527 ORGANIZATIONS: REPORTING REQUIREMENTS IMPOSED ON POLITICAL ORGANIZATIONS AFTER THE ENACTMENT OF P.L. 106-230

CRS Report for Congress
Received through the CRS Web
527 Organizations: Reporting Requirements
Imposed on Political Organizations after the
Enactment of P.L. 106-230
Marie B. Morris
Legislative Attorney
American Law Division
Summary
On July 1, 2000, President Clinton signed H.R. 4762, P.L. 106-230. The law
amended the Internal Revenue Code [IRC] to require political organizations described
in IRC § 527 to disclose their political activities, if they were not already required to do
so by the Federal Election Campaign Act [FECA]. This report summarizes the three
major changes made by the law and some of the major responses to the legislation. First,
all 527 organizations which expect to have over $25,000 in gross receipts during a
taxable year and which are not required to report to the Federal Election Commission
[FEC] are required to register with the IRS within 24 hours of their formation, whether
they are involved in state, local, or federal elections. Second, 527 issue advocacy
organizations, which previously reported neither to the IRS nor the FEC, are required
to file regular disclosure statements with the IRS. Third, all 527 organizations with gross
receipts in excess of $25,000 per year are required to file annual reports with the IRS.
The registration statements, disclosure forms, and annual reports will be made public.^th
H.R. 527 and S. 527 in the 107 Congress would exempt most state and local 527
organizations from the requirements of P.L. 106-230.
Background. Section 527 of the Internal Revenue Code was enacted in 1975 by
P.L. 93-625 to clarify the tax treatment of “political organizations.” Section 527 covers
the tax treatment of all political organizations intended to influence the nomination,
selection, appointment, or election of a candidate for federal, state, or local public office,
whether the organizations are parties, PACs, or candidate committees. Prior to the
enactment of P.L. 106-230, political activists had formed special 527 organizations which
did not have to disclose their activities to either the FEC or the IRS because they
structured their activities so that they neither engaged in express advocacy nor had taxable
income. The lack of federal oversight of certain 527 organizations’ political activities
attracted those who wanted to participate anonymously in the political process and
alarmed those who believed that there should be full disclosure of all political activities.
P.L. 106-230 was the result of desires to increase public disclosure of non-reporting 527

Congressional Research Service ˜ The Library of Congress

organizations’ political activities. On July 1, 2000, President Clinton signed P.L. 106-230,
which passed the 106^th Congress as H.R. 4762.
Under prior law, it was possible to have a 527 organization and not realize that fact.
This was because there was no requirement to report to the IRS unless the organization
had taxable income, and no requirement to register with the FEC unless the organization
engaged in express advocacy. The “organization” could be as informal as a separate bank
account used to fund a candidate’s campaign. Under prior law, IRC § 527 treated
political organizations as tax-exempt for purposes of any federal law referring to tax-
exempt organizations. It provided that as long as their money was used only for “exempt
function”¹ purposes, 527 organizations were not taxed on contributions of money or
property; membership dues, fees, or assessments; proceeds from political fundraising or
entertainment events; proceeds from sales of political campaign materials (providing the
organization is not in the business of conducting such events or selling such materials); and
proceeds from conducting bingo games. This “exempt function” income did not have to
be reported to the IRS. Political organizations were taxed on investment income, capital
gains, and on any expenditures which are not for political purposes. IRC § 2501(a)(5)
provides that transfers of money or other property to a political organization are not
subject to gift taxes. IRC § 84 provides that if someone transfers appreciated property to
a 527 organization, he is treated as if he had sold the property to the 527 organization for
fair market value. The transferor has to recognize and pay taxes on any gain.
Summary of changes. The new law changed the prior 527 regime. First, all 527
organizations which expect to have over $25,000 in gross receipts during a taxable year
and which are not required to report to the FEC, whether they are involved in state, local,
or federal elections, are required to register with the IRS within 24 hours of their
formation. The registration statements are subject to public disclosure. Second, 527 issue
advocacy organizations, which previously reported neither to the IRS nor the FEC, are
required to file periodic disclosure statements with the IRS. These statements are made
public. Third, all 527 organizations with gross receipts in excess of $25,000 per year are
required to file annual reports with the IRS. The annual reports will be made public.
Registration requirements. Under prior law, a political organization was a 527
organization with no action on its part. An organization could be a 527 organization or
could have a 527 organization without even being aware of the fact. Unless it had taxable
(generally, investment) income, it did not have to report anything to the IRS. Section 1 of
the new law prohibits an organization from being a 527 organization unless it notifies the
IRS, electronically and in writing, within 24 hours after formation. There are three
exceptions: one for organizations which do not anticipate having more than $25,000 of
gross receipts per year; another for “persons” which are required to report to the FEC
under the Federal Election Campaign Act [FECA] as “political committees;” and a third
for tax-exempt organizations that conduct 527-type activities directly instead of in a
separate organization. The penalty for failure to register is that the organization will be
taxed at the maximum corporate tax rate on all gross receipts (less certain expenses) for
the period of the failure. The IRS has issued Form 8871 for organizations to register and

