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Monday, May 7, 2012

CRS: Is § 162(e) Unconstitutional After Citizens United?

CRS LogoCongressional Research Service, Deductibility of Corporate Campaign Expenditures (R42381), by Erika K. Lunder:

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 § 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) 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 § 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 § 501(c)(6) organization is taxed under § 527(f). That section imposes a tax on § 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 § 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 § 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 § 162(e) is unconstitutional based on Citizens United.

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