports on Form 8872, beginning with

the first month or quarter in which the political

organization accepts contributions or makes

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expenditures. IRC 527(j)(2). However, only those political organizations that accept contributions

or make expenditures with respect to a particular election for federal office (as defined in

IRC 527(j)(6)) are subject to the requirement to file pre-election reports for that election.

IRC 527(j)(2)(A)(i)(II); Rev. Rul. 2000-49, Q&A-23.

3. Are all political organizations

required to file periodic reports

on Form 8872?

No, IRC 527(j)(5) provides that some

organizations are not subject to the Form 8872

periodic reporting requirement. The organizations

excepted from these filing requirements are as

follows:

(a) Organizations excepted from the requirement to file a Form 8871;

(b) State and local candidate committees; and

All other political organizations, including state and local political action committees, are

subject to the reporting requirements of IRC 527(j), even if they file reports with state or local

election agencies. Rev. Rul. 2000-49, Q&A-24.

4. Must a state or local candidate

or officeholder organize a

formal committee?

No, as discussed above in Section B,

IRC 527 does not require organizations to have

formal organizational documents. Therefore, a

candidate or officeholder does not need to organize

a formal committee to qualify for the exception

under IRC 527(j)(5) for committees of state or local

candidates. Rev. Rul. 2000-49, Q&A-25.

5. Must purely state and local

political organizations file

Form 8872?

Yes, unless the organization meets one of

the exceptions discussed above in question 3.

Except as provided above, political organizations

that engage in exempt function activities solely

with respect to elections for state or local offices

are not excepted from the Form 8872 filing

requirements. Although the timing of the reports is

based upon federal elections, the requirement to file the reports is based on accepting contributions

or making expenditures for an exempt function under IRC 527(e)(2), which includes attempting to

influence state or local elections. Therefore, unless a political organization meets one of the

exceptions discussed above, it is subject to the requirement of filing Form 8872 with the Service.

Rev. Rul. 2000-49, Q&A-26.

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Election Year Issues

6. What if an organization

receives $25,000 or more in any

taxable year?

As discussed above, organizations that

reasonably anticipate that they will not receive

$25,000 or more in annual gross receipts are not

required to file Form 8872. A political

organization that does, in fact, receive $25,000 in

any taxable year no longer qualifies for that

exception. Therefore, the organization must begin

filing Form 8872 unless it meets one of the other exceptions discussed above. IRC 527(j)(5). The

organization must file, within 30 days of receiving $25,000, any Form 8872 that would otherwise

have been due during the calendar year prior to that date. Rev. Rul. 2000-49, Q&A-27.

7. How often must the periodic

reports be filed?

Political organizations subject to the

periodic reporting requirement may choose to file

on a monthly basis or on a schedule that depends

upon whether it is an election year or non-election

year, but it must file on the same schedule basis for

the entire calendar year. Rev. Rul. 2000-49,

Q&A-28.

8. What is an election year and

non-election year for purposes

of determining the due dates

for filing Form 8872?

An election year is any year in which a

regularly scheduled general election for federal

office is held, i.e., any even-numbered year. A

non-election year is therefore any odd-numbered

year.

9. When must the periodic

reports be filed if the

organization files monthly?

Political organizations that choose to file

monthly must file Form 8872 reports on the 20th

day after the end of the month and shall be

complete as of the last day of the month. However,

in any year in which a regularly scheduled general

election is held (even-numbered years), these

organizations shall not file the reports regularly due

in November and December (i.e., the monthly reports for October and November). Instead, the

organizations must file a Form 8872 report twelve days before the general election (or fifteen days

before if posted by registered or certified mail) that contains information through the twentieth day

before the general election. These organizations must also file a report no more than thirty days after

the general election which shall contain information through the twentieth day after the election. The

year end report is due by January 31 of the following year. IRC 527(j)(2)(B); Rev. Rul. 2000-49,

Q&A-30 & Q&A-31.

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Election Year Issues

10. When must the periodic

reports be filed if the

organization does not file

monthly?

Political organizations that choose not to

file monthly must file semi-annual reports in

non-election years (odd-numbered years). These

reports are due on July 31 for the first half of the

year and, for the second half of the year, on January

31 of the following year. Rev. Rul. 2000-49,

Q&A-32. In an election year (even-numbered

years), these organizations must file quarterly

reports due on the 15th day after the last day of the quarter, except that the return for the final quarter

shall be due on January 31 of the following year. In addition, the organizations must file pre-election

reports with respect to any election for which the organization receives a contribution or makes an

expenditure. These reports are due the 12th day before the election (the 15th day before if posted

by registered or certified mail) and must contain information through the twentieth day before the

election. The organizations must also file a post-general election report due thirty days after the

general election and containing information through the twentieth day after the election.

IRC 527(j)(2)(A); Rev. Rul. 2000-49, Q&A-33.

11. What is an election for these

purposes?

For purposes of determining what is an

election year and what elections trigger the

pre-election and post-general election reports, an

"election" is a general, special, primary, or runoff

election for a Federal office; a convention or caucus

of a political party with authority to nominate a

candidate for Federal office; a primary election to select delegates to a national nominating

convention of a political party; or a primary election to express a preference for the nomination of

individuals for election to the office of President. IRC 527(j)(6). Thus, an election for these

reporting requirements does not include elections that are purely state or local elections. When an

election involves both candidates for federal office and candidates for state or local offices, it is an

election for purposes of the reporting deadlines, but only those organizations that make contributions

or expenditures with respect to the candidates for federal office are required to file the pre-election

reports for those elections. IRC 527(j)(2)(A)(i)(II). However, all periodic reports filed must contain

information about the contributions and expenditures within the reporting period, regardless of

whether they were accepted or made with respect to candidates for federal, state or local office.

IRC 527(j); Rev. Rul. 2000-49, Q&A-34.

12. What is a general election?

A general election an election for Federal

office held in even numbered years on the Tuesday

following the first Monday in November or an

election held to fill a vacancy in a Federal office

(i.e., a special election) that is intended to result in

the final selection of a single individual to the office at stake. See 11 C.F.R. § 100.2(b).

Rev. Rul. 2000-49, Q&A-35.

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Election Year Issues

13. How will "election" under

§ 527(j)(6) be interpreted?

The definition of "election" under

IRC 527(j)(6) is virtually identical to the definition

of "election" under the FECA (2 U.S.C. § 431(1)).

Organizations may rely on FEC interpretations of

the FECA definition in the absence of further

guidance from the Service. The FEC publishes

information concerning the filing requirements under the FECA and the dates for filing those reports,

including information on the dates of elections, on its Web Site at

http://www.fec.gov/pages/report.htm. Rev. Rul. 2000-49, Q&A-36.

14. What must the reports

contain?

The reports must include the name, address,

and (if an individual) the occupation and employer,

of any person to whom expenditures are made that

aggregate $500 or more in a calendar year and the

amount of such expenditure. The reports must also

include the name, address, and (if an individual) the

occupation and employer, of any person that contributes in the aggregate $200 or more in a calendar

year and the amount of such contribution. IRC 527(j)(3). However, an organization is not required

to report independent expenditures, as defined in § 301 of the FECA. IRC 527(j)(5)(E). This

reporting requirement only applies to contributions received or expenditures made after July 1, 2000,

that are not made or received pursuant to binding contracts entered into before July 2, 2000.

Rev. Rul. 2000-49, Q&A-37.

15. What is an independent

expenditure under § 301 of the

FECA?

An independent expenditure is an

expenditure by a person expressly advocating the

election or defeat of a clearly identified candidate

for federal office which is made without

cooperation or consultation with any candidate for

federal office, or any authorized committee or agent

of such candidate, and which is not made in concert

with, or at the request or suggestion of, any candidate for federal office, or authorized committee or

agent of such candidate. See 2 U.S.C. § 431(17). Rev. Rul. 2000-49, Q&A-38.

16. Where is the Form 8872 filed?

The report is filed by sending a signed copy

of Form 8872 to the Internal Revenue Service

Center, Ogden, UT 84201. The form must be

signed by an official authorized by the organization

to sign the report. Rev. Rul. 2000-49, Q&A-39.

Alternatively, the organization may file Form 8872 electronically instead, via the IRS Web Site at

www.irs.gov/polorgs. Political organizations that have filed Form 8871 both electronically and in

writing will receive a user ID and password to enable them to file Form 8872 electronically.

Because the user ID and password are sent to all political organizations that file Form 8871 both electronically

and in writing, some organizations that are not required to file Form 8872 will receive a user ID and password.

Therefore, an organization should not assume that it is required to file Form 8872 merely because it has received a user

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Organizations that file Form 8872 electronically are not required to send a copy to Ogden, UT. See

News Release IR-2000-80 (Nov. 14, 2000).

17. What if a political organization

does not file the required

Form 8872?

An organization that filed Form 8871 and

does not file the required Form 8872, or which fails

to include the information required on the

Form 8872, is subject to the payment of an amount

equal to the amount not disclosed on return

multiplied by the highest corporate tax rate,

currently 35 percent. IRC 527(j)(1);

Rev. Rul. 2000-49, Q&A-40.

(2) Annual Return Requirements

1. Are political organizations

required to file annual income

tax returns?

Political organizations that have taxable

income in excess of the $100 specific deduction

allowed under IRC 527 are required to file an

annual income tax return, the Form 1120-POL. In

addition, for taxable years beginning after June 30,

2000, political organizations that have $25,000 or

more in gross receipts for the taxable year are

required to file the Form 1120-POL, without regard to whether they have taxable income.

IRC 501(c) organizations that are subject to tax under IRC 527(f)(1) are also required to file the

Form 1120-POL. IRC 6012(a)(6); Rev. Rul. 2000-49, Q&A-43. The return is due on or before the

15th day of the third month after the close of the organization's fiscal year. IRC 6072(b);

Rev. Rul. 2000-49, Q&A-44. Thus, for a calendar year taxpayer, the return is due on March 15 of

the following year. Some organizations that do not have taxable income or gross receipts of $25,000

or more during a tax year nevertheless file a Form 1120-POL in order to start the statute of

limitations period running.

2. Are political organizations

required to file an annual

information return?

Tax-exempt political organizations that are

required under IRC 6012(a)(6) to file an income tax

return are also required to file Form 990 for taxable

years beginning after June 30, 2000. IRC 6033(g).

Tax-exempt political organizations with gross

receipts less than $100,000 and assets of less than

$250,000 may file Form 990-EZ. Tax-exempt

political organizations with gross receipts of less than $25,000 are not required to file Form 990 or

Form 990-EZ. Rev. Rul. 2000-49, Q&A-45. The return is due on or before the 15th day of the fifth

month after the close of the organization's fiscal year. Thus, for a calendar year taxpayer, Form 990

is due on May 15 of the following year. Rev. Rul. 2000-49, Q&A-46.

ID and password from the Service.

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Election Year Issues

3. What if the political

organization fails to file

Form 1120-POL or Form 990?

A political organization that fails to file a

required Form 1120-POL or Form 990 or fails to

include required information on those returns is

subject to a penalty of $20 per day for every day

such failure continues. The maximum penalty

imposed with regarding any one return is the lesser

of $10,000 or 5 percent of the gross receipts of the

organization for the year. In the case of an organization having gross receipts exceeding $1,000,000

for any year, the penalty is increased to $100 per day with a maximum penalty of $50,000.

IRC 6652(c)(1)(A); Rev. Rul. 2000-49, Q&A-47.

(3) Public Disclosure Requirements

1. Are the reports, returns, and

notice of status filed by a

political organization publicly

available?

Yes, Form 8871 (including any supporting

papers), and any letter or other document the

Internal Revenue Service issues with regard to

Form 8871, will be open to public inspection at the

Service's National Office. IRC 6104(a);

Rev. Rul. 2000-49, Q&A-19. Form 8872 will be

made available for public inspection by the Service.

IRC 6104(b) and IRC 6104(d)(6);

Rev. Rul. 2000-49, Q&A-41. Form 1120-POL and Form 990 for taxable years beginning after June

30, 2000 will be made available for public inspection by the Service. IRC 6104(b);

Rev. Rul. 2000-49, Q&A-48. Contributor information must be disclosed to the public. IRC 6104(b)

and IRC 6104(d)(3)(A).

In addition, the organization is required to make a copy of these materials available for public

inspection during regular business hours at the organization's principal office and at each of its

regional or district offices having at least three paid employees by the public in the same manner as

applications for exemption and annual information returns of IRC 501(c) organizations are made

available. It must also provide a copy to any person requesting a copy in person or in writing without

charge other than a reasonable charge for reproduction and postage in the same manner that

IRC 501(c) organizations provide copies of their applications and annual returns. IRC 6104(d)(1);

Rev. Rul. 2000-49, Q&A-19, Q&A-41 & Q&A-48. The organization only needs to make its

Form 1120-POL and Form 990 available for a three-year period after filing. IRC 6104(d)(2).

2. What is the penalty for failure

to comply with the public

inspection requirement?

A penalty of $20 per day will be imposed on

any person with a duty to comply with the public

inspection requirement for each day a failure to

comply with the requirement to make the

Form 8871 available continues.

IRC 6652(c)(1)(D); Rev. Rul. 2000-49, Q&A-20.

Similarly, a penalty of $20 per day will be imposed

on any person with a duty to comply with the public inspection requirement for each day a failure

to comply with the requirement to make the Form 8872, Form 1120-POL or Form 990 continues.

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The maximum penalty that may be incurred for any failure to disclose any one report is $10,000.

IRC 6652(c)(1)(C); Rev. Rul. 2000-49, Q&A-42 & Q&A-49.

3. Is the Service required to

provide a list of organizations

that have filed Form 8871?

Yes. Under IRC 6104(d), the Service is

required to provide upon the Internet a list of

organizations that have filed the notice, including

the name, address, electronic mailing address, the

contact person, and the custodian of records within

five business days of receiving the notice from

political organizations. This listing is available on

the IRS Web Site at www.irs.gov/polorgs under "Notices and Reports," where the Service has posted

all filed Forms 8871 and Forms 8872.

4. Are filed forms posted on the

IRS Web Site considered

"widely available"?

As discussed above, the Service is currently

posting all filed Forms 8871 and Forms 8872 on the

IRS Web Site at www.irs.gov/polorgs. As long as

the organization provides the IRS Web Site address

to the person making the request for copies of the

forms, the forms are considered widely available

under Reg. 301.6104(d)-3. Rev. Rul. 2000-49,

Q&A-19 & Q&A-41.

G. Special Rules for Principal Campaign Committees

1. What is a "principal campaign

committee?"

For purposes of IRC 527, a "principal

campaign committee" is the political campaign

committee designated by a candidate for Congress

as the candidate's principal campaign committee for

purposes of § 302(e) of the FECA (2 U.S.C.

§ 432(e)). IRC 527(h)(2)(A). Therefore, principal

campaign committees of candidates for public offices other than those in the United States Congress

cannot qualify for treatment as a "principal campaign committee" under IRC 527.

2. What are the rules relating to

designation of a principal

campaign committee?

A candidate for Congress may only

designate one committee as a principal campaign

committee at any time and, unless the candidate has

only one campaign committee, must make the

designation in the manner specified in the

regulations. IRC 527(h)(2)(B). No political

committee may be designated as the principal

campaign committee of more than one candidate for Congress and no committee that supports or has

supported more than one candidate for Congress may be designated as a principal campaign

committee. Reg. 1.527-9(a).

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Designation is made by attaching a statement to the committee's Form 1120-POL in each year

the designation is desired. The statement must contain the name, address, and taxpayer identification

number of the candidate and of the committee. Reg. 1.527-9(b). Revocation of the designation may

be made only with the consent of the Commissioner in accordance with the procedures outlined in

Reg. 1.527-9(c).

3. What is the tax treatment of a

principal campaign committee?

The political organization taxable income of

a principal campaign committee is taxed at the

graduated rates under IRC 11(b) rather than the

highest rate specified in IRC 11(b). IRC 527(h)(1).

4. May a principal campaign

committee make contributions

to campaign committees of

other candidates?

As noted above, a campaign committee will

not qualify as a principal campaign committee if it

supports more than one candidate for Congress.

Reg. 1.527-9(a). This requirement in the

regulations refers to and adopts the requirements of

the regulations under the FECA. Those regulations

provide that support does not include contributions

by an authorized campaign committee to an

authorized campaign committee of another candidate that aggregate $1,000 or less per election. 11

C.F.R. § 102.12(c). Therefore, a political organization will not qualify as a principal campaign

committee if it contributes more than $1,000 per election to another candidate for Congress.

However, if the committee's contributions to another Congressional candidate aggregate $1,000 or

less per election, then it will continue to qualify as a principal campaign committee under

IRC 527(h).

For purposes of construing the phrase "amounts aggregating $1,000 or less per election,"

primary and general elections are considered separate elections. Therefore, where a principal

campaign committee contributed $2,000 to the authorized committee of a candidate for Congress,

but designated $1,000 for the candidate's primary election and $1,000 for the general election, the

contribution did not disqualify the committee from treatment as a principal campaign committee

under IRC 527(h) because the $1,000 limit per election was not exceeded. See, e.g.,

TAM 92-24-002 (Feb. 19, 1992) and TAM 93-20-002 (Jan. 14, 1993).

Because the requirements of IRC 527(h) are imposed by reference to FEC rules and because

those rules only concern federal elections, there is no limitation imposed upon the amount of

contributions a principal campaign committee may make to candidates for nonfederal offices or the

number of nonfederal candidates it may support. This point is also covered in TAM 92-24-002,

which concludes that a principal campaign committee's contributions of $3,000 to the campaign

committee of a local judge and $2,000 to the committee of a mayoral candidate had no effect upon

its status as a principal campaign committee under IRC 527(h).

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An organization that does not qualify as a

principal campaign committee under IRC 527(h)

solely because it supports more than one candidate

for Congress, but otherwise meets the requirements

for a political organization, will continue to qualify

as a political organization. Contributions to

another political organization are exempt function

expenditures. Therefore, the political organization

taxable income would be taxed at the highest rate

specified in IRC 11(b) rather than at the graduated rates. IRC 527(b).

A principal campaign committee is not

required to terminate immediately following an

election. It may remain in existence for a

reasonable period of time in order to wind up the

affairs of the campaign without losing its status as

a political organization. Similarly, a candidate may

have the political campaign committee continue in

existence between election cycles for use in a

reelection effort. During those periods, the political

organization will continue to qualify as a principal

campaign committee under IRC 527(h). However, once a candidate indicates an intention not to

seek reelection, the political campaign committee may retain its status as a principal campaign

committee only for the period of time reasonably necessary to wind up the affairs of the campaign.

