STATEMENT BY NORMAN A. SUGARMAN, ASSISTANT COMMISSIONER OF INTERNAL REVENUE Mr. Chairman and Members of the Committee, I am appearing today in response to the request of your Committee for a representative of the Bureau of Internal Revenue to testify before the Committee as to the application of the tax laws to campaign expenditures and related matters. We are pleased to be able to cooperate with your committee and shall do our best to give you such information and other assistance as may be provided under the present laws and regulations governing the administration of the Federal tax statutes. The Bureau of Internal Revenue is charged with the responsibility of seeing that the taxes levied by the Congress are paid. There are about 80 different kinds of Federal internal revenue taxes imposed by law. For each of these taxes we must draw up the rules and issue interpretative guides to assist taxpayers in complying with the law, and provide effective enforcement, through the manpower available to us, in those instances where the law is not being properly followed. In fulfilling its obligation to the American people, the Bureau of Internal Revenue acts as a service agency rather than as a regulatory body. We are mindful of the tremendous economic impact of taxes in shaping business and other transactions; but the business or economic decisions made are generally those of the private citizen or of other organizations, and not those of the Bureau of Internal Revenue. Our job is to determine the tax consequences of the decisions and actions of others. With your permission, I would like to describe the tax laws which may have application to campaign expenditures and the role of the Bureau of Internal Revenue in administering these laws. 1. Provisions of the Revenue Statutes The basic Federal tax statutes are contained in the Internal Revenue Code, which is Title 26 of the United States Code. You will understand that most of the statutory provisions of the tax code are rules of general application—which will apply or not apply to activities in the political field, depending, just as in any other case, upon the facts of each situation. With but one exception, no provision of the Internal Revenue Code refers directly to political campaigns. There are, of course, many provisions which relate to the tax treatment of receipts and expenditures, and these may have application in the field with which this committee is concerned. The text of the statutory provisions is attached to my statement as Exhibit A. At the close of my remarks, I would like to offer this compilation of the statutory provisions for the records of this committee. A. Income-tax provisions.-The principal provisions of the income-tax law which must be considered in connection with the tax treatment of contributions to, or expenditures made in behalf of, a political organization or candidate are sections 23 (a), (o), and (q), and section 24 (a) of the Internal Revenue Code. Section 23 (a) (1) (A) provides in part that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 23 (0) permits an individual to deduct up to 20 percent of his adjusted gross income for contributions to described charitable, religious, educational, and similar organizations. Section 23 (q) provides a corresponding deduction up to 5 percent of net income in the case of a corporation. Each of these provisions contains a restriction to the effect that contributions will not be allowable if made to an organization a substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. A similar phrase in section 101 (6) denies exemption to organizations engaged in such activities. Another provision of the tax law which provides a guiding rule in this field is section 24 (a) of the Internal Revenue Code. This section generally prohibits the deduction of personal, living, or family expenses. The only section of the Internal Revenue Code which directly refers to political campaigns is a recent amendment to the provision relating to the deduction for bad debts. This amendment is contained in section 23 (k) (6) of the Internal Revenue Code, which was added by Public Law 471, 82d Congress (2d Session). The amendment makes an exception to the rules generally applicable in allowing a deduction for bad debts, by specifically denying deduction for 1952 and later years in the case of a taxpayer (other than a bank) with respect to loans to a political party, any national, state, or local committee of a political party, or any 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 any individual whose name is presented for election to any Federal, state, or local elective public office, whether or not such individual is elected. B. Gift-tax provisions. In addition to these income-tax provisions, the Federal gift-tax law may have application in some situations to political contributions. The gift tax is imposed by Chapter 4 of the Internal Revenue Code on transfers by individuals of money or property by gift. There is no special exemption under the gift tax for contributions to political organizations. Such gifts are subject to the reporting requirements and to tax on the same basis as gifts to individuals. However, the following provisions must be taken into consideration. An annual "exclusion" from the tax base of $3,000 per donee is permitted under section 1003 (b) (3). This means that a contribution to any person or group, including a political organization, may be made each year in the amount of $3,000 or less without reporting for gift-tax purposes. There is only one exception: gifts of "future interests in property" must be reported regardless of amount. Also the "splitting" provisions enacted in 1948 apply to gifts by a husband or wife. This has the effect of doubling the exclusion, so that a husband may make a $6,000 contribution to each donee without any part of it being considered as a "gift," if his wife consents. The gift-tax law also permits each donor a $30,000 lifetime exemption. This is in addition to the annual $3,000 per donee exclusion. As in the case of the exclusion, a husband may use his wife's, exemption, if she consents. Thus a married person may make annual gifts of $6,000 each to any number of individuals or organizations plus gifts totalling an additional $60,000 throughout his lifetime, without gift tax liability. Gifts to charitable, religious, educational, and similar organizations are deductible without limitation in computing the net amount of gifts subject to the gift tax, but, as in the case of the income tax, only if such organizations do not devote a substantial part of their activities to carrying on propaganda, or otherwise attempting, to influence legislation. 