Deductibility of Corporate Campaign
Expenditures
Erika K. Lunder
Legislative Attorney
February 28, 2012
Congressional Research Service
7-5700
www.crs.gov
R42381
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Deductibility of Corporate Campaign Expenditures
Summary
As the 2012 election cycle heats up, one question often asked is whether businesses may deduct
amounts spent on political activities. A related question is whether they may deduct dues paid to a
Section 501(c)(6) trade association that then engages in such activities. These questions have
greater significance in light of the Supreme Court’s 2010 decision in Citizens United v. FEC,
which struck down long-standing prohibitions in federal campaign finance law on corporations
making certain types of campaign-related expenditures.
Section 162(e) of the Internal Revenue Code (IRC) generally prohibits corporations from
deducting the types of expenditures that they can now make post Citizens United. The statute,
which long predates the 2010 decision, prohibits taxpayers from deducting campaign-related and
lobbying expenditures as a trade or business expense. With respect to dues, the IRC generally
permits a Section 501(c)(6) trade association to decide whether to notify its members of the
portion of dues that are allocated to political activities and, therefore, not deductible. If the group
provides the notification, then its members may not deduct that portion of the dues. If the group
chooses not to provide the notification, or otherwise fails to do so, then it must generally pay a tax
(known as a “proxy tax”) on that amount. The notification and proxy tax requirements do not
apply to any amount on which the Section 501(c)(6) organization is taxed under Section 527(f).
That section imposes a tax on Section 501(c) organizations that make an expenditure for
influencing elections, among other activities.
Some have suggested that Citizens United calls into question the constitutionality of Section
162(e). The arguments appear to be that the tax code cannot disallow a deduction for activities
that the Supreme Court has held are protected speech or provide beneficial tax treatment to only
some types of speech (e.g., non-political business speech, the expenditures for which may be
deductible). It is not clear this is true. Prior to Citizens United, the Supreme Court ruled that a
regulatory provision similar to Section 162(e) was constitutional, explaining there is no
requirement that the government subsidize a taxpayer’s First Amendment rights by permitting a
deduction for political expenditures. It is not at all clear that Citizens United changes this
analysis. Therefore, until a court speaks to the issue, it seems premature to conclude that Section
162(e) is unconstitutional based on Citizens United.
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Deductibility of Corporate Campaign Expenditures
Contents
Disallowance of Deduction for Political Expenditures.................................................................... 1
Dues to Section 501(c)(6) Trade Associations .......................................................................... 3
Constitutionality of IRC Section 162(e) .......................................................................................... 4
Contacts
Author Contact Information............................................................................................................. 6
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Deductibility of Corporate Campaign Expenditures
ne question raised after the Supreme Court’s decision in Citizens United v. FEC,1 which
struck down prohibitions in the Federal Election Campaign Act (FECA) on corporations
O using their general treasury funds to make independent expenditures and electioneering
communications, is whether businesses may deduct the amounts spent on these activities.
Independent expenditures are communications “expressly advocating the election or defeat of a
clearly identified candidate” that are not coordinated with any candidate or party.2 Electioneering
communications are broadcast, cable, or satellite transmissions that refer to a clearly identified
federal candidate and are aired within 60 days of a general election or 30 days of a primary.3 The
Court determined that these prohibitions constitute a “ban on speech” in violation of the First
Amendment.4 Notably, the federal ban on corporate contributions to political candidates and
parties remains in effect.5
Disallowance of Deduction for Political
Expenditures
Long prior to Citizens United, the federal tax laws have included a provision that generally
prohibits taxpayers from deducting campaign and lobbying expenditures as a trade or business
expense. Section 162(e) of the Internal Revenue Code (IRC) disallows a deduction for amounts
paid or incurred in connection with
• influencing legislation (including bills, constitutional amendments, and public
referenda and initiatives) through communication with a member or employee of
a legislative body or a government official or employee who participates in
formulating legislation;
• participation or intervention in any political campaign on behalf of or in
opposition to a candidate for public office;
• attempts to influence the general public with respect to elections, legislative
matters, or referenda; and
• any direct communication with a covered executive branch official in an attempt
to influence his or her official actions or position.6
There are exceptions for local legislation and qualifying small amounts.7
1 130 S. Ct. 876 (2010). For analysis of this case, see CRS Report R41045, The Constitutionality of Regulating
Corporate Expenditures: A Brief Analysis of the Supreme Court Ruling in Citizens United v. FEC, by L. Paige
Whitaker.
