Allowable political activities and reporting requirements for tax-exempt entities.

• Author: Greenwell, David

With the next presidential election only several months away, the chances are very good that CPAs will be asked for guidance related to political campaigns, and in particular with Sec. 527 political organizations. This is also a good time to advise tax-exempt organizations of the potential dangers of becoming too involved with a political campaign. Some charities, including churches, have incurred penalties and loss of tax-exempt status due to their involvement with political campaigns. This item provides basic guidance in the structure and operations of Sec. 527 organizations as well as some insight into allowable political activities for other tax-exempt organizations.

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Sec. 527 was enacted after a long controversy over the tax treatment of political organizations. The legislative history states that Sec. 527(a) explicitly provides a tax exemption for political organizations, since political activity (including its financing) is not a trade or business that is appropriately subject to tax. The investment income generated by such organizations, however, is treated as an item of income subject to tax (Sec. 527(b); Regs. Sec. 1.527-4).

Before 1968, the IRS generally followed an informal policy that did not require political parties and organizations to file returns. The apparent reasoning was that the returns would be largely since donations were nontaxable gifts and political expenditures were not deductible; however, the IRS had ruled privately that receipts from sources other than donations could be taxable income (see generally www.irs.gov/pub/irs-tege/eotopici89.pdf for an IRS description of pre-Sec. 527 law).

In 1972, the Federal Election Campaign Act, P.L. 92-225, became law, prohibiting federal campaign expenditures by corporations and unions. Some of these provisions were modified by the Supreme Court's Citizens United ruling in 2010, which prohibited the government from limiting independent spending by corporations and unions for electioneering communications (Citizens United v. Federal Election Commission, 130 S. Ct. 876 (2010)).

In 1973, the IRS provided its first comprehensive public statement of its position regarding the tax treatment of political organizations (Announcement 73-84; see generally Rev. Rul. 74-21 and Rev. Rul. 74-475), which were taxed on interest, dividends, and capital gains from sales of securities, less deductible expenses directly attributable to producing that income, and were...