On July 1, 2000, President Clinton signed into law H.R. 4762 (Public Law 106-230), a campaign finance reform bill that requires increased disclosure from political organizations described in section 527 of the Internal Revenue Code (the "Code") (hereinafter, "Political Organizations"). At one point, proposed legislation would have required disclosure of politically related activities, including identification of contributors by certain types of exempt organizations, such as 501(c)(6) trade associations. This provision did not survive. However, "separate segregated funds" established by exempt organizations to minimize taxation of investment income must register and disclose. Accordingly, exempt organizations with separate segregated funds for political type activities should take steps to ensure registration and reporting under the new law.
The legislation creates a new set of rules for Political Organizations, requiring them to disclose details about their organization, contributors, expenditures, annual returns, and other information. The amendments to section 527 and other corresponding sections of the Code that are applicable to Political Organizations are effective immediately. On July 12, 2000, the Internal Revenue Service (the "Service") issued a news release announcing Form 8871, Political Organization Notice of Section 527 Status, and on July 17, 2000, the Service released Form 8872, Political Organization Report of Contributions and Expenditures. Political Organizations already in existence on June 30, 2000, must file Form 8871 by July 31, 2000, and newly created Political Organizations must file Form 8871 within 24 hours of their creation.
This legislation should have only limited impact for section 501(c)(3) organizations, which are strictly prohibited from engaging in any type of elective political activities described in section 527 of the Code.
Section 527(e)(1) of the Code defines a Political Organization as a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purposes of directly or indirectly accepting contributions or making expenditures, or both, for one or more "exempt functions." Exempt functions generally include, in the context of section 527, influencing or attempting to influence the selection, nomination, election, or appointment of an individual to a federal, state, or local public office, or office in a political organization.
The term "separate segregated fund" for purposes of section 527(f) has the same meaning as such term is used in 2 U.S.C. 441b(b)(2)(c), namely a segregated fund to be utilized for political purposes by a corporation, labor organization, membership organization, cooperative, or corporation without capital stock. A separate segregated fund is treated as a separate organization that must obtain a federal employer identification number. By establishing a separate segregated fund that participates in political activities on its behalf, an exempt organization avoids taxation otherwise imposed on its net investment income to the extent of political activity expenditures. As a result of the new legislation, these funds must make disclosures that were previously not required.
Previously, a Political Organization was not required to notify the Service of its existence or to file reports or information returns, such as the Form 990 filed by public charities. Only a Political Organization that had "political organization taxable income," as defined in section 527(c)(1) of the Code, was required to file Form 1120-POL. Until now, the Service was prohibited from disclosing a Political Organization's Form 1120-POL to the general public.
Consequently, prior to H.R. 4762, Political Organizations could be used to collect unlimited amounts of soft money for issue advertising in connection with elections. And, if their activities were not reportable under the Federal Election Campaign Act of 1971 (FECA), they were not required to disclose the identities of their contributors. In addition, such secret donors could transfer unlimited amounts of money to a Political Organization without incurring any gift taxes. Because of these factors, Political Organizations became the vehicle of choice to funnel soft money into political campaigns. With campaign finance reform being a hot political issue, Congress enacted and the President signed H.R. 4762 into law.
General. Section 1 of H.R. 4762 amends section 527 of the Code by adding a new subsection (i). Under section 527(i), unless specifically excepted, within 24 hours of the date of its establishment every Political Organization must notify the Service, electronically and in writing, of its establishment by filing Form 8871. A Political Organization that was in existence on June 30, 2000, must file Form 8871 on or before July 31, 2000.
Form 8871. Form 8871 asks for general information, including the name and address of the organization, custodian of records, and contact person. The Political Organization must disclose its purpose; the names, relationships, and addresses of all related entities; the names and addresses of all officers, directors; and the names and addresses of the five most highly compensated employees who earn more than $50,000 annually. Before filing Form 8871, a Political Organization must have its employer identification number, even if it has no employees.
