Lobbying and Political Expenditures (Portfolio 613)

Tax Management Portfolio, Lobbying and Political Expenditures, No. 613-4th, analyzes the federal tax treatment of expenditures made to influence legislation and political campaigns, as well as the taxation of political candidates, political organizations, and public office holders.

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Tax Management Portfolio, Lobbying and Political Expenditures, No. 613-4th, analyzes the federal tax treatment of expenditures made to influence legislation and political campaigns, as well as the taxation of political candidates, political organizations, and public office holders.

Expenditures for lobbying and political campaigning generally are nondeductible, except for expenses of direct lobbying at the local level. Organizations that are tax-exempt under §501(c)(3) are subject to loss of their exempt status and other sanctions if they exceed the limitations that apply to lobbying activities or intervene in political campaigns. Some other types of exempt organizations are permitted to lobby or campaign to varying degrees. Also, campaign organizations are largely exempt from federal income tax.

This Portfolio: (1) describes in detail the limited conditions under which lobbying expenditures can be deducted under §162 and explains the deduction limitations imposed by §162(e) and by the specific deduction prohibitions of §§271 and 276; (2) discusses how political organizations (such as PACs and campaign funds) are taxed and subject to reporting requirements under §527; (3) analyzes the taxation of candidates and of political office holders; and (4) analyzes the limitations on the lobbying and political activities of all organizations exempt from tax under §501(c), the safe harbor rule of §501(h), and the sanctions that can be imposed on an organization for exceeding the limits.

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Hugh K. Webster, A.B., Middlebury College (1983); J.D., Duke Law School (1986); Author, 872 T.M., Fiduciary Duties of Nonprofit Directors and Officers, 614 T.M., Trade Associations, The Law of Associations (Matthew Bender & Company); Editor, Nonprofit Legal and Tax Letter.


Detailed Analysis

I. Introduction

A. General

B. Tax Consequences of Lobbying and Political Expenditures

1. Nonbusiness Individual Taxpayers

2. Business Taxpayers

3. Tax–Exempt Organizations

4. Political Organizations

C. Nontax Considerations Relating to Lobbying and Political Expenditures

II. Deductibility of Political Expenditures

A. Introduction

B. Participation in a Political Campaign

1. General

2. PACs

3. Political Convention Expenses

C. Limitations on Deductions for Indirect Contributions to Political Parties

1. General

2. Deductions for Bad Debts Owed by Political Parties ( 271)

a. General Rule

b. Exemptions

3. Other Indirect Contributions to Political Parties or Candidates ( 276)

a. General

b. Advertising

c. Admission to Dinner or Program

d. Inaugural Events and Committees

III. Deductibility of Lobbying Expenditures

A. Overview

B. History

1. Before 1962

2. Enactment of 162(e) in 1962

3. Revision of 162(e) in 1993

C. Nondeductible Lobbying Expenditures

1. General

2. Attempts to Influence the General Public/Grass Roots Lobbying

a. Legislative Matters and Referendums

b. Proposed Regulations (1980)

3. Direct Federal and State Legislative Lobbying

a. Overview

b. Exceptions

c. Influencing Legislation - Lobbying Communications

d. Activities Other Than Lobbying Communications

e. Assisting Others to Lobby

f. Anti–Avoidance Rule

4. Lobbying of Covered Executive Branch Officials

5. Charitable Contributions

6. Foreign Lobbying

7. Illegal Lobbying and Political Expenditures

D. Deductible Lobbying Expenditures

1. Deductible Local Lobbying Expenditures

a. General

b. The Object: Legislation or Proposed Legislation

c. The Connection of the Object with the Taxpayer: The “Direct Interest” Test

d. Types of Activities for Which Deductions Are Allowed

(1) Direct Legislative Communication

(2) Indirect Legislative Communication Through Membership and Other Organizations

