Scenario: Mr. Roland ran for a House seat during the last election, but lost (in a landslide). Mr. Roland raised $5.4 Million for his campaign. After the campaign, auditors discovered that Mr. Roland used $300,000 of those campaign funds for a personal vacation immediately after the election. Mr. Roland has asked you, his CPA, what are the tax consequences of his personal use of the campaign funds.

Write a conclusion for the memo

Subject:Mr. Roland's tax return

Facts:Mr. Roland ran for a seat in the House during the last election. Mr. Roland raised $5.4 million for his election campaign. Following the campaign, auditors discovered he used $300,000 of the campaign funds to pay for a vacation after the election was over.

Question:How does the personal use of his campaign funds impact his tax return this year?

Discussion:

In dealing with the issue of campaign funds being used for personal expenses, House Rule XXIII clause 6(b) states that a candidate "may not convert campaign funds to personal use in excess of an amount representing reimbursement for legitimate and verifiable campaign expenditures."

This is also stated in the Federal Election Campaign Act (FECA), in 2 U.S.C 439a (b)(1), which states that contributions or donations accepted by any candidate for federal office may not be "converted by any person to any personal use." FECA holds that a candidate using campaign funds for personal expenses must reimburse the campaign within 30 days.

As far as the Internal Revenue Code is concerned, IRC Section 527(d) defines the situations where campaign funds are not treated as personal use: "an amount is not treated as diverted for the personal use of a candidate or any other person if any political organization contributes the amount to or for the use of another qualifying political organization or certain charitable organizations or deposits the amount in the general fund of the Treasury or in the general fund of any state or local government."

Rep. No. 93-1357, 93rd Cong., 2d Sess. 30 (1974), 1975-1 C.B. 517, 534, in discussing In discussing the provisions of section 527(d), states that "as under present law, when amounts are diverted from a political organization by a candidate for his personal use, the amount diverted is taxable income to the candidate in the year in which the funds are diverted."