Exceptions to the Notification Requirements. Three categories of organizations are not required to meet the notification requirement under section 527(i). They are:
- an organization that reasonably expects its annual gross receipts to always be less than $25,000,
- a political committee required to report under FECA, or
- a tax-exempt organization described in section 501(c) that itself is treated as having political organization taxable income under section 527(f)(1).
The third category of organizations excepted from the notification requirements includes an exempt organization described in section 501(c) that expends during a taxable year any amount on political activities, within the meaning of section 527, and is required to pay tax in such taxable year on an amount equal to the lesser of (i) its net investment income for the taxable year, or (ii) the amount spent on exempt functions in such taxable year.
Consequently, an organization such as a social welfare organization, trade association, labor union, etc. is not required to file Form 8871 even if it expends moneys on political activities. Although many prior versions of the legislation required disclosure by organizations described under section 501(c) that participated in political activities, after much debate, the final legislation was drafted more narrowly and excepted such organizations from the filing and disclosure requirements. However, if such an exempt organization establishes a separate segregated fund that qualifies as a Political Organization, such segregated fund must file Form 8871 in a timely manner. Accordingly, under section 527(i), an exempt organization that makes expenditures for political activities must affirmatively elect either to establish a separate segregated fund that will qualify as a Political Organization and will be subject to notification and disclosure requirements or to pay tax in accordance with section 527(f)(1).
Failure to File. A Political Organization that fails to file Form 8871 in a timely manner will not be treated as such for any period before the Form 8871 is filed. As a result, its taxable income will include any income related to political activities, such as contributions (and any deductions connected with the production of such income). Also, contributions made to the Political Organization may not qualify for gift tax exclusion for contributors.
Public Disclosure by the Political Organization. Effective immediately, a Political Organization must make its Form 8871 available for inspection during regular business hours at its principal office. A Political Organization that fails to make public its Form 8871, as required, must pay a penalty of $20 for each day during which such failure continues.
Public Disclosure by the Service. Within five business days of the receipt of the Form 8871 of a Political Organization, the Service is required to make such Form and any additional documents submitted therewith available for public inspection. By August 15, 2000, the Service also is required to make available, on the Internet and at the National Office, a list of all Political Organizations that have filed the Form 8871 with the Service, and the name, address, electronic mailing address, custodian of records, and contact person for each Political Organization.
Periodic Filing Requirements
Form 8872. Section 2 of H.R. 4762 adds subsection (j) to section 527 of the Code. Section 527(j) provides that, for taxable years beginning after June 30, 2000, a Political Organization that accepts contributions or makes expenditures for a political activity during any calendar year must periodically file a report disclosing its contributions and expenditures. Form 8872 (Political Organization Report of Contributions and Expenditures) must be used by a Political Organization to file such reports. The timing of filing Form 8872 will depend upon whether the calendar year is an election year or not.
In a calendar year in which a regularly scheduled election is held, a Political Organization must file the Form 8872 on a quarterly basis, beginning with the first quarter of the calendar year in which it accepts contributions or makes expenditures. The Form 8872 must be filed no later than the 15th day after the last day of each calendar quarter except that, for the quarter ending on December 31, the Form 8872 must be filed no later than January 31 of the following calendar year. In addition, the Political Organization must also file a pre-general election report (no later than the 12th day before the election) and a post-general election report (no later than the 30th day after the election). Some Political Organizations potentially face July filing deadlines for pre-election reports. The Service in a news release issued on July 17, 2000, stated that many Political Organizations may not yet be aware of this deadline and that therefore, the Service has decided to extend the deadline for any July filings of Form 8872 until July 31, 2000.
In all other calendar years, a Political Organization must semiannually file Form 8872, for periods beginning January 1 and ending June 30 and for periods beginning July 1 and ending December 31. The Form 8872 for such periods must be filed no later than July 31 and January 31, respectively.
In lieu of the quarterly or semiannual filing of Form 8872, as described in the two preceding paragraphs, a Political Organization may file monthly reports within 20 days of the end of the last day of each month.