¹ Exempt function is defined in IRC § 527(e)(2) as “influencing or attempting to influence the
selection, nomination, election, or appointment of any individual to any Federal, State, or local
public office . . . .”

has provided a place on its website to register electronically. The IRS notes in its
informational material that the organization will need an employer identification number
[EIN] in order to register.
Immediately after enactment of P.L. 106-230, there was a question about how to
interpret the statutory exception for a “political committee” required to report to the FEC,
and thus exempted from registration with the IRS. The definition of political committee
under 2 U.S.C. § 431(4) is
(A) any committee, club, association, or other group of persons which
receives contributions aggregating in excess of $1,000 during a calendar year or
which makes expenditures aggregating in excess of $1,000 during a calendar
year; or
(B) any separate segregated fund established under the provisions of section
441b(b) of this title; or
(C) any local committee of a political party which receives contributions
aggregating in excess of $5,000 during a calendar year, or makes payments
exempted from the definition of contribution or expenditure as defined in
paragraphs (8) and (9) of this section aggregating in excess of $5,000 during a
calendar year, or makes contributions aggregating in excess of $1,000 during a
calendar year or makes expenditures aggregating in excess of $1,000 during a
calendar year.
Political committees only report to the FEC if they are involved in “express
advocacy,” i.e., they make statements for or against a candidate in federal elections. The
question involved political committees with multiple funds. Some took the position that
if the political committee had one fund that reported to the FEC and others that did not
(because they only engaged in either issue advocacy or state elections), the whole
committee, including the non-disclosing funds, was exempt from registering with the IRS.
Others took the position that each separate fund should be viewed as a separate 527
organization, and, if a fund did not report to the FEC, it had to register with the IRS. In
Announcement 2000-72, the IRS took the position that the separate accounts which are
not registered with the FEC must file Form 8871. See Q&A 4. The IRS reiterated this
position in Rev. Rul. 2000-49, Q&A 6.
The law requires state and local candidate committees, federal and state issue
advocacy committees, and funds that intend to influence an election or the selection,
nomination, or appointment of a candidate to public office to register with the IRS. The
information on the Form 8871 is to be made public by the IRS not later than 5 business
days after it receives the notice from the political organization. An organization can
comply with the public disclosure requirement by furnishing the IRS website address to the
requester. Rev. Rul 2000-49.
Disclosure of contributions and expenditures. Section 2 of the law requires
“disclosures” by political organizations. The disclosure requirements do not apply to
“persons” required to report to the FEC as political committees; state or local committees
of political parties; political committees of state or local candidates; organizations which
anticipate having gross receipts of less than $25,000 per year; organizations exempt from

