Political Organizations and the New Disclosure Requirements

CPAs are often involved with political campaigns and usually serve in a treasury or fiduciary capacity with political committees or candidates. As such, they should be aware that, on July 1, 2000, the President signed P.L.106-230, which amended Sec. 527.

New Sec. 527(i) requires that a political organization provide both electronic and written notice to the IRS, within 24 hours after the date on which the organization is established, that it is to be treated as a political organization. Under Sec. 527(i), the notice must include (1) the name and address of the organization, its business address (if different) and its electronic mailing address; (2) the purpose of the organization; (3) the names and addresses of its officers, highly compensated employees, contact person, custodian of its records and a listing of its board of directors; (4) the name and address of, and relationship to, any related entities (within the meaning of Sec. 168(h)(4)); and (5) any other information required by the Service. The IRS released Form 8871, Political Organization Notice of Section 527 Status, for this purpose. This form is to be filed with the IRS Service Center in Ogden, Utah or over the IRS Website at www.irs.gov/bus_info/eo/pol-file.html .

An organization will not be treated as a political organization under Sec. 527 until Form 8871 is filed; until the filing, its exempt-function income (minus any deductions directly connected with the production of that income) will be taxable income.

There are several exceptions to this new notification requirement. The first excludes an organization that reasonably anticipates that its gross receipts will be less than $25,000 for any tax year. The second excludes those entities brought under Sec. 527 because of Sec. 527(f)(1). Sec. 527(f)(1) provides that, if a Sec. 501(c) organization exempt from tax under Sec. 501(a) spends any sums for an exempt function, the organization is subject to tax as if it were a political organization, on the lesser of its net investment income or the amount spent during the year for the exempt function. In addition, the new notification rules do not apply to any person required to report under the Federal Election Campaign Act of 1971 as a political committee.

Form 8871, along with any papers, correspondence, etc., with respect to the notice, will be public information. In addition, the Service will make available, on the Internet and at IRS offices, a list of all political organizations that file under Sec. 527(i), and the name, address, electronic mailing address, custodian of records and contact person for each organization.

New Sec. 527(j) requires a political organization that accepts a contribution or makes an expenditure for an exempt function (after July 1, 2000) to disclose such contributions and expenditures. Two alternatives are provided for the timing of the disclosures: (1) quarterly reports, a pre-election report and a post-election report for a calendar year in which a regularly scheduled election is held and semi-annual reports in other years; or (2) monthly reports.

For reporting such activities, the IRS recently issued Form 8872, Political Organization Report of Contributions and Expenditures. The disclosures must include (1) the amount of each expenditure made to a person if the total amount of expenditures to such person in the calendar year equals or exceeds $500, the name and address of each person, and (in the case of an individual) his occupation and the name of his employer; and (2) the name and address of all contributors that contributed $200 or more to the organization during the calendar year and the amount of the contribution, and (in the case of an individual contributor) the individual's occupation and the name of his employer. A political organization exempt from registering as a political organization on Form 8871 is exempt from filing Form 8872. In addition, a (1) state or local committee of a political party or (2) political committee of a state or local candidate is also exempt from filing Form 8872.

An election is defined in Sec. 527(j) as: (1) a general, special, primary or runoff election for a Federal office; (2) a convention or caucus of a political party that has authority to nominate a candidate for a Federal office; (3) a primary election held for the selection of delegates to a national nominating convention of a political party; or (4) a primary election held for the expression of a preference for the nomination of individuals for election to the office of President.

If Form 8872 is not timely filed, or if it fails to report all of the required information, penalties will be assessed equal to the highest tax rate specified in Sec. 11(b) (presently 35%) multiplied by the total amount of contributions and expenditures to which a failure relates.

Under Secs. 6012(a)(6) and 6033(g), political organizations must now file information returns (similar to returns filed by tax-exempt organizations under Sec. 501(a)), containing a summary of receipts and disbursements and any other information the Service deems appropriate. Under Sec. 6104, the information returns filed by a political organization will be made public at the times and places specified by the IRS; however, the names and addresses of any contributor to an organization do not have to be identified. A return filed by a political organization must now be made available for inspection during the organization's regular business hours and a copy must be provided, if requested. However, listings of contributors are exempted from the disclosure requirements. The penalty for failing to comply with the public inspection requirements will be $20 per day for each day a failure to comply continues.

These disclosure and reporting rules also apply to segregated political action committees associated with nonprofit organizations, such as Sec. 501(c)(6) entities.

From Charles H. Brown III, CPA, Ellin & Tucker, Chartered, Baltimore, MD