Taxing Political Expenditures

The Supreme Court's recent decision in Citizens United v. Federal Election Commission severely restricts the ability of Congress to regulate, much less prohibit, the use of corporate money to influence elections, but what about Congress's power to tax that money?

As it is now, corporations cannot claim expenses of attempting to influence elections or legislation as business expense (see Internal Revenue Code section 162(e)). So corporate profits that are spent on electioneering are effectively subject to income tax at the corporate level. The shareholders bear the burden of the tax, but very indirectly.

But what if the expenses of electioneering were considered a form of a dividend?

This is not unprecedented, because there are lots of places in the Internal Revenue Code in which something that looks like one thing is recharacterized as something else. To take just one example, IRC section 7872 says that if a corporation makes an interest-free loan to a shareholder, the loan is recharacterized as an interest-bearing loan at a market rate of interest, with imputed interest payments by the shareholder to the corporation and imputed dividend payments in the same amounts by the corporation to the shareholder. There are also many rulings and court decisions in which officers or shareholders who have used corporate money to pay personal expenses are held to have received either compensation or dividends from the corporation.

So it would not be unreasonable for Congress to say that, if a corporation uses its money to advance the personal political beliefs of the officers or shareholders, that money should be considered to be payments to those officers or shareholders. For most publicly-traded corporations, dividends are not tax-deductible by the corporation, so income paid out as dividends is taxed twice, once at the corporate level and again at the shareholder level.

But the really nasty part is that Congress could offer corporations a choice: If the political expenses are approved by the shareholders, then the expenses could be considered a dividend to those shareholders, but if the political expenses are approved only by the board of directors, then the income falls on the directors alone.

Neither alternative is going to be very appealing to corporations. Getting shareholder approval for political spending could turn shareholder meetings into political battles, and stock prices could suffer if investors decide that they don't want to own a stock that pays a dividend of $10 while the investor has $12 of taxable income. But directors are certainly not going to want to pay personal income tax on what might be millions of dollars of income they never actually received.

Taxing directors or shareholders on the money spent on corporate electioneering might not solve the problem of corporate influence, but it might make it more difficult and more painful.