If the committee remains in existence longer than is reasonably necessary, or is converted to another

use, then its status as a principal campaign committee will be terminated, even if it still qualifies as

a political organization. The determination of whether the committee has remained in existence

longer than reasonably necessary or has been converted to another use is based on the facts and

circumstances of the situation. Some factors to be considered are whether the candidate has taken

any steps towards seeking election for a different office, whether the political expenditures of the

committee are primarily in support of the candidate's campaign activities (either past or future), and

whether the committee makes substantial non-political expenditures.

H. Special Rules for Newsletter Funds

To be subject to income tax only as a

political organization under IRC 527, a newsletter

fund must be described in IRC 527(g). (To the

extent newsletter fund expenses are deductible by

a public office holder under IRC 162(a), the fund

may also satisfy the requirements to be a political

organization as described in IRC 527(e)(1). In that

case, the rules regarding political organizations generally apply in determining the organization's tax

treatment, and not the rules regarding newspaper funds.)

5. What if a political organization

no longer qualifies as a

principal campaign committee

because it supports more than

one candidate?

6. Does a political organization

continue to qualify as a

principal campaign committee

when its candidate is not

seeking reelection to a

Congressional office?

1. What must a newsletter fund

do to be a political organization

under IRC 527?

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To be described in IRC 527(g), a fund must meet three requirements. First, it must be

established and maintained by an individual who holds, has been elected to, or is a candidate for

nomination or election to, any federal, state, or local elective public office. Second, the fund must

be established for use by such individual exclusively to prepare and circulate the individual's

newsletter (the "organizational test"). Third, the fund must be maintained for use by such individual

exclusively to prepare and circulate the individual's newsletter (the "operational test").

IRC 527(g)(1); Reg. 1.527-7(a).

Newsletter funds are subject to the same rules regarding taxable income as other IRC 527

organizations, except that they are not allowed to take the specific $100 deduction. Therefore, if a

newsletter fund has any political organization taxable income, it must file Form 1120-POL.

2. Must a newsletter fund

maintain a "segregated fund?"

All amounts received by a newsletter fund

(and income thereon) must be segregated for use

for the newsletter fund's exempt function. If

amounts are not properly segregated, the fund is not

described in IRC 527(g). Unlike political

organizations generally, which must be organized

and operated primarily for their exempt purpose, newsletter funds must be used exclusively for the

preparation and circulation of the newsletter. Compare IRC 527(e)(1) to IRC 527(g)(1).

3. What is the exempt function of

a newsletter fund?

The exempt function of a newsletter fund

consists solely of preparing and circulating the

newsletter. IRC 527(g)(2)(A); Reg. 1.527-7(c).

Consequently, its expenditures must be

characterizable as preparation and circulation

expenditures, for example, expenditures for

secretarial services, printing, addressing, and mailing. Campaign activities that are not attributable

to the preparation and circulation of the candidate's newsletter are not exempt function activities of

a newsletter fund. IRC 527(g)(2); Reg. 1.527-7(c).

4. May newsletter fund assets be

used for campaign activities?

No, the assets of a newsletter fund may not

be used for campaign activities. Reg. 1.527-7(d)

provides that the exempt function of a newsletter

fund does not include the following items:

(A) Expenditures for an exempt function as defined in Reg. 1.527-2(c);

(B) Transfers of unexpended amounts to a political organization

described in IRC 527(e)(1).

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Reg. 1.527-7(e) provides that excess

newsletter funds (funds held by a newsletter fund

that has ceased to engage in the preparation and

circulation of the newsletter) are treated as

expended for the personal use of the person who

has established and maintained the fund, except to

the extent that within a reasonable period of time

(A) They are contributed to another IRC 527(g) newsletter fund;

(B) They are contributed to or for the use of an IRC 509(a)(1) or (2)

public charity; or

general fund of a State or local government.

If a newsletter fund makes any expenditures

for non-exempt function activities (including

political activities that are exempt function

activities for other political organizations), it is no

longer exclusively operated for the purposes set

forth in IRC 527(g) and, consequently, it loses its

exempt status as an organization described in that

subparagraph. See also Reg. 1.527-7(a) and (c).

Generally, loss of exempt status will operate prospectively, and the newsletter fund will be

taxed pursuant to IRC 527 for prior periods. However, where a newsletter fund makes expenditures

for non-exempt function activities, the facts and circumstances may indicate the fund was never

established and maintained exclusively for an exempt function. In that case, loss of exempt status

will operate retroactively, and the newsletter fund will not be taxed pursuant to IRC 527 for prior

periods. Reg. 1.527-7(a).

If a newsletter fund loses its exempt status

as an organization described in IRC 527(g), the

individual who established and maintains the fund

will be held to be in receipt of income in the

amount of any expenditures made by the fund for

non-exempt function activities during the period

prior to loss of exempt status. In addition, future

contributions to the fund will constitute income to such individual. If loss of exempt status operates

retroactively, past contributions may also constitute income to such individual, for the periods in

which received by the fund. Reg. 1.527-7(a). See Rev. Rul. 73-356, 1973-2 C.B. 31 (concerning

tax treatment of non-exempt newsletter funds).

5. What are the rules relating to

excess funds held by a

newsletter fund?

the organization does one of the following with the excess funds:

6. What is the tax effect of

making expenditures for

non-exempt function activities?

7. What is the tax effect of a

newsletter fund losing its

exempt status?

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Election Year Issues

I. Political Organizations and IRC 6113

1. What are the general

requirements of IRC 6113 for

political organizations?

IRC 6113 requires IRC 527 political

organizations (as well as IRC 501(c) organizations

that are ineligible to receive tax deductible

charitable contributions) to disclose in "an express

statement (in a conspicuous and easily recognizable

format)," the nondeductibility of contributions

during fundraising solicitations. A fundraising

solicitation is any solicitation of contributions or gifts that is made in written form, by television or

radio, or by telephone, but does not include any letter or telephone call that is not part of a

coordinated fundraising campaign soliciting more than 10 persons during the calendar year. This

requirement does not apply to political organizations that normally do not have gross receipts in

excess of $100,000 during a tax year, although two or more organizations may be treated as one

organization where necessary to prevent the avoidance of this provision through the use of multiple

organizations.

Notice 88-120, 1988-2 C.B. 454, provides detailed guidance, including safe harbors, on the

application of IRC 6113. The following questions and answers are based upon Notice 88-120.

2. What are examples of

solicitations that must contain

the disclosure statement?

A political organization's solicitations for

all voluntary contributions as well as solicitations

for attendance at testimonials and other fundraising

events must include the disclosure statement. For

example, solicitations by a political organization

for contributions to a Congressional campaign

committee must include the disclosure statement.

Solicitations for memberships and annual dues, as well as solicitations for membership and dues

renewals, are also subject to the requirements of IRC 6113.

3. What are examples of

situations that do not require

the disclosure statement?

Situations where a political organization is

not required to make the IRC 6113 disclosure

statement include billing advertisers in its

publications and billing attendees at a conference it

conducts (as distinguished from a testimonial or

fundraising event). General material discussing a

political candidacy and requesting persons to vote

for the candidate or "support" the candidate need not include the disclosure statement unless the

material specifically requests either a financial contribution or a contribution of volunteer services

on behalf of the candidate.

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Election Year Issues

4. When does an organization

have annual gross receipts that

do not normally exceed

$100,000?

In determining whether an organization has

annual gross receipts that do not normally exceed

$100,000, the Service will generally follow the

principles set forth in Reg. 1.6033-2(g) and Rev.

Proc. 83-23, 1983-1 C.B. 687, which provide rules

for determining annual gross receipts with respect

to the similar exception from the filing of annual

information returns for small organizations. In

general, these rules set out a three year average as the basic rule. The organization must include the

required disclosure statement on all solicitations made more than 30 days after reaching $300,000

in gross receipts for the three year period of the calculation. For example, if on July 1 of the third

year of a calculation (for an organization with a calendar year accounting period) the organization

reaches $300,000 in total gross receipts for the prior two years and the first six months of the third

year, it must include the required disclosure statement on all solicitations no later than August 1.

A local, regional, or state chapter of an organization with gross receipts under $100,000 must include

the disclosure statement in its solicitations if at least 25 percent of the money solicited will go to the

national, or other, unit of the organization that has annual gross receipts that exceed $100,000

because the solicitation is considered as being in part on behalf of such unit of the organization.

5. What is a qualifying print

medium format?

In the case of a solicitation by mail, leaflet,

or advertisement, Notice 88-120 provides that the

organization will have satisfied IRC 6113 if the

following four requirements are met:

(A) The solicitation includes whichever of the following statements the

organization deems appropriate: "Contributions or gifts to [name of

organization] are not deductible as charitable contributions for

Federal income tax purposes," "Contributions or gifts to [name of

organization] are not tax deductible," or "Contributions or gifts to

[name of organization] are not tax deductible as charitable

contributions;"

(B) The statement is in at least the same size type as the primary message

stated in the body of the letter, leaflet, or ad;

section that the contributor returns with the contribution; and

(D) The statement is in the first sentence in a paragraph or itself

constitutes a paragraph.

Also, if a trade association or labor union with over $100,000 in annual gross receipts solicits funds that will pass

through a PAC with less than $100,000 in gross receipts, the solicitation must contain the required disclosure statement.

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Election Year Issues

6. What is a qualifying telephone

solicitation format?

In the case of a solicitation by telephone,

Notice 88-120 provides that the organization will

have satisfied IRC 6113 if the following three

requirements are met:

(A) The solicitation includes whichever of the following statements the

organization deems appropriate: "Contributions or gifts to [name of

organization] are not deductible as charitable contributions for

Federal income tax purposes," "Contributions or gifts to [name of

organization] are not tax deductible," or "Contributions or gifts to

[name of organization] are not tax deductible as charitable

contributions;"

(B) The statement is made in close proximity to the request for

contributions, during the telephone call, by the telephone solicitor;

and

contribute during the telephone solicitation complies with the

requirements for print medium solicitations set forth above.

7. What is a qualifying television

solicitation format?

In the case of a solicitation by television,

Notice 88-120 provides that the organization will

have satisfied IRC 6113 if the following two

requirements are met:

(A) The solicitation includes whichever of the following statements the

organization deems appropriate: "Contributions or gifts to [name of

organization] are not deductible as charitable contributions for

Federal income tax purposes," "Contributions or gifts to [name of

organization] are not tax deductible," or "Contributions or gifts to

[name of organization] are not tax deductible as charitable

contributions;" and

(B) If the statement is spoken, it is in close proximity to the request for

contributions; if the statement appears on the television screen, it is

in large, easily readable type appearing on the screen for at least five

seconds.

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Election Year Issues

8. What is a qualifying radio

solicitation format?

In the case of a solicitation by radio, Notice

88-120 provides that the organization will have

satisfied IRC 6113 if the following two

requirements are met:

(A) The solicitation includes whichever of the following statements the

organization deems appropriate: "Contributions or gifts to [name of

organization] are not deductible as charitable contributions for

Federal income tax purposes," "Contributions or gifts to [name of

organization] are not tax deductible," or "Contributions or gifts to

[name of organization] are not tax deductible as charitable

contributions;" and

(B) The statement is made in close proximity to the request for

contributions during the same radio solicitation announcement.

9. What if a political organization

makes a fundraising

solicitation and does not follow

the formats set forth above?

If a political organization makes a

solicitation to which IRC 6113 applies, and the

solicitation does not comply with the formats set

forth above, the Service will evaluate all the facts

and circumstances to determine whether the

solicitation contained "an express statement (in a

conspicuous and easily recognizable format) that

contributions and gifts are not deductible for

Federal income tax purposes." IRC 6113(a). A good faith effort to comply with the requirements

of IRC 6113 will be an important factor in the evaluation of the facts and circumstances. However,

disclosure statements made in the fine print will not be considered to be in compliance with the

statutory requirement.

10. What are the penalties for

failure to comply with the

requirements of IRC 6113?

The failure to include the required

disclosure of the non-deductibility of contributions

in fundraising solicitations to which IRC 6113

applies results in a penalty of $1,000 for each day

on which such a failure occurs, up to a maximum

penalty of $10,000. IRC 6710(a). No penalty will

be imposed if the failure is due to reasonable cause.

IRC 6710(b). In cases where the failure to make the required disclosure is due to intentional

disregard of the law, the $10,000 per year limitation on the penalty does not apply and more severe

penalties based on up to 50 percent of the aggregate cost of the solicitations are applicable.

IRC 6710(c). For purposes of determining the penalty, "each day on which a failure occurs" means

the day that a solicitation is mailed, distributed, published, telecast, broadcast, or spoken by

telephone. IRC 6710(d). For example, if an organization mails 500 noncomplying solicitations on

March 30 and 50 noncomplying solicitations on April 5, the penalty would be $2,000, so long as the

violation did not involve intentional disregard of the disclosure requirement.

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Election Year Issues

4. Political Activities of IRC 501(c) Organizations

A. IRC 501(c) Organizations and Political Activities

1. May IRC 501(c) organizations

engage primarily in political

campaign activities?

IRC 501(c) describes a large number of

different types of organizations that are exempt

from federal income taxation, including charitable

organizations, labor unions, business leagues,

social clubs, pension trusts, veterans associations,

insurance companies, fraternal associations, and

titleholding companies. None of these provisions

provide specifically for participation in political campaign activity as an exempt purpose. Thus, the

question becomes whether participation in a political campaign furthers the specified exempt

purpose of the IRC 501(c) organization. In those cases where this question has been specifically

addressed, the answer has been no.

In some instances, there are specific statutory or regulatory statements that participation in

a political campaign is not in furtherance of exempt purposes. Charitable organizations described

in IRC 501(c)(3) are prohibited from participating or intervening in political campaigns (see

discussion in Part 2). The regulations under IRC 501(c)(4) provide that promotion of social welfare

does not include participation or intervention in political campaigns. Reg. 1.501(c)(4)-1(a)(2)(ii).

G.C.M. 34233 (Dec. 3, 1969) raises this question with respect to labor unions described in

IRC 501(c)(5) and business leagues described in IRC 501(c)(6). The G.C.M. contrasts support of

a candidate for office with lobbying activities.

It notes that the content of specific legislative

proposals may be readily identified and related to the business or labor interests of the organizations.

Therefore, business leagues and labor unions may engage in lobbying activities that are germane to

their exempt purposes as their primary activity. However, "support of a candidate for public office

necessarily involves the organization in the total political attitudes and positions of the candidate."

Because of this, the G.C.M. concluded that "this involvement transcends the narrower [exempt]

interest" of the organization and could not be the primary activity of an organization described in

either IRC 501(c)(5) or IRC 501(c)(6).

This rationale would appear to apply to other types of exempt organizations.

2. May IRC 501(c) organizations

make expenditures for IRC 527

"exempt function" activities?

An IRC 501(c) organization may make

expenditures for exempt function activities as

defined in IRC 527 to the extent consistent with its

exempt status. As discussed above, an

IRC 501(c)(3) organization is expressly prohibited

from participating or intervening in any political

For an overview of the federal tax rules concerning political and lobbying activities by exempt organizations, see

2000 Joint Committee Report. For a detailed discussion of exempt organizations and lobbying activities, see 1997 CPE

Text.

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Election Year Issues

campaign on behalf of or in opposition to any candidate for elective public office. Some other

IRC 501(c) organizations are precluded from political activities because the subparagraph in which

they are described limits them to an exclusive purpose (for example, IRC 501(c)(2) title holding

companies, IRC 501(c)(20) group legal services plans). Other IRC 501(c) organizations are not

similarly prohibited from engaging in political activities. An IRC 501(c) organization may generally

make expenditures for political activities if such activities (and other activities not furthering its

exempt purposes) do not constitute the organization's primary activity. Some of the IRC 501(c)

organizations that have been held to be able to engage in political activities to varying degrees are

social welfare organizations described in IRC 501(c)(4) (Rev. Rul. 81-95, 1981-1 C.B. 332 --

because organization's primary activities promote social welfare, its less than primary participation

in political campaigns will not adversely affect its exempt status); labor organizations described in

IRC 501(c)(5) (Marker v. Schultz, 485 F.2d 1003 (D.C. Cir. 1973) and G.C.M. 36286 (May 22,

1975)); business leagues described in IRC 501(c)(6) (G.C.M. 34233 (Dec. 3, 1969)); and fraternal

beneficiary societies described in IRC 501(c)(8) (PLR 83-42-100 (July 20, 1983)).

3. What effect does political

activity by an IRC 501(c)

organization have on the

deductibility of dues or

contributions to the

organization?

Generally, amounts paid to IRC 501(c)

organizations other than IRC 501(c)(3)

organizations are not deductible as charitable

contributions. Nevertheless, in some instances,

dues or contributions to such organizations may be

deductible as business expenses under IRC 162.

However, amounts paid for intervention or

participation in any political campaign may not be

deducted as a business expense. IRC 162(e)(2)(A).

Therefore, any amounts paid to an IRC 501(c)

organization that are specifically for political activities would not be deductible under IRC 162.

Furthermore, if a substantial part of the activities of the IRC 501(c) organization consists of political

activities, a deduction under IRC 162 is allowed only for the portion of dues or other payments to

the organization that the taxpayer can clearly establish was not for political activities.

Reg. 1.162-20(c)(3). However, until 1993, no mechanism existed at the association level to ensure

notification to members of the disallowance.

In 1993, Congress enacted the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993)

which disallowed the deduction for direct lobbying at the Federal and state level as a business

expense under IRC 162. Grassroots lobbying and political campaign activity continued to be

nondeductible. In addition, § 13222 of OBRA 1993 amended IRC 6033, adding a new subsection

to provide a system based on the disallowance of dues that builds in an incentive (or penalty) to

ensure that associations notify their members. The trigger is contained in IRC 6033(e), which

imposes reporting and notice requirements on tax-exempt organizations incurring expenditures to

which IRC 162(e) applies. IRC 162(e)(3) denies a deduction for the dues (or other similar amounts)

paid to certain tax-exempt organizations to the extent that the organization, at the time the dues are

assessed or paid, notifies the dues payer that the dues are allocable to nondeductible lobbying and

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Election Year Issues

political expenditures of the type described in IRC 162(e)(1).

The reporting and notice

requirements and proxy tax under IRC 6033(e) are discussed in Section D.

B. Tax on Political Expenditures - IRC 527(f)

1. What if an IRC 501(c)

organization makes

expenditures for political

activities?

