[EL] Treatment of independent political expenditures on a company's financial books

[John White]

Section 162(e) of the Code prohibits deductions for a variety of lobbying and political expenditures, and has for a long time.  Citizens United would have no effect on the tax treatment of political expenditures, including IEs or contributions to super-PACs.  I thought the original post's inquiry was how these matters would be handled for financial reporting purposes, not tax reporting.  The text of the Code provision follows, and is applicable to both individuals and corporations in computing taxable income.

I do not know how the expenses would be handled for financial reporting purposes.

(e) Denial of deduction for certain lobbying and political expenditures
(1) In general
No deduction shall be allowed under subsection (a) for any amount paid or incurred in connection with-
(A) influencing legislation,
(B) participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office,
(C) any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or
(D) any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.
(2) Exception for local legislation
In the case of any legislation of any local council or similar governing body-
(A) paragraph (1)(A) shall not apply, and
(B) the deduction allowed by subsection (a) shall include all ordinary and necessary expenses (including, but not limited to, traveling expenses described in subsection (a)(2) and the cost of preparing testimony) paid or incurred during the taxable year in carrying on any trade or business-
(i) in direct connection with appearances before, submission of statements to, or sending communications to the committees, or individual members, of such council or body with respect to legislation or proposed legislation of direct interest to the taxpayer, or
(ii) in direct connection with communication of information between the taxpayer and an organization of which the taxpayer is a member with respect to any such legislation or proposed legislation which is of direct interest to the taxpayer and to such organization,
and that portion of the dues so paid or incurred with respect to any organization of which the taxpayer is a member which is attributable to the expenses of the activities described in clauses (i) and (ii) carried on by such organization.
(3) Application to dues of tax-exempt organizations
No deduction shall be allowed under subsection (a) for the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under section 6033<http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00006033----000-.html> (e)(1)(A)(ii)<http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00006033----000-.html#e_1_A_ii> is allocable to expenditures to which paragraph (1) applies.
(4) Influencing legislation
For purposes of this subsection-
(A) In general
The term "influencing legislation" means any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation.
(B) Legislation
The term "legislation" has the meaning given such term by section 4911<http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004911----000-.html> (e)(2)<http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004911----000-.html#e_2>.
(5) Other special rules
(A) Exception for certain taxpayers
In the case of any taxpayer engaged in the trade or business of conducting activities described in paragraph (1), paragraph (1) shall not apply to expenditures of the taxpayer in conducting such activities directly on behalf of another person (but shall apply to payments by such other person to the taxpayer for conducting such activities).
(B) De minimis exception
(i) In general Paragraph (1) shall not apply to any in-house expenditures for any taxable year if such expenditures do not exceed $2,000. In determining whether a taxpayer exceeds the $2,000 limit under this clause, there shall not be taken into account overhead costs otherwise allocable to activities described in paragraphs (1)(A) and (D).
(ii) In-house expenditures For purposes of clause (i), the term "in-house expenditures" means expenditures described in paragraphs (1)(A) and (D) other than-
(I) payments by the taxpayer to a person engaged in the trade or business of conducting activities described in paragraph (1) for the conduct of such activities on behalf of the taxpayer, or
(II) dues or other similar amounts paid or incurred by the taxpayer which are allocable to activities described in paragraph (1).
(C) Expenses incurred in connection with lobbying and political activities
Any amount paid or incurred for research for, or preparation, planning, or coordination of, any activity described in paragraph (1) shall be treated as paid or incurred in connection with such activity.



John J. White, Jr.
white at lfa-law.com<mailto:white at lfa-law.com>
(425) 822-9281 ext. 321
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From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Volokh, Eugene
Sent: Wednesday, September 28, 2011 2:44 PM
To: law-election at uci.edu
Subject: [EL] Treatment of independent political expenditures on a company's financial books

               That may well be so, though I'm not sure that I would treat the deductibility of business expenses as a "subsidy."  My point, though, was just to suggest that there is already likely a longstanding practice with regard to this, given that corporations have long been able to speak out about ballot measures.  It seems to me the rule with regard to corporate speech about candidates ought to be the same.

Of course, now that I think of it, since in half the states corporations had been able to speak out about candidates even before Citizens United, there may have been a well-settled practice with regard to deductibility of those expenses as well.

Eugene

From: Fredric Woocher [mailto:fwoocher at strumwooch.com]
Sent: Wednesday, September 28, 2011 2:30 PM
To: Volokh, Eugene; law-election at uci.edu
Subject: RE: [EL] Treatment of political contributions on a company's financial books

Constitutionally protected "speech," yes.  But wouldn't taking a tax deduction for these expenditures as a "business expense" make them taxpayer-subsidized?  I don't think the Constitution requires that.

Fredric D. Woocher
Strumwasser & Woocher LLP
10940 Wilshire Blvd., Ste. 2000
Los Angeles, CA 90024
fwoocher at strumwooch.com<mailto:fwoocher at strumwooch.com>
(310) 576-1233


________________________________
From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Volokh, Eugene
Sent: Wednesday, September 28, 2011 10:07 AM
To: law-election at uci.edu
Subject: Re: [EL] Treatment of political contributions on a company's financial books
               I take it this refers largely to independent political expenditures, or to contributions to independent organizations that make such expenditures, since Citizens United did not strike down the ban on direct contributions to candidates.  And I would think such an independent expenditure supporting or opposing a candidate would be treated the same way as independent expenditures supporting or opposing ballot measures, which have long been seen as constitutionally protected, no?

               Eugene

From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Ellen Aprill
Sent: Wednesday, September 28, 2011 10:04 AM
To: law-election at uci.edu
Subject: [EL] Treatment of political contributions on a company's financial books

As has been discussed on this list, Section 162(e) makes these amounts nondeductible for tax purposes.  Especially now that Citizens United has held that corporations can make political contributions and in light of the Super-Pacs, I was hoping that someone on the list knows how auditors treat these amounts for purposes of financial reporting.
Thanks.

   Ellen
--
Ellen P. Aprill
John E. Anderson Professor of Tax Law
Loyola Law School
919 Albany Street
Los Angeles, CA 90015
213-736-1157

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