WikiLeaks Document Release
http://wikileaks.org/wiki/CRS-RS21716
February 2, 2009
Congressional Research Service
Report RS21716
Political Organizations Under Section 527 of the Internal
Revenue Code
Erika Lunder, American Law Division
January 28, 2008
Abstract. Political organizations have the primary purpose of influencing federal, state, or local elections and
conducting similar activities. Those that qualify under Section 527 of the Internal Revenue Code are taxed
only on certain income. Under the Code, 527 organizations are subject to reporting requirements that involve
registration, the periodic disclosure of contributions and expenditures, and the annual filing of tax returns.
Section 527 organizations must also comply with applicable campaign finance laws. In the 110th Congress, the
527 Transparency Act of 2007 (H.R. 1204) would change the frequency of the periodic disclosure requirements
and the penalties for violating them, and the State and Local Candidate Fairness Act of 2007 (H.R. 3771) would
change the tax rates at which state and local candidates' principal campaign committees are taxed. This report
describes these organizations, the reporting requirements they face under the Internal Revenue Code, and the
two bills.
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Prepared for Members and Committees of Congress
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Political organizations have the primary purpose of influencing federal, state, or local elections
and conducting similar activities. Those that qualify under Section 527 of the Internal Revenue
Code are taxed only on certain income. Under the Code, 527 organizations are subject to
reporting requirements that involve registration, the periodic disclosure of contributions and
expenditures, and the annual filing of tax returns. Section 527 organizations must also comply
with applicable campaign finance laws. In the 110th Congress, the 527 Transparency Act of 2007
(H.R. 1204) would change the frequency of the periodic disclosure requirements and the penalties
for violating them, and the State and Local Candidate Fairness Act of 2007 (H.R. 3771) would
change the tax rates at which state and local candidates' principal campaign committees are taxed.
This report describes these organizations, the reporting requirements they face under the Internal
Revenue Code, and the two bills.
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Background ..................................................................................................................................... 1
Section 527 Political Organizations ................................................................................................ 1
Reporting Requirements.................................................................................................................. 2
Notification of Status ................................................................................................................ 2
Disclosure of Expenditures and Contributions.......................................................................... 3
Information Return.................................................................................................................... 4
Tax Return................................................................................................................................. 4
Public Access ............................................................................................................................ 5
Dual Reporting.......................................................................................................................... 5
Selected Legislation in the 110th Congress...................................................................................... 5
H.R. 1204 .................................................................................................................................. 5
H.R. 3771 .................................................................................................................................. 6
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Author Contact Information ............................................................................................................ 6
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Prior to 1975, the Internal Revenue Code (IRC) was silent as to the tax treatment of organizations
whose primary purpose is influencing elections. The Internal Revenue Service (IRS) treated
contributions to political organizations as gifts, which meant that the organizations did not have
taxable income and were not required to file tax returns. By the early 1970s, it was apparent that
these organizations had sources of income besides contributions, and the IRS indicated it would
require those with investment and other types of income to file tax returns and pay tax at the
corporate rate.
P.L. 93-635, enacted in 1975, added Section 527 to the IRC to address the tax treatment of
political organizations. The section grants tax-exempt status to qualifying political organizations.
This treatment is the focus of this report, but it should be noted that Section 527 has two other
purposes: it imposes a tax on 501(c) organizations that make political expenditures1 and it
clarifies that expenditures by political organizations on behalf of an individual are generally not
income to the individual.
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Political organizations that qualify under Section 527 are taxed only on certain income. A
political organization is any organization, including a party, committee, association, or fund,2 that
is organized and operated primarily to directly or indirectly accept contributions and/or make
expenditures for an exempt function.
