Companies cannot deduct for federal tax purposes the cost of setting up and maintaining a political action committee (PAC), according to a recent "technical advisory" issued by the Internal Revenue Service.
The advisory, which is almost guaranteed to be tested in the courts, declared that the company, which was not identified, could not deduct legal fees setting up the PAC and interest on a loan to get it started.
In addition, the firm must determine the value of the time employes spend working on PAC matters and the costs of withholding contributions for the PAC from employes' paychecks. Both these costs cannot be deducted for federal income tax purposes.
The technical advisory was issued to a field auditor who questioned the practice of deducting these costs and requested a ruling from officials in Washington. The advisory applies only to the company in question, but, if confirmed by the courts, would have broad implications in the business-political community.
"There is no doubt it will be appealed," Gary D. Lipkin, assistant counsel at the National Association of Manufacturers and former attorney for the Federal Election Commission, said. Lipkin said he doubted the ruling, if upheld, would prevent any large corporations from continuing to operate PACs, but he said it might interfere with plans of small firms to start political committees.
Pete Kennerdell, at the Public Affairs Council, estimated that about half of companies forming PACs have treated the costs as deductible. He questioned whether the advisory would significantly inhibit any of these firms.
Since 1974, corporate PACs have become a major political force. Rising from relative insignificance eight years ago, 1,885 business political committees raised $67.7 million for the 1980 election, most of which went into House and Senate races.
The IRS advisory ruling found that "the expenditures in question made by [the] PAC are for participation in or intervention in political campaigns in behalf of a candidate for public office and/or in connection with attempts to influence the general public, or a segment thereof, with respect to legislative matters, elections or referendums. [The company's] cost with regard to [the] PAC therefore consititute nondeductible expenditures."
In determining that the costs of withholding contributions for the PAC from employes' pay and commissions, the IRS declared that the company's "expenditures... were not impartial. The PAC was set up to support certain political beliefs and candidates who agree with those beliefs."