Friday, October 9, 2020
Given that we're well into election season, I thought I'd end my week highlighting a significant difference between a couple types of political organizations: 501(c)(4)s and 527 groups.
At a broad level, 501(c)(4) organizations are similar to 527 organizations: both are exempt from taxation and both can accept donations and spend those donations for political purposes. Donors do not get a deduction for donations to either type of organization.
There are, of course, some differences. 527 orgs face no limitations on their ability to spend money supporting candidates for office. The Code defines their exempt function as working to influence the selection of political figures. 501(c)(4) orgs, by contrast, have to be "primarily engaged" in promoting social welfare; the promotion of social welfare does not include supporting or opposing candidates for office. So 501(c)(4)s, unlike 527 orgs, cannot be organized with the sole purpose of supporting candidates for office.
But donors to 501(c)(4)s have a significant tax advantage, at least if they donate appreciated property. The donation of appreciated property to 501(c)(4) organizations is not a realization event. So, while the donor may not get a deduction, the donor also does not have to pay taxes on any imputed gain from the donation.
But in 1975, when Congress enacted section 527 of the Code, it also enacted section 84. Under section 84, the transfer of appreciated property to a 527 org is treated as a realization event and the donor is required to pay taxes on any appreciation as if the donor had sold the property to the political organization for its fair market value on the date of the donation.
It's probably worth pointing out that section 84 only applies where the fair market value of the property exceeds the basis at the time of transfer. A donor can't create a deduction by donating property that has lost value.
Also, thanks to Ellen Aprill for highlighting section 84 for me; it's an interesting point of deemed realization and it creates an interesting and (I suspect) unintentional break between 527 and 501(c)(4) organizations.
Samuel D. Brunson