2 2 U.S.C. §431(17).
3 2 U.S.C. §434(f)(3).
4 See Citizens United, 130 S. Ct. at 898.
5 2 U.S.C. §441b(a).
6 IRC §162(e)(1)(A)-(D) and (e)(1)(4); IRC §4911(e)(2). Depending on the nature of the expenditures, other provisions
of law may be relevant. See, e.g., Treas. Reg. §1.276-1 (generally denying a deduction for certain advertising and
entertainment expenditures that directly or indirectly finance political parties or candidates); Treas. Reg. §1.271-1
(generally denying a deduction for a worthless debt owed by a political party).
7 IRC §162(e)(2) and (e)(4)(B).
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While there is minimal interpretative guidance for these provisions, it appears that many of the
corporate campaign expenditures permitted under Citizens United would be non-deductible under
Section 162(e) as either “participation in, or intervention in, any political campaign on behalf of
(or in opposition to) any candidate for public office” or “an[] attempt to influence the general
public, or segments thereof, with respect to elections.”8 It does not seem possible to argue that an
activity which is an independent expenditure under FECA would fall outside these Section 162(e)
categories since such an expenditure, by definition, involves expressly advocating for or against a
candidate.9 In other words, independent expenditures appear to be per se campaign intervention
under Section 162(e).10
Electioneering communications present a trickier situation. FECA defines them as broadcast,
cable, or satellite communications that refer to a federal candidate and are made within 60 days of
a general election or 30 days of a primary.11 The IRC does not have an analogous bright-line
standard for determining whether communications that merely refer to a candidate are campaign
intervention. Rather, it appears that making this type of determination for tax law purposes
requires looking at the facts and circumstances of each case to assess whether the communication
indicates a preference for or against the candidate, with the communication’s timing being one
factor to consider.12 Due to this intersection between tax and campaign finance law, it seems
possible that an issue advocacy communication might, depending on its timing and content, be an
electioneering communication under FECA, but not be treated as campaign intervention under the
IRC. Such a communication, nonetheless, may still be non-deductible due to the lobbying
provisions in Section 162(e) (e.g., an issue advocacy communication linked to legislative matters
would appear to be non-deductible even if there were a question as to whether it should be
characterized as campaign activity).
8 IRC §162(e)(1)(B) and (C).
9 2 U.S.C. §431(17) (defining “independent expenditure” as an expenditure by a person that expressly advocates for the
election or defeat of a clearly identified candidate and is not made in cooperation with or at the suggestion of such
candidate).
10 Cf. Judith E. Kindell and John Francis Reilly, Election Year Issues, IRS 2002 EO CPE TEXT, 346-49 (2002) (stating
it is inappropriate for the IRS to use campaign finance law’s “express advocacy” standard in interpreting the campaign
intervention prohibition in IRC Section 501(c)(3) because the tax statute’s language encompasses more than that). The
language in Section 501(c)(3) and Section 162(e)(1)(B) are similar.
11 2 U.S.C. §434(f)(3)(A).
