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Tea Party Patriots Inc has announced this week that it has a new funding source. TPP expects to generate between $500,000 and $1,000,000 from this activity with minimal cost. Its a great thing, because:

Our financeteamhas determined that this will make a huge dent in the organizations overhead costs, which means that we can worry less about keeping the organizations bills paid and focus more on promoting our core values across America.

So, we want to ask you to do one thing: stay engaged. By simply staying subscribed to this email list and continuing to open emails fromTeaPartyPatriots, you will help us maintain the value of our email list and keep this funding source open. If you would prefer to opt out of third-partyemails while continuing to receive emails fromTeaPartyPatriots,please click here.

Now this message came from Tea Party Patriots Inc, the 501(c)(4) not Tea Party Patriots Citizens Fund, which as a PAC should be taxed under Section 527. There is a significant tax difference between the two. As you might guessit is a better deal for the 501(c)(4) to be receiving the third party payments than it would be for the PAC. Of course .

How Political Organizations Are Taxed Differently Than 501(c) Organizations

There are 29 different varieties of 501(c) organizations, many of which have peculiar wrinkles to them, but what c(3) and c(4) organizations have in common is that just about all their income is exempt. Contributions, of course, but also interest, dividends, capital gains and royalties are all exempt. The big exception is something called Unrelated Business Taxable Income. There are quite a few gray areas in UBTI, but basically income from letting somebody use your mailing list is only slightly gray barely a dingy white.

Political (Section 527 organizations) are taxed as corporations. They file Form 1120-POL. Except for exempt function income everything is taxable. If who you rent the list to is sharply restricted, you might be able to construct an argument that the list rental is exempt function income, but it is something of a stretch.

I dont practice in this area, so I consulted with Marcus Owens of Caplin & Drysdale. Mr. Owens spent most of his career with the IRS finishing up as the director of the Exempt Organizations Division. Here is what he wrote.

More Than You Probably Want To Know About Mailing List Rentals

Actually, its a bit more complex than that. Most mailinglistrentals are structured as royalty arrangements, that is, the owner of thelistallows the renter to access the names/contact info for a fee. As a result, the income stream fits within a series of court decisions, principally involving charities, that have held that right of access to be a form of intangible intellectual property, thus coming within the royalty exception from the calculation of UBTI under section 512 of the Internal Revenue Code. Assuming that the 501(c)(4) does not provide marketing services along with the IP, then the royalty exception will protect the income stream from taxation. To the extent that services are provided, a commensurate portion of the revenue would be reclassified as marketing revenue, and thus taxable income to the otherwise tax-exemptlistowner. Somelistowners want to maximize their income from suchlists, and agree to provide various services for an increased fee, e.g. personal appearances by notable people associated with thelistowner. Whether such services constitute taxable marketing or non-taxable quality control is a current point of contention between tax-exemptlistowners and the IRS. Because the taxable income of 527s is not calculated using the UBIT rules, but rather the regular rules applicable to taxable corporations, royalty income would be taxable income in the hands of a 527. However, as 527s are permitted to help other 527s and candidates, if thelistrentals are limited to other 527 groups, particularly those with a common purpose or orientation, e.g. other Tea Party groups or aligned candidates, then an argument could be made that thelistincome is not taxable, but rather akin to the income received from the sale of bumper stickers and other campaign paraphernalia. Its not a great argument, but it would key off Treas. Reg. sect. 1.527-3(a)(2)(e) which provides that the sale of campaign materials is exempt if it relates to organizing voters to vote for a candidate for public office.

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Tea Party Patriots Inc Dodging Tax On E-mail Fees?