e. Direct Connection of the Expense to the Activity; Entertainment Expenses

2. Deductible State and Federal Lobbying Expenses

a. Expenses of Legislative Monitoring

b. Pre–Legislative Expenses Beyond Monitoring

c. De Minimis Lobbying Expenses

d. Dues Paid to a Trade Association That Lobbies and Pays the Excise Tax

e. Expenses of “Lobbying” Administrative Bodies

f. Expenses of Lobbyists

3. Deductible Institutional or “Goodwill” Advertising

IV. Allocation of Costs to Nondeductible Expenses; Dues Paid to Tax-Exempt Organizations

A. General

B. Allocation of Direct Legislative and Executive Branch Lobbying Expenses

1. Allocating Expenses to Activities

a. General

b. Third-Party Costs

c. Ratio Method

d. Gross–Up Method

e. Section 263A Method

f. Special Rules

2. Allocating Costs of a Single Activity

C. Allocation of Expenses of Grass Roots Lobbying and Campaigning

D. Dues Paid to Tax–Exempt Organizations

1. Overview

2. Coverage

3. Proxy Tax or Notice

a. General

b. Notice

c. Proxy Tax

V. The Expenses of a Professional Lobbyist or Advertising Agency

A. Lobbyist

B. Advertising Agency

C. Agents

VI. Taxation of Candidates and Public Office Holders

A. Relationship Between the Candidate or Public Office Holder and the Political Organization

B. The Candidate's Income

C. The Candidate's Expenses

D. The Public Office Holder's Income

E. The Public Office Holder's Expenses

1. Expenses Paid by the Office Holder

2. Office Holder's Expenses Paid by a Political Organization

F. The Public Office Holder's Charitable Deduction

G. Special Rules Applicable to Members of Congress

VII. Taxation of Political Organizations and Exempt Organizations That Campaign - 527

A. Introduction and History

B. Taxation of Political Organizations (Including PACs)

1. General

2. Qualification as a “Political Organization”

a. Structure

b. Organization and Operation

c. Contributions or Expenditures

d. Definition of “Exempt Function”

