Section 527 Political Organizations: Background and Issues for Federal Election and Tax Laws

Section 527 Political Organizations:

Background and Issues for Federal Election

and Tax Laws

(name redacted)

Analyst in American National Government

Erika Lunder

Legislative Attorney

(name redacted)

Legislative Attorney

February 8, 2008

Congressional Research Service

7-....

www.crs.gov

RL33888

CRS Report for Congress

Prepared for Members and Committees of Congress

Section 527 Political Organizations

Summary

Several prominent groups organized under § 527 of the Internal Revenue Code (IRC) were

prominent players in the 2004 presidential election, raising and spending approximately $435

million and being widely seen as having an impact on the outcome of the race. Yet, some socalled “527” organizations remain outside the purview of federal election law. Section 527, added

to the IRC in 1975, provides tax-exempt status to federal, state, and local political organizations.

At first, it was generally thought that, with respect to federal election activities, political

organizations correlated directly with political committees as defined under the Federal Election

Campaign Act (FECA). It became clear by 2000, however, that this was not necessarily true

because prevailing judicial interpretation of Supreme Court precedent has permitted FECA

regulation of only those communications containing express advocacy (i.e., explicitly urging the

election or defeat of clearly identified federal candidates). By avoiding such terms, groups could

arguably promote issue positions in reference to particular federal elected officials without

triggering FECA’s disclosure, contribution limits, and source restrictions. Still, the groups

qualified for the favorable tax treatment of § 527 organizations because that benefit is not limited

to groups that conduct express advocacy.

In 2002, the Bipartisan Campaign Reform Act (BCRA) addressed express advocacy, but regulated

only messages broadcast within 30 days of a primary or 60 days of a general election that referred

to a federal office candidate. BCRA left unregulated such areas as broadcasts aired before

elections and voter mobilization efforts. Groups wishing to engage in these activities and still

avail themselves of the unlimited funding sources no longer available to political parties generally

qualify for tax-exempt status under IRC § 527. Supporters of BCRA have led the effort to extend

federal election law regulation to these types of 527 organizations, seeing the enormous amounts

of money raised and spent in recent years as a result of the FEC’s failure to enforce existing law.

BCRA critics, however, insist that what occurred since 2004 was the predictable result of the ban

on soft money activity by national parties, thus redirecting massive amounts of unregulated

money to outside groups that are less accountable to the political system; they insist that many of

these groups not engaging in express advocacy cannot be constitutionally regulated.

In the 109th Congress, the House twice passed similar bills to add 527 organizations to FECA’s

political committee definition, unless involved solely in state and local elections. The Senate

Rules and Administration Committee reported a similar measure, but the Senate did not act on it.

Similar bills (H.R. 420 and S. 463) have been offered in the 110th Congress. Other bills (H.R.

2316; H.R. 1204) that would affect 527s have also been introduced in the 110th Congress. This

report explores the evolution of the 527 issue and attempts to address it in the courts, the Federal

Election Commission, and Congress. It will be updated periodically to reflect further

developments.

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Section 527 Political Organizations

Contents

Introduction ................................................................................................................................1

Foundations of the 527 Issue .......................................................................................................1

Federal Election Campaign Act .............................................................................................1

Key Provisions of FECA.................................................................................................2

Express Advocacy and the “Major Purpose Test”.............................................................2

P.L. 93-625 and Section 527 of the Internal Revenue Code ....................................................3

Emergence of Issue Advocacy Campaigns.............................................................................4

Effect on Campaign Finance Reform Debate ...................................................................5

Emergence of the 527 Issue...................................................................................................6

527 Activity in 2000........................................................................................................7

Congress’s Response to 527s and Issue Advocacy .......................................................................8

527 Disclosure Requirements: P.L. 106-230 and P.L. 107-276 ...............................................9

Bipartisan Campaign Reform Act of 2002 (BCRA) ............................................................. 10

527 Activity in 2000 - 2006 Federal Elections ........................................................................... 11

2000 Elections .................................................................................................................... 11

2002 Elections .................................................................................................................... 13

2004 Elections .................................................................................................................... 14

Fundraising by 527s in 2004 ......................................................................................... 15

Spending by 527s in 2004 and Its Impact ...................................................................... 16

2006 Elections .................................................................................................................... 17

Summary of 2000 - 2006 Data............................................................................................. 18

Efforts to Regulate 527s ............................................................................................................ 19

FEC-Proposed Rules in 2004 and Constitutional Concerns .................................................. 19