Except for expenditures made from a

separate segregated fund under IRC 527(f)(3), an

IRC 501(c) organization that makes expenditures

for exempt function activities is subject to tax

under IRC 527(b). IRC 527(f)(1) provides that the

tax base is an amount equal to the lesser of (1) the

organization's net investment income for the

taxable year in which such expenditures are made,

or (2) the aggregate amount of expenditures for exempt function activities during the year. This

treatment applies whether the IRC 501(c) organization makes such expenditures directly, or through

another organization. Thus, an IRC 501(c) organization may not avoid taxation under IRC 527(f)(1)

by establishing a separate organization to make expenditures for exempt function activities, except

as provided in IRC 527(f)(3).

2. What is included in net

investment income?

IRC 527(f)(2) defines net investment

income as the excess of (a) the gross amount of

income from interest, dividends, rents, and

royalties, plus the excess (if any) of gains from the

sale or exchange of assets over the losses from the

sale or exchange of assets, over (b) allowable

deductions which are directly connected with producing such income. Income and expenses taken

into account for purposes of the unrelated business income tax under IRC 511 are not taken into

account in calculating net investment income for purposes of IRC 527(f)(2).

3. Is interest on state or local

bonds excluded in determining

net investment income?

Interest on state or local bonds, within the

meaning of IRC 103, should be excluded in

determining net investment income under

IRC 527(f)(2). In determining the gross amount of

income from interest, etc., the definition of gross

income under IRC 61 and the exclusions from

gross income thus defined apply. Expenses directly

connected with the production of interest on state or local bonds may not be deducted in determining

net investment income.

Payments that are similar to dues include voluntary payments or special assessments used to conduct political

campaign activities.

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Election Year Issues

4. What is deductible in

determining net investment

income?

Deductions allowed in determining net

investment income under IRC 527(f)(2) must meet

the same requirements as deductions allowed under

IRC 527(c)(1). Expenses, depreciation, and similar

items must qualify as deductions allowed under

Chapter 1 and must be directly connected with the

production of the gross amount of income which is

subject to tax. Reg. 1.527-4(c)(1). Directly connected deductions have a proximate and primary

relationship to the production of the taxable income and are incurred in the production of such

income. The determination of whether a deduction was incurred in the production of taxable income

is made on the basis of the relevant facts and circumstances. An item attributable solely to items of

taxable income is proximately and primarily related to such income. Reg. 1.527-4(c)(2). For

example, state income taxes paid on net investment income are attributed solely to items of taxable

income and thus have a proximate and primary relationship with producing that income. Since

IRC 164 allows a deduction for such taxes, they are deductible in computing net investment income

under IRC 527(f). See Rev. Rul. 85-115, 1985-2 C.B. 172. The legislative history indicates that

indirect expenses (such as general administrative expenses) are not allowed as deductions as these

amounts were expected to be relatively small so that eliminating them would simplify the tax

calculation. S. Rep. No. 93-1357, 93d Cong., 2d Sess. 29 (1974), 1975-1 C.B. 527, 533. The

modifications under IRC 527(c)(2) also apply in computing the tax under IRC 527(f)(1).

Reg. 1.527-6(d).

5. Are all expenditures that are

considered exempt function

expenditures for political

organizations identically

treated when carried on by an

IRC 501(c) organization?

No, not all expenditures that are considered

exempt function expenditures for political

organizations are treated as taxable expenditures

when carried on by an IRC 501(c) organization.

Reg. 1.527-6(b)(4) and Reg. 1.527-6(b)(5) provide

two specific exceptions. Under Reg. 1.527-6(b)(4),

where an IRC 501(c) organization appears before

any legislative body for the purpose of influencing

the appointment or confirmation of an individual to

a public office, any expenditure relating to such

appearance is not treated as an exempt function expenditure.

The exception provided by

Reg. 1.527-6(b)(5) relates to expenditures for nonpartisan activities (including nonpartisan voter

registration and "get-out-the-vote" campaigns). To come within the exception, nonpartisan voter

registration and "get-out-the-vote" campaigns must not be specifically identified by the organization

with any candidate or political party.

This exception is similar to, but more limited than, the "furnishing technical advice or assistance" exception

relating to lobbying by IRC 501(c)(3) organizations under IRC 4911 and 4945. The exception contained in Reg.

1.527-6(b)(4) only concerns certain requested

appearances before legislative bodies, whereas "technical advice or

assistance" may be given otherwise than by appearance. Furthermore, the exception under Reg. 1.527-6(b)(4) only

applies to appearances relating to appointments and confirmations, while the subject matter of the "technical advice or

assistance" exception is unlimited.

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Election Year Issues

Both issues are unresolved. With respect to

6. Are an IRC 501(c)

the FECA issue, the statute specifically permits

organization's expenditures

labor unions and trade associations to spend money

allowed by the FECA (2 U.S.C.

for (1) internal communications with members,

§ 441b(b)(2)(C)) and its

stockholders, and their families (but not to the

indirect expenses relating to

general public) that might involve support of

political campaign activity

particular candidates; (2) the conduct of

considered exempt function

nonpartisan registration and get-out-the-vote

expenditures?

campaigns aimed at their members, stockholders,

and families; and (3) the establishment,

administration, and solicitation of contributions to

separate segregated funds to be used for political

purposes. As a result, when the regulations under IRC 527 were published in proposed form, several

commentators suggested that these expenditures, which are made routinely by some IRC 501(c)

organizations and are regarded as appropriate under the FECA for such organizations, should be

treated differently from identical expenditures made by political organizations. In other words, the

commentators suggested that such expenditures continue to be treated as "exempt function" activities

for political organizations (including separate segregated funds of IRC 501(c) organizations) but not

for IRC 501(c) organizations.

No final determination of the issue was made; therefore, the treatment of expenditures

allowed by the FECA is reserved in the final regulations. Reg. 1.527-6(b)(3).

The treatment of indirect expenses also is reserved in the final regulations.

Reg. 1.527-6(b)(2). As noted above, indirect expenses are defined in Reg. 1.527-2(c)(2) as expenses,

such as overhead and record keeping, that are necessary to support directly related exempt function

activities.

The Supplementary Information to the final regulations, T.D. 7744, 1981-1 C.B. 360, 361,

explains that when these two subparagraphs (Reg. 1.527-6(b)(2) and (3)) are adopted as a final

regulation, they will apply on a prospective basis. This means that an IRC 501(c) organization

currently may engage in activities permitted by the FECA or may make any indirect exempt function

expenditures and will not be subject to tax with respect to such expenditures under IRC 527. This

situation may change when Reg. 1.527-6(b)(2) and (3) are promulgated, but there is no indication

at present as to how or when the matters will be resolved. In summary, any decision with regard to

the adverse treatment of such expenditures will be applied on a prospective basis from the date of

any such decision.

As a result of these reserved provisions, an IRC 501(c) organization may pay for the indirect

expenses of an IRC 527 organization without incurring tax under IRC 527(f). However, to take

advantage of this situation, an IRC 501(c) organization must actually pay the indirect expenses. In

TAM 94-33-001 (Jan. 26, 1994), for example, an IRC 501(c)(6) organization that made payments

to the general treasury of its affiliated political action committee was determined to be subject to the

tax under IRC 527(f). Although the IRC 501(c)(6) organization stated that it intended the payments

to be used to defray the administrative costs of the political action committee, it made the payment

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Election Year Issues

directly to the general treasury of the political action committee, took no steps to ensure that the

funds were used solely for the indirect expenses of the political action committee, and based the

amount paid on the number of its members rather than on any determination of actual indirect

expenditures made by the political action committee.

No. While an expenditure may be made for

an exempt function directly or through another

organization, an IRC 501(c) organization will not

be absolutely liable under IRC 527(f)(1) for

amounts transferred to an individual or

organization. An IRC 501(c) organization is,

however, required to take reasonable steps to

ensure that the transferee does not use such

amounts for an exempt function.

Reg. 1.527-6(b)(1)(ii).

C. Separate Segregated Fund Under IRC 527(f)

Expenditures for exempt function activities

made by a separate segregated fund described in

IRC 527(f)(3) are considered as made by an

organization separate from the IRC 501(c)

organization that maintains the fund.

IRC 527(f)(3). Thus, an IRC 501(c) organization is

not subject to tax under IRC 527 by reason of

expenditures for exempt function activities made

by a separate segregated fund that it maintains.

A separate segregated fund is a fund

maintained by an IRC 501(c) organization that is a

"separate segregated fund" within the meaning of 2

U.S.C. § 441b(b) (formerly 18 U.S.C. § 610), or of

a similar state statute, or within the meaning of a

state statute that permits the segregation of dues

money for expenditure for political campaign activities. IRC 527(f)(3).

If a separate segregated fund meets the

requirements for a political organization under

IRC 527(e)(1), it is treated for tax purposes as a

political organization. Reg. 1.527-6(f).

Expenditures by the separate segregated fund for

non-exempt function activities would have the

same result as expenditures made by any other political organization. See Part 3 for a discussion of

the taxation of political organizations.

7. Is an IRC 501(c) organization

absolutely liable for amounts

transferred to an individual or

organization that are used for

political purposes?

1. What is the tax treatment to an

IRC 501(c) organization of

expenditures for political

activities made by a separate

segregated fund maintained by

the organization?

2. What is a separate segregated

fund?

3. How is a separate segregated

fund taxed?

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If a separate segregated fund does not meet the requirements for a political organization

under IRC 527(e)(1), it is subject to tax, as a taxable organization, under general tax principles. See

IRC 527(f)(3), which provides that a separate segregated fund "shall be treated as a separate

organization."

4. What is the tax treatment of a

fund that loses its status as a

separate segregated fund under

applicable federal or state law?

If a fund loses its status as a separate

segregated fund under applicable federal or state

law, it is no longer treated as a separate

organization for federal tax purposes.

IRC 527(f)(3). In that event, expenditures made

from such a fund will subject the IRC 501(c)

organization that maintains it to tax, pursuant to

IRC 527(f)(1). For example, see TAM 96-16-002

(Dec. 13, 1995), where an account established as a separate segregated fund of an IRC 501(c)(5)

organization lost that status by failing to meet the operational test. The account was not treated as

a separate entity, but as a bank account of the IRC 501(c)(5) organization.

5. Is a transfer of dues or political

contributions by an IRC 501(c)

organization to a separate

segregated fund an exempt

function expenditure?

A transfer of dues or political contributions

by an IRC 501(c) organization to a separate

segregated fund is an exempt function expenditure

of the IRC 501(c) organization unless the transfer

is made promptly after the receipt of such amounts

by the IRC 501(c) organization and is made directly

to the separate segregated fund. Reg. 1.527-6(e).

Reg. 1.527-6(e) also provides that a transfer is

considered promptly and directly made if the

following conditions are met:

(A) The procedures followed satisfy applicable federal or state campaign law and

regulations;

(B) The IRC 501(c) organization maintains adequate records to show that

amounts transferred were political contributions and dues and not investment

income; and

for the IRC 501(c) organization.

For example, an IRC 501(c) organization that collected political contributions and dues along

with other receipts from its members and deposited all amounts collected in an interest-bearing

checking account did not make an exempt function expenditure when it subsequently transferred the

political contributions and dues to the separate segregated fund. The IRC 501(c) organization

maintained records showing the amount of political contributions and dues received and, once or

twice a month, transferred the amounts collected in the immediately preceding month or half-month

period to the separate segregated fund. Although the small amount of interest earned on these funds

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was retained by the IRC 501(c) organization, the funds were deposited in the interest-bearing account

primarily as an administrative convenience and not to earn investment income. See G.C.M. 39837

(May 22, 1990).

In Alaska Public Service Employees Local 71 v. Commissioner, T.C.M. 1991-650, an

IRC 501(c)(5) organization maintained a separate segregated fund. The primary source of funds for

the separate segregated fund consisted of contributions from members of the IRC 501(c)(5)

organization. Five percent of the general fund dues were allocated to the political fund unless

discontinued by the member and some additional contributions were withheld from the salary of the

office staff of the IRC 501(c)(5) organization. These amounts were deposited in the general fund

and promptly transferred (up to four times a month) to the separate segregated fund. It was agreed

that these amounts did not constitute an exempt function expenditure by the IRC 501(c)(5)

organization. However, in addition to these amounts, the organization authorized a transfer of

$25,000 to the separate segregated fund from its general fund. During that year, the IRC 501(c)(5)

organization had more than $25,000 of net investment income. Three years later, after the Service

proposed to assess tax under IRC 527 on the amount transferred, the IRC 501(c)(5) organization

attempted to reverse the transaction by transferring $25,000 from the separate segregated fund to the

general fund. The court held that since the IRC 501(c)(5) organization failed to show that the

transfer consisted of dues and not investment income and that the dues had not been used to earn

investment income prior to the transfer, the $25,000 transfer was an exempt function expenditure

subject to tax under IRC 527(f)(1). The court further held that the IRC 501(c)(5) organization's

attempt to reverse the transaction was not effective.

6. May an IRC 501(c)

organization whose income is

derived from fees and

donations establish a separate

segregated fund?

An IRC 501(c) organization that derives its

income from fees and donations is not prohibited

from establishing a separate segregated fund.

Amounts contributed by others directly to the

separate segregated fund and expenditures made by

the fund will not be attributed to the IRC 501(c)

organization for the purposes of the tax under

IRC 527.

The question of whether transfers from the IRC 501(c) organization to the separate

segregated fund will be considered exempt function expenditures of the IRC 501(c) organization is

determined on the basis of the relevant facts and circumstances. Amounts transferred from the

general fund of the IRC 501(c) organization will be considered exempt function expenditures

causing the organization to be subject to tax under IRC 527. Amounts collected by the IRC 501(c)

organization that are designated for the separate segregated fund and are promptly and directly

transferred to the separate segregated fund in accordance with Reg. 1.527-6(e) will not be considered

exempt function expenditures of the IRC 501(c) organization.

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7. May an IRC 501(c)(4)

organization that has a related

IRC 501(c)(3) organization also

have a related PAC?

There is nothing that prohibits an

IRC 501(c)(4) organization that has a related

IRC 501(c)(3) organization from also having a

related PAC. However, the same concerns apply

when an IRC 501(c)(4) organization with a related

IRC 501(c)(3) organization conducts political

activities through a PAC as when it conducts those

activities itself. Like the situation with

IRC 501(c)(4) organizations, contributions to a PAC are not tax-deductible. Therefore, to ensure that

no tax-deductible contributions are used to support the political campaign activity of the PAC, it

must be separately organized and adequate records must be maintained.

As with political activities conducted directly by IRC 501(c)(4) organizations, a particular

concern is the allocation of income and expenses when an IRC 501(c)(3) organization and a related

PAC share staff, facilities, or other expenses or conduct joint activities. The determination of

whether the allocation method used is appropriate and reasonable is based upon the relevant facts

and circumstances.

D. IRC 6033(e) Reporting and Notice Requirements and Proxy Tax

(1) Organizations Excepted from the Reporting and Notice Requirements

1. Are all IRC 501(c)

organizations subject to the

requirements of IRC 6033(e)?

No, IRC 6033(e)(1)(B)(i) provides that the

IRC 6033(e) notice requirements do not apply to

IRC 501(c)(3) organizations. In addition,

IRC 6033(e)(3) provides an exception for

organizations that establish to the satisfaction of the

Secretary that substantially all of the dues or similar

amounts received by the organization are not

deducted by its members as business expenses. Most IRC 501(c) organizations do not receive dues

that are deducted by their members as business expenses under IRC 162. Therefore, the Service

provides in Rev. Proc. 98-19, 1998-1 C.B. 547, § 4.01, that, pursuant to IRC 6033(e)(3), the

requirements of IRC 6033(e) shall not apply to organizations recognized by the Service as exempt

from taxation under IRC 501(a), other than (1) IRC 501(c)(4) social welfare organizations that are

not veterans organizations, (2) agricultural and horticultural organizations described in

IRC 501(c)(5), and (3) IRC 501(c)(6) organizations.

2. Which IRC 501(c)(4) and

IRC 501(c)(5) organizations

does Rev. Proc. 98-19 except?

IRC 501(c)(4) veterans' organizations and

IRC 501(c)(5) labor organizations are excepted by

the Service from the IRC 6033(e) requirements in

Rev. Proc. 98-19, § 4.01. Other IRC 501(c)(4)

social welfare organizations and IRC 501(c)(5)

See Part 2, Section F, for a discussion of affiliation with IRC 501(c)(3) organizations. See, also, Appendix IV

for brief descriptions of some of the types of affiliations possible with exempt organizations.

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agricultural and horticultural organizations that meet a safe harbor set forth in Rev. Proc. 98-19,

§ 4.02, also will be excepted from IRC 6033(e). The safe harbor provides that these organizations

are not subject to IRC 6033(e) if more than 90 percent of their annual dues (or similar amounts) are

received from members paying annual dues (or similar amounts) of $75 or less,

or from

(1) IRC 501(c)(3) organizations, (2) state or local governments, (3) entities whose income is exempt

from tax under IRC 115, or (4) organizations excepted by § 4.01 of Rev. Proc. 98-19 as noted above.

Organizations that do not meet the safe harbor may establish that they satisfy the requirements of

IRC 6033(e)(3) by maintaining records establishing that at least 90 percent of the annual dues

received by the organization are not deductible by its members (without regard to IRC 162(e)) and

notifying the Service on its Form 990, Return of Organization Exempt from Income Tax, that it is

described in IRC 6033(e)(3).

Rev. Proc. 98-19, § 5.06.

3. What organizations described

in IRC 501(c)(6) are excepted

by Rev. Proc. 98-19?

Generally, IRC 501(c)(6) organizations are

subject to the IRC 6033(e) requirements. However,

Rev. Proc. 98-19, § 4.03, provides an exception for

IRC 501(c)(6) organizations if over 90 percent of

their annual dues (or similar amounts) are received

from (1) IRC 501(c)(3) organizations, (2) state or

local governments, (3) entities whose income is

exempt from tax under IRC 115, or (4) organizations excepted by § 4.01 of Rev. Proc. 98-19, as

noted above. IRC 501(c)(6) organizations that do not meet this test may also establish that they

satisfy the requirements of IRC 6033(e)(3) by maintaining records establishing that at least 90

percent of the annual dues received by the organization are not deductible by its members (without

regard to IRC 162(e)) in the same manner as IRC 501(c)(4) and IRC 501(c)(5) organizations and

notifying the Service on its Form 990 that it is described in IRC 6033(e)(3).