An exempt function is the influencing or attempting to influence the selection, nomination,
election, or appointment of an individual to a federal, state, or local public office, to an office in a
political organization, or as a Presidential or Vice-Presidential elector.3 An exempt function does
not necessarily involve explicitly advocating for or against the individual. For example, when
determining whether an issue advocacy communication is for an exempt function, the IRS looks
at such things as whether it identifies a candidate, identifies his or her position on the issue and
this has been raised to distinguish the candidate from others, is timed to coincide with an election,
targets voters in a particular election, and is not part of an ongoing series of similar
communications by the organization on the same issue.4
527 organizations are subject to tax only on political organization taxable income. This is the
organization's gross income, excluding exempt function income, less $100 and any allowable
deductions. Exempt function income is any amount received, to the extent that it is segregated to
use for an exempt function, as:
1
These organizations are not treated as 527 organizations for purposes of the reporting requirements discussed in this
report.
2
This includes qualifying newsletter funds. IRC � 527(g). In order to qualify, the fund must be established and
maintained (1) by an individual who holds or is a candidate for elective public office and (2) for the exclusive use of
preparing and circulating the individual's newsletter.
3
An exempt function includes making expenditures relating to these offices if the expenses would be allowed as a
business deduction if incurred by the individual.
4
Rev. Rul. 2004-6, 2004-1 C.B. 328.
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� contributions of money or other property,
� membership dues, fees, or assessments,
� proceeds, which are not received in the ordinary course of business, from
political fundraising and entertainment events or from the sale of campaign
materials, and
� proceeds from conducting a bingo game.
The tax rate is generally the highest corporate income tax rate. However, under IRC � 527(h),
income of the principal campaign committee of a Congressional candidate is taxed using the
graduated corporate tax rate schedule. This is not true for campaign committees of candidates for
state or local office.
527 organizations include the entities regulated by the Federal Election Campaign Act (FECA), as
amended by the Bipartisan Campaign Reform Act (BCRA).5 For example, political parties and
candidate committees are 527 organizations. However, because some 527 organizations are
unrelated to federal elections, not all 527 organizations are regulated by FECA. In recent years,
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there has been considerable debate about the extent to which FECA regulates certain types of 527
organizations and the constitutional limitations on such regulation. For more information, see
CRS Report RL33888, Section 527 Political Organizations: Background and Issues for Federal
Election and Tax Laws, by R. Sam Garrett, Erika Lunder, and L. Paige Whitaker.
Prior to 2000, certain political organizations received the tax benefits of Section 527 without
reporting their existence to the FEC or the IRS. This was because not all 527 organizations
reported to the FEC under FECA and organizations only filed a return to the IRS if they had
taxable income. The fact that organizations could qualify under Section 527 without reporting to
the FEC was largely unnoticed until 1996, when the IRS began issuing guidance on the types of
activities that qualify as exempt functions.6 This awareness helped lead to an increase in the
number of 527 organizations, called "stealth PACs," that were designed to avoid reporting to the
FEC. In 2000 and 2002, Congress amended Section 527 to require that organizations report to the
IRS, the FEC, or a state.7
An organization must notify the IRS of its 527 status by electronically filing Form 8871 within 24
hours of its formation.8 The information provided on Form 8871 includes the organization's
name, address, and purpose; names and addresses of certain employees and directors; and name
of and relationship to any related entities. An organization that fails to timely file the form will
not be treated as a 527 organization (i.e., it will be subject to tax on all income) for the period
5
For more information on campaign finance, see CRS Report RL34324, Campaign Finance: Legislative Developments
and Policy Issues in the 110th Congress, by R. Sam Garrett.
6
PLR 9652026 (1996); PLR 9725036 (1997); PLR 9808037 (1997); PLR 199925051 (1999).
7
P.L. 106-230; P.L. 107-276.
8
IRC � 527(i).
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between its formation and the filing. An organization that fails to notify the IRS within thirty days
of any material change to the reported information will not be treated as a 527 organization for
the period between the change and the notification.