12 Cf. Rev. Rul. 2004-6, 2004-1 C.B. 328 (discussing factors the IRS will look at when determining whether an issue
advocacy communication has crossed the line into election activity for purposes of the tax imposed on Section 501(c)
organizations for engaging in certain political activities). Under the ruling, factors tending to show that an issue
advocacy communication is campaign activity include, the communication identifies a candidate for public office and
the candidate’s position on the subject of the communication; the candidate’s position has been raised (either by the
communication or in other public communications) to distinguish him or her from other candidates; the communication
is timed to coincide with an electoral campaign; the communication is targeted at voters in a particular election; and the
communication is not part of an ongoing series of substantially similar advocacy communications by the organization
on the same issue. Factors tending to indicate that the communication is not campaign activity include the absence of
one or more of the above factors; the communication identifies specific legislation or an event outside the
organization’s control that it hopes to influence; the communication’s timing coincides with a specific event outside the
organization’s control that it hopes to influence; the candidate is identified solely as a government official who is in a
position to act on the issue in connection with a specific event (e.g., will vote on the legislation); and the candidate is
identified solely in a list of the legislation’s key sponsors.
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Dues to Section 501(c)(6) Trade Associations
It is common for businesses to pay dues or make similar payments to trade associations that have
federal tax-exempt status as Section 501(c)(6) organizations.13 While these payments are
generally deductible as a trade or business expense,14 special rules apply when the Section
501(c)(6) group engages in lobbying or campaign activities.15
In that situation, the tax consequences depend on whether the Section 501(c)(6) entity provides its
members, at the time the dues are assessed or paid, with a “reasonable estimate” of the portion of
dues that are allocable to those activities.16 If the group provides the notification, then its
members are unable to deduct that portion of the dues.17 If the group chooses not to provide the
notification, or otherwise fails to do so, then it must pay a tax (known as a “proxy tax”) on the
amount of non-deductible dues.18 The proxy tax is imposed at the highest corporate rate, which is
currently 35%.19
The notification and proxy tax requirements do not apply to any amount on which the Section
501(c)(6) organization is taxed under Section 527(f).20 That section imposes a tax on Section
501(c) organizations that make an expenditure for “influencing or attempting to influence the
selection, nomination, election, or appointment of any individual to any Federal, State, or local
public office or office in a political organization, or the election of Presidential or Vice-
Presidential electors.”21 The Section 527(f) tax is imposed at the highest corporate rate (35%) on
the lesser of the organization’s net investment income or the total amount of taxable expenditures.
When the tax is based on the organization’s net investment income, this means the full amount of
the organization’s taxable expenditures was not taxed under Section 527(f). As a result, the
Section 501(c)(6) organization may still be subject to the notification and proxy tax requirements
for the non-taxed amount.22 Also, since the Section 527(f) tax generally does not apply to
lobbying activities, amounts spent for these purposes are subject to the notification and proxy tax
requirements.
13 IRC §501(c)(6) (describing “Business leagues, chambers of commerce, real-estate boards, boards of trade, or
professional football leagues ... , not organized for profit and no part of the net earnings of which inures to the benefit
of any private shareholder or individual”).
14 IRC §162(a) (generally permitting a deduction for “ordinary” and “necessary” business expenses).
15 IRC §162(e)(3); IRC §6033(e). See also Rev. Proc. 98-19, 1998-1 C.B. 547 (explaining that Section 6033 applies to
only certain types of Section 501(c) organizations). This analysis would also generally apply if the corporation paid
dues to a Section 501(c)(4) social welfare organization. See id. Under federal tax law, Section 501(c) organizations may
not have engaging in campaign activity (and any other non-exempt purpose activity) as their primary purpose. For
further discussion of the political restrictions imposed on Section 501(c) organizations, see CRS Report RL33377, Tax-
Exempt Organizations: Political Activity Restrictions and Disclosure Requirements, by Erika K. Lunder.
16 IRC §6033(e)(1)(A)(ii). In general, the expenditures are treated as paid out of the dues and, if they exceed the dues,
the excess is carried over to the next year. IRC §6033(e)(1)(C). The organization may also be subject to tax if it
underestimates the amounts.