Rev. Proc. 98-19,

§ 5.06.

4. What are "annual dues" and

"similar amounts?"

The term "annual dues" means the amount

an organization requires a person to pay to be

recognized by the organization as a member for an

annual period. "Similar amounts" includes, but is

not limited to, voluntary payments made by

persons, assessments made by the organization to

cover basic operating costs, and special assessments imposed by the organization to conduct

lobbying activities. Rev. Proc. 98-19, § 5.01. "Member" is used in its broadest sense and is not

The $75 amount will be increased for years after 1998 by a cost-of-living adjustment under IRC 1(f)(3), rounded

to the next highest dollar. Rev. Proc. 98-19, § 5.05. For tax years beginning in 2001, this amount is $81. Rev. Proc.

2001-13, 2001-03 I.R.B. 337, § 3.21.

The organization may also request a private letter ruling to this effect in accordance with the procedures set forth

in Rev. Proc. 2001-4, 2001-1 I.R.B. 121. If an organization receives a favorable private letter ruling, the Service will

not contest its entitlement to exemption under IRC 6033(e)(3) for a subsequent year so long as the character of its

membership is substantially similar to its membership at the time of the ruling.

IRC 501(c)(6) organizations may also request a private letter ruling as discussed above.

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limited to persons with voting rights in the organization. Rev. Proc. 98-19, § 5.02. If payment for

a "membership" is intended to provide more than one person with recognition by the organization

as a member for an annual period, annual dues is the full amount of payment request for that

category of membership.

5. How does Rev. Proc. 98-19

treat affiliated organizations?

Rev. Proc. 98-19 provides a special

aggregation rule that treats affiliated organizations

(a national trade association that has state and local

chapters) as a single organization for purposes of

IRC 6033(e). The rule provides that if more than

one organization described in IRC 501(c)(4),

IRC 501(c)(5), or IRC 501(c)(6) share a name, charter, historic affiliation, or similar characteristics,

and coordinate their activities, organizations in the affiliate structure are treated as a single

organization. In applying the tests set forth in the safe harbor, only dues paid by the "ultimate

members," whether paid to one level, which then remits the amounts to other levels in the structure,

or paid separately to each level, are considered. Amounts paid by one organizational level to another

are not considered, even if they are characterized as "dues." If the organization as a whole meets the

requirements of IRC 6033(e)(3), (more than 90 percent of the dues are received from persons paying

$75 or less) all organizations in the affiliated structure meet the requirements.

Rev. Proc. 98-19,

§ 5.03.

Rev. Proc. 98-19, § 5.04, provides an example applying the affiliation rule. A group of

national, state, and local IRC 501(c)(4) organizations share a common name and work jointly to

promote their purpose. Individuals or families pay annual dues of $75 to the local organizations,

entitling them to membership in the national and state organizations. The local organizations remit

a portion of the dues to the state and national organizations. These remittances by the local

organizations exceed $75. The total amount received by all local organizations is $950x. In

addition, corporations pay dues of $500 to and become members of the national organization. The

total amount received from these members is $50x. Since the $950x exceeds 90 percent of the

$1000x received from all members, all of the national, state, and local organizations meet the

requirements of IRC 6033(e)(3). The transfers from the local organization are not considered in this

determination.

(2) Exempt Organization Requirements

1. How are exempt organizations

taxed under IRC 6033(e)?

As discussed above, organizations may not

avoid the disallowance of the deduction for

political campaign activity by deducting dues paid

to tax-exempt organizations that engage in political

campaign activity. Thus, to prevent this avoidance,

IRC 6033(e) provides that organizations subject to

its provisions are required to provide a notice to its members indicating the nondeductible portion

If organizations within the affiliated structure are on different taxable years, the organizations may base their

calculations of annual dues received on any single reasonable taxable year.

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of dues paid due to political campaign activities. If the exempt organization does not provide the

notice or if its actual political campaign expenditures exceed the amount disclosed in the notice, the

organization will be subject to a proxy tax on the amount that should have been included in the

notice but was not. The proxy tax is equal to this amount multiplied by the highest corporate rate

imposed by IRC 11. IRC 6033(e)(2). Thus, the organization has the option of providing a notice

to its members of the amount of dues that is not deductible due to political campaign activities or

paying the proxy tax.

2. What notices must be provided

to members?

An organization subject to IRC 6033(e) is

required to provide notice to each person paying

dues of the portion of dues that the organization

reasonably estimates will be allocable to the

organization's political campaign expenditures

during the year and, thus, is not deductible by the

member. This estimate must be provided at the time of assessment or payment of the dues and must

be reasonably calculated to provide the organization's members with adequate notice of the

nondeductible amount. IRC 6033(e)(1)(A)(ii). The legislative history indicates that the notice

should be provided in a conspicuous and easily recognizable format, referring to IRC 6113 and the

regulations thereunder for guidance regarding the appropriate format of the disclosure statement.

3. What information must be

disclosed on the Form 990?

IRC 501(c)(4), IRC 501(c)(5), and

IRC 501(c)(6) organizations are required to

disclose information regarding their political

campaign activities on Form 990, Return of

Organization Exempt from Income Tax. If an

organization is excepted from the IRC 6033(e)

requirements either because substantially all of its dues were not deductible by its members or

because its direct lobbying expenditures consisted solely of in-house expenditures that did not

exceed $2,000, it must disclose this information on the Form 990. If the organization does not meet

either of these exceptions, it must disclose the information necessary to determine if it is subject to

the proxy tax. This information consists of the total dues received from members, the amount of its

IRC 162(e) lobbying and political campaign expenditures, and the amount it disclosed to its

members as the nondeductible portion of dues. IRC 6033(e)(1)(A)(i).

4. What amount is disclosed on

the Form 990 as IRC 162(e)

lobbying and political

campaign expenditures?

The amount disclosed begins with the

organization's lobbying and political campaign

expenses determined in accordance with

IRC 162(e). Thus, direct lobbying of local councils

or similar governing bodies with respect to

legislation of direct interest to the organization or

its members and in-house direct lobbying expenses

if the total of such expenditures is $2,000 or less

For guidance regarding IRC 6113, see Notice 88-120, 1988-2 C.B. 454, discussed above in Part 3, Section I.

However, unlike IRC 6113, there is no penalty associated with failure to provide the disclosure notice in this format.

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(excluding allocable overhead expenses) should be excluded from the amount disclosed.

IRC 162(e)(2) and IRC 162(e)(5)(B). Amounts carried over from prior years, either because the

lobbying and political campaign expenditures exceeded the dues received in those years or because

the organization received a waiver of the proxy tax imposed on that amount must be included.

IRC 6033(e)(1)(C) and IRC 6033(e)(2)(B). The current year's lobbying and political campaign

expenditures should be reduced, but not below zero, by costs allocated in a prior year to lobbying

and political campaign activities that were cancelled after a return reporting these costs was filed in

accordance with Reg. 1.162-29(e)(2).

5. What amount is disclosed for

nondeductible dues notices?

If the organization notified its members in

accordance with IRC 6033(e)(1)(A)(ii) of its

estimate of the portion of dues that would not be

deductible under IRC 162(e), it must disclose on

Form 990 the total amount of dues that its members

were notified were nondeductible. For example, if

the organization timely notified its members that 25 percent of their dues would be nondeductible

and the members paid a total of $100,000 of dues allocable to the year, the amount reported on

Form 990 would be $25,000.

6. What if lobbying and political

campaign expenditures exceed

the estimated amount?

If the actual lobbying and political

campaign expenditures of an organization subject

to IRC 6033(e) exceed the amount that it notified

its members was not deductible (either because the

expenses were higher than anticipated or the dues

receipts were lower), the organization is liable for

a proxy tax on the excess amount.

IRC 6033(e)(2)(A). The organization may seek a waiver of the proxy tax.

7. How does an organization

request a waiver?

A waiver of the proxy tax is requested on

Form 990. The organization checks a box agreeing

to add the amount it entered as its taxable amount

of lobbying and political campaign expenditures to

its dues estimate for the following year and enter

the amount on the next year's Form 990. An

organization may use this waiver procedure only if it sent dues notices at the time of assessment or

payment of dues that reasonably estimated the dues allocable to nondeductible lobbying and political

campaign expenditures.

It is also possible that an organization could overstate the portion of the dues that are not deductible in the notice

of disallowance. It could do so by overestimating the amount of the disallowed expenses or underestimating dues

income. The Conference Report indicates that guidance should be issued to cover this eventuality. H.R. Rep. No.

103-213, 103d Cong., 1st Sess. 608 n. 66 (1993),

reprinted in 1993-3 C.B. 393, 486. Therefore, the legislative history

clearly indicates that organizations that overstate the portion of dues that are not deductible may be able to take this

excess into account. Until such time as guidance is issued, a reasonable method would be to treat an overstatement

similarly to an understatement and take the excess amount into account in the following year by subtracting it from the

estimate of lobbying and political campaign expenses for that year.

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As noted above, an organization subject to

IRC 6033(e) must report on the Form 990 the total

dues it received from members, the amount of its

IRC 162(e) lobbying and political campaign

expenditures for the year, and the amount it

disclosed to its members as the nondeductible

portion of dues. The amount subject to the IRC 6033(e)(2) proxy tax is its lobbying and political

campaign expenditures under IRC 162 less the amount disclosed to the members as nondeductible.

However, if this amount is more than the amount by which the total dues received exceeds the

amount disclosed to the members as nondeductible, then the tax is imposed on the lesser amount and

the excess is carried over to the next year. For example, an organization reports on the Form 990

that its lobbying and political campaign expenditures under IRC 162(e) for the taxable year were

$600x and the aggregate amount of nondeductible dues notices is $100x. If the total amount of dues

received was $800x, then the taxable amount would be $500x ($600x - $100x). However, if the total

amount of dues received was $400x, the taxable amount would be limited to $300x ($400x - $100x)

and the excess $200x ($500x - $300x) would be carried over and included in the next year's IRC 162

lobbying and political campaign expenditures.

The taxable amount is multiplied by the highest rate specified in IRC 11 to determine the

IRC 6033(e) proxy tax. If the organization elects to pay the tax, it is reported on Form 990-T,

Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)). When an

organization elects to pay the proxy tax rather than to provide its members with an estimate of dues

allocable to IRC 162(e) lobbying and political campaign expenditures, all of the members' dues

remain eligible for deduction to the extent otherwise deductible. The organization may also request

a waiver of this tax if it made a reasonable estimate and agrees to adjust its notice of IRC 162(e)

lobbying and political campaign expenditures to members in the following year. Thus, in the second

example above, if the organization requested a waiver, both the excess amount and the taxable

amount would be carried over and included in the next year's IRC 162 lobbying and political

campaign expenditures.

No, organizations subject to IRC 6033(e)

are not required to pay estimated tax on the

IRC 6033(e) proxy tax, even if they do not provide

notices to their members. The instructions for

Form 990-T indicate that theproxy tax is not to be

included when calculating estimated tax liability.

Under-reported political campaign

expenditures are subject to the IRC 6033(e) proxy

tax for the year at issue only to the extent that the

same expenditures (if actually reported) would have

resulted in a proxy tax liability for that year. A

waiver of the proxy tax for the taxable year only

applies to reported expenditures. Under-reporting

8. How is the IRC 6033(e) proxy

tax determined?

9. Must estimated tax on the

proxy tax be paid?

10. What if political campaign

expenditures are under-

reported?

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political campaign expenditures may also subject the organization to a $10 per day penalty under

IRC 6652 for filing an incomplete or inaccurate return.

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APPENDIX I

The Enactment of the Political Campaign Prohibition for Charitable Organizations

As mentioned above, there is no legislative history concerning the enactment of the political

campaign prohibition beyond the mere fact that Lyndon Johnson proposed it and it was accepted and

enacted.

Why Johnson proposed the political campaign prohibition in the first place has been the

subject of considerable interest. At least four scenarios have been proposed; three of which indicate

that the purpose was to punish a charitable organization that was assisting his opponent, Dudley

Dougherty, in the 1954 Texas Senatorial Primary.

The first scenario is that Johnson "offered the amendment out of concern that funds provided

by a charitable organization were being used to help finance the campaign of [Mr. Dougherty]."

Hopkins, The Law of Tax Exempt Organizations (7th ed.) 504 (1998).

The other two surmises that focus on the Johnson-Dougherty primary campaign as the cause

of the amendment mention a specific organization and seem to indicate in each case that it was the

charity's activity, not its financial help, that triggered Johnson's reaction. One points to an

organization established by the Texas billionaire, H. L. Hunt. Lobbying and Political Activities of

Tax-Exempt Organizations, Hearings before the Subcommittee in Oversight, Committee on Ways

and Means, House of Representatives, 100th Cong., 1st Sess. 144 (1987) (hereinafter 1987 Oversight

Hearings) (statement of William Lehrfeld). This organization, Facts Forum, produced various radio

and television programs, "Answers for Americans," "State of the Nation," and "Facts Forum," and

claimed a listening and viewing audience of at least 5,000,000. It also published a periodical, Facts

Forum News, with a claimed circulation of 60,000

No one has uncovered specific evidence that

Facts Forum intervened in the primary campaign. However, George Reedy, then a principal aide on

Johnson's Senate staff, noted in a 1987 letter to the United States Catholic Conference (hereinafter

USCC) that while he had no recollection of the legislation, "it is entirely possible that he was

In his book, Mr. Hopkins does not cite a source. However, D. Benson Tesdahl, "Intervention in Political

Campaigns After the Pickle Hearings - A Proposal for the 1990s," 4

Exempt Organization Tax Review 1165, 1178 n.

26 and 1179 n. 38 (Nov. 1991) discloses that Mr. Hopkins has stated that his information concerning Lyndon Johnson's

motive came from a conversation he had with Lawrence M. Woodworth. According to this account, Mr. Woodworth

stated that Johnson was upset about support a political opponent had received from a charity and directed Mr.

Woodworth to draft the language that Johnson proposed on the Senate floor the same day. Mr. Woodworth conveyed

no further information other than that Senator Johnson did not want any legislative history; however, as a staff member

(he did not become Chief of Staff of the Joint Committee on Taxation until 1964), it is doubtful he had any.

Facts Forum was created in June 1951. It was terminated in November 1956 because, as a spokesman for Mr.

Hunt announced, "he's tired of fighting for useless and lost causes." Mr. Hunt's resolve did not last long. In the summer

of 1958, he essentially recreated Facts Forum when he established LIFE LINE, which continued to exist until the early

1970s. (Facts Forum and LIFE LINE are often confused.) A general description of the history of these organizations

is found in Harry Hurt III's biography of H. L. Hunt,

Texas Rich (1991). The activities of Facts Forum are chronicled

in a series by Ben Bagdikian that appeared in the

Providence Journal-Bulletin, Jan. 1954) and was reprinted in The

Reporter

(Feb. 16, 1954). Unfortunately, the material does not cover the period with which we are concerned.

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irritated by the activities of Dougherty's followers -- especially H. L. Hunt." (Letter reprinted in 1987

Oversight Hearings, 448.)

The most extensive research on this issue has been performed by the USCC. The material

the USCC collected was explained and presented in a written submission to the 1987 Oversight

Hearings, 419-452, and indicates that Johnson's provision may have been directed at the activities

of yet another organization, the Committee for Constitutional Government (hereinafter

"Committee").

The USCC's perusal of documents at the Lyndon Baines Johnson Presidential

Library disclosed a June 15, 1954, memorandum from George A. Siegel, a Johnson aide who later

became General Counsel for the Senate Democratic Policy Committee. Mr. Siegel's memorandum

responded to a question by Johnson "as to whether any Texas election laws have been violated by

the Committee in circulating the Ballinger article on Dudley Dougherty and by printing a box on its

brochure urging people to write to Dougherty and let him know their views on his platform." Mr.

Siegel's response stated his opinion that the Committee should be regarded having violated Texas

election law "by having provided an indirect means for corporations to contribute to the political

candidacy of Dougherty," but noted, in passing, that the activities presumably would not jeopardize

its tax-exempt status under IRC 101(6) (the predecessor of IRC 501(c)(3)). (Letter reprinted in 1987

Oversight Hearings, 446-447.) As it did with Mr. Reedy, the USCC wrote to Mr. Siegel in an

attempt to gather further information. Mr. Siegel responded by telephone, stating he was unable to

recall any particulars due to the passage of time.

Another document uncovered indicated that Johnson asked John W. McCormack, then the

Democratic Whip in the House of Representatives, to write the Service's Commissioner, T. Coleman

Andrews, concerning the Committee's tax-exempt status. Commissioner Andrews responded on

June 28, 1954. He stated that the Service "was taking appropriate steps to see just what is the effect

of these activities under the internal revenue laws and what, if anything, can be done about their

present status in relation to exemption privileges." Representative McCormack forwarded the

Commissioner's reply to Johnson's office. It was received July 2, 1954, the date the floor amendment

was presented. (Letters reprinted in 1987 Oversight Hearings, 451-452.)

The proximity in time between the investigation of the Committee's status and the floor

amendment makes it very possible that the Committee was indeed the target of the amendment. It

would also furnish an explanation both of the breadth of the description of political campaign

activities and of the absoluteness of the prohibition. There is, however, yet another possibility that

would also fit into the time frame, would also explain the extent and absoluteness of the amendment,

but had nothing to do with the Johnson-Dougherty primary. Instead, this fourth scenario, set forth

by Mr. Leonard Silverstein (1987 Oversight Hearings, 148-149), raises the possibility that the

amendment was presented to trump an even more restrictive proposed addition to the 1954 Code.

Mr. Silverstein noted that Johnson's amendment was presented to and adopted by the Senate on July

2, 1954, one day after Senator Patrick Anthony (Pat) McCarran had introduced a similar but much

A summary of the USCC's findings are set forth in Deirdre Dessingue Halloran and Kevin M. Kearney, "Federal

Tax Code Restrictions On Political Activity," 38

Catholic Law. 105, 106-108 (1998). Ms. Halloran, Associate General

Counsel of the USCC, was involved in the USCC's search for documentary evidence regarding the origin of the political

campaign prohibition.

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harsher amendment that would have revoked the exempt status of organizations making donations

to "subversive" organizations or individuals (100 Cong. Rec. 9,446 (July 1, 1954). As Mr.

Silverstein stated: "A close reading of the Congressional Record of that week would seem to imply

that anti-communist sentiment was high pitched at the time, prompted especially by discussion of

the proposed admission of Communist China to the United Nations, as well as of left-wing

subversive activities in Guatemala."

