CONTRIBUTIONS BY NATIONAL LODGE TO PAC WILL BE AN EXEMPT FUNCTION EXPENDITURE.

UIL Number(s) 0527.00-00

                                             Date: October 4, 1988

This is in reference to a ruling request dated June 14, 1988, submitted by your legal representative concerning the federal income tax consequences of the proposed transactions described below.

The information submitted indicates you are a nonprofit corporation. You have been recognized by the Service as exempt from federal income tax under section 501(a) of the Internal Revenue Code as a fraternal beneficiary association described in section 501(c)(8) of the Code and operate under the lodge system.

You are a state-wide organization that operates as a subordinate to a national organization. Your members are various local lodges throughout the state. Both the national organization and the local lodges are fraternal organizations described in section 501(c)(8) of the Code.

The local lodges are currently required under your Constitution and By-Laws to pay dues (called a "semi-annual per capita tax") of $5 per individual dues paying member of the local lodge. Each local lodge determines and assesses its own members' dues. You then pay a portion of the dues you receive from the local lodges to the national lodge.

Pursuant to a resolution to be adopted at your 1988 Annual Conference, you propose to pay a portion of the dues you receive from your local lodges to a political action committee (the "PAC") for the purposes of general funding for the PAC. You will establish a separate non-interest bearing checking account to receive deposits only of members' dues. From this account, you will write checks only for deposit to the general checking account of the PAC or to your general checking account (or, less likely, for direct payment of your administrative expenses). Thus, the dues and contributions transferred to the PAC will not be used to earn investment income. You maintain in your general ledgers a current record of the dues received and the transfers to the PAC. The purpose for the foregoing arrangement is to provide an easy and simple procedure for the fundding of the PAC. The PAC will only contribute to candidates running for public office in state government or in a political subdivision of your state and will only support state and local legislative issues.

Section 527(b)(1) of the Code imposes a tax on the political organization taxable income of every political organization.

Section 527(c)(1) of the Code defines political organization taxable income as an amount equal to the excess (if any) of the gross income for the taxable year (excluding any exempt function income), over certain deductions computed with the modifications provided in section 527(c)(2).

Section 527(c)(3) of the Code provides that the term exempt function income means any amount received as (A) a contribution of money or other property; (B) membership dues from a member of the political organization; (C) proceeds from a political fundraising or entertainment event; or (D) proceeds from the conducting of any bingo game.

Section 1.527-1 of the Income Tax Regulations provides that a political organization is an organization that is organized and operated primarily for an exempt function as defined in section 1.527-2(c) of the regulations.

Section 1.527-2(a)(1) of the regulations defines a political organization as a party, committee, association, fund or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures for an exempt function activity (as defined in section 1.527-2(c)).

Section 1.527-2(b)(1) of the regulations defines a segregated fund as a fund which is established and maintained by a political organization or an individual separate from the assets of the organization or the personal assets of the individual. The purpose of such a fund must be to receive and segregate exempt function income (and earnings on such income) for use only for an exempt function or for an activity necessary to fulfill an exempt function. The fund must be clearly identified and established for the purposes intended. A savings or checking account into which only contributions to the political organization are placed and from which only expenditures for exempt functions are made may be a segregated fund. If an organization that had designated a fund to be a segregated fund for purposes of segregating amounts expends more than an insubstantial amount from the segregated fund for activities that are not for an exempt function during a taxable year, the fund will not be treated as a segregated fund for such a year. Further, if more than insubstantial amounts segregated for an exempt function in prior years are expended for other than an exempt function, the facts and circumstances may indicate that the fund was never a segregated fund as defined herein.

Section 1.527-2(c)(1) of the regulations provides that an exempt function includes all activities that are directly related to and support the process of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to public office or office in a political organization.

Section 1.527-6(a) of the regulations provides that if an organization described in section 501(c) of the Code which is exempt under section 501(a) expends any amount for an exempt function, it may be subject to tax under those provisions.

Section 1.527-(6)(b)(1)(i) of the regulations provides that except as provided in this section, the term exempt function will generally have the same meaning it has in section 1.527-2(c).

Section 1.527-6(e) of the regulations provides that a transfer of political contributions of dues collected by a section 501(c) organization to a separate segregated fund is not treated as an expenditure for an exempt function when the transfer is made promptly after the receipt of such amounts and deposited directly to the separate segregated fund. A transfer is considered promptly and directly made if:

(1) the procedures followed by the section 501(c) organization satisfy the requirements of applicable federal or State campaign law and regulations;

(2) the section 501(c) organization maintains adequate records to demonstrate that amounts transferred in fact consist of political contributions or dues rather than investment income; and

(3) the political contributions or dues transferred were not used to earn investment income for the section 501(c) organization.

Section 1.527-6(f) of the regulations provides that to avoid the application of section 1.527-6(a), an organization described in section 501(c) of the Code that is exempt from taxation under section 501(a) may, if it is consistent with its exempt status, establish and maintain a separate segregated fund (as defined in section 1.527- 2(b)(1)) to receive contributions and make expenditures in a political campaign. If such a fund meets the requirements of section 1.527-2(a) (relating to the definition of a political organization) it shall be treated as a political organization subject to the provisions of section 527.

You have asked us to assume for the purposes of this ruling request that the above-described transfers will comply with all state campaign laws and regulations, including the laws and regulations governing political contributions and similar expenditures, and to assume that the PAC meets the requirements of a separate segregated fund under Reg. 1.527-2(a).

Accordingly, we rule that the transfer of a portion of each of your member local lodges' dues to the PAC as described herein will be done "promptly and directly" (within the meaning of section 1.527- 6(e) of the regulations) and will not be treated as an expenditure for an "exempt function" within the meaning of section 1.527-2(c).

We trust the foregoing will be of assistance to you.

This ruling is directed only to the organization that requested it. Section 6110(j)(3) of the Code provides that the ruling may not be used or cited as precedent.

                                   Sincerely yours,