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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15201
Experience:  15years with H & R Block. Divisional leader, Instructor
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A person ran for a seat in the U.S. House of Representative.

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A person ran for a seat in the U.S. House of Representative. She raised 2 million for her campaign. 6 months after losing the election, auditors discovered that she has used 240,000 of the campaign funds to purchase a vacation home in Costa Rica. What are the income tax consequences ofthis use of campaign funds? (She lives in Illinois)

Robin D :

Hello and thank you for using Just Answer,

The IRS has ruled that conversion of campaign funds to personal use may transform the funds into taxable personal income.

        Political funds are not taxable to the political candidate by or for whom they are collected if they are used for expenses of a political campaign or some similar purpose. However, any amount diverted from the channel of campaign activity and used by the political candidate for any personal purpose is income taxable to such candidate for the year in which the funds are so diverted

Federal, state and local candidate campaign committees; federal, state and local political party committees; and most other political committees are generally organized under section 527. A political organization is subject to tax on its political organization taxable income. Generally, this tax is calculated by multiplying the political organization taxable income by the highest rate of tax specified in §11(b). If the organization is the principal campaign committee of a candidate for U.S. Congress, the tax is calculated using the graduated rates specified in §11(b).
The exempt function income of a political organization is income that the organization sets aside for use for its exempt function that was received as one of the following four types of income: (1) a contribution of money or other property; (2) membership dues, fees, or assessments from a member of the political organization; (3) proceeds from a political fundraising or entertainment event or from the sale of political campaign materials, which are not received in the ordinary course of any trade or business; or (4) proceeds from conducting bingo games that are defined in § 513(f)(2). Investment income, or income from a trade or business (such as renting excess office space to an unrelated organization), of a political organization is not exempt function income and is subject to tax. Taxable income includes exempt function income (such as contributions) for any period of time that a political organization does not file a Form 8871 as required.

Robin D :

Rev. Proc. 68-19, 1968-1 C.B. 810, Section 2. See also Rev. Rul. 74-23, 1974-1 C.B. 17

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