The notice requirements do not apply to a 527 organization that:
� anticipates having gross receipts of less than $25,000 for any year,
� is a political committee of a state or local candidate,
� is a state or local committee of a political party, or
� is required to report to the FEC as a political committee.
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A 527 organization that accepts a contribution or makes an expenditure for an exempt function
must periodically file a disclosure report, Form 8872, with the IRS.9 The report may be filed
electronically, and organizations with annual contributions or expenditures exceeding $50,000
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must do so. The organization may file on a (1) quarterly basis in a year with a regularly scheduled
election and semi-annually in any other year or (2) monthly basis. There are additional
requirements for pre-general election, post-general election, and year-end reports. An
organization that fails to file a timely or accurate Form 8872 is subject to a penalty that equals the
highest corporate tax rate multiplied by the amount of contributions and/or expenditures to which
the failure relates.
A periodic report must include (1) the name, address, occupation, and employer of any
contributor who makes a contribution during the reporting period and has given at least $200
during the year, along with the amount and date of the contribution, and (2) the amount, date, and
purpose of each expenditure made to a person during the reporting period if that person has
received at least $500 during the year, along with the person's name, address, occupation, and
employer.
The disclosure requirements do not apply to a political organization that is not required to or did
not file a Form 8871 (see above) or is a qualified state or local political organization.10 The
requirements also do not apply to any expenditure that is an independent expenditure (i.e., an
expenditure that expressly advocates for a candidate but is made without the candidate's
cooperation).
In 2003, the Eleventh Circuit Court of Appeals vacated and remanded, with instructions to
dismiss for lack of jurisdiction, a district court's decision that held most of the disclosure
requirements were unconstitutional.11 The district court had held that the requirements for
9
IRC � 527(j).
10
Under Section 527(e)(5), a qualified state or local political organization is (1) intended to influence the selection,
nomination, election, or appointment of an individual to a state or local political office or office in a state or local
political organization and (2) required to report information regarding contributions and expenditures to the state. The
state's reporting requirements must be similar to the federal ones. A federal candidate or officeholder may not be
involved in the organization.
11
Mobile Republican Assembly v. United States, 353 F.3d 1357 (11th Cir. 2003), vacating and remanding National
Fed'n of Republican Assemblies v. United States, 218 F.Supp.2d 1300 (S.D.Ala. 2002), as amended by 2002 U.S. Dist.
(continued...)
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organizations involved in state and local elections violated the Tenth Amendment12 and the
requirement to disclose expenditures violated the First and Fifth Amendments. The basis of the
district court's decision was that the requirements were part of a regulatory (campaign finance
reform) scheme that was subject to a higher level of scrutiny than action under Congress' taxing
powers would be. The district court then closely examined the requirements and found some to be
impermissible. For example, the district court held that the requirement to disclose expenditures
was unconstitutional because Congress had not sufficiently tailored the requirement to meet its
informational and corruption-related goals or established a compelling reason to treat political
organizations differently than other tax-exempt organizations. The Court of Appeals held that the
disclosure requirements fell within Congress' power to tax and that the Anti-Injunction Act,
which requires taxpayers pay a tax before disputing it, barred the suit.
Section 527 organizations with gross receipts of at least $25,000 ($100,000 if a qualified state or
local political organization) must annually file an information return, Form 990, with the IRS.13
Form 990 includes such information as the organization's revenue sources and functional
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expenses. Contributions of at least $5,000 must be reported on the form's Schedule B. An
organization that fails to file a timely or accurate return is subject to a penalty of $20 per day, not
to exceed the lesser of $10,000 or 5% of the organization's gross receipts.14 For organizations
with more than $1 million in gross receipts, the penalty is $100 per day and is limited to $50,000.