17 IRC §162(e)(3).
18 IRC §162(e)(3); IRC §6033(e)(1)(A)(ii) and (e)(2).
19 IRC §6033(e), IRC §11.
20 IRC §6033(e)(1)(B)(iii).
21 IRC §527(e)(2).
22 See IRS Internal Revenue Manuel 7.27.12.2.1, 7.27.12.3 (05-21-2003).
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Constitutionality of IRC Section 162(e)
Some have suggested that the Supreme Court’s analysis in Citizens United might raise questions
about whether IRC Section 162(e) is constitutional. The arguments appear to be that the tax laws
cannot disallow a deduction for activities that the Supreme Court has held are protected speech or
provide beneficial tax treatment to only some types of speech (e.g., non-political business speech,
the expenditures for which may be deductible). As discussed below, the Supreme Court upheld
the constitutionality of a provision similar to Section 162(e), and it is not clear Citizens United
would impact that analysis.
Congress has broad powers to tax under the Constitution.23 In general, tax distinctions and
classifications are constitutionally permissible so long as “they bear a rational relation to a
legitimate governmental purpose.”24 The rational basis standard is a low level of review by a
court. In the tax context in particular, courts typically show great deference in recognition of “the
large area of discretion which is needed by a legislature in formulating sound tax policies.”25 At
the same time, not all exercises of Congress’s taxing power receive such deference. Sometimes,
tax provisions are subject to higher levels of scrutiny. For example, tax provisions based on the
content of speech are, like non-tax provisions, subject to strict scrutiny.26 A provision subject to
this highest level of scrutiny must be necessary to serve a compelling government interest and be
narrowly drawn to achieve that end.27 This is a heavy burden for the government to meet.
The decision by Congress to deny a deduction for certain business expenses, while allowing a
deduction for others, appears to be well within its broad taxing powers and subject to minimal
review by a court. As the Court has explained, deductions of trade or business expenses “may, to
be sure, be disallowed by specific legislation, since deductions, are a matter of grace and
Congress can, of course, disallow them as it chooses.”28
It might, nonetheless, be argued that a more rigorous analysis should apply when, as here, a
deduction is disallowed for expenditures related to the exercise of a constitutional right. However,
the Supreme Court has held there is no requirement for the federal government to subsidize the
constitutional rights of taxpayers. In Cammarano v. United States,29 the Court upheld the validity
of a tax regulation (in effect prior to IRC Section 162(e)) that disallowed a business deduction for
lobbying expenditures. The taxpayers had been denied a deduction for amounts paid to a
professional organization to lobby against a state initiative that would have had dire consequences
for their business. They argued the disallowance violated the First Amendment, relying on a
previous case, Speiser v. Randall.30 In Speiser, the Court had struck down a state property tax
exemption that required taxpayers to take a loyalty oath on the grounds that the state’s tax
23 U.S. CONST. art. I, §8, cl. 1 (“The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises
....”).
24 Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547 (1983).
25 Id. at 547 (internal quotations omitted).
26 See Arkansas Writers. Project, Inc. v. Ragland, 481 U.S. 221 (1987) (striking down a state sales tax that taxed
general interest magazines, but exempted newspapers and religious, professional, trade, and sports magazines).