However, it is not simply the temper of the moment that gives credence to Mr. Silverstein's

theory. McCarran was a Senator of enormous influence. Former Chairman of the Judiciary

Committee and of its Internal Security Subcommittee (and ranking minority member after the

Republicans obtained control of the Senate in 1953), author of the Internal Security Act of 1950 and

the McCarran-Walter Immigration Act, his political positions were quite different from Johnson's

-- McCarran once explained he remained a Democrat because "I can do more good by staying in the

Democratic Party and watching the lunatic fringe -- the Roosevelt crowd."

Nevertheless, Johnson

had sometimes sided with McCarran, for example, he had voted to override President Truman's

vetoes of both the Internal Security Act of 1950 and the McCarran-Walter Immigration Act.

Furthermore, in 1954, Johnson's was somewhat in McCarran's debt -- during the primary campaign

Johnson asked McCarran for a letter praising Johnson's "staunch Americanism." Robert Dallek,

Lone Star Rising, (1991) 450. Nevertheless, as Minority Leader, Johnson's strategy has been

described as "promoting party unity and bipartisanship at the same time." Id. at 447. Allowing

passage of McCarran's amendment contravened that strategy.

Furthermore, there is every evidence that McCarran's proposed amendment was a serious

effort. It was not the Senator's first foray into the world of exempt organizations. As previously

mentioned, McCarran authored the Internal Security Act of 1950, and § 11(b) of that Act denied

exemption to any organization registered under the Act as a Communist-action or Communist-front

organization. Pub. L. 81-831, reprinted in 1950-2 C.B. 250, 252. The proposed bill went much

further -- it would have denied exemption to organizations making donations not only to

organizations covered under the 1950 Act but to other "subversive organizations" or to an individual

that was a member of a "subversive organization." McCarran explained the provision at length,

arguing for its constitutionality although not touching on its administrability, furnishing ample

evidence that passage was intended. 100 Cong. Rec. 9,447 (July 1, 1954).

Given these contexts, Mr. Silverstein's theory, that Johnson's amendment was an exercise in

circumspection (although one with far-reaching effects), has considerable appeal. This, however,

For a description of Senator McCarran, see Alfred Steinberg, "McCarran: Lone Wolf of the Senate," Harper's,

Nov. 1950, at 87.

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is not to deny the attractiveness of the hypotheses of Mr. Hopkins, Mr. Lehrfeld, or the USCC.

Perhaps all four are true; nothing is certain.

This would not be the first instance of a the impetus for a Code provision being an exempt organization's opposition

to a legislator. It is evident that, in 1934, the apparent sponsor of the limitation on lobbying activities, Senator David

Reed, was aiming at an exempt organization, the National Economy League, that was opposing legislation that he was

making the centerpiece of his primary campaign for renomination as the Republican candidate for Senator from

Pennsylvania. See the discussion of the 1934 enactment of the limitation on the lobbying activities of charities, 1997

CPE Text, 264-266.

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APPENDIX II

The Political Campaign Prohibition vis a vis the Restriction on Private Benefit

The American Campaign Academy and Coalition for Freedom Cases

A. Introduction

As discussed in the text, an organization will not qualify as an IRC 501(c)(3) organization

if it participates in a political campaign. However, it must meet all of the requirements under

IRC 501(c)(3) in order to qualify for tax exemption. In particular, the organization must be operated

for the benefit of the public, rather than for private interests, which could include political entities.

B. Private Benefit Cases

(1) American Campaign Academy

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court held that

an organization formed to operate a school to train individuals for careers as political campaign

professionals did not qualify as an organization described in IRC 501(c)(3) because it was operated

primarily for the private benefit of Republican entities and candidates. In the case, the issue raised

by the Service and addressed by the court was not whether the American Campaign Academy (the

Academy) had participated or intervened in a political campaign on behalf of, or in opposition to,

any candidate for public office. Rather, the issue was whether a private interest was being served

so that the Academy was not described in IRC 501(c)(3). The lessons to be gleaned from American

Campaign Academy are as follows:

(1) The fact that an organization's activities may be described as

educational will not sustain exemption if more than insubstantial

private benefit is present.

(2) Failure to provide information need not consist of an outright refusal.

If the information is relevant, the organization may be required to

produce a concrete and responsive answer. Where other evidence

indicates that private benefit exists, a failure to substantively respond

on certain factual points may justify a finding that the facts being

avoided would be detrimental to the organization.

Neither of these principles were novel at the time of the American Campaign Academy decision and

neither have any peculiar application to organizations involved with political advocacy. However,

in view of the persistent notion that American Campaign Academy is somehow a stealth political

campaign prohibition case, its facts, its resolution, and where it fits within the penumbra of

IRC 501(c)(3) analysis are set forth in considerable detail below.

As its primary activity, the Academy operated a school to train individuals for careers as

campaign managers, communications directors, finance directors, and other professionals involved

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in the running of a political campaign. The Academy had several secondary purposes including

sponsoring research and publishing instructional materials, reports, newsletters, pamphlets or books

relating to the conduct of political campaigns. (These activities were ancillary to the operation of

the school; the research and publications were normally used in the Academy's classes.) The

Academy also engaged in some public opinion research and polling on political issues and attempts

to elevate the standards of professionalism, ethics, and morality in the conduct of political

campaigns.

In most respects, the Academy operated as a traditional school on a single subject with a

faculty experienced in the various subjects relating to the operation of a political campaign. The Tax

Court noted that similar campaign management courses were offered by various colleges and

universities, as well as other organizations. The Academy, therefore, would be described in

IRC 501(c)(3) so long as it served a public interest as required by Reg. 1.501(c)(3)-1(d)(1)(ii) and

did not violate the IRC 501(c)(3) political campaign prohibition.

The Tax Court noted that the Academy did not train candidates nor participate in, nor

intervene in, any political campaign on behalf of any candidate and that the government did not

assert that the Academy was involved in any proscribed campaign activities. Id. at 1055, 1063.

Therefore, since the Academy manifestly was an educational institution, and since it did not violate

the political campaign prohibition, what was the problem?

The problem was that the Academy failed to establish that it was operated exclusively for

exempt purposes as required by IRC 501(c)(3); instead, the factual record disclosed that the

Academy was operated for the benefit of a private interest (in this case, Republican entities and

candidates) rather than for a public purpose. The case was simply an evidentiary matter.

The Academy's application for recognition of exemption under IRC 501(c)(3) disclosed that

it was an outgrowth of programs formerly sponsored by the National Republican Congressional

Committee (NRCC), the NRCC contributed assets to the Academy; some of the faculty were

previously involved in the NRCC training program and one its three initial directors was the

executive director of the NRCC. The Academy instituted a curriculum that included studies of

"Growth of NRCC, etc." and "Why are people Republicans."

The Academy's newsletters reported

on the activities of 119 of its 120 graduates -- 85 participated in Congressional or Senatorial

campaigns, four were employed by the NRCC or Republican National Committee Field Divisions,

10 graduates participated in the State or local campaigns or were employed by State Republican

parties, and several worked as political consultants. In all cases in which the Service was able to

identify the party affiliation of the organization that the graduates worked for, the party affiliation

The Tax Court made the following observation:

Following the reorganization of petitioner's curriculum after the 1986 election, additional partisan

topics such as "Other Republican givers lists," "How some Republicans have won Black votes," and

"NRCC/RNC/State Party naughtiness" were added. The academy's curriculum failed to

counterbalance the Republican party focus of these courses with comparable studies of Democratic

or other political parties.

Id. at 1070-1071.

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was Republican. Consequently, when the Service requested the Academy to provide additional

information regarding its application for recognition of exemption, it specifically requested the

Academy to identify how many of its graduates worked for Republican, how many worked for

Democratic, and how many worked for other party candidates or organizations. As the Tax Court

noted, the Academy replied as follows:

We do not require students to remain in contact with the Academy following

graduation. Of those who chose to do so, some have informed the Academy of the

identity of the candidate(s) for whom they are working. (See the [attached]

newsletters *** .) To the best that can be determined, the predominant party

affiliation of the candidates for whom Academy graduates are working in 1986 are

Republican, but the Academy has no exact numbers. Id. at 1061.

The Tax Court treated this response as the equivalent of an admission that no organizations other

than Republican organizations were served by the Academy's graduates, as demonstrated by the

court's comment:

A showing that petitioner's graduates served in Congressional and Senatorial

campaigns of candidates from both major political parties in substantial numbers

would have significantly aided petitioner's contention that its activities only

benefitted nonselect members of a charitable class. Nevertheless, petitioner did not

see fit to include in the administrative record any specific example of a graduate

working for a Democratic Senatorial or Congressional candidate. We cannot

assume that information regarding the placement of academy graduates, not shown

to be unavailable, would have been favorable to petitioner; i.e., would have reflected

nonpartisan placement. In fact, the contrary is true. See Fear v. Commissioner, T.C.

Memo. 1989-211; see also Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158 (1946), affd. 162 F.2d 513 (10th Cir. 1947). Consequently, it is reasonable to

infer from petitioner's omission that the affiliation information, had it been included,

would have revealed the Republican affiliation of the candidates.

Based upon our review of the administrative record, we find that petitioner operated

to advance Republican interests. We also find that placement of 85 of petitioner's

graduates in the campaigns of 98 Republican Senatorial and Congressional

candidates conferred a benefit on those candidates. Petitioner's partisan purpose

The court's conclusion that the Academy had intentionally avoided providing the information requested was based

on the fact that the Academy included the study of FEC rules and regulations in its curriculum. Therefore,

[P]etitioner would have to concede that it is peculiarly positioned to have knowledge and awareness

of the ready availability of data from the Commissioner's public records. Accordingly, we infer that

petitioner's "best determination" regarding the predominant Republican party affiliation of the

candidates for whom Academy graduates were working in 1986 reflects the political affiliations

disclosed in the Federal Election Commission's public records.

Id. at 1072.

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distinguishes the case at bar from Rev. Rul. 76-456.

Likewise, petitioner's partisan

purpose differs significantly from the nonpartisan educational purpose served by a

university through means of a political science course which required each student

to participate in a two-week period in the political campaign of a candidate of his

or her choice. See Rev. Rul. 72-512, 1972-2 C.B. 246. Id. at 1072-1073.

Accordingly, the Academy's service of the private interest of Republican entities and

candidates makes its situation distinguishable from IRC 501(c)(3) training schools that have been

determined to be described in IRC 501(c)(3), such as those described in Rev. Rul. 67-72, 1967-1

C.B. 125 (labor and management operated, industry wide training program including classroom and

on-the-job training); Rev. Rul. 68-504, 1968-2 C.B. 211 (organization conducted courses on various

banking subjects open to employees of all banks in the urban area); and Rev. Rul. 72-101, 1972-1

C.B. 144 (organization created as a result of collective bargaining agreements trained individuals

working or desiring work in a particular industry.) In all three rulings there was an emphasis on the

industry-wide basis of the program. None of the programs were organized, operated, or influenced

by any particular business corporation, but rather served the public by providing training on a broad

basis.

This contrasts with the Academy, which was funded by an organization (in this case, a

Republican entity) that both dominated the officers and selection process and became the seemingly

sole employer of its graduates.

On numerous other occasions, both the Service and the courts have concluded that an

organization the engages in an acknowledged educational activity, like the Academy, is not described

in IRC 501(c)(3) if it serves private interests on more than an insubstantial basis. See The Callaway

Family Association, Inc. v. Commissioner, 71 T.C. 340 (1978), and Manning Association v.

Commissioner, 93 T.C. 596 (1989) (organizations engaged in researching the genealogy of a family)

wherein each court observed "petitioner was not denied exemption because it had no exempt

purposes, but rather because its activities, taken as a whole, are not exclusively dedicated to exempt

purposes" (71 T.C. at 341, quoted in 93 T.C. at 611); See also Rev. Rul. 74-116, 1974-1 C.B. 127

(organization keeping members informed of current scientific and technical data with respect to a

specific type of computer is not described in IRC 501(c)(3)).

Rev. Rul. 76-456, 1976-2 C.B. 151, holds that an organization formed to elevate the standards of ethics and

morality in the conduct of political campaigns that disseminates information concerning general campaign practices,

furnishes teaching aids to political science and civics teachers, and publicizes its proposed code of fair campaign

practices without soliciting the signing or endorsement of the code by candidates qualifies as an educational organization

under IRC 501(c)(3). The revenue ruling, emphasizing the organization's nonpartisan nature (as well as the fact that

it did not solicit the signing or endorsement of its code of fair campaign practices by candidates for political office),

concluded that the organization exclusively served a public purpose by increasing citizens' knowledge and understanding

of election processes. As the court noted on page 1069, the Academy argued that the revenue ruling prescribed the

proper characterization of all benefits conferred by organizations engages in such activities.

In a sense, all training of students serves an incidental private benefit to both the student in increased future

earnings and the eventual employer who benefits from the services of the trained individual. There is a distinction,

however, where the private benefit served is incidental to the overriding public benefit in education and training and

training focused on the private benefit of one interest.

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A summary review of all the above cited materials should not lead one to conclude that a

school to train campaign workers cannot be described in IRC 501(c)(3). The American Campaign

Academy's conclusion that a private interest is being served more than incidentally is based on the

particular facts of the case including the Academy's funding, its assumption of some Republican

party training, the composition of its admission panels, the content of its courses, the composition

of its Board of Directors and faculty, and the subsequent employment of its graduates. For a

thorough discussion of private benefit in the educational context, see G.C.M. 39716 (Mar. 29, 1988).

(2) Coalition for Freedom

In American Campaign Academy, an organization failed to qualify as an organization

described in IRC 501(c)(3) because, although its activities did not constitute prohibited political

campaign intervention, its method of operation conferred a substantial private benefit on another

organization, which happened to be a political party. In Coalition for Freedom, different activities

gave rise to adverse conclusions under IRC 501(c)(3) with respect to private benefit (and inurement)

as well as political campaign intervention.

On December 20, 1994, in a stipulated decision, the Tax Court upheld the Service's

revocation of the exempt status of Coalition for Freedom, Inc., (CFF) as an organization described

in IRC 501(c)(3). Coalition for Freedom, Inc. v. Commissioner, Docket No. 5406-93X.

In an

unpublished technical advice memorandum that was attached to CFF's Tax Court petition, the

Service concluded that revocation of the CFF's IRC 501(c)(3) status was appropriate for the

following reasons:

1. CFF served a private rather than a public interest under

Reg. 1.501(c)(3)-1(d)(1)(ii) due to the nature of its payments to

non-IRC 501(c)(3) organizations (and their employees and consultants).

2. To the extent that these amounts inured to the benefit of "insiders" of CFF,

they also constituted inurement.

3. The various payments to, and affiliation with, political organizations and

other non-IRC 501(c)(3) organizations and individuals that worked with and

for political organizations constituted political campaign intervention.

Coalition for Freedom, Inc. Petition for Declaratory Judgment, reprinted in 7 Exempt Organizations

Tax Review 1005 (June 1993).

CFF was part of a large network of organizations controlled by the same individuals. CFF's

ostensible role was to produce and disseminate educational materials related to foreign policy issues,

bias in the media, the impact of welfare programs on minorities, and other similar activities. The

network of organizations generally performed activities supportive of political positions and political

The Tax Court's stipulated decision stated that revocation did not prejudice CFF's right to seek IRC 501(c)(3)

status after 1992 nor to litigate post-1992 adverse determinations regarding exempt status.

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candidates for public office. In addition to CFF, the individuals controlled two other organizations

that had been recognized as exempt as organizations described in IRC 501(c)(4) and an

unincorporated political action committee, National Congressional Club (NCC). They also

controlled Education Support Foundation, Inc. (ESF), which had an application pending for

recognition of its status as an organization described in IRC 501(c)(4). ESF owned all of the stock

of Jefferson Marketing, Inc. (JMI), a for-profit corporation, whose main activity involved campaign

related political consulting and other activities supportive of political campaigns. JMI had seven

wholly-owned for-profit subsidiaries that supported its activities.

The technical advice memorandum analyzed the activities of CFF and the other organizations

in the network during the years at issue. It determined that CFF engaged in a number of fundraising

activities seeking tax-deductible contributions for a variety of projects, most of which never

materialized. Instead, most of the money raised was used to pay fees and expenses to JMI, its

taxable subsidiaries, and to individuals employed by those entities.

In a suit filed by the FEC alleging that ESF and NCC were in fact one organization, the FEC

argued that two of the three members of CFF's Board controlled both ESF and NCC (as well as JMI

due to ESF's ownership of JMI) and that JMI was providing services to NCC and other political

clients for less than fair market value. The funds provided by CFF enabled JMI and its subsidiaries

to engage in activities for its political clients at less than fair market value. In additional, the funds

enabled JMI and its subsidiaries to provide services to political clients who were known to be unable

or unexpected to pay their full bills timely, particularly Funderburk for Senate (FFS), the political

campaign committee of former Ambassador David Funderburk.

CFF paid consulting fees to individuals who were heavily involved in the FFS campaign

along with other political campaign activities of JMI and NCC. The individuals paid appeared to

be spending all their time on non-CFF political activities during periods when they were being paid

consulting fees by CFF. CFF also hired Mr. Funderburk after his unsuccessful campaign. He was

paid a monthly consulting fee, although the only work done on the project for which he was hired

was done by JMI (for which JMI was also paid).

CFF engaged in a joint fundraising event with NCC and sponsored an event featuring three

Presidential candidates whose views coincided with those of CFF. There was no indication that CFF

took any steps to ensure that it conducted these events in a neutral manner with respect to the

campaign.

The technical advice memorandum stated that the benefits flowing from CFF to JMI, its

subsidiaries, and the individuals showed that CFF was operated for the substantial non-exempt

purpose of serving those private interests rather than operating for the benefit of the public. In

addition, the flow of funds to the benefit of the insiders of CFF constituted inurement. Finally, the

technical advice memorandum noted that the interrelated structure of the organizations and the flow

of benefits from CFF to support the political activities of JMI and its subsidiaries created a situation

where CFF was engaging in prohibited political campaign activity.

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C. Conclusion

As illustrated by these cases, an organization that is operated for the benefit of private parties,

including political entities, rather than for the benefit of the public will not qualify as an

IRC 501(c)(3) organization. Whether the organization has also violated the political campaign

prohibition depends upon all of the relevant facts and circumstances.

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APPENDIX III

The New Reporting and Disclosure Regime for IRC 527 Organizations

A. The "New Section 527 Organizations"

[T]he terms "partisan electoral politics" and "electioneering" raise virtually the

same vagueness concerns as the language "influencing any election for Federal

office," the raw application of which the Buckley court determined would

impermissibly impinge on First Amendment values....