Proposal to Redefine Political Committee ..................................................................... 19

Proposal to Redefine “Expenditure” .............................................................................. 21

2004 FEC Rule and Related Litigation ................................................................................ 22

FEC Enforcement Action Against Three 527s for 2004 Activities ........................................ 24

Legislative Activity to Regulate 527s .................................................................................. 25

108th Congress .............................................................................................................. 25

109th Congress .............................................................................................................. 26

110th Congress .............................................................................................................. 27

Conclusion................................................................................................................................ 29

Tables

Table 1. Top Ten 527s in 2000 Elections, Ranked by Receipts ................................................... 12

Table 2. Top Ten Donors to Key 527s in 2000 Elections ............................................................ 12

Table 3. Top Ten 527s in 2002 Elections, Ranked by Receipts ................................................... 13

Table 4. Top Ten Donors to Key 527s in 2002 Elections ............................................................ 13

Table 5. Top Ten 527s in 2004 Elections, Ranked by Receipts ................................................... 14

Table 6. Top Ten Donors to Key 527s in 2004 Elections ............................................................ 15

Table 7. Top Ten 527s in 2006 Elections, Ranked by Receipts ................................................... 17

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Section 527 Political Organizations

Table 8. Top Ten Donors to Key 527s in 2006 Elections ............................................................ 18

Table 9. Receipts and Disbursements by Federal-Related 527s: 2000-2006................................ 18

Table 10. H.R. 420 (Meehan-Shays) and S. 463 (McCain-Feingold), the 527 Reform Act

of 2007, Compared with Current Law .................................................................................... 28

Table A-1. Disclosure Requirements under the Internal Revenue Code ...................................... 31

Appendixes

Appendix. Summary of Internal Revenue Code Provisions Applicable to 527

Organizations......................................................................................................................... 31

Contacts

Author Contact Information ...................................................................................................... 34

Acknowledgments .................................................................................................................... 34

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Section 527 Political Organizations

Introduction

In recent years, the terms “527 organizations,” “527 groups,” and “527s” have been used

interchangeably to describe groups that intend to influence federal elections in ways that may be

outside the scope of federal election law. The terms stem from the fact that these organizations are

provided tax-exempt status under Section 527 of the Internal Revenue Code (IRC).1 These groups

have become the subject of controversy due to the different definitions used in federal election

law and tax law as to what constitutes political or election-related activity and the lack of uniform

opinion as to what election law itself regulates or may permissibly regulate.

Strictly speaking, IRC § 527 provides tax-exempt status to many more organizations than just

those that are colloquially referred to as 527s. The section applies not only to organizations that

are active in federal elections, but also to organizations involved in state and local elections and

certain non-electoral activities. While IRC § 527 applies to a broad range of organizations, only

the groups colloquially referred to as 527s (i.e., those groups that intend to influence federal

elections in ways that may be outside the scope of federal election law) are the focus of current

controversy. This report discusses this limited subset of organizations exempt under IRC § 527

and uses the terms 527 organizations, 527 groups, and 527s interchangeably to refer to them.

Section 527 was added to the IRC in 1975 to provide tax-exempt status to political organizations,

as defined in that statute. At that time, it was generally thought that, with respect to groups

participating in federal elections, political organizations correlated directly with political

committees as labeled by and operating under federal election law. Indeed, political committees—

whether political parties, political action committees (PACs), or candidate committees—have taxexempt status under IRC § 527. In 2000, however, it came to light that some groups engaged in

federal-election-related issue advocacy were claiming exempt status under IRC § 527 while not

being regulated under the Federal Election Campaign Act (FECA). These groups were shrouded

in mystery because no disclosure was required under either the tax or election laws at that time.

Foundations of the 527 Issue

Federal Election Campaign Act

Financial activity in federal elections is governed by the Federal Election Campaign Act (FECA)

of 1971, as amended, (2 U.S.C. §431 et seq.) as well as by certain court rulings. Generally, FECA

imposes limitations and prohibitions on money from certain sources and requires public

disclosure of money raised and spent in federal elections. Due to the Supreme Court striking

down spending limits as unconstitutional in its landmark 1976 Buckley v. Valeo ruling,2 federal

law does not impose mandatory limits on campaign spending by candidates or groups.3

1

26 U.S.C. § 527.

Buckley v. Valeo, 424 U.S. 1 (1976).

3

Although such limits exist in presidential races (and in some states and localities), these limits are accepted

voluntarily by candidates, usually in exchange for public funds or benefits.

