The private benefit doctrine and tax-exempt entities


by Alex May and Neal Nusholtz   |   Michigan Bar Journal


Charitable organizations are exempt from income tax under Internal Revenue Code (IRC) §501(c)(3) if they are both organized and operated exclusively for one or more of the public purposes specified in that code section. An organization failing to meet either an organizational test in its formation documents or an operational test in actual practice is not exempt.1 The instructions for the application for recognition of exemption under Section 501(c)(3) state the rule about exempt purpose specifically as an exclusion of private benefit:

“A Section 501(c)(3) organization must not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially”).2


It’s November, and many readers are immersed in college football. Harken back to Sept. 5, 1908, when a new phrase was added to the nomenclature of college football: the forward pass. St. Louis University’s Bradbury Robinson, in a game against Carroll (Iowa) College, threw the pigskin downfield for a 20-yard gain, widely acknowledged as the first forward pass in history.3 Thereafter, it was part of the game.

Recently, a couple new terms have become familiar in college athletics: name, image, and likeness (NIL) and collectives. In 2021, the National Collegiate Athletic Association adopted a policy allowing student-athletes to be paid for their name, image, and likeness without affecting their athletic eligibility.4 Collectives formed to develop, fund, and otherwise facilitate NIL deals for student-athletes. Generally, these collectives operated independently of the affiliated university. Some have applied for and obtained their own tax exemptions under §501(c)(3), while others operate under the sponsorship of existing 501(c)(3) organizations that support the affiliated university or its athletic programs.

Donations funding NIL payments are not deductible from one’s federal income taxes; private benefits were cited as a reason to disqualify college donations as charitable deductions in Internal Revenue Service Advice Memorandum 2023-004, which addressed charitable deductions for donations to NIL collectives. Some nonprofit collectives have informed donors that 80-100% of contributions will be paid out as compensation to student-athletes for their NIL rights.5 Collectives have paid student-athletes to promote it or a partner charity by posting videos on social media, autographing memorabilia, leading sports camps, and attending fundraisers.

The memorandum also stated that tax exemption requires organizations to engage primarily in activities that further an exempt purpose. Generally, an occasional benefit to a private interest incidental to an organization pursuing an exempt purpose will not be deemed to have impermissibly served private interests. The memorandum also held that when an organization’s activities result in a direct benefit to designated or identifiable individuals, the private benefit is not incidental to exempt purposes.

Occasionally, the IRS has recognized organizations whose activities benefitted student-athletes as charitable entities, but those rulings were based on a determination that the activities advanced education, an exempt purpose under §501(c)(3).6 The activities of NIL collectives do not appear to further educational purposes.

The memorandum stated that the potential public benefit of access to student-athletes and the increased recruitment of student-athletes from compensated activities does not make the private benefit “qualitatively incidental.” The memorandum concluded that “a single nonexempt purpose, if substantial in nature, precludes exemption and, consequently, many organizations that develop paid NIL opportunities for student athletes are not tax exempt.”

Now, let’s explore the use of tax-exempt campaign funds for criminal defense of a politician. This article does not comment on the propriety of paying criminal defense fees as it affects the payor, but the tax effect to the payee. Sometimes, payment of a politician’s legal fees must be declared as income to the politician.


IRC §527 governs the tax requirements of political organizations. Political organizations cannot be subject to the same stringent private benefit rules applied to 501(c)(3) entities because, after all, campaign organizations are formed for the private benefit of the candidate. Generally, amounts expended by a political organization for exempt functions are not income to the individual or individuals on whose behalf the expenditures are made.7 The exempt functions of a political organization are defined as all activities directly related to and supporting 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.8

Whether an expenditure is an exempt function depends upon facts and circumstances. Typically, when an organization supports an individual’s campaign for public office, its activities and expenditures in furtherance of that individual’s election or appointment are for an exempt function of the organization. Political contributions are not taxable to the candidates on whose behalf they are collected provided they are used for campaign expenses or similar purposes.9 Political funds used by the candidate for personal purposes are includible in the candidate’s gross income for that year.10 “Personal use“ refers to any use of funds in a campaign account of a present or former candidate to fulfill commitments, obligations, or expenses of any person if the expense would exist irrespective of the candidate’s campaign or duties as a federal officeholder.11

The IRS presumes that in the absence of evidence to the contrary, contributions to a candidate are political funds not intended for the candidate’s unrestricted personal use.12 Expenditures of political funds by a candidate for anything other than campaign or similar purposes will be considered a diversion of such funds, requiring them to be included in his or her income.13


Generally, where an organization supports an individual’s campaign for public office, its activities and expenditures in furtherance of election or appointment to that office are for exempt functions. Exempt functions include indirect expenses — expenditures not directly related to influencing or attempting to influence the selection process but necessary to support directly related activities.14 Functions supporting directly related activities are those which must be engaged in to allow the political organization to influence or attempt to influence the selection process (i.e., overhead and record keeping.) Similarly, expenses incurred while soliciting contributions are necessary to support the organization’s activities.15