Confining the definition of "political committee" to an organization whose major

purpose is the election of a particular federal candidate or candidates provides an

appropriate "bright-line" rule; attempting to determine what is an "issue advocacy"

group versus an "electoral politics" group-as the Commission proposes-does not.

Federal Election Commission v. GOPAC, 917 F.Supp. 851, 861 (D.D.C. 1996)

The GOPAC decision illustrates the differences between qualifying as a "political committee"

under the FECA and qualifying as a "political organization" under IRC 527 -- under the FECA, the

GOPAC decision tells us it is inappropriate to make a determination on the basis of issue advocacy

versus electoral politics; under IRC 527, as will be described below, the Service examines all facts

and circumstances to determine if there is a sufficient nexus between the activity and the election

of an individual to public office.

Considerable consequences result from the distinct treatment that an organization might

receive under the two statutory regimes. The FECA requires political committees to register and file

periodic reports with the FEC disclosing the funds they raise and spend. 2 U.S.C. § 431(17), § 433,

and § 434. Until July 1, 2000, IRC 527 had no information reporting requirements. As Joseph

Mikrut, Treasury Tax Legislative Counsel, testified before the Oversight Subcommittee of the House

Committee on Ways and Means, June 20, 2000:

Although some uncertainty remains, the current prevailing view of the courts

appears to be that, in the absence of coordination with a candidate's campaign, only

communications that contain express words advocating the election or defeat of a

candidate-such as "vote for," "support," "defeat," and certain other "magic

words"-are subject to the requirement of the FECA, including the restrictions on

contributors eligible to fund such communications, the contribution limits, and

public disclosure requirements for funds raised and spent on such communications.

Accordingly, individuals, entities, and groups-including section 527 political

organizations-that attempt to influence Federal elections, but that refrain from

"express advocacy," may be able to avoid the FECA reporting and disclosure

requirements. (Footnotes omitted.)

Mr. Mikrut's testimony is reprinted in 5 Paul Streckfus' EO Tax Journal 220 (June 2000).

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To take advantage of this situation, a type of campaign finance vehicle, dubbed a "new

section 527 organization," or "soft PAC" has surfaced.

Essentially, as Mr. Mikrut's testimony

notes, organizations could qualify for IRC 527 treatment because they attempt to influence the

election of individuals to public office; at the same time, they would argue they were not subject to

the reporting or disclosure requirements under the FECA because they do not engage in express

advocacy within the scope of the FECA.

What is "new" about these organizations requires some clarification. They are not "new" in

any theoretical sense. Since the IRC 527(e)'s definition of "exempt function" is broad and

IRC 527(a) permits an organization that makes indirect expenditures for an exempt function to

qualify for tax-exempt treatment, organizations with a more remote nexus between their activities

and the election of an individual to public office have qualified as a political organization under

IRC 527. (For example, as noted in the text, a 1983 G.C.M. (39178) concludes that an organization

formed and controlled by a political organization to construct, own, and operate a building to house

the political organization's headquarters qualifies for IRC 527 status.) Furthermore, for purposes of

IRC 527, expenditures need not be related to a particular candidate's campaign, but may relate to

attempts to influence voting on multiple (announced or unannounced) candidates. As noted in

Reg. 1.527-2(c)(5)(viii), Example 8:

Q is an organization described in section 527(e)(2). Q finances seminars and

conferences which are intended to influence persons who attend to support

individuals to public office whose political philosophy is in harmony with the

political philosophy of Q. The expenditures for these activates are for an exempt

function.

Consequently, since the enactment of IRC 527, should an organization constructed in such

a manner requested a ruling that it qualified for IRC 527 treatment, it would have received a

favorable answer. However, no such ruling was requested and none was issued until December 27,

1996.

The December 27, 1996 ruling, PLR 96-50-026, concerned a separate segregated fund

established by an IRC 501(c)(4) organization. According to the document that established the fund,

the fund was prohibited from engaging in express advocacy activities that would trigger the reporting

and disclosure requirements of the FECA; instead, it would engage in distribution of voters' guides

that would constitute prohibited political intervention for an IRC 501(c)(3) organization. The fund's

description of its activities tracked the description of voters' guides set forth in Rev. Rul. 78-248,

1978-1 C.B. 154, and Rev. Rul 80-282, 1980-2 C.B. 178., which set forth facts and circumstances

to be considered in determining whether these activates jeopardized IRC 501(c)(3) status. Favorable

The term "new section 527 organization" first appeared in Frances R. Hill's extended discussion of the

phenomenon, "Probing the Limits of Section 527 To Design a New Campaign Finance Vehicle," 26

Exempt

Organization Tax Review

205. The term "soft PAC," which connotes that the organization does not receive "hard

money" contributions that are subject to the FECA rules, is found in a discussion paper by Rosemary E. Fei, "The Uses

of Section 527 Political Organizations,"

Structuring the Inquiry into Advocacy Vol. 1 23, Urban Institute (2000)

(hereinafter Fei 2000).

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factors for IRC 501(c)(3) status, for example, wide distribution, were rejected; unfavorable ones, for

example, targeting distribution toward particular areas and "bias," were adopted. Therefore, in

concluding that the fund's activities qualified for IRC 527 treatment, PLR 96-50-026 stated as

follows:

Rev. Ruls. 78-248 and 80-282 address the facts and circumstances that are relevant

to determining when voting records and voter guides cross the line from simply

educating voters to influencing or attempting to influence their votes in the context

of section 501(c)(3)'s prohibition on participation or intervention in a political

campaign on behalf of or in opposition to a candidate. But they also may be used to

indicate the types of voter guides and voting records that would qualify as an exempt

function activity under section 527(e)(2). Since the 501(c)(3) prohibition is also

based on a "facts and circumstances" test, the rulings provide guidance as to the

important factors to consider.

****

Based on the factors identified in the revenue rulings, the Fund's voter guides and

voting records would be prohibited political intervention for a section 501(c)(3)

organization and are, correspondingly, for an exempt function within the meaning

of section 527 (e)(2). While the guides may not meet all of the factors, any one guide

meets enough of the factors so that distribution of the guide can be said to be an

exempt function activity within the meaning of section 527(e)(2).

The issuance of PLR 96-52-026 (Oct. 1, 1996) marked a watershed. As Ms. Fei has noted:

"While it may already have been clear to the IRS, tax lawyers up to this point had not been sure

exactly how far Section 527's exempt function reached in practice." Fei 2000, 26. In three

subsequent private letter rulings the Service recognized the IRC 527 status of organizations that were

expressly prohibited from expressly advocating the election or defeat of any candidate but that

expressly avowed their voter education activities would be biased to influence election campaigns.

PLR 97-25-036 (Mar. 24, 1997); PLR 98-08-037 (Nov. 21, 1997); PLR 1999-25-051 (Mar. 29,

1999). The effect of these rulings' issuance has been described as follows:

Tax lawyers' recent "discovery" of just how much broader was the IRS's tax law

definition of political activities under Section 527 than that set forth by any election

commission gave election lawyers just the opening they needed. Advocates found

ample room to design programs to influence election outcomes without express

advocacy of any candidate's election or defeat - independent of any candidate, party,

or registered political action committee - and conduct these programs free of

regulation under any election law, using a 527 political organization. Fei 2000, 28.

The emergence of these organizations resulted in legislative proposals to amend IRC 527;

a hearing held by the Subcommittee on Oversight of the House Committee of Ways and Means, June

19, 2000; and ultimately passage of Public Law 106-230, which, as noted above, was signed by

President Clinton on July 1, 2000.

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B. Public Law 106-230

On July 1, 2000, Public Law 106-230 was enacted, amending IRC 527. The new law, which

became effective immediately, created a reporting regime for IRC 527 organizations. The new law

requires IRC 527 organizations to provide a notice of status, periodically report contributions and

expenditures, and file annual information returns as well as tax returns. The new law does not affect

any period prior to July 1, 2000. Prior law with respect to IRC 527 status is unchanged. The

following revenue ruling, released October 12, 2000 (see IR-2000-71, Oct. 12, 2000), concerns the

reporting requirements created under the new law.

Rev. Rul. 2000-49, 2000-44 I.R.B. 430, Oct. 30, 2000

ISSUES

On July 1, 2000, Pub. L. 106-230 was enacted, amending § 527 of the Code. The new law

imposes three reporting and disclosure requirements on political organizations described in § 527:

(1) an initial notice of status, (2) periodic reports of contributions and expenditures, and (3) annual

returns. This revenue ruling provides questions and answers relating to the reporting and disclosure

requirements for political organizations described in § 527.

QUESTIONS AND ANSWERS

I. Notice of Status

1. Q. What is the notice of status requirement for an organization described in § 527?

A. Under § 527(i)(1)(A), a political organization is required to give notice both

electronically and in writing to the Service that it is a political organization described in § 527.

2. Q. What is the required notice form?

A. The required notice form is Form 8871, Political Organization Notice of Section 527

Status.

3. Q. Are all political organizations required to file the Form 8871 notice?

A. No. Under § 527(i)(5) and § 527(i)(6), three types of organizations are not required

to file the Form 8871 notice:

(a) Persons required to report under the Federal Election Campaign Act

of 1971 (FECA) as a political committee (see 2 U.S.C. § 431(4));

(b) Organizations that reasonably anticipate that their annual gross

receipts will always be less than $25,000; and

because they have made an "exempt function" expenditure.

All other political organizations, including state and local candidate committees, are required to file

the notice.

4. Q. Is a political organization required to file Form 8871 if it does not know whether it

will have annual gross receipts of $25,000 or more for any taxable year?

A. A newly established political organization is not required to file Form 8871 if it

reasonably anticipates that its annual gross receipts will be less than $25,000 for its first six taxable

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years. However, if an organization, in fact, does have annual gross receipts of $25,000 or more for

any taxable year, it is required to file Form 8871 within 30 days of receiving $25,000.

5. Q. Is the separate segregated fund established under § 527(f)(3) by a § 501(c)

organization required to file Form 8871?

A. A § 501(c) organization that is not prohibited from participating in political campaign

activity has the option of conducting the activity itself or setting up a separate segregated fund. If

the § 501(c) organization conducts the activity itself, it is subject to tax under § 527(f)(1) on the

lesser of its investment income or the amount of its political expenditures, but it is not required to

file Form 8871 pursuant to § 527(i)(5)(A). If the § 501(c) organization establishes a separate

segregated fund, the fund is treated as a separate political organization under § 527(f)(3) and does

not qualify for the exception under § 527(i)(5)(A). Therefore, unless it meets one of the other

exceptions, the separate segregated fund is required to file Form 8871.

6. Q. Is an organization that finances both federal and non-federal election activity required

to file the Form 8871 notice?

A. As a general rule, any political organization (whether or not separately incorporated)

that is organized and operated primarily for an exempt function under § 527(e)(2) (see Q&A-17)

must file Form 8871 unless it meets one of the exceptions discussed above (see Q&A-3), one of

which is being required to report under FECA as a political committee. An organization that

finances election activity (within the meaning of FECA) for both federal and non-federal elections

may establish a political committee to receive contributions and make expenditures for both federal

and non-federal election activity. In that case, the organization must register as a political committee

and comply with the FECA contribution limitations and reporting requirements. 11 C.F.R.

§ 102.5(a)(1)(ii). Such an organization is, therefore, not required to file Form 8871.

If, however, the organization sets up separate accounts to conduct its federal election activity

and its non-federal election activity, the federal account is treated as a separate political committee

that is required to register and report under FECA. 11 C.F.R. § 102.5(a)(1)(i). The treatment of the

federal account as a separate committee is consistent with the organizational requirements for

political organizations under § 527, as discussed below in Q&A-12. Accordingly, the separate

federal account is not required to file Form 8871. However, a separate non-federal account is not

required to register and report under FECA as a political committee. Therefore, a separate

non-federal account that is described in § 527(e)(1) is required to file Form 8871.

7. Q. Are political organizations that are required to report to state or local election

agencies excepted from the notice requirement?

A. Section 527(i) does not except political organizations that file reports with state or

local election agencies from the notice of status requirement. Therefore, unless the political

organization meets one of the exceptions discussed above in Q&A-3, it must file Form 8871 with

the Service.

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8. Q. When must the organization file Form 8871?

A. Form 8871 must be filed within 24 hours after the date on which the organization was

established. See Notice 2000-36, 2000-33 I.R.B. 173 for information about filing requirements for

organizations in existence before July 30, 2000.

9. Q. What are the methods of filing Form 8871?

A. Section 527(i)(1)(A) requires that the organization file Form 8871 both electronically

and in writing. Therefore, the methods for filing Form 8871 are as follows:

(a) Electronically via the Internal Revenue Service Internet Web Site (IRS Web Site) at

www.irs.gov./polorgs, and

(b) In writing by sending a signed copy of Form 8871 to the Internal Revenue Service

Center, Ogden, UT 84201. An organization can fill in and print out the form from

the IRS Web Site.

10. Q. Must an organization take any additional steps before filing Form 8871?

A. Before filing Form 8871, the political organization must have its own employer

identification number (EIN) even if it has no employees. To obtain an EIN, an organization must

file Form SS-4, Application for Employer Identification Number, with the Service (see Q&A-52).

11. Q. What information must be provided in the Form 8871 notice?

A. Under § 527(i)(3), an organization must provide in its Form 8871 notice its name and

address (including any business address, if different) and electronic mailing address; its purpose; the

names and addresses of its officers, highly compensated employees, contact person, custodian of

records, and members of its Board of Directors; and the name and address of, and relationship to,

any related entities (within the meaning of § 168(h)(4)).

12. Q. Does § 527(i) change the organizational requirements for § 527 organizations?

A. No. Section 527 does not require an organization to have formal organizational

documents, such as articles of incorporation. Under § 1.527-2(a)(2) of the Income Tax Regulations,

a political organization meets the organizational test if it is organized for the primary purpose of

carrying on exempt function activities as defined in § 527. The regulation specifically states that the

organization need not be formally chartered or established as a corporation, trust, or association. For

example, a separate bank account can qualify as a political organization. See Rev. Rul. 79-11,

1979-1 C.B. 207.

The requirement that a § 527 organization include the names and addresses of its officers,

highly compensated employees, and members of its Board of Directors does not change the

organizational test for § 527. Section 527(i) does not require political organizations to be organized

with Boards of Directors, officers and highly compensated employees. It merely requires the

organization to provide their names and addresses if it is so organized.

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13. Q. What is a "related entity" for this purpose?

A. An entity is a "related entity" within the meaning of § 168(h)(4), which provides that

an organization is related to another entity as follows:

(a) The two entities have (i) significant common purposes and substantial common

membership or (ii) directly or indirectly substantial common direction or control; or

(b) Either entity owns (directly or through one or more entities) a 50 percent or greater

interest in the capital or profits of the other. For this purpose, entities treated as

related entities under (a) above shall be treated as one entity.

14. Q. What are "highly compensated employees" for this purpose?

A. Highly compensated employees for this purpose are the five employees (other than

officers and directors) who are reasonably expected to have the highest annual compensation over

$50,000. Compensation includes both cash and noncash amounts, whether paid currently or

deferred, for the 12-month period that began with the date the organization was formed (if the

organization was formed after June 30, 2000). If the organization was already in existence on June

30, 2000, it must use the accounting period that includes July 1, 2000.

15. Q. What if an organization described in § 527(e)(1) does not file the Form 8871 notice?

A. An organization described in § 527(e)(1) must file Form 8871 unless it is an

organization described in § 527(i)(5) or § 527(i)(6) (see Q&A-3). If the organization fails to file

Form 8871 on a timely basis, § 527(i)(4) provides that until the organization satisfies the notice

requirement, the taxable income of the organization includes its exempt function income (including

contributions received, membership dues, and political fundraising receipts), minus any deductions

directly connected with the production of that income. For purposes of computing its taxable

income, the organization may not deduct its exempt function expenditures because § 162(e) denies

a deduction for political campaign expenditures.

Under § 527(b), the tax is computed by multiplying the organization's taxable income

(including its net investment income) by the highest corporate tax rate, currently 35 percent. The

organization must file a Form 1120-POL to report the income and pay the tax.

16. Q. When is an organization described in § 527(e)(1)?

A. An organization is described in § 527(e)(1) if it meets both the organizational and

operational tests, that is, it must be organized and operated primarily for the purpose of accepting

contributions or making expenditures for an exempt function under § 527(e)(2). See § 1.527-2(a).

17. Q. What is an "exempt function" under § 527(e)(2)?

A. "Exempt function" means, under § 527(e)(2), 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 individual or electors are selected, nominated, elected, or appointed.

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18. Q. Are transfers to political organizations that fail to file Form 8871 subject to the gift

tax?

A. Section 2501(a)(5) provides that the gift tax does not apply to transfers of money or

other property to political organizations within the meaning of § 527(e)(1). Therefore, transfers to

an organization described in § 527(e)(1) (see Q&A-16) are not subject to the gift tax, regardless of

whether the organization has filed Form 8871.

19. Q. Is the Form 8871 notice publicly available?

A. Yes. Under § 6104(a), Form 8871 (including any supporting papers), and any letter

or other document the Service issues with regard to Form 8871, will be open to public inspection.

Copies of Form 8871 that have been filed are currently available at the IRS Web Site at

www.irs.gov/polorgs and are considered widely available under § 301.6104(d)-3 of the Procedure

and Administration Regulations, as long as the organization provides the IRS Web Site address to

the person making the request. In addition, the organization is required to make a copy of these

materials available for public inspection during regular business hours at the organization's principal

office (and at each of its regional or district offices having at least three paid employees) in the same

manner as applications for exemption of § 501(c) organizations are made available. § 6104(d).

20. Q. What is the penalty on the organization for failure to comply with the public

inspection requirement?

A. Under § 6652(c)(1)(D), a penalty of $20 per day may be imposed on any person with

a duty to comply with the public inspection requirement for each day a failure to comply continues.

II. Periodic Reporting Requirements

21. Q. What are the periodic reporting requirements imposed upon political organizations?

A. Under § 527(j), a political organization is required to periodically report certain

contributions it receives and expenditures it makes.

22. Q. What is the required periodic reporting form?

A. The required periodic reporting form is Form 8872, Political Organization Report

of Contributions and Expenditures.