2

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Key Provisions of FECA

Key features of federal election law regulation include the following:

•

Source Prohibitions—Unions and corporations are prohibited from making

contributions or expenditures in federal elections. The corporate ban was first

enacted in 1907, the labor ban in 1943. While union treasury and corporate

money may not be used in federal elections, a separate segregated fund (i.e.,

political action committee (PAC)) may raise voluntary contributions from

designated classes of individuals, to give or spend in federal elections. [2 U.S.C.§

441b] Foreign nationals are also prohibited from contributing or spending money

in any American election, at the federal, state, or local level, with an exemption

for permanent resident aliens (i.e., green card holders). [2 U.S.C.§ 441b]

•

Contribution Limits—Contributions to candidates, parties, and PACs in federal

elections are limited (e.g., for an individual—$2,300 per candidate, per election;

$5,000 per year to a PAC; and an aggregate of $108,200 in a two-year election

cycle to all federal candidates, parties, and PACs).4 Most PACs and party

committees may give a candidate $5,000 per election. (Parties may also make

coordinated expenditures to pay for campaign services or advertisements for and

with the cooperation of a candidate, subject to formula-based limits, indexed for

inflation.) [2 U.S.C.§ 441a]

•

Disclosure Requirements—Candidates, PACs, and parties involved in federal

elections must register with the FEC and file periodic reports on receipts and

expenditures, itemizing for amounts over $200. [2 U.S.C.§ 432-437]

Express Advocacy and the “Major Purpose Test”

Only money raised and spent according to the requirements and restrictions of federal law may be

used to influence an election for federal office. Such funds are often referred to as hard money.

FECA defines both “contribution” and “expenditure” as monies or anything of value “for the

purpose of influencing any election for Federal office.”5 In order to preserve the law’s regulation

of contributions and expenditures against invalidation for constitutional vagueness, the Supreme

Court in Buckley v. Valeo construed the terms “contribution” and “expenditure” to encompass

only funds donated for or spent for express advocacy (that is, voter communications using explicit

phrases and words such as “vote for,” “vote against,” “elect,” and “defeat”). 6 Likewise, the Court

construed the term “political committee” to include only “organizations that are under the control

of a candidate or the major purpose of which is the nomination or election of a candidate.”7 In so

doing, the Buckley Court established the “major purpose test,” which determines whether or not

an organization, if it raises more than $1,000 in “contributions” or makes more than $1,000 in

“expenditures,” is subject to regulation under FECA as a “political committee.”8

4

These limits are in effect for the 2007-2008 election cycle, as adjusted, where required by law, for inflation.

2 U.S.C. § 431(8)(A), (9)(A).

6

Buckley, 424 U.S. at 44, n.52.

7

Id. at 79.

8

See 2 U.S.C. § 431(4)(A).

5

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Neither FECA nor the Supreme Court, however, has yet defined precisely how to ascertain the

major purpose of an organization. Indeed, how the major purpose test works, and to what groups

it applies, are at the heart of a debate concerning the circumstances under which non-party

organizations, including 527s, can constitutionally be considered FECA regulated “political

committees.” For example, some observers proffer that it is relevant to examine an organization’s

activities beyond express advocacy to ascertain its major purpose, while others maintain that

Supreme Court precedent still limits FECA regulation through the designation of “political

committee” status to only those organizations engaging in express advocacy. 9

P.L. 93-625 and Section 527 of the Internal Revenue Code

Prior to 1975, the Internal Revenue Code was silent as to the tax treatment of organizations

whose primary purpose is influencing elections. The Internal Revenue Service (IRS) did not

generally require these organizations to file tax returns or pay taxes. It appears this was because

the IRS treated contributions to political organizations as gifts,10 which meant that the

organizations did not have taxable income. By the early 1970s, it became apparent that these

organizations had sources of income other than contributions, such as investment income and

gain from the sale of donated property. In 1973, the IRS announced it would begin requiring

political committees and parties with investment and other types of income to file tax returns and

pay taxes.11 Parties and committees were taxed as corporations, trusts, or partnerships, depending

on the surrounding circumstances. 12

In 1975, Congress responded to the IRS action by adding Section 527 to the Internal Revenue

Code (P.L. 93-625; 88 Stat. 2108).13 Section 527 as enacted by P.L. 93-625 is similar to the

current version, with the exception of the reporting requirements that currently exist (these are

discussed below in the section on P.L. 106-230 and P.L. 107-276 and in the Appendix).