A 527 organization is not required to file Form 990 if it is:
� state or local committee of a political party,
� a political committee of a state or local candidate,
� required to report to the FEC as a political committee,
� a caucus or association of state or local officials,
� an authorized committee under FECA � 301(6) of a candidate for federal office,
� a national committee under FECA � 301(14) of a political party, or
� a Congressional campaign committee of a political party committee.15
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Any tax-exempt organization with political organization taxable income must file a tax return,
Form 1120-POL, with the IRS.16 An organization that does not file a return will be penalized for
each month the return is late in an amount that equals 5% of the tax due, not to exceed 25% of the
(...continued)
LEXIS 20845 (S.D.Ala. 2002).
12
Congress has since exempted these organizations from the requirements. P.L. 107-276.
13
IRC � 6033(g).
14
IRC � 6652(c)(1)(A).
15
IRC � 6033(g)(3).
16
IRC � 6012(a)(6).
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tax due.17 An organization that is late in paying its taxes will be penalized for each month the
payment is late in an amount that equals 0.5% of the unpaid tax, not to exceed 25% of the unpaid
tax.18 Neither penalty will be imposed if the organization shows that the failure was due to
reasonable cause. The penalties may be increased if the failure was due to negligence or fraud.19
The IRS and the 527 organization must make Forms 8871, 8872, and 990 publicly available.20 An
organization that fails to do so is subject to a penalty of $20 per day, which is limited to $10,000
for failures relating to Forms 8872 and 990.21 Furthermore, the IRS must post electronically-
submitted Forms 8871 and 8872 in an on-line database within 48 hours of their filing. The
database also includes some organizations' Forms 8871, 8872, and 990 that were submitted on
paper. The database is available on the IRS website at http://www.irs.gov.
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Some 527 organizations may have to report to the IRS and the FEC. As discussed above,
organizations that report to the FEC as political committees do not file Forms 8871, 8872, and
990 with the IRS. Under BCRA, organizations that spend more than $10,000 on electioneering
communications must report to the FEC. Organizations that report to the FEC solely under this
rule are not exempt from the IRS reporting requirements since they are not reporting to the FEC
as political committees.
The 527 Transparency Act of 2007 would no longer allow 527 organizations to file the periodic
expenditure and contribution reports with the IRS on a semi-annual basis. Instead, all 527
organizations that report to the IRS would be required to file monthly reports, in addition to pre-
election, post-election, and year-end reports. An organization that failed to do so would face a
penalty equal to 30% of the expenditures and contributions that were not adequately reported,
with the organization's managers jointly and severally liable for the penalty. Additionally,
contributions to that organization would be subject to the gift tax. The organizations would be
required to notify their contributors about the failure within 90 days of the IRS's final
17
IRC � 6651(a)(1). Under IRC � 6652(c)(1)(A), the penalty for failing to file Form 1120-POL is the same penalty that
applies for failing to file Form 990. It appears to be the IRS's position that the penalty under IRC � 6651 applies rather
than the penalty under IRC � 6652 and that "[a] technical correction may be needed to clarify that penalties under �
6652 that apply to failure to file Form 990 . . . do not apply to a failure to file Form 1120-POL." Rev. Rul. 2003-49,
2003-1 C.B. 903.
18
IRC � 6651(a)(2).
19
IRC � 6662 and 6663.
20
IRC � 6104. P.L. 107-276 repealed the requirement that Form 1120-POL be made available.
21
IRC �� 6652(c)(1)(C) and (D).
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determination that the failure had occurred. Finally, the bill would require that the reports be
simultaneously filed with the FEC.
The State and Local Candidate Fairness Act of 2007 would change the tax rate at which state and
local candidates' principal campaign committees are taxed. As mentioned, 527 organizations are
generally taxed at the highest corporate income tax rate on their political organization taxable
income, but the principal campaign committees of congressional candidates are taxed according
to the graduated corporate income rate schedule. H.R. 3771 would extend that special rule to the
principal campaign committees of state and local candidates so that these committees would also
be taxed using the graduated rates.
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Erika Lunder
Legislative Attorney
elunder@crs.loc.gov, 7-4538