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No worthless debt deduction for unrepaid loan to 501(c)(4) org/political party

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Chief Counsel Advice 201842006

In Chief Counsel Advice, IRS has concluded that a now-dissolved Code Sec. 501(c)(4) organization that made expenditures in support of a candidate for elective public office was a “political party” under Code Sec. 271. Accordingly, a taxpayer could not claim a worthless debt deduction for any debt owed by that organization.

Background.  Code Sec. 166(a)(1) allows a deduction for a debt which becomes worthless within the tax year.

However, under Code Sec. 271, the deduction under Code Sec. 166 is not allowed for worthlessness of any debt that is owed by a political party.

Included in Code Sec. 271(b)(1)‘s definition of a “political party” is a committee, association, or organization which accepts contributions or makes expenditures for the purpose of influencing or attempting to influence the election of presidential or vice-presidential electors or of any individual whose name is presented for election to any Federal, State, or local elective public office, whether or not such individual is elected. (Code Sec. 271(b)(1)) However, an organization is not a political party if it engages in activities related to an election campaign that are truly nonpartisan in nature. (Reg. § 1.271-1(b))

Code Sec. 501(c)(4) provides a tax exemption for social welfare organizations. To be tax-exempt under Code Sec. 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare. The earnings of a Code Sec. 501(c)(4) organization may not inure to the benefit of any private shareholder or individual.

Facts. Organization filed a Return of Organization Exempt from Income Taxation (Form 990) for each of the tax years, Year 1, Year 2, and Year 3, as an organization described in Code Sec. 501(c)(4).

In Year 2, Taxpayer made a loan to Organization. In Year 3, Organization dissolved without any repayment of the loan. On Taxpayer’s income tax return for Year 3, Taxpayer claimed a worthless debt deduction under Code Sec. 166 in the amount of the loan.

According to Taxpayer, Organization’s purpose was to advocate for improved public education. On its Form 990 for Year 3, Organization reported that it engaged in political campaign activity in connection with a certain candidate, who was running for an elective public office. Specifically, Organization stated that it spent funds to promote the election of the candidate.

Issue. The issue raised in the CCA was whether a Code Sec. 501(c)(4) organization that made expenditures in support of a candidate for elective public office is a “political party” under Code Sec. 271 and, if so, whether worthless debt deductions may be claimed for any debt owed by such organization.

Organization is a “political party.” The CCA concluded that Organization was a “political party” under Code Sec. 271 because it made expenditures for the purpose of influencing or attempting to influence the election of a candidate for elective public office.  IRS found that Organization’s qualification under Code Sec. 501(c)(4) is independent from whether it’s a political party for purposes of Code Sec. 271. Specifically, Code Sec. 271 just looks to whether an organization—regardless of its status for tax purposes—accepts contributions or makes expenditures to influence the election of a candidate for public office, which Organization clearly did in this case.

Accordingly, Taxpayer could not claim a worthless debt deduction under Code Sec. 166 for the debt owed by Organization.

References: For the deductibility of bad or worthless debts owed by political parties, see FTC 2d/FIN ¶M-2533United States Tax Reporter ¶2714. For 501(c)(4) organizations, see FTC 2d/FIN ¶D-5100 et seq, United States Tax Reporter ¶5014.13.

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