Ellen P. Aprill (Loyola-L.A.) has published Legal Defense Funds as Political Organizations, 131 Tax Notes 277 (Apr. 18, 2011):

This report lays out the advantages of, and difficulties with, registering a congressional legal defense fund as a § 527 organization. It begins by offering as background a summary of the congressional and executive branch rules that apply to these funds, the Federal Election Commission’s position on them, and a brief description of the best-known legal defense funds — the two established by President Clinton.

The report considers whether contributions to funds that do not register as  § 527 organizations are income to the official and, if so, whether there are matching deductions. The report examines whether contributors to the legal defense funds could have gift tax liability. It concludes the tax section by examining whether the trust would be considered a grantor trust.

The report then explains the use of a  § 527 organization for such a fund and describes how that use can avoid both income and gift tax liability that a legal defense fund might otherwise generate. The report also discusses how a legal defense fund becomes a  § 527 organization and describes two funds established by state officeholders that operated as  § 527 organizations. Finally, the report recommends that the House and Senate rules regarding legal expense funds be amended to explicitly recognize  § 527 legal defense funds.

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