2. Administrative procedures This summarizes the principal provisions of the Internal Revenue Code which may have application to the field of this committee's study. Before turning to the more detailed rules which have developed out of experience in applying the income tax law, brief mention should be made of the procedures under which issues of this nature are detected and determined. The administration of the tax laws by the Bureau of Internal Revenue is conducted through its Washington headquarters and its field organization. The headquarters office in Washington provides general supervision and leadership for field operation and furnishes technical advice with respect to tax matters to the public and to the field offices. The field offices process returns, receive remittances, canvass for delinquent returns, conduct investigations, determine tax liabilities, and hear appeals. In performing these functions, the Bureau has, of course, but one objective, namely, the proper determination of tax liability under the law. It attempts to attain this objective by the following means: 1. Regulations are issued and tax return forms and instructions are placed in taxpayers' hands in order that taxpayers generally will have information which will enable them to file proper income tax returns. 2. Rulings are issued, upon request, as to the tax consequences of transactions, and such of the rulings as are of sufficient significance are published. 3. Tax returns are audited to determine if errors have been made and to instruct as to the proper treatment of the items involved. 4. Appropriate field inquires are conducted to further compliance with the revenue laws. All of these procedures may provide points of contact by the Bureau of Internal Revenue with items of campaign contributions or expenditures. They are, of course, available and employed as part of the regular technique of tax administration in the course of which any hundreds of different issues will be determined. A discussion of tax administration would not be complete without reference to the role of the courts. The Bureau of Internal Revenue does not, of course, have the last word as to the application of the tax laws to contributions or expenditures. Taxpayers can appeal a determination of the Bureau to the courts; and, accordingly, judicial thinking plays an important, and sometimes controlling, role in the interpretation and administration of the tax laws in all fields. 3. Income-tax rules generally applicable to campaign contributions and expenditures The combination of administrative interpretation and judicial decision has produced certain basic rules and standards which are applicable here in discussing the tax treatment of political contributions and expenditures. In passing it should be noted that in the application of these rules and standards, determinations are made on a case by case basis, with the result in each case being determined upon the basis of the law as applied to all the pertinent facts. The principle has long been established that in order for an expenditure to be deductible for Federal income tax purposes, the taxpayer must be able to point to a specific section of the Internal Revenue Code as authority for the allowance of the deduction. Generally, payments in the nature of contributions must be claimed as deductions under section 23 (o) or section 23 (q) of the Code, relating to contributions to certain charitable, etc., organizations, or they must qualify as ordinary and necessary business expenses under section 23 (a) (1) of the Code. Contributions for political purposes are not deductible under any of the sections mentioned. Treasury Department regulations provide as follows: "Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income (Regulations 111, sections 29.23 (o)−1 and 29.23 (q)-1). In Textile Mills Securities Corporation v. Commissioner (314 U. S. 326), decided in 1941, the Supreme Court sustained this regulation in denying the deduction of such expenses as business expenses under section 23 (a). As a specific application of this regulation, the Bureau has a published ruling of long standing to the effect that contributions to a political organization are not proper deductions in the Federal income-tax return of the donor (I. T. 3276, C. B. 1939-1, page 108). These principles are equally applicable to advertising; expenditures for advertising of a political nature are not deductible. In applying these general rules, there must be distinguished payments which are made to business, civic, and political organizations for the purpose of attracting and playing host to conventions and similar gatherings which will draw sizable numbers of guests and visitors to the community. Such payments may be deducted by business enterprises as ordinary and necessary business expenses provided that they are made with a reasonable expectation of a financial return commensurate with the amount expended (Section 29.23 (a)-13 of Regulations 111 and I. T. 3706, 1945 C. B., page 87). Within the broad framework of these rules, many subsidiary tax questions have arişen on which the Bureau has had occasion to pass. For example, expenditures which are necessary in the performance of the duties of an office are distinguished from expenses incurred in seeking a public office. Under section 48 (d) of the Internal Revenue Code the performance of the functions of a public office is considered for tax purposes as the conduct of a "Trade or business." Accordingly, expenditures of an incumbent in the performance of his official duties are allowed as deductions. These may include, for example, a Congressman's payments for clerk hire in excess of his allowance (O. D. 310, 1 C. B., page 104). However, the running for office or the conduct of a political campaign for public office is not recognized as "carrying on a trade or business." Accordingly, expenditures-advertising, traveling, printing, contributions to party organizations, etc.