[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.527-5]

[Page 230-231]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.527-5  Activities resulting in gross income to an individual or 
political organization.

    (a) In general--(1) General rule. Amounts expended by a political 
organization for an exempt function are not income to the individual or 
individuals on whose behalf such expenditures are made. However, where a 
political organization expends any other amount for the personal use of 
any individual, the individual on whose behalf the amount is expended 
will be in receipt of income. Amounts are expended for the personal use 
of an individual where a direct or indirect financial benefit accrues to 
such individual. For example, if a political organization pays a 
personal legal obligation of a candidate for public office, such as the 
candidate's federal income tax liability, the amount paid is includible 
in such candidate's gross income. Similarly, if a political organization 
expends anyamount of its exempt function income for other than an exempt 
function, and the expenditure results in a direct or indirect financial 
benefit to the political organization, it must include the amount of 
such expenditure in its gross income. For example, if a political 
organization expends exempt function income for making an improvement or 
addition to its facilities, or for equipment, which is not necessary for 
or used in carrying out an exempt function, the amount of the 
expenditure will be included in the political organization's gross 
income. However, if a political organization expends exempt function 
income to make ordinary and necessary repairs on the facilities the 
political organization uses in conducting its exempt function, such 
amounts will not be included in the political organization's gross 
income.
    (2) Expenditure for an illegal activity. Expenditures by a political 
organization that are illegal or for an activity that is judicially 
determined to be illegal are treated as amounts not segregated for use 
only for the exempt function and shall be included in the political 
organization's taxable income. However, expenses incurred in defense of 
civil or criminal suits against the organization are not treated as 
taxable to the organization. Similarly, voluntary reimbursement to the 
participants in the illegal activity for similar expenses incurred by 
them are not taxable to the organization if the organization can 
demonstrate that such payments do not constitute a part of the 
inducement to engage in the illegal activity or part of the agreed upon 
compensation therefor. However, if the organization entered into an 
agreement with the participants to defray such expenses as part of the 
inducement, such payments would be treated as an expenditure for an 
illegal activity. Except where necessary to prevent the period of 
limitation for assessment and collection of a tax from expiring, a 
notice of deficiency will not generally be issued until after there has 
been a final determination of illegality by an appropriate court in a 
criminal proceeding.
    (b) Certain uses not treated as income to a candidate. Except as 
otherwise provided in paragraph (a) of this section, if a political 
organization:
    (1) Contributes any amount to or for the use of any political 
organization described in section 527(e)(1) or newsletter fund described 
in section 527(g),
    (2) Contributes any amount to or for the use of any organization 
described in paragraph (1) and (2) of section 509(a) which is exempt 
from taxation under section 501(a), or

[[Page 231]]

    (3) Deposits any amount in the general fund of the U.S. Treasury or 
in the general fund of any State or local government,

such amount shall not be treated as an amount expended for the personal 
use of a candidate or other person. No deduction shall be allowed under 
the Internal Revenue Code of 1954 for the contribution or deposit 
described in the preceding sentence.
    (c) Excess funds--(1) General rule. Generally, funds controlled by a 
political organization or other person after a campaign or election are 
excess funds and are treated as expended for the personal use of the 
person having control over the ultimate use of such funds. However, such 
funds will not be treated as excess funds to the extent they are:
    (i) Transferred within a reasonable period of time by the person 
controlling the funds in accordance with paragraph (b) of this section, 
or
    (ii) Held in reasonable anticipation of being used by the political 
organization for future exempt functions.
    (2) Excess funds transferred at death. Where excess funds are held 
by an individual who dies, and these funds go to the individual's estate 
or any other person (other than an organization or fund described in 
paragraph (b) of this section), the funds are income of the decedent and 
will be included in the decedent's gross estate unless the estate or 
other person receiving such funds transfers the funds within a 
reasonable period of time in accordance with paragraph (b) of this 
section.

This paragraph (c)(2) will not apply where the individual who dies 
provides that the funds be transferred to an organization or fund 
described in paragraph (b) of this section.

[T.D. 7744, 45 FR 85733, Dec. 30, 1980]