Midterm elections are ramping up in the United States which means tax-exempt political organizations and their activities will once again be in the spotlight.
Political organizations are unique organizations which operate under both federal tax and election law. Because of the overlap, rules governing political organizations can be convoluted and hard to digest.
A political organization is a party, committee, association, fund, or other organization organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures to influence the selection, nomination, election, or appointment of an individual to public office.
Political organizations are largely exempt from taxation, which means these organizations enjoy the benefits of charitable nonprofit organizations without actually engaging in charitable activities at all.
501(c)’s vs. Political Organizations
Generally, organizations which are exempt from taxation are listed in § 501(c) of the Internal Revenue Code (“I.R.C.”). Instead, tax-exempt political organizations are governed under I.R.C. § 527. 501(c) organizations are exempt from income tax for various public policy reasons, such as helping to improve lives, strengthening communities and the economy, and lightening the burdens of government.
To incentivize social good, the government subsidizes 501(c) organizations by eliminating their tax burden. Conversely, political organizations organized under § 527 do not provide charitable services or improve social welfare. Rather, their sole function is to influence the election of candidates for public office.
Because 501(c) organizations are primarily charitable organizations, they are restricted in their ability to engage in political activities. The political activities rules, such as the rule on insubstantial lobbying and the Johnson Amendment, vary between the different 501(c) types. For more information, check out our blog post on the topic, here.
The political organization’s exemption relates to its activities influencing public elections. Such activities do not need to directly influence an election, the exemption also applies to indirect conduct. Income is exempt from taxation when it is received as:
- a contribution of money or other property;
- membership dues or fees;
- proceeds from political fundraising or entertainment event, or proceeds from the sale of political campaign materials, which are not received in the ordinary course of any trade or business; or
- proceeds from conducting games of bingo.
Registration and Disclosure Requirements
Political organizations must register with the Department of Treasury upon formation.
- First, the organization will notify the IRS electronically, using Form 8871, Political Organization Notice of Section 527 Status.
- The organization will then file Form 8453-X, Political Organization Declaration for Electronic Filing of Notice Section 527 Status, with the IRS.
- Upon receipt of Form 8453-X, the IRS will send the organization a username and password that must be used to file an amended Form 8871 or to electronically file Form 8872, Political Organization Report of Contributions and Expenditures. Failure to register as a political organization will nullify the organization’s tax-exempt status.
Political organizations must make regular disclosures to the IRS following formation. The organization may choose to file disclosures either monthly or periodically. If the organization chooses the latter, it will be required to make disclosures as follows:
- In the case of a year in which a regularly scheduled election is held:
- Quarterly report;
- Pre-Election report; and
- Post-General election report
- In the case of a year in which a regularly scheduled election is not held:
- Report covering the period beginning January 1 and ending June 30; and
- Report covering the period beginning July 1 and ending December 31
The disclosure reports will contain information relating to the contributions to and expenditures by the political organization. Failure to make the required disclosures will result in heavy penalty fees.
The I.R.C. is the predominate regulator of § 527 organizations, but political organizations which make expenditures to influence federal elections must also comply with U.S. Federal Election Commission (“FEC”) rules. For example, the FEC requires periodic disclosures by certain political organizations and prohibits coordination of activities between political campaigns and § 527 organizations.
Millions of dollars flow through political organizations each election cycle. These funds are used primarily for issue advocacy and voter mobilization. Prudent donors can visit the IRS’ and FEC’s websites to view recent disclosures from political organizations before deciding which to contribute to.
IRS Political Organization Disclosure Search: https://forms.irs.gov/app/pod/basicSearch/search;jsessionid=V2hviU1hOfadWqsQHpqziAGm.50?execution=e1s1&format=
FEC Filings and Reports: https://www.fec.gov/data/browse-data/?tab=filings
Kyler Mejia is a third-year law student at Arizona State University law school and legal extern with Caritas Law Group, P.C. Caritas Law Group, P.C. advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide as well as donors with regard to major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.