23. Q. When are political organizations required to file periodic reports on Form 8872?

A. Under § 527(j)(2), political organizations that accept contributions or make

expenditures for an exempt function under § 527 (see Q&A-17) during a calendar year are required

to file periodic reports on Form 8872, beginning with the first month or quarter in which they accept

contributions or make expenditures. In addition, organizations that make contributions or

expenditures with respect to an election for federal office (as defined in § 527(j)(6)) may be required

to file pre-election reports for that election.

24. Q. Are all political organizations required to file periodic reports on Form 8872?

A. No, § 527(j)(5) provides that some organizations are not subject to this requirement.

The organizations excepted from the filing requirements are as follows:

(a) Organizations excepted from the requirement to file a Form 8871 (see Q&A-3);

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(b) Political committees of a state or local candidate, including political committees of

state or local officeholders; and

All other political organizations, including state and local political action committees, are

subject to the reporting requirements of § 527(j), even if they file reports with state or local election

agencies.

25. Q. Must a state or local candidate or officeholder organize a formal committee to be

excepted from the Form 8872 filing requirements?

A. No. As discussed in Q&A-12, § 527 does not require organizations to have formal

organizational documents. Therefore, a candidate or officeholder does not need to organize a formal

committee to qualify for the exception under § 527(j)(5) for committees of state or local candidates.

26. Q. Are political organizations that engage in exempt function activities (as defined in

§ 527(e)(2)) solely with respect to elections for state or local offices excepted from the

Form 8872 filing requirements?

A. No. Although the timing of the reports is based upon federal elections (see Q&A-34),

the requirement to file the reports is based on accepting contributions or making expenditures for

an exempt function under § 527(e)(2) (see Q&A-17). Therefore, unless a political organization

meets one of the exceptions discussed above in Q&A-24, it must file Form 8872 with the Service.

27. Q. Is an organization that reasonably anticipated it would not have annual gross receipts

of $25,000 or more required to file Form 8872 if it, in fact, receives $25,000 or more in any

taxable year?

A. An organization that receives $25,000 in any taxable year no longer qualifies for the

exception in § 527(j)(5)(C) and, therefore, must begin filing Form 8872 unless it meets one of the

other exceptions discussed in Q&A-24. The organization must file, within 30 days of receiving

$25,000, any Form 8872 that would otherwise have been due during the calendar year prior to that

date.

28. Q. How often must the Form 8872 be filed?

A. A political organization subject to the periodic reporting requirement may choose to

file Form 8872 on a monthly basis or on a quarterly/semi-annual basis, but it must file on the same

basis for the entire calendar year.

29. Q. What is an election year and non-election year for purposes of determining the due

dates for filing Form 8872?

A. An election year is any year in which a regularly scheduled general election for

federal office is held, i.e., any even-numbered year. A non-election year is therefore any

odd-numbered year.

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30. Q. If an organization chooses to file on a monthly basis, when is Form 8872 due in a

non-election year?

A. Pursuant to § 527(j)(2)(B), a political organization that chooses to file monthly must

file Form 8872 reports not later than the 20th day after the end of the month, which must be complete

as of the last day of the month. December activity is included in the year-end report which is due

not later than January 31 of the following year.

31. Q. If an organization chooses to file on a monthly basis, when is Form 8872 due during

an election year?

A. Pursuant to § 527(j)(2)(B), in any election year (i.e., even-numbered years), monthly

reports are due not later than the 20th day after the end of the month (see Q&A-30), except the

organization shall not file the reports regularly due in November and December (i.e., the monthly

reports for activity in October and November). Instead, the organization must file a Form 8872

report not later than 12 days before the general election (or 15 days before the general election if

posted by registered or certified mail) that contains information through the 20th day before the

general election. The organization must also file a report no more than 30 days after the general

election which shall contain information through the 20th day after the election. The December

activity is included in the year-end report due not later than January 31 of the following year.

32. Q. If an organization chooses not to file on a monthly basis, when is Form 8872 due in

a non-election year?

A. Pursuant to § 527(j)(2)(A), a political organization that chooses not to file monthly

must file semi-annual reports in non-election years (i.e., odd-numbered years). These reports are due

not later than July 31 for the first half of the year and, for the second half of the year, not later than

January 31 of the following year.

33. Q. If an organization chooses not to file on a monthly basis, when is Form 8872 due

during an election year?

A. Pursuant to § 527(j)(2)(A), in an election year (even-numbered years), an organization

that chooses not to file monthly reports must file quarterly reports not later than the 15th day after

the last day of the quarter, except that the return for the final quarter shall be due not later than

January 31 of the following year. The organization must also file a post-general election report not

later than 30 days after the general election that contains information through the 20th day after the

election. In addition, the organization must file a pre-election report for any election for federal

office with respect to which the organization makes a contribution or expenditure. These reports

shall be filed not later than 12 days before the election (15 days before if posted by registered or

certified mail) and must contain information through the 20th day before the election.

34. Q. What is an election for purposes of the reporting deadlines under § 527(j)?

A. For purposes of determining what is an election year and what elections trigger the

pre-election and post-general election reports, § 527(j)(6) provides that an "election" is a general,

special, primary, or runoff election for a federal office; a convention or caucus of a political party

with authority to nominate a candidate for federal office; a primary election to select delegates to a

national nominating convention of a political party; or a primary election to express a preference for

the nomination of individuals for election to the office of President. Thus, an election for purpose

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of these reporting deadlines does not include a purely state or local election. When an election

involves both candidates for federal office and candidates for state or local offices, it is an election

for purposes of the reporting deadlines, but only those organizations that make contributions or

expenditures with respect to the candidates for federal office are required to file the pre-election

reports for those elections under § 527(j)(2)(A)(i)(II). However, all reports filed under § 527(j) must

contain information about the contributions and expenditures within the reporting period, regardless

of whether they were accepted or made with respect to candidates for federal, state or local office.

35. Q. What is a general election?

A. A general election is either one of the following:

(a) an election for federal office held in even numbered years on the Tuesday following

the first Monday in November or

(b) an election held to fill a vacancy in a federal office (i.e., a special election) that is

intended to result in the final selection of a single individual to the office at stake.

See 11 C.F.R. 100.2(b).

36. Q. How will "election" under § 527(j)(6) be interpreted?

A. The definition of "election" under § 527(j)(6) is virtually identical to the definition

of "election" under FECA (2 U.S.C. § 431(1)). Organizations may rely on FEC interpretations of

the FECA definition in the absence of further guidance from the Service. The FEC publishes

information concerning the filing requirements under FECA and the dates for filing those reports,

including information on the dates of elections, on its Web Site at

http://www.fec.gov/pages/report.htm.

37. Q. What must a Form 8872 report contain?

A. The report must include the name, address, and (if an individual) the occupation and

employer, of any person to whom expenditures are made that aggregate $500 or more in a calendar

year and the amount of such expenditure. The report must also include the name, address, and (if

an individual) the occupation and employer, of any person that contributes in the aggregate $200 or

more in a calendar year and the amount of such contribution. However, an organization is not

required to report independent expenditures, as defined in § 301 of FECA. Only expenditures made

or contributions received after July 1, 2000, that are not made or received pursuant to binding

contracts entered into before July 2, 2000, must be reported.

38. Q. What is an independent expenditure under § 301 of FECA?

A. An independent expenditure is an expenditure by a person expressly advocating the

election or defeat of a clearly identified candidate for federal office which is made without

cooperation or consultation with any candidate for federal office, or any authorized committee or

agent of such candidate, and which is not made in concert with, or at the request or suggestion of,

any candidate for federal office, or authorized committee or agent of such candidate. See 2 U.S.C.

§ 431(17).

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39. Q. Where is the Form 8872 filed?

A. The report is filed by sending a signed copy of Form 8872 to the Internal Revenue

Service Center, Ogden, UT 84201. The form must be signed by an official authorized by the

organization to sign the report.

40. Q. What if a political organization that has filed Form 8871 does not file the required

Form 8872?

A. Under § 527(j)(1), a political organization that does not file the required Form 8872

or which fails to include the information required on the Form 8872 is subject to a penalty equal to

the amount of contributions and expenditures that are not disclosed multiplied by the highest

corporate tax rate, currently 35 percent.

41. Q. Is the Form 8872 filed by political organizations publicly available?

A. Yes. Under § 6104(b) and § 6104(d)(6), Form 8872 will be made available for public

inspection by the Service. Copies of Form 8872 that have been filed are currently available at the

IRS Web Site at www.irs.gov/polorgs and are considered widely available under § 301.6104(d)-3,

as long as the organization provides the IRS Web Site address to the person making the request. In

addition, under § 6104(d)(1)(A), the organization is required to make a copy of these reports

available for public inspection during regular business hours at the organization's principal office

(and at each of its regional or district offices having at least three paid employees) in the same

manner as applications for exemption of § 501(c) organizations are made available. Pursuant to

§ 6104(b) and § 6104(d)(3)(A), contributor information must be disclosed to the public.

42. Q. What if the political organization does not make its Form 8872 publicly available?

A. Under § 6652(c)(1)(C), a penalty of $20 per day may be imposed on any person with

a duty to comply with the public inspection requirement for each day a failure to comply continues.

The maximum penalty that may be incurred for any failure to disclose any one report is $10,000.

III. Annual Return Requirements

43. Q. Which political organizations are required to file annual income tax returns?

A. A political organization that has taxable income in excess of the $100 specific

deduction allowed under § 527 is required to file an annual income tax return on Form 1120-POL,

U.S. Income Tax Return for Certain Political Organizations. In addition, for taxable years beginning

after June 30, 2000, a political organization that has $25,000 or more in gross receipts for the taxable

year is also required to file Form 1120-POL, without regard to whether it has taxable income.

§ 6012(a)(6).

44. Q. When is the Form 1120-POL due?

A. The Form 1120-POL is due on or before the 15th day of the third month after the

close of the organization's taxable year. § 6072(b). Thus, for a calendar-year taxpayer,

Form 1120-POL is due on March 15 of the following year.

45. Q. Which political organizations are required to file an annual information return?

A. A political organization that is required under § 6012(a)(6) to file an income tax

return is also required to file Form 990, Return of Organization Exempt from Income Tax, for taxable

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years beginning after June 30, 2000. § 6033(g). Organizations with gross receipts less than

$100,000 and assets less than $250,000 may file Form 990-EZ, Short Form Return of Organization

Exempt from Income Tax. Organizations with gross receipts of less than $25,000 are not required

to file Form 990 or Form 990-EZ.

46. Q. When is the Form 990 due?

A. The Form 990 (or Form 990-EZ) is due on or before the 15th day of the fifth month

after the close of the organization's taxable year. Thus, for a calendar-year taxpayer, Form 990 is due

on May 15 of the following year.

47. Q. What if the political organization fails to file Form 1120-POL or Form 990?

A. A political organization that fails to file a required Form 1120-POL or Form 900 or

fails to include required information on those returns is subject to a penalty of $20 per day for every

day such failure continues. The maximum penalty imposed regarding any one return is the lesser

of $10,000 or 5 percent of the gross receipts of the organization for the year. In the case of an

organization having gross receipts exceeding $1,000,000 for any year, the penalty is increased to

$100 per day with a maximum penalty of $50,000. § 6652(c)(1)(A).

48. Q. Are the Forms 1120-POL and Forms 990 filed by political organizations publicly

available?

A. Yes, the Forms 1120-POL and the Forms 990 filed for taxable years beginning after

June 30, 2000 will be made available for public inspection by the Service. § 6104(b). In addition,

each political organization must make a copy of its returns available for public inspection during

regular business hours at its principal office (and any regional or district offices having at least three

paid employees) in the same manner as annual information returns of § 501(c) organizations are

made available. It must also provide a copy of the returns to any person requesting a copy in person

or in writing without charge other than a reasonable charge for reproduction and postage in the same

manner that § 501(c) organizations provide copies of their annual returns. § 6104(d)(1). If an

organization's returns are widely available under § 301.6104(d)-3 (such as on the Internet), the

organization need not respond to requests for copies so long as it provides the web site address where

the returns are available to the person making the request. Returns only need to be made available

for three years after filing. § 6104(d)(2). Contributor information must be disclosed to the public.

§ 6104(d)(3)(A).

49. Q. What if the political organization does not make its Forms 1120-POL and Forms 990

publicly available?

A. A penalty of $20 per day may be imposed on any person with a duty to comply with

the public inspection requirement for each day a failure to comply continues. The maximum penalty

that may be incurred for any failure to disclose any one return is $10,000. § 6652(c)(1)(C).

IV. General

50. Q. What if the filing date for any of these forms falls on Saturday, Sunday or a holiday?

A. If any due date falls on a Saturday, Sunday or legal holiday, the organization may file

the report on the next business day.

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51. Q. Where can organizations get copies of the various forms?

A. The various forms (Form SS-4, Form 8871, Form 8872, Form 1120-POL, and

Form 990) and their instructions are available by calling 1-800-TAX-Form (1-800-829-3676) or via

the Internet at the IRS Web Site at www.irs.gov in the "Forms and Publications" section.

52. Q. What if an organization has questions regarding the notice and reporting requirements

or has any problem obtaining an EIN?

A. For more information or if an organization has any problem obtaining an EIN,

organizations may call the TE/GE Customer Service Center at 1-877-829-5500.

DRAFTING INFORMATION

The principal author of this announcement is Judith E. Kindell of Exempt Organizations.

For further information regarding this announcement contact Judith E. Kindell on (202) 622-6494

(not a toll-free call).

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APPENDIX IV

Political Campaign Activity and Affiliations Between and Among Exempt Organizations

1. May an IRC 501(c) contribute to a PAC?

Better Education Foundation is an IRC 501(c)(3) organization whose charitable purpose is

to improve education. Good Education PAC is an IRC 527 organization that promotes candidates

for public office that support good education. Better Education Foundation makes a contribution

to Good Education PAC, as illustrated in Example 1.

Example 1

Better Education Foundation has violated the political campaign prohibition. It may not do

indirectly what it could not do directly.

2. May an IRC 501(c)(3) establish an IRC 527 PAC?

Better Education Foundation is exempt under IRC 501(c)(3). It establishes a PAC under

federal election laws, the Better Education Foundation PAC. See Example 2, below.

Example 2

The Better Education Foundation has violated the prohibition on participation or intervention

in a political campaign on behalf of or in opposition to any candidate for public office. As discussed

above, the legislative history of IRC 527 makes it clear it was not intended to affect in any way the

prohibition against participation or intervention in a political campaign by IRC 501(c)(3)

organizations. This is true whether the PAC is a federal PAC or a state PAC. It is true even if the

PAC ultimately repays any funds used for establishing the organization. The IRC 501(c)(3)

organization may not do indirectly through a PAC what it could not do directly itself.

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3. May the directors of an IRC 501(c)(3) organization establish a PAC?

Abbott, Barnes, Carter, Daniels and Edwards are members of the Board of Directors of Better

Education Foundation, an IRC 501(c)(3) organization. Because of their interest in education,

Abbott, Barnes, Carter, Daniels and Edwards decide to establish the Good Education PAC. They

do so on their own time and without using any of the resources or facilities of Better Education

Foundation. See Example 3, below.

Example 3

Better Education Foundation has not violated the political campaign intervention prohibition. The

members of the Board of Directors are not prohibited from engaging in political activity simply

because they are on the Board of an IRC 501(c)(3) organization.

4. May an IRC 501(c) organization other than an IRC 501(c)(3) organization contribute to an

IRC 527 PAC?

City Workers Labor Union is an IRC 501(c)(5) organization that represents city workers.

Fair City PAC is an IRC 527 organization that promotes candidates who support higher wages for

city employees. City Workers Labor Union makes a contribution to Fair City PAC as illustrated

below, in Example 4.

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Example 4

So long as political campaign intervention is not the primary activity of City Workers Labor

Union, it will not jeopardize the exempt status under IRC 501(c)(5) of City Workers Labor Union.

However, City Workers Labor Union will be subject to tax on the lesser of the contribution or its

investment income under IRC 527(f). The result would be the same for IRC 501(c)(4) social welfare

organizations and IRC 501(c)(6) trade associations.

5. May an IRC 501(c) organization other than an IRC 501(c)(3) organization establish an

IRC 527 PAC?

The City Workers Labor Union is an IRC 501(c)(5) organization. It establishes an IRC 527

PAC, the City Workers Labor Union PAC. See Example 5, below.

Example 5

The provisions of

IRC 527(f) encourage IRC 501(c) organizations that are not prohibited from intervening or

participating in political campaigns, such as IRC 501(c)(4), IRC 501(c)(5) and IRC 501(c)(6)

organizations, to establish separate PACs to engage in their political campaign activities.

6. May an IRC 501(c)(3) organization be a member of an IRC 501(c) organization that engages

in some political activity?

Good Health Hospital and Caring Hands Hospital are both exempt as IRC 501(c)(3)

organizations. Doctors Hospital and Suburban Hospital are for-profit hospitals. All four hospitals

are located in Fair City. Hospital Trade Association is an IRC 501(c)(6) organization that promotes

the hospital industry in Fair City. All four hospitals are members of Hospital Trade Association, as

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illustrated below, in Example 6. Hospital Trade Association does engage in some political campaign

activity, but it is not its primary activity.

Example 6

Good Health Hospital and Caring Hands Hospital may be members of Hospital Trade

Association without jeopardizing their exempt status provided they do not earmark any of their

contributions for the political campaign activity of Hospital Trade Association.

7. May an IRC 501(c) organization that has IRC 501(c)(3) members establish an IRC 527

organization?

Good Health Hospital and Caring Hands Hospital are both exempt as IRC 501(c)(3)

organizations. Doctors Hospital and Suburban Hospital are for-profit hospitals. All four hospitals

are located in Fair City. Hospital Trade Association is an IRC 501(c)(6) organization that promotes

the hospital industry in Fair City. All four hospitals are members of Hospital Trade Association.

Hospital Trade Association establishes Hospital Trade Association PAC, an IRC 527 organization.

See Example 7, below.

Example 7

Whether Hospital Trade Association carries on its activities directly or through an IRC 527

organization, Good Health Hospital and Caring Hands Hospital may be members of Hospital Trade

Association without jeopardizing their exempt status provided they do not earmark any of their

contributions for the political campaign activity of Hospital Trade Association.

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8. May an IRC 501(c)(3) organization contribute to an IRC 527 organization that is affiliated

with an IRC 501(c) organization of which the IRC 501(c)(3) organization is a member?

Good Health Hospital and Caring Hands Hospital are both exempt as IRC 501(c)(3)

organizations. Doctors Hospital and Suburban Hospital are for-profit hospitals. All four hospitals

are located in Fair City. Hospital Trade Association is an IRC 501(c)(6) organization that promotes

the hospital industry in Fair City. All four hospitals are members of Hospital Trade Association.