27 See id. at 231.
28 Comm’r v. Tellier, 383 U.S. 687, 693 (1966) (quoting Comm’r v. Sullivan, 356 U.S. 27, 28 (1958)).
29 Cammarano v. United States, 358 U.S. 498 (1959).
30 Speiser v. Randall, 357 U.S. 513 (1958).
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administration procedures did not afford adequate due process. In striking down the provision that
was clearly “aimed at the suppression of dangerous ideas,” the Court emphasized its chilling
effect on the proscribed speech and equated it to a fine for engaging in that type of speech.31
In Cammarano, the Court rejected the claim that Speiser was controlling, reasoning that the
nondiscriminatory disallowance of a deduction for lobbying expenditures was different because,
unlike the provision in Speiser, it was not intended to suppress dangerous ideas.32 Instead, the
Court explained, the taxpayers “are not being denied a tax deduction because they engage in
constitutionally protected activities, but are simply being required to pay for those activities
entirely out of their own pockets, as everyone else engaging in similar activities is required to do
under” the tax laws.33 The Court further explained that the disallowance “express[ed] a
determination by Congress that since purchased publicity can influence the fate of legislation
which will affect, directly or indirectly, all in the community, everyone in the community should
stand on the same footing as regards its purchase so far as the Treasury of the United States is
concerned.”34
In a subsequent case, Regan v. Taxation With Representation of Washington,35 the Court addressed
a similar issue in upholding the federal tax law that limits the lobbying of Section 501(c)(3)
organizations to “no substantial part” of their activities. The Court rejected the argument that the
limitation infringed on the organization’s First Amendment rights.36 Rather, the Court, noting it
had held in Cammarano that the First Amendment does not require the federal government to
subsidize lobbying, explained that “Congress has merely refused to pay for the lobbying out of
public moneys” and stated that it “again reject[s] the notion that First Amendment rights are
somehow not fully realized unless they are subsidized by the State.”37
The above subsidization analysis would seem to apply to Section 162(e), which is similar to the
regulation at issue in Cammarano. Using such an analysis, a court would likely find Section
162(e) to be constitutional. It is not clear that Citizens United changes this conclusion. The
Court’s holding in Citizens United does not expressly address the constitutionality of Section
162(e). Any argument that the decision suggests Section 162(e) might be an unconstitutional
burden on free speech appears debatable in light of the subsidization rationale expressed in
Cammarano. In other words, it is not at all clear the holding in Citizens United that the
government may not ban corporations from engaging in certain political speech requires the
government to subsidize that speech. Furthermore, there might be some question as to the extent
31 Id. at 519 (internal quotations omitted).
32 See Cammarano, 358 U.S. at 513.
33 Id.
34 Id. In a concurring opinion, Justice Douglas explained that if Congress had denied all business expense deductions to
taxpayers spending money to lobby, then that would be placing a penalty on the exercise of First Amendment rights.
See id. at 515 (Douglas, J., concurring) (“Deductions are a matter of grace, not of right.... To hold that this item of
expense must be allowed as a deduction would be to give impetus to the view favored in some quarters that First
Amendment rights must be protected by tax exemptions. But that proposition savors of the notion that First
Amendment rights are somehow not fully realized unless they are subsidized by the State. Such a notion runs counter to
our decisions ... , and may indeed conflict with the underlying premise that a complete hands-off policy on the part of
government is at times the only course consistent with First Amendment rights.”).
35 Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983).
36 See id. at 546. The Court also noted the organization had the option to set up a separate Section 501(c)(4)
organization that could engage in the lobbying activities.
37 Id. at 545-46 (internal citations omitted).
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to which a court would extend the Citizens United analysis, in which the Court found the
government’s anti-distortion, anti-corruption, and shareholder protection concerns insufficient to
support the ban on corporate political speech,38 to Section 162(e), which does not prohibit speech
or distinguish among taxpayers based on corporate status. Thus, until a court speaks to the issue,
it seems premature to conclude that Section 162(e) is unconstitutional based on Citizens United.
Author Contact Information
Erika K. Lunder
Legislative Attorney
elunder@crs.loc.gov, 7-4538
38 See, e.g., Citizens United, 130 S. Ct. at 899 (“the Government may commit a constitutional wrong when by law it
identifies certain preferred speakers”); 130 S. Ct. at 903, 907 (while prior case law had “found a compelling
governmental interest in preventing the corrosive and distorting effects of immense aggregations of wealth that are
accumulated with the help of the corporate form and that have little or no correlation to the public’s support for the
corporation’s political ideas” [internal quotations omitted], this “antidistortion rationale [is] all the more an aberration”
since “[t]he purpose and effect of this law is to prevent corporations, including small and nonprofit corporations, from
presenting both facts and opinions to the public.”); 130 S. Ct. at 908 (“Limits on independent expenditures ... have a
chilling effect extending well beyond the Government’s interest in preventing quid pro quo corruption. The
anticorruption interest is not sufficient to displace the speech here in question.”).
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