—of a candidate running for election or for reelection to a public office are not deductible as business or nonbusiness expenses. (David A. Reed, 13 B T. A. 513 rev'd CCA-3, 34 Fed. (2d) 263, rev'd Sup. Ct. per curiam, 281 U. S. 699, 50 S. Ct. 352; Michael F. McDonald, 1 TC 738, aff'd 139 F. (2d) 400, aff'd 323 US 57.) In concluding my remarks, I would like to read a public statement issued during the recent campaign by the Commissioner of Internal Revenue on October 9, 1952, as to the treatment of political expenditures: "There has come to the attention of the Bureau of Internal Revenue the facts that certain business corporations are providing newspaper or magazine advertisements, or radio and television programs, which urge voters to prefer one political party over another, with the expectation that the expense of such advertisements or programs may be deductible for income-tax purposes. "In order that there may be no misapprehension on the part of these corporations or of any other taxpayers, the Bureau of Internal Revenue directs their attention to the long-standing rule, based upon Departmental regulations, that 26585-52-14 contributions for political campaign expenses or other expenditures of a political nature are not deductible for income-tax purposes. This rule applies whether the payments are made directly to a political party or indirectly in the form of paid advertisements or contributed radio and television time, or in any other manner. "The field offices of the Bureau of Internal Revenue will enforce this rule, as they have in the past, in the audit of tax returns, and will disallow all such claimed deductions for direct or indirect expenditures of a political nature." Mr. Chairman, that concludes my statement, and with your permission I would like to offer this compilation of the statutes for the record of your committee. The CHAIRMAN. Yes. Thank you very much. (The matter referred to is as follows:) EXHIBIT A PROVISIONS OF THE INTERNAL REVENUE CODE REFERRED TO IN STATEMENT BEFORE THE SPECIAL COMMITTEE OF THE HOUSE OF REPRESENTATIVES TO INVESTIGATE CAMPAIGN EXPENDITURES, 1952, AND RELATED PROVISIONS NOTE. All sections set forth below are quoted from the Internal Revenue Code, as amended. Sec. 101. Exemptions from tax on corporations (as amended by sec. 301 of the (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. For loss of exemption under certain circumstances, see sections 3813 and 3814; (NOTE. The last sentence in section 101 (6) was added by section 332 (c) of the Revenue Act of 1950.) (b) Exclusions from Gross Income.-The following items shall not be included in gross income and shall be exempt from taxation under this chapter: * (3) Gifts, Bequests, Devises, and Inheritances.-The value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property. (NOTE.-Section 22 (b) (3) appears above as amended by section 111 (a) of the Revenue Act of 1942.) Sec. 23. Deductions from gross income In computing net income there shall be allowed as deductions: (a) Expenses.— (1) Trade or Business Expenses. (A) In General.-All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or .business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. In the case of any sports program conducted for the benefit of the American National Red Cross, expenses described in section 22 (b) (16) (B) shall be allowable under this subparagraph only to he extent that such expenses exceed the amount excluded from gross income by section 22 (b) (16). (B) Corporate Charitable Contributions.-No deduction shall be allowable under subparagraph (A) to a corporation for any contribution or gift which would be allowable as a deduction under subsection (q) were it not for the 5 percentum limitation therein contained and for the requirement therein that payment must be made within the taxable year. (2) Non-trade or Non-business Expenses.—In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. (k) Bad Debts. (6) Exception.-This subsection shall not apply in the case of a taxpayer, other than a bank, as defined in section 104, with respect to debts owed by (A) any political party, (B) any national, state, or local committee of any political party, or (C) any 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. For the purpose of this paragraph, the terms "contributions" and "expenditure" shall have the meanings prescribed for such terms in section 591 of title 18 of the United States Code. (0) Charitable and Other Contributions.-In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of: (1) The United States, any State, Territory, or any political subdivision thereof or the District of Columbia, or any possession of the United States, for exclusive public purposes; (2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or of any State or Territory or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. For disallowance of certain charitable, etc., deductions otherwise allowable under this paragraph, see sections 3813 and 162 (g) (2); (3) The special fund for vocational rehabilitation authorized by section 12 of the World War Veterans' Act, 1924, 43 Stat. 611 (U. S. C., Title 38 § 440); (4) Posts or organizations of war veterans, or auxiliary units or societies of any such posts or organizations, if such posts, organizations, units, or societies are organized in the United States or any of its possessions, and if no |