Form 8872 must include the name, address, employer, and occupation of each contributor of $200 or more annually. In addition, organizations or individuals receiving $500 or more annually from the Political Organization must be listed on the Form 8872.
Exceptions to Filing Periodic Reports. Certain Political Organizations are excepted from filing Form 8872.
- Organizations required to report under FECA,
- Any State or local committee of a political party or political committee of a State or local candidate,
- Any organization that reasonably expects that its annual gross receipts will be less than $25,000,
- A tax-exempt organization described in section 501(c) that is itself treated as having taxable income under section 527(f)(1).
Penalty for Non-filing. A Political Organization that fails to file Form 8872 in a timely manner or fails to include all the required information must pay tax in an amount provided in section 527(b)(1).
Public Disclosure by the Political Organization. Effective immediately, a Political Organization must make its Forms 8872 available for inspection during regular business hours at its principal office. A Political Organization that fails to make public its Forms 8872, as required, must pay a penalty of $20 for each day during which such failure continues. The maximum penalty for non-disclosure is $10,000 for each Form 8872.
Public Disclosure by the Service. The statute authorizes the Service to prescribe the place and manner in which it will disclose the Form 8872 filed by a Political Organization. At this time the Service has not provided any such information.
Form 1120-POL. Prior to the enactment of H.R. 4762, a Political Organization that had political organization taxable income, as such term is defined in section 527(c)(1), was required to file Form 1120-POL. For taxable years beginning after June 30, 2000, a Political Organization that has political organization taxable income or has gross receipts of $25,000 or more for a taxable year must file the Form 1120-POL.
Failure to File. A Political Organization that is required, but fails, to file its Form 1120-POL in a timely manner will be assessed a penalty in the amount of $20 for each day during which such failure continues. The maximum penalty for failure to file Form 1120-POL will not exceed the lesser of $10,000 or five percent of the gross receipts of the Political Organization. If the gross receipts of the Political Organization exceed $1 Million, the daily penalty will be in the amount of $100 and the maximum penalty will be the lesser of $50,000 or five percent of the Political Organization’s gross receipts.
Public Disclosure by the Political Organization. A Political Organization that files a Form 1120-POL for any taxable year beginning after June 30, 2000, must make such Form 1120-POL available, free of charge, for public inspection at its principal office or make a copy available to a person requesting the same. The Political Organization may charge a reasonable fee for reproducing its Form 1120-POL. A Political Organization can fulfill its disclosure requirement by making the Form 1120-POL widely available, such as by posting its Form 1120-POL on the Internet.
Public Disclosure by the Service. Previously, the Service neither was required, nor permitted, to make available for public inspection the Form 1120-POL filed by a Political Organization. H.R. 4762 changes that and, for taxable years beginning after June 30, 2000, the Form 1120-POL filed by a Political Organization must be made available for public inspection by the Service. The Service is specifically authorized to disclose the name and address of any contributor to a Political Organization.
An exempt organization described under section 501(c) of the Code that participates in activities that qualify as "exempt function" activities is not required to meet the notification and disclosure requirements discussed herein. However, if such an organization establishes a separate segregated fund (as defined above), the separate segregated fund is treated as a Political Organization and, unless it reasonably expects its annual gross receipts to always be less than $25,000 or it is required to report under FECA, the segregated fund must make the filings and disclosure requirements discussed herein.
Consequently, after July 1, 2000, generally, Political Organizations that used to escape reporting under FECA because they did not expressly advocate the election of a particular candidate or grassroots lobbying on particular legislative issues, will now be required to notify the Service of their existence and to file periodic reports with the Service. In addition, Political Organizations also are required to make available for public inspection any information (whether reports or returns) provided to the Service. Because the definition of Political Organization under the tax laws is much broader than the definition of political committee under FECA, the amendments to section 527 of the Code will apply to many organizations that are not covered under FECA. Because H.R. 4762 generally covers Political Organizations that are active in state or local campaigns, Political Organizations that are involved solely in such campaigns must carefully review their activities to determine whether they are required to file the Forms 8871 and 8872.