tax under other sections of the Code; or to “expenditures” which are “independent
expenditures” under FECA.
Political organizations which are required to disclose must report each expenditure
of $500 or more, including the name and address and, if applicable, occupation of the
person or organization to whom the expenditure was made; and each contribution of $200
or more, including the name, address, and, if applicable, occupation and employer of all
contributors. Contracts to spend or contribute are treated as contributions or expenditures.
The statute applies to expenditures made and contributions received after July 1, 2000. The
IRS has issued Form 8872, Political Organization Report of Contributions and
Expenditures, for use in complying with the periodic reporting requirement.
The statute includes two schedules for disclosure which are similar to the schedules
in FECA. The organization can choose to comply with either one. Schedule A provides
for quarterly reports in the calendar year in which a regularly scheduled election is held,
plus a pre-election report, and a post-election report. In non-election years, two reports,
each covering six months, must be filed. Schedule B provides for monthly reports, with
special reports to be filed in November and December in the years of regularly scheduled
elections, with a special year end report to be filed by the end of January. The penalty on
organizations failing to file Form 8872, or failing to include required information, is a tax
equal to the highest corporate tax rate, currently 35%, multiplied by the amount not
disclosed.
Form 8872, including the names of the contributors, is subject to public disclosure.
The penalty for failing the make the reports public is a $20 per day penalty, up to a
maximum of $10,000 per return. An organization can comply with the public disclosure
requirement by furnishing the IRS website address to the requester. Rev. Rul. 2000-49.
Annual reporting requirements. Under prior law, 527 organizations with
taxable income over $100 were required to file Form 1120-POL. Section 3 of the new law
retains this requirement and, in addition, requires 527 organizations with gross receipts of
$25,000 or more to file Form 1120-POL plus an annual information return [Form 990] with
the IRS for taxable years beginning after June 30, 2000. If an organization uses a calendar
year, the first year covered by these annual reporting requirements would be 2001. Under
prior law, tax-exempt organizations with gross receipts of $25,000 or more filed an annual
information return [Form 990] with the IRS, but 527 organizations were not required to
do so. The new law brings 527 organizations with gross receipts of at least $25,000 per
year under the annual information return requirement. In addition to the information that
other exempt organizations supply, 527 organizations will be required to publicly disclose
information about their substantial contributors. Form 1120-POL is due on the 15^th day
of the third month following the close of the taxable year. For a calendar year
organization, Form 1120-POL is due March 15. Form 990 is due on the 15^t^h day of the
fifth month after the close of the taxable year. For calendar year organizations, Form 990
is due on May 15.
Annual information returns may be disclosed by the IRS, and the new law requires
527 organizations to make their annual returns and Forms 1120-POL available to members
of the public requesting copies. Existing law requires exempt organizations to supply a
copy of any return filed during the prior 3 years. As 527 organizations acquire a back file
of information returns and 1120-POLs, this requirement will apply to them as well. The

penalty for failing to file the annual information return or failing to include the correct
information on the return is imposed on the organization is $20 per day for each day the
return is not filed, up to the lesser of $10,000 or 5 percent of the organization’s gross
receipts for the year. For organizations with gross receipts over $1,000,000, the daily
penalty is $100, with a maximum penalty of $50,000. For failing to comply with the public
inspection requirements in IRC § 6104(d), the organization is charged $20 per day for each
day the failure continues, up to a maximum of $10,000 per return. IRC § 6652(c)(1).
Responses to the legislation. The IRS has issued two forms and instructions.
Form 8871 is used for meeting the registration requirements and Form 8872 is used to
fulfill the disclosure of contributions and expenditure requirements. The forms are available
on the IRS website. The IRS posts on the Internet a list of all organizations that have filed
Form 8871, with links to the Form 8871, which includes the name, address, electronic
mailing address, contact person, and record custodian of each organization. The URL is
[http://www.irs.gov/bus_info/eo/posearch.html]. The IRS has done the same for Form
8872. The URL is [http://www.irs.gov/bus_info/eo/posearch2.html]. The IRS has not yet
finalized Forms 990 and 1120-POL for political organizations, but draft forms are available
for comment at [http://www.irs.gov/bus_info/tax_pro/dftform2.html].
In October the IRS released Rev. Rul. 2000-49, 2000-44 IRB 430 (Oct. 30, 2000);
available at [http://ftp.fedworld.gov/pub/irs-irbs/irb00-44.pdf] which provides guidance
about the new reporting and disclosure requirements for 527 organizations.
On August 21, 2000, the National Federation of Republican Assemblies filed a suit
in the Federal District Court for the Southern District of Alabama challenging the
constitutionality of P.L. 106-230. Mobile Republican Assembly v. United States, Docket
No. 00-CV-759. During the fall, an amended complaint and a request for a preliminary
injunction were filed and new plaintiffs were added to the suit. To date, this is the only
lawsuit of which we are aware challenging the constitutionality of the statute.
Three bills to limit or eliminate the effect of P.L. 106-230 on state and local 527
organizations were introduced near the end of the 106^th Congress. S. 3193 would have
exempted state and local candidates’ campaign committees from the section 1 registration
requirements. H.R. 5265 would have exempted state and local 527 organizations from the
registration and the disclosure of contributions and expenditures requirements, providing
the organizations were subject to state or local reporting requirements and the state and
local reports were publicly available. H.R.5277 contained similar provisions to those in
H.R. 5265 as well as a number of technical corrections such as eliminating the requirement
that electronic filings with the IRS be duplicated in writing, imposing a gift tax on
undisclosed contributions, and clarifying some of the penalties.
In the 107^th Congress, H.R. 527 and S. 527 would exempt state and local political
organizations from the registration requirement, the disclosure of contributions and
expenditures requirements, and the annual report requirements, providing the organizations
are subject to state or local reporting requirements and the state and local reports were
publicly available.