TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, March 24, 2014

Oklahoma For-Profit Corporation Not Subject to 501(c)(4) Rules Established to Support Republican Senate Candidate

Tulsa World, T.W. Shannon Supporters Set Up For-Profit Corporation to Pay for Political Ads:

T.W.Supporters of U.S. Senate candidate T.W. Shannon are using an unusual, potentially controversial and possibly revolutionary maneuver to pay for campaign advertising in support of Shannon.

Oklahomans for a Conservative Future, which has spent more than $300,000 for television and print advertising on Shannon's behalf, is a for-profit corporation set up Feb. 5. ...  

Theoretically, as a for-profit, private corporation, the company is not subject to the same federal disclosure laws as regular political committees —— meaning it can keep the source of its money secret.

It is also not subject to the same Internal Revenue Service restrictions as the 501(c)(4) "social welfare" organizations that have become popular with political operatives in recent years. The 501(c)(4) organizations do not have to disclose donors, but they do have to convince the IRS that political advocacy is not their primary activity.

Oklahomans for a Conservative Future does have to file expenditure reports with the Federal Election Commission, but otherwise it is free to spend as much as it wants on whomever it wants without having to justify its status to the IRS.

But there are potential drawbacks.

Two types of federal law —— income tax and campaign finance —— come into play, and the two do not always mesh.

Donald Tobin of the Moritz School of Law at Ohio State University said laws are ambiguous on whether for-profit companies engaged primarily in political activity are exempt from reporting requirements."It's an open question," said Tobin, an authority on campaign finance law who predicted in 2007 that private corporations could be used to hide the identity of political donors.

Also unclear, said Tobin, is whether political contributions to a for-profit corporation count as income. "Corporations are prohibited from deducting expenses for advocacy," said Tobin, meaning the money contributed to such corporations could be subject to the full 35 percent corporate income tax rate.

Tobin said political "corporations" like Oklahomans for a Conservative Future have not surfaced previously because 501(c)(4) organizations have been so successful."The social welfare organizations have been so good that they haven't had to form corporations," said Tobin.

For more, see Donald B. Tobin (Ohio State), The 2013 IRS Crisis: Where Do We Go From Here?, 142 Tax Notes 1120 (2014).

(Hat Tip: Jon Forman.)

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Couldn't there also be gift tax consequences to the individual donors?

Posted by: Matt Hickey | Mar 24, 2014 11:34:47 AM

Lobbying firms can deduct their expenses, even if their contributors can not deduct their payments to the lobbying firms. H. Rep't No. 103-213, 103d Cong., 1st Sess. Note 3 at p. 610 (1993) (Conference Report).

Posted by: DLN | Mar 25, 2014 8:30:47 AM