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Rev. Rul. 1974-21 Document Info Printer

Revenue Rulings
Internal Revenue Service
 Revenue Ruling

Rev. Rul. 74-21

1974-1 C.B. 14

Sec. 61
 Sec. 162
 Sec. 7805 

Caution: Clarified by Rev. Rul. 74-475

Caution:Modified by Rev. Rul. 74-475 

IRS Headnote

Political campaign funds; committee controlled. An unincorporated
organization established and operated exclusively for political purposes is
not exempt from Federal income tax and is required to file returns, Forms
1120, beginning with 1972. Interest, dividends, and net gains from the
sales of securities are includible in gross income and expenses directly
attributable to interest and dividend income are deductible. Under the
provisions of section 7805(b) of the Code, the organization is not required
to file a return for 1971 or prior years. It need not include in its gross
income gain from contributed securities sold before October 3, 1972.
Penalty will not be assessed for 1972 provided the return for that year is
filed and the tax paid on or before April 15, 1974 and an extension of time
may be granted for the filing of the return and payment of tax for 1973. 

Full Text

Rev. Rul. 74-21 

The Internal Revenue Service has been asked as to the proper treatment, for
Federal income tax purposes, of an organization under the circumstances
described below. 

An organization was established and operated for the exclusive purpose of
engaging in activities to influence the nomination and election of
individuals to public office. It performs its purpose in part by conducting
fund raising affairs and disbursing political contributions for campaign
purposes. The organization maintains books and records, including
substantiating data of receipts and expenditures. 

During 1972, the organization received political contributions in the form
of money and securities. The securities were held by the organization, in
its name, until it, in its own discretion, decided to sell the securities
to obtain funds for campaign purposes. Capital gains were realized during
1972 on the sale of the securities, a portion of the gains being realized
before October 3, 1972, and the balance of such gains being realized on and
after October 3, 1972. It also received interest earned on bank deposits
and dividends from contributed stock. 

Expenditures were made by the organization for campaign purposes; for fund
raising activities relating thereto; for activities undertaken for the
production of interest and dividend income; and for expenses paid upon the
sale of the securities. No funds of the organization were used for other
than campaign purposes. Available documents indicate that the organization
was organized as an unincorporated committee. The organization has
associates and an objective to carry on jointly, activities in furtherance
of the purposes for which the organization was organized. Its officers have
continuing exclusive authority to make management decisions. Also it has a
continuing identity unaffected by changes in persons associated with the
organization. The organization will terminate upon conclusion of all of its
campaign activities. 

The specific questions asked are: 

(1) whether the organization is exempt from Federal income tax; if not
exempt, the type of a Federal income tax return to be filed and the due
date thereof; 

(2) which of the foregoing amounts received are includible in gross income;

(3) to what extent are expenditures of the organization deductible. 

Section 61 of the Internal Revenue Code of 1954 defines gross income as all
income, from whatever source derived, except as otherwise provided by law. 

Section 162 of the Code provides, in part, that there shall be allowed as a
deduction all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business. 

Section 6012(a)(2) of the Code provides that returns with respect to income
taxes under subtitle A shall be made by every corporation. 

Section 6072(b) of the Code provides, in part, that returns of corporations
under section 6012 made on the basis of the calendar year shall be filed on
or before the fifteenth day of March following the close of the calendar
year, and such returns made on the basis of a fiscal year shall be filed on
or before the fifteenth day of the third month following the close of the
fiscal year. Extensions of time for filing returns are provided by section
6081 of the Code and extensions of time for paying tax by section 6161 of
the Code. 

Section 162(e)(2) of the Code and section 1.162-20 of the Income Tax
Regulations provides, in relevant part, that all expenditures for political
campaign purposes (including the support of or opposition to any candidate
for public office), or for carrying on propaganda (including advertising)
relating to any of the foregoing purposes, are not deductible from gross

Section 501 of the Code provides rules under which certain organizations
may be exempt from the Federal income tax imposed by the Internal Revenue
Code. That section describes with particularity the purposes for which an
organization must be organized and operated in order to be exempt from
Federal income tax thereunder. An organization that is organized and
operated exclusively to engage in activities the purpose of which is to
influence the nomination or election of individuals to public office is not
one of the organizations that may be exempt from the Federal income tax for
purposes described in section 501. Nor is such an organization one covered
by any other provision of the Code as exempt from the Federal income tax.
There is no judicial decision holding that such an organization is exempt
from such tax. 

Section 7701(a)(2) of the Code provides: 

"The term 'partnership' includes a syndicate, group, pool, joint venture,
or other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on, and which is not,
within the meaning of this title, a trust or estate or a corporation. . .

Section 7701(a)(3) of the Code provides that the term "corporation"
includes associations, joint stock companies, and insurance companies. 

Not all activities conducted jointly by individuals are treated as separate
entities for tax purposes. Regulations under section 7701 set forth
criteria for determining whether individuals engaging in common activities
are entities for tax purposes and for distinguishing between organizations
which are taxable as trusts, partnerships or corporations. However, those
criteria were developed without reference to, and do not definitively
cover, unincorporated organizations (other than trusts) which are engaged
in not-for-profit activities. Based upon all the circumstances of the
instant case, it is held that the organization is a separate entity for tax
purposes, that it more nearly resembles a corporation than a trust or
partnership, and that the tax rules for corporations apply. 

Accordingly, it is held, in the instant case: 

(1) that the organization is not exempt from Federal income tax; 

(2) a return, Form 1120, U.S. Corporation Income Tax Return, is required to
be filed by the organization as an association taxable as a corporation; 

(3) the due date for the filing of the return is March 15, (subject to the
granting of appropriate extensions of time) following the close of the
taxable year (calendar year); 

(4) income of the organization includible in gross income to be reported in
its return is interest, dividends, and the net gains from the sale of
securities (computed in accordance) with the applicable provisions of the
Code such as those relating to basis, holding period and amount realized); 

(5) campaign contributions are not includible in the gross income of the

(6) expenditures for campaign purposes are not deductible; 

(7) expenses directly attributable to activities undertaken for the
production of the interest and dividend income are deductible. Expenses
attributable to the sale of the securities are to be taken into account in
determining the gain or loss realized on the sale of the securities.
Expenses incurred for fund-raising activities are part of the costs of
obtaining political contributions and are not deductible in determining
taxable income. 

However, under the provisions of section 7805(b) of the Code, this Revenue
Ruling shall not be applied so as to: 

(1) require the filing by the organization of a Federal income tax return
for 1971 or prior years, 

(2) require the inclusion in gross income of the gain realized on any sale
or exchange of the securities made by the organization before October 3,
1972, and, 

(3) assert the delinquency penalty or the failure to pay penalty under
section 6651 of the Code for 1972 provided the return for such year is
filed and the tax paid on or before April 15, 1974. Moreover, in view of
the circumstances, extensions of time for not more than six months will be
granted for the filing of returns and payment of tax for 1973 under
sections 6081 and 6161 of the Code. 

Having in mind the possibility of hardship which might result from a
requirement of immediate payment in full, the Internal Revenue Service
will, in hardship cases, enter into appropriate arrangements for deferred
payment of tax. 

The conclusions of this Revenue Ruling are equally applicable to
incorporated organizations. Further, in order to promote administrative
efficiency in the processing of returns, an entity which files a return in
accordance with this Revenue Ruling, should attach a statement to the face
of such return stating that the return is filed in accordance with Rev.
Rul. 74-21.

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