Section 527 Segregated Funds – Charity Lawyer Blog

Tax-exempt organizations not prohibited from engaging in political campaign activities have the option of conducting such activity through a distinct, segregated fund within their organization. Doing so allows the organization to avoid tax on its political expenditures. These so-called 527 funds will be treated as a separate entity, with the funds’ earnings and expenditures not being attributed to the exempt organization itself. Instead, the 527 fund is treated as a separate Section 527 organization for tax purposes.

527 organizations are political organizations organized and operated to influence the nomination, selection, and election/appointment of candidates for public office. For the 527 fund to qualify as a 527 organization, the fund’s purpose must be to receive and segregate income for use in influencing the nomination, selection, and election/appointment of a candidate for public office. If expenditures of more than an insubstantial amount are used for other purposes, the fund will not be treated as a separate 527 organization.

The exempt organization holding the 527 fund may solicit contributions or membership dues for the 527 fund. Contributions, membership dues, or other fees collected must not be received in consideration for services, goods, or other items of value, and must be received and in accordance with applicable state and federal law, such as campaign finance laws. The exempt organization should maintain adequate records to verify all income and expenditures are segregated from the organization’s other assets and are used only for permissible campaign activities.

Examples of permissible campaign activities include:

1. Media advertisements
2. Partisan voter guides
3. Guest speakers at events
4. Rallies
5. Dinner fundraisers
6. Debates
7. Newspaper editorials
8. Endorsements

A 527 fund is subject to the same rules and reporting requirements as a 527 organization, including the requirements to notify the IRS of its establishment by filing Form 8871 and making periodic disclosures to the IRS through Forms 8872.

If your organization is considering establishing a 527 fund, remember to seek guidance from a tax professional to ensure that the fund is setup properly and will not jeopardize your organization’s tax-exempt status.

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Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.