(1) Directly Related Expenses

(2) Indirect Expenses

(3) Terminating Expenses

(4) Public Office Expenses

(5) Illegal Expenditures

3. Determination of Exempt Function Income

a. Categories of Exempt Function Income

(1) Contributions

(2) Dues

(3) Fundraising Events

(4) Sales

(5) Bingo

b. Segregation Requirement

(1) General

(2) A Candidate's Own Segregated Fund

4. Calculation of Tax Liability

a. Political Organization Taxable Income

(1) General

(2) Income

(3) Deductions

b. Tax Rates

c. Filing Requirements

5. Diversion of Funds

6. Consequences of Not Obtaining Exemption Under 527

C. Taxation of Newsletter Funds

D. Taxation of Campaign Expenditures of 501(c) Organizations Exempt Under 501(a)

1. Introduction

2. Exempt Organizations to Which 527(f) Applies

3. Tax Base

a. Net Investment Income

b. Campaign Expenditures

4. Tax Imposed

5. Escape Valve: The Separate Segregated Fund (PAC)

E. Notice of Nondeductibility to Donors

F. Reporting and Disclosure Requirements

1. General

2. Notice of Formation

3. Disclosure of Expenditures and Contributions

4. Annual Returns

VIII. Tax Incentives for Individual Political Campaign Contributions

A. Introduction and History

B. Designation of Income Tax Payment to the Presidential Election Campaign Fund

1. General

2. Procedure for Designation of Payment to the Presidential Election Campaign Fund

3. Operation of the Presidential Election Campaign Fund

C. Individual Contributions to Political Organizations

1. Not Subject to the Gift Tax

2. Transfer of Appreciated Property

IX. Limitations on Political Activities of Tax-Exempt Organizations

A. Introduction

B. Political Activities by 501(c)(3) Organizations

1. Candidates for Public Office

2. Participation or Intervention in a Political Campaign

3. Permissible Election-Related Activities

4. Educational Activities vs. Participation or Intervention

5. Irrelevance of Motive

6. Other Activities

7. De Minimis

C. Action Organizations and Lobbying: An Overview

D. Action Organizations That Are Primarily Aimed at Legislation

1. General Rule

2. Background

3. Advocacy

E. Action Organizations That Engage in Substantial Activities to Influence Legislation

1. Definition of “Attempting to Influence Legislation”

2. Activities That May Fall Outside the Definition

a. Nonpartisan Analysis, Study or Research

b. Providing Requested Technical Advice

c. Self–Protection

d. Discussion of Broad Social Issues

3. Definition of “Substantial”

F. Constitutional Considerations

1. General

2. First Amendment Arguments

3. Fifth Amendment Arguments

G. Section 501(h): The Lobbying Safe Harbor Rule

1. Introduction

2. Eligible Organizations

3. Calculation of Permissible Legislative Expenditures

a. General

b. Exempt Purpose Expenditures

c. The Lobbying and Grass Roots Nontaxable Amounts

d. Example

4. Sanctions for Impermissible Lobbying Expenditures

a. Excess Lobbying Expenditures: 4911 Excise Tax

b. Lobbying Ceiling Amounts: Loss of Exemption

c. Example

5. Scope of Activity Subject to Testing Under 501(h) and 4911

a. Influencing Legislation - Lobbying Expenditures

(1) Direct Lobbying

(2) Grass Roots Lobbying

(3) Allocation of Expenditures

(4) Change in Use of Materials

(5) Transfers Treated as Lobbying

b. Excluded Activities

c. Communications with Members

6. Affiliation Rules

a. Determination of the Existence of an Affiliated Group

b. Consequences of Affiliation

7. Election and Termination Procedures/Reporting

H. General Sanctions on Prohibited Lobbying and Political Activities of 501(c)(3) Organizations

1. Loss of Tax–Exempt Status

a. General

b. Excise Tax on Disqualifying Lobbying Expenditures

c. Options Available After Loss of Exemption

2. Loss of Deduction for Contributions

3. Excise Tax on Campaign Expenditures; Also 527(f)

4. Injunction and Termination Assessment

I. Reporting Requirements

1. Form 990

2. Form 1120–POL

3. Form 4720

X. Limitations on Lobbying and Political Activities of Other Exempt Organizations

A. Introduction

B. Section 501(c)(1) Federal Instrumentalities

C. Section 501(c)(2) and (25) Title Holding Organizations

D. Section 501(c)(4) Civic Leagues

E. Section 501(c)(5) Labor Organizations

F. Section 501(c)(6) Business Leagues

G. Section 501(c)(7) Social Clubs

H. Section 501(c)(8), (9), (11), (17), (18), (20), (21), (22) and (24) - Fraternal and Employee Benefit Organizations

I. Section 501(c)(12), (14), (15) and (16) Mutual and Cooperative Organizations

J. Section 501(c)(10) and (13) Fraternal Lodges and Cemetery Companies

K. Section 501(c)(19) Veterans’ Organizations


Table of Worksheets

Worksheet 1 Articles of Incorporation of a Section 527 Political Organization

Worksheet 2 Comparison of Sections 162(e) and 4911 of the Internal Revenue Code Regarding Federal Lobbying

Worksheet 3 Sample Time Sheet for Employees Working in Government Relations for Their Company in Order to Allocate Non-deductible Lobbying Expenses Pursuant to Section 162(e) of the Internal Revenue Code

Worksheet 4 Memorandum to 501(c)(3) Client Wishing to Sponsor Candidate Debates

Worksheet 5 Sample Memorandum to Client Outlining Appropriate Structure for an Organization that Wishes to Support Political Candidates

Worksheet 6 Memorandum to Client Regarding Participation of Officials of a 501(c)(4) Organization, with a 501(c)(3) Foundation, in Political Activities

Worksheet 7 IRS Fact Sheet on Political Intervention Activities (FS-2006-17)