Hypothetically Speaking

Suppose a candidate commits one or more political crimes after ballots have been counted and, after being indicted, uses campaign funds to pay criminal defense attorney fees. Those fees can be income to the candidate in the year they are paid if they are deemed to be for his or her personal expense. Expenditures which are illegal or for a judicially determined illegal activity are not considered expenditures in furtherance of an exempt function even though they are made in connection with the selection process.16

Under IRC 527, expenditures for illegal activity are added to the taxable income of a political organization. Reimbursements for criminal defense to participants in criminal activities are not taxable if they are not an incentive to engage in criminal activity:

“Expenditures by a political organization that are illegal or for an activity that is judicially determined to be illegal are treated as amounts not segregated for use only for the exempt function and shall be included in the political organization’s taxable income. … [V]oluntary reimbursement to the participants in the illegal activity for similar expenses incurred by them are not taxable to the organization if the organization can demonstrate that such payments do not constitute a part of the inducement to engage in the illegal activity.”17

What follows is a discussion of relevant factors involved in determining if payment of a candidate’s criminal defense fees by a political organization would be income to the candidate. The factors are whether the fees are a debt that would exist irrespective of the campaign; whether the candidate was a candidate at the time of the crime; and whether the crime benefitted the campaign.

Issue I: Whether criminal defense fees would exist irrespective of the campaign.

A test for taxability of campaign payment of a candidate’s expenses is whether the expense would exist irrespective of whether there had been a political campaign. In Federal Election Commission v. Craig for U.S. Senate,18 candidate Larry Craig had pled guilty to disorderly conduct in an airport bathroom. He subsequently used campaign funds to pay an attorney more than $197,000 to reverse his guilty plea. The Federal Election Commission sued Craig to surrender that money and pay a civil penalty of $45,000. The court said:

“If campaign funds are used for a financial obligation that is caused by campaign activity or the activities of an officeholder, that use is not personal use. However, if the obligation would exist even in the absence of the candidacy or even if the officeholder were not in office, then the use of funds for that obligation generally would be personal use.”19

The court analogized Craig’s charge to driving under the influence of alcohol, and the FEC had already held that attorney fees for driving while intoxicated are personal and not a campaign expense.

Issue II: Whether the politician was a candidate at the time of the crime.

If the crimes at issue were committed after ballots were counted, was the candidate even a candidate at the time of the crime? One case held that the candidacy terminates upon counting of the ballots, but the campaign continues during the period of a contest under state laws:

“When a candidate who has been defeated in a general election contests the certification of his or her opponent, we believe the individual is still a ‘candidate’ until a termination report is filed.”20

Issue III: Whether the crime benefited the campaign.

Another question that might be raised is whether crimes actually benefit a political campaign. That issue came up in an income tax case where a corporation deducted criminal defense fees it had paid on behalf of its sole shareholder, who had made tax concealed protection payments of more than $1.7 million in cash to the Gambino crime family. The company was disallowed the deduction because it could not show that it benefited from the crime.21


To date, no politician has attempted to justify criminal defense costs as a campaign expense by arguing that committing a crime was necessary to carry out an exempt function of the campaign. If that argument is raised in a tax court petition, it could result in caselaw that provides comprehensive legal guidance on the relevant issues.



1. 26 CFR (“Treas. Reg.”) 1.502(c)(3)-1(c)(1)(a).

2. Form 1023 (Application for Recognition of Exemption Under Section 501(c).

3. Morrison, The Early History of Football’s Forward Pass, Smithsonian Magazine https://www.smithsonianmag.com/history/the-early-history-of-footballs-forward-pass-78015237/ (posted December 28, 2010) (accessed October 20, 2023).

4. IRS Advice Memorandum 2023-004.

5. Id.

6. See, e.g., Rev. Rul. 55-587, 1955-2 C.B. 261 (high school athletic association promoted educational purposes); Rev. Rul. 67-291, 1967-2 C.B. 184 (organization subsidizing training table for university athletic teams furthered university educational program). See Rev. Rul. 56-13, 1956-1 C.B. 198 (organization formed to persuade students of outstanding athletic ability to attend a particular university is not an educational organization).

7. Treas. Reg. § 1.527-5(a).

8. Treas. Reg. §1.527-2(c)(1).

9. Rev. Rul. 71-449, 1971-2 C.B. 77 (1977).

10. Field Service Advice 0887.

11. Federal Election Commission Notice 1995-5.

12. Revenue Procedure 68-19, 1968-1 CB 810, January 1, 1968.

13. GCM 33622 (I.R.S. Sept. 15, 1967).

14. Revenue Procedure 68-19, 1968-1 CB 810, January 1, 1968.

15. Treas. Reg. §1.527-2(c)(2).

16. Treas. Reg. §1.527-2(c)(4).

17. Treas. Reg. 1.527-5(a)(2).

18. Fed Election Comm v Craig for U.S. Senate, 816 F3d 829 (D.C. Cir. 2016).

19. Id. at p. 835.

20. Legislative Coordinating Council v Stanley, 264 Kan 690, 700; 957 P2d 379, 389 (1998).

21. Cap. Video Corp. v. Comm’r, 83 T.C.M. (CCH) 1229 (T.C.), aff’d, 311 F.3d 458 (1st Cir. 2002).