Hospital Trade Association establishes Hospital Trade Association PAC, an IRC 527 organization.

Good Health Hospital contributes a portion of its Hospital Trade Association Dues to the Hospital

Trade Association PAC through a checkoff program, as illustrated in Example 8, below.

Example 8

Good Health Hospital has violated the prohibition on participation or intervention in a

political campaign on behalf of or in opposition to any candidate for public office by contributing

to the Hospital Trade Association PAC through the checkoff program.

9. May an IRC 501(c)(3) organization establish an IRC 501(c) organization that establishes an

IRC 527 PAC?

Green Earth Society is an IRC 501(c)(3) organization. It establishes an IRC 501(c)(4)

organization, Save the Earth Action Fund, to engage in substantial lobbying activities. Save the

Earth Action Fund establishes several PACs under the election laws of various states, as illustrated

in Example 9, below. Save the Earth Action Fund also establishes a federal PAC, Save the Earth

Action Fund PAC, an IRC 527 organization. See Example 10 below. Green Earth Society and Save

the Earth Action Fund do not commingle their finances or other resources, conduct separate activities

in furtherance of their exempt purposes and maintain and respect their separate entities. Green Earth

Society does not earmark for political campaign activities any support it provides to Save the Earth

Action Fund.

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Example 9

Example 10

The mere establishment and affiliation of these federal and state IRC 527 organizations by

Save the Earth Action Fund does not result in Green Earth Society having violated the political

campaign prohibition. So long as the organizations themselves act as separate entities and not as

agents of the other, the Service will respect the separate legal status of the organizations and not

attribute activities of the IRC 501(c) organization to the IRC 501(c)(3).

10. May an IRC 501(c)(3) organization that establishes an IRC 501(c) organization contribute

to an IRC 527 organization established by the IRC 501(c) organization?

Green Earth Society is an IRC 501(c)(3) organization that has established an IRC 501(c)(4)

organization, Save the Earth Action Fund. Save the Earth Action Fund establishes Save the Earth

Action Fund PAC, an IRC 527 organization. Green Earth Society contributes to the Save the Earth

Action Fund PAC, as illustrated in Example 11, below.

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Election Year Issues

Example 11

Green Earth Society has violated the prohibition on political campaign activity by

contributing to the Save the Earth Action Fund PAC.

11. May an IRC 501(c) organization establish both an IRC 501(c)(3) organization and an

IRC 527 organization?

Downtown Business League is an IRC 501(c)(6) organization that promotes businesses in

the downtown area. It establishes Downtown Business League Education Fund to carry on

educational activities. It also establishes Downtown Business League PAC to support candidates

who promote downtown business development. See Example 12, below.

Example 12

Downtown Business League Education Fund has not violated the political campaign

prohibition merely because it was established by Downtown Business League, which also established

Downtown Business League PAC. As long as the three organizations maintain their separate

existence, the activities of one will not be attributed to the others. The result would be the same for

IRC 501(c)(4) social welfare organizations and IRC 501(c)(5) labor unions.

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Election Year Issues

12. May an IRC 501(c)(3) organization that was established by an IRC 501(c) organization

contribute to an IRC 527 organization also established by the IRC 501(c) organization?

Downtown Business League is an IRC 501(c)(6) organization that promotes businesses in

the downtown area. It establishes Downtown Business League Education Fund to carry on

educational activities. It also establishes Downtown Business League PAC to support candidates

who promote downtown business development. Downtown Business League Education Fund makes

a contribution to Downtown Business League PAC as illustrated below in Example 13.

Example 13

Downtown Business League has violated the prohibition on participating or intervening in

a political campaign on behalf of or in opposition to a candidate for public office.

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Subject Listing

1. Introduction ..........................................................335

2. IRC 501(c)(3) Organizations and the Political Campaign Prohibition ............. 336

A. History of the Statutes ............................................336

(1) Enactment of the Prohibition .................................336

(2) Private Foundations and Electioneering Activities ................ 337

(3) Enactment of Additional Provisions ...........................338

B. General Issues ..................................................339

1. Political Campaign Prohibition .........................339

2. "Candidate" ........................................339

3. "Public Office" ......................................339

4. "Public Office" Construed .............................340

5. "Offers Himself or is Proposed by Others" ................342

6. Other Government Agency Definitions of Candidate ........ 343

7. "Does Not Participate In, or Intervene In" .................344

8. Issue Advocacy and Political Campaign Participation ....... 344

9. Feasibility of Using FEC "Express Advocacy" Standard ..... 346

10. Educational Activity and Political Campaign Participation ... 349

C. Motivation and Absoluteness of the IRC 501(c)(3) Campaign Prohibition ... 350

1. Motivation .........................................350

2. Absoluteness of the Prohibition .........................352

D. Excise Taxes and Flagrant Violations ................................353

(1) The IRC 4955 Excise Taxes .................................353

1. IRC 4955 Taxes and Revocation ........................353

2. Organization Tax ....................................355

3. Manager Tax .......................................355

4. "Political Expenditure" under IRC 4955(d)(1) ............. 355

5. "Political Expenditure" under IRC 4955(d)(2) ............. 355

6. Effective Control of Organization by Candidate ............ 356

7. Promoting Candidacy as Primary Purpose .................356

8. Voter Registration, etc. ...............................357

9. Effect of IRC 4955 on IRC 501(c)(3) Political Prohibition ... 357

10. Coordination of IRC 4955 with IRC 4945 .................357

11. Coordination of IRC 4955 with IRC 4958 .................357

12. Imposition of Tax on Manager ..........................358

13. "Organization Manager" ..............................358

14. Organization Officer as "Organization Manager" ........... 358

15. Manager's Agreement to the Political Expenditure .......... 359

16. Manager's Knowledge of a Political Expenditure ........... 359

17. Manager's Willful Agreement ..........................360

18. Manager's Reasonable Cause ...........................360

19. Manager's Reliance on Advice of Counsel ................360

20. Effect when Counsel Advice Determined Incorrect ......... 360

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21. Failure to Seek Advice of Counsel ......................360

22. Organization's Reliance on Advice of Counsel ............. 361

23. Burden of Proof .....................................361

24. Computation and Reporting ............................361

25. "Corrected" Expenditures that are not "Willful and Flagrant" .. 361

26. "Willful and Flagrant" ................................361

27. "Correction" ........................................362

28. Abatement .........................................362

29. Requests for Abatement ...............................362

(2) The Treatment of Flagrant Political Expenditures ................. 363

1. IRC 6852 Termination Assessment ......................363

2. IRC 7409 Injunction ..................................363

E. Attribution of the Acts of Individuals to IRC 501(c)(3) Organizations ....... 363

1. Officials ...........................................363

2. Others .............................................364

F. Relationship of IRC 501(c)(3) Organizations with Organizations

That Conduct Political Campaign Activities ...........................365

1. PAC Established by Organization .......................365

2. PAC Established by Organization's Directors .............. 366

3. Related IRC 501(c)(4) Organization .....................367

G. Particular Situations Involving the Application of

Facts and Circumstances Tests .....................................369

1. Coverage of Political Campaigns in Periodicals ............ 369

2. "Voters' Guides" .....................................370

3. Voting Records .....................................370

4. Candidate Questionnaires .............................371

5. Distribution of Material Prepared by Political Organization ... 372

6. Public Forums ......................................372

7. Distribution of Campaign Literature at Public Forums ....... 375

8. Breadth of Issues in Advocacy Communication ............ 375

9. Nonelectoral Advocacy Communication ..................376

10. Broadcast Stations ...................................377

11. Colleges and Universities .............................377

12. Voter Registration ...................................378

13. Identification of Unregistered Voters .....................379

14. Private Foundation Voter Registration ...................379

15. Candidates as Speakers at Organization's Events ........... 380

16. Fundraising ........................................382

17. Internet ............................................382

H. Situations Involving Business Activities ..............................383

1. General Rules .......................................383

2. Mailing Lists .......................................383

3. Paid Political Advertising .............................384

4. Loans .............................................384

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I. Charity/PAC Matching Programs ...................................385

1. General Description ..................................385

2. Whether Payments Result in Income to Employee .......... 385

3. Whether Corporate Charitable Deduction is Permitted ....... 386

4. Effect on Charity ....................................387

3. Political Organizations Under IRC 527 .....................................387

A. History of the Statute .............................................387

(1) Situation Prior to Enactment .................................387

(2) Enactment of the Statute ....................................388

(3) The 1981 and 1988 Amendments .............................388

(4) The 2000 Amendments .....................................388

B. Tax Treatment of Political Organizations .............................389

1. Organizations Covered by IRC 527 ......................389

2. Tests Establishing Political Organization Status ............ 389

3. Organizational Test ..................................389

4. Lack of Formal Organizing Documents ...................390

5. Ambiguous Organizing Documents ......................390

6. Operational Test .....................................390

7. Corporate Formalities ................................390

8. Employer Identification Number ........................391

9. Tax Treatment ......................................391

10. Application for Exemption ............................391

11. Notice of Status .....................................391

12. Exceptions to Notice .................................392

13. Less than $25,000 Gross Receipts Exception .............. 392

14. IRC 527(f)(3) Separate Segregated Fund ..................392

15. Federal and Non-federal Activity ........................393

16. Requirement to Report to State or Local Election Authorities . 393

17. Filing Form 8871 ....................................394

18. Information Provided on Form 8871 .....................394

19. "Related Entity" .....................................394

20. "Highly Compensated Employees" ......................394

21. Failure to File Form 8871 .............................395

22. Gift Tax Consequences ...............................395

C. Segregated Funds of Political Organizations ...........................395

1. IRC 527 Requirements ................................395

2. "Segregated Fund" ...................................395

3. Savings or Checking Account ..........................396

4. Record Keeping Requirement ..........................396

D. Exempt Function Activities of Political Organizations ................... 396

1. "Exempt Function" ...................................396

2. "Selection Process" ..................................397

3. Office Holder's Expenses ..............................397

4. "Exempt Function" Activity ............................397

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Election Year Issues

5. "Expenditures" ......................................397

6. Directly Related Expenditures ..........................398

7. Non-Announced Candidate ............................398

8. Expenditures Unrelated to Candidate's Own Campaign ...... 398

9. Election Night Expenditures ...........................399

10. Post-Election Cash Awards ............................399

11. Activities Between Elections ...........................399

12. Candidate Salary ....................................399

13. Candidate Spouse's Expenses ..........................400

14. Terminating Activities ................................400

15. Time for Termination .................................400

16. Nonpartisan Educational Workshop .....................400

17. Referendum or Initiative Measure .......................401

18. Tax Status of Ballot Measure Committee .................402

19. Indirectly Related Expenditures .........................402

20. Organizations that Oppose Candidates ...................403

E. Taxable and Exempt Function Income of Political Organizations .......... 403

1. General Rules Regarding Taxable Income ................403

2. Treatment of Interest on State or Local Bonds .............403

3. Capital Gains and Losses ..............................404

4. Expenses, Depreciation, and Similar Items ................ 404

5. "Directly Connected" .................................404

6. Dual Use ...........................................404

7. Indirect Expenses ....................................405

8. Form 1120-POL Filing Requirement .....................405

9. Assessment and Collection ............................405

10. "Exempt Function Income" ............................406

11. "Contribution of Money or Other Property" ............... 406

12. "Membership Dues, Membership Fee or Assessment" ....... 407

13. Political Fundraising Proceeds ..........................407

14. "Ordinary Course of a Trade or Business" .................408

15. Bingo Game Proceeds ................................408

16. Raffle Ticket Income - Exempt Function Income ........... 408

17. Raffle Ticket Income - Contributions ....................409

18. Raffle Ticket Income - Membership Dues .................409

19. Raffle Ticket Income - Political Fundraising Event ......... 409

20. Raffle Ticket Income - Bingo ..........................410

21. Indirect Receipt of Exempt Function Income .............. 410

22. Non-Exempt Function Expenditures .....................410

23. More Than Insubstantial Amount of Expenditures .......... 411

24. Effect of Substantial Non-Exempt Function Expenditures .... 411

25. Taxation of Non-Exempt Political Organization ............ 411

26. Illegal Expenditures ..................................412

27. Non-Exempt Expenditures That Financially

Benefit Organization .................................412

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Election Year Issues

28. Loans .............................................413

29. Transfers to Other Organizations ........................413

30. "To or For the Use Of" Public Charity ....................413

31. Expenditures Resulting in Gross Income for Individual ...... 415

32. "Personal Use" ......................................415

33. Repayment of Loan ..................................416

34. Excess Campaign Funds ..............................416

35. "Reasonable Period of Time" or "Reasonable Anticipation

Of Use for Future Exempt Functions" ....................417

36. Use of Non-Segregated Fund for Non-Exempt Function ..... 417

F. Reporting and Disclosure Requirements ..............................417

(1) Periodic Reporting Requirements .............................417

1. Periodic Reporting Requirements .......................417

2. Events That Trigger Requirement .......................417

3. Exceptions from Filing ...............................418

4. Organizational Requirement ...........................418

5. Purely State or Local Organizations .....................418

6. Receipt of $25,000 or More ............................419

7. Frequency of Filing ..................................419

8. Election Year and Non-Election Year ....................419

9. Monthly Filings .....................................419

10. Non-Monthly Filings .................................420

11. Election ...........................................420

12. General Election .....................................420

13. Interpretation of "Election" ............................421

14. Information Reported .................................421

15. Independent Expenditure ..............................421

16. Filing Form 8872 ....................................421

17. Failure to File .......................................422

(2) Annual Return Requirements .................................422

1. Annual Income Tax Return ............................422

2. Annual Information Return ............................422

3. Failure to File .......................................423

(3) Public Disclosure Requirements ..............................423

1. Public Availability ...................................423

2. Failure to Make Available .............................423

3. List of Organizations .................................424

4. "Widely Available" ..................................424

G. Special Rules for Principal Campaign Committees ......................424

1. "Principal Campaign Committee" .......................424

2. Designation of Status .................................424

3. Tax Treatment ......................................425

4. Contributions to Other Candidates .......................425

5. Support More Than One Candidate for Congress ........... 426

6. Candidate Not Seeking Reelection ......................426

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Election Year Issues

H. Special Rules for Newsletter Funds ..................................426

1. General Tests .......................................426

2. "Segregated Fund" ...................................427

3. Exempt Function ....................................427

4. Campaign Activities ..................................427

5. Excess Funds .......................................428

6. Non-Exempt Function Activities ........................428

7. Loss of Status .......................................428

I. Political Organizations and IRC 6113 ................................429

1. General Requirements ................................429

2. Solicitations Requiring Disclosure ......................429

3. Situations Not Requiring Disclosure .....................429

4. Annual Gross Receipts Exceeding $100,000 ............... 430

5. Print Medium Safe Harbor .............................430

6. Telephone Safe Harbor ...............................431

7. Television Safe Harbor ...............................431

8. Radio Safe Harbor ...................................432

9. Failure to Comply with Safe Harbors ....................432

10. Failure to Comply with IRC 6113 .......................432

4. Political Activities of IRC 501(c) Organizations ..............................433

A. IRC 501(c) Organizations and Political Activities ......................433

1. Political Campaign as Primary Activity ...................433

2. IRC 527 "Exempt Function" Activities ...................433

3. Effect on Deductibility of Dues or Contributions ........... 434

B. Tax on Political Expenditures - IRC 527(f) ............................435

1. Political Expenditures ................................435

2. Net Investment Income ...............................435

3. State or Local Bond Interest ............................435

4. Deductions Allowed ..................................436

5. Special Exceptions ...................................436

6. FECA Allowed Expenditures and Indirect Expenses ........ 437

7. Liability for Transfers ................................438

C. Separate Segregated Fund Under IRC 527(f) ..........................438

1. Tax Treatment ......................................438

2. "Separate Segregated Fund" ............................438

3. Taxation of Separate Segregated Fund ...................438

4. Loss of Status .......................................439

5. Transfer of Dues or Contributions .......................439

6. Separate Segregated Fund of Organization

Deriving Income from Fees and Donations ................440

7. Organization with Related PAC and Charity ...............441

D. IRC 6033(e) Reporting and Notice Requirements and Proxy Tax .......... 441

(1) Organizations Excepted from Reporting and Notice Requirements ... 441

1. Organizations Excepted from IRC 6033(e) ................441

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Election Year Issues

2. IRC 501(c)(4) and IRC 501(c)(5) Organizations ............ 441

3. IRC 501(c)(6) Organizations ...........................442

4. "Annual Dues" and "Similar Amounts" ...................442

5. Affiliated Organizations ...............................443

(2) Exempt Organization Requirements ...........................443

1. Taxation Under IRC 6033(e) ...........................443

2. Notices to Members ..................................444

3. Information Disclosed on Form 990 .....................444

4. Amount of IRC 162(e) Expenditures .....................444

5. Amount for Nondeductible Dues Notice ..................445

6. Expenditures Exceed Estimated Amount ..................445

7. Waiver Request .....................................445

8. Proxy Tax Determination ..............................446

9. Estimated Tax ......................................446

10. Under-Reported Expenditures ..........................446

APPENDIX I: Enactment of Political Campaign Prohibition for Charitable Organizations ... 448

APPENDIX II: Political Campaign Prohibition vis a vis Restriction on Private Benefit ..... 452

A. Introduction ....................................................452

B. Private Benefit Cases .............................................452

(1) American Campaign Academy ................................ 452

(2) Coalition for Freedom ...................................... 456

C. Conclusion .....................................................458

APPENDIX III: New Reporting and Disclosure Regime for IRC 527 Organizations ........ 459

A. The "New Section 527 Organizations" ...............................459

B. Public Law 106-230 ..............................................462

APPENDIX IV: Affiliations Between and Among Exempt Organizations ................ 473

1. Charity Contributes to PAC ............................473

2. Charity Establishes PAC ..............................473

3. Charity Directors Establish PAC ........................474

4. Non-Charity Contributes to PAC ........................474

5. Non-Charity Establishes PAC ..........................475

6. Non-Charity with Charity Members .....................475

7. Non-Charity (with Charity Members) Establishes PAC ...... 476

8. Charity Contributes to PAC Established by Non-Charity ..... 477

9. Charity Establishes Non-Charity That Establishes PAC ...... 477

10. Charity Contributes to PAC Established by Non-Charity ..... 478

11. Non-Charity Establishes Both Charity and PAC ............ 479

12. Charity Contributes to PAC Established by Non-Charity ..... 480

487