[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: 26CFR1.527-6]

[Page 231-233]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.527-6  Inclusion of certain amounts in the gross income of an 
exempt organization which is not a political organization.

    (a) Exempt organizations--General rule. If an organization described 
in section 501(c) which is exempt from tax under section 501(a) expends 
any amount for an exempt function, it may be subject to tax. There is 
included in the gross income of such organization for the taxable year 
an amount equal to the lesser of:
    (1) The net investment income of such organization for the taxable 
year, or
    (2) The aggregate amount expended during the taxable year for an 
exempt function.

The amount included will be treated as political organization taxable 
income.
    (b) Exempt function expenditures--(1) Directly related expenses. (i) 
Except as provided in this section, the term exempt function will 
generally have the same meaning it has in Sec. 1.527-2(c). Thus, 
expenditures which are directly related to the selection process as 
defined in Sec. 1.527-2(c)(1) are expenditures for an exempt function. 
Expenditures for indirect expenses as defined in Sec. 1.527-2(c)(2), 
when made by a section 501(c) organization are for an exempt function 
only to the extent provided in paragraph (b)(2) of this section. 
Expenditures of a section 501 (c) organization which are otherwise 
allowable under the Federal Election Campaign Act or similar State 
statute are for an exempt function only to the extent provided in 
paragraph (b)(3) of this section.
    (ii) An expenditure may be made for an exempt function directly or 
through another organization. A section 501(c) organization will not be 
absolutely liable under section 527(f)(1) for amounts transferred to an 
individual or organization. A section 501(c) organization is, however, 
required to take reasonable steps to ensure that the transferee does not 
use such amounts for an exempt function.
    (2) Indirect expenses. [Reserved]
    (3) Expenditures allowed by Federal Election Campaign Act. 
[Reserved]
    (4) Appointments or confirmations. Where an organization described 
in paragraph (a) of this section appears before any legislative body in 
response to a written request by such body for the purpose of 
influencing the appointment or confirmation of an individual to a public 
office, any expenditure directly related to such appearance is not 
treated as an expenditure for an exempt function.
    (5) Nonpartisan activity. Expenditures for nonpartisan activities by 
an organization to which paragraph (a) of this

[[Page 232]]

section applies are not expenditures for an exempt function. Nonpartisan 
activities include voter registration and get-out-the-vote campaigns. To 
be nonpartisan voter registration and get-out-the-vote campaigns must 
not be specifically identified by the organization with any candidate or 
political party.
    (c) Character of items included in gross income--(1) General rule. 
The items of income included in the gross income of an organization 
under paragraph (a) of this section retain their character as ordinary 
income or capital gain.
    (2) Special rule in determining character of item. If the amount 
included in gross income is determined under paragraph (a)(2)(ii) of 
this section, the character of the items of income is determined by 
multiplying the total amount included in gross income under such 
paragraph by a fraction, the numerator of which is the portion of the 
organization's net investment income that is gain from the sale or 
exchange of a capital asset, and the denominator of which is the 
organization's net investment income. For example, if $5,000 is included 
in the gross income of an organization under paragraph (a)(2) of this 
section, and the organization had $100,000 of net investment income of 
which $10,000 is long term capital gain, then $500 would be treated as 
long term capital gain:
[GRAPHIC] [TIFF OMITTED] TC08OC91.002

    (d) Modifications. The modifications described in section 527(c)(2) 
apply in computing the tax under paragraph (a)(2) of this section. Thus, 
no net operating loss is allowed under section 172 nor is any deduction 
allowed under part VIII of subchapter B. However, there is allowed a 
specific deduction of $100.
    (e) Transfer not treated as exempt function expenditures. Provided 
the provisions of this paragraph (e) are met, a transfer of political 
contributions or dues collected by a section 501(c) organization to a 
separate segregated fund as defined in paragraph (f) of this section is 
not treated as an expenditure for an exempt function (within the meaning 
of Sec. 1.527-2(c)). Such transfers must be made promptly after the 
receipt of such amounts by the section 501(c) organization, and must be 
made directly to the separate segregated fund. A transfer is considered 
promptly and directly made if:
    (1) The procedures followed by the section 501(c) organization 
satisfy the requirements of applicable Federal or State campaign law and 
regulations;
    (2) The section 501(c) organization maintains adequate records to 
demonstrate that amounts transferred in fact consist of political 
contributions or dues, rather than investment income; and
    (3) The political contributions or dues transferred were not used to 
earn investment income for the section 501(c) organization.
    (f) Separate segregated fund. An organization or fund described in 
section 527(f)(3) is a separate segregated fund. To avoid the 
application of paragraph (a) of this section, an organization described 
in section 501(c) that is exempt from taxation under section 501(a) may, 
if it is consistent with its exempt status, establish and maintain such 
a separate segregated fund to receive contributions and make 
expenditures in a political campaign. If such a fund meets the 
requirements of Sec. 1.527-2(a) (relating to the definition of a 
political organization), it shall be treated as a political organization 
subject to the provisions of section 527. A segregated fund established 
under the Federal Election Campaign Act will continue

[[Page 233]]

to be treated as a segregated fund when it engages in exempt function 
activities as defined in Sec. 1.527-2(c), relating to State campaigns.
    (g) Effect of expenditures on exempt status. Section 527(f) and this 
section do not sanction the intervention in any political campaign by an 
organization described in section 501(c) if such activity is 
inconsistent with its exempt status under section 501(c). For example, 
an organization described in section 501(c)(3) is precluded from 
engaging in any political campaign activities. The fact that section 527 
imposes a tax on the exempt function (as defined in Sec. 1.527-2(c)) 
expenditures of section 501(c) organizations and permits such 
organizations to establish separate segregated funds to engage in 
campaign activities does not sanction the participation in these 
activities by section 501(c)(3) organizations.

[T.D. 7744, 45 FR 85734, Dec. 30, 1980]