Section 527 applies to “political organizations” which are those organizations, including a party,

committee, association, or fund, that are organized and operated primarily to directly or indirectly

accept contributions and/or make expenditures for an “exempt function.” An exempt function is

the influencing or attempting to influence the selection, nomination, election, or appointment of

an individual to a federal, state, or local public office, to an office in a political organization, or as

a presidential or vice-presidential elector.

Section 527 political organizations are subject to tax only on “political organization taxable

income.” This is the organization’s gross income, excluding “exempt function income,” less $100

9

See, e.g., Edward B. Foley, The “Major Purpose” Test: Distinguishing Between Election-Focused and Issue-Focused

Groups, 31 N. KY. L. REV. 341, 355 (2004)(arguing that “it makes no sense” to examine only whether an organization

spends most of its funds on express advocacy in order to determine whether its major purpose is nomination or election

of a candidate); and James Bopp, Jr. and Richard E. Coleson, The First Amendment is Still not a Loophole: Examining

McConnell’s Exception to Buckley’s General Rule Protecting Issue Advocacy, 31 N. KY. L. REV. 289, 323 (2004)

(arguing that “it is only proper” to examine an organization’s express advocacy activity in order to determine whether

its major purpose is nomination or election of a candidate).

10

See IRS Notice of Opportunity to Submit Written Comments and to Request Public Hearing with Respect to the Tax

Treatment of Contributions of Appreciated Property to Committees of Political Parties, 37 Fed. Reg. 22,427-28

(October 19, 1972).

11

IRS Announcement 73-84, 1973-2 C.B. 461.

12

Id.

13

See H.Rept. 93-1502 at 104.

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and any allowable deductions. Exempt function income is any amount received, to the extent that

it is segregated to use for an exempt function, as

•

contributions of money or other property,

•

membership dues, fees, or assessments,

•

proceeds, which are not received in the ordinary course of business, from

political fundraising and entertainment events or from the sale of campaign

materials, and

•

proceeds from conducting a bingo game.

The tax rate is generally the highest corporate income tax rate. Under IRC § 527(h), however,

income of the principal campaign committee of a congressional candidate is taxed using the

graduated corporate tax rate schedule. This special rule does not apply for campaign committees

of candidates for state or local office.

Under P.L. 93-625, political organizations only had contact with the IRS if they were required to

file a tax return because they had taxable income. Thus, the law was properly thought of as

addressing the tax treatment of these organizations, rather than regulating them. The lack of

reporting requirements may have been because, at the time of the law’s enactment, political

organizations were generally thought of as candidate funds and political parties and committees14

(i.e., the same types of entities that, when involved in federal elections, are regulated by FECA).

Emergence of Issue Advocacy Campaigns

During the 1996 election cycle, a new phenomenon was seen in campaigns for President and

Congress that marked a turning point both in the way in which campaigns for federal office are

conducted and in efforts to regulate the flow of money in federal elections. Political parties and

interest groups had in 1995 and 1996 made broadcast communications that discussed candidates’

merits in conjunction with particular issue positions, which, while technically not meeting federal

election law criteria for election-related activity, were widely viewed as intending to influence

federal races. As public policy messages without express advocacy language, such activities were

labeled issue advocacy. By not explicitly urging the defeat or election of clearly identified

candidates, entities could present information to the public which encouraged more positive or

negative views of public officials who also were candidates. Not only could these

communications be paid for with funds from any source and in any amount (i.e., soft money), but

they were not uniformly disclosed either.

While issue advocacy caught much of the political world by surprise in 1996, it quickly caught on

as the new growth area of money in politics. While the lack of disclosure made it impossible to

know for sure the extent of such activity, the Annenberg Public Policy Center estimated that

between $135 and $150 million was spent on broadcast issue advocacy in 1996, rising to between

$250 and $341 million in 1998, and some $509 million in 2000.15

14

See, e.g., H.Rept. 93-1642 at 22 (describing the provision that added IRC § 527 as “provid[ing] that political parties

or committees (and separate campaign funds) are to be taxed on investment income and on income from a trade or

business, but not on campaign contributions they receive”).

15

Annenberg Public Policy Center, Issue Advertising in the 1999-2000 Election Cycle, at

(continued...)

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Effect on Campaign Finance Reform Debate

The highly visible and increasing levels of “issue spending” in the 1996-2000 elections reinforced

perceptions of a major loophole by which politically interested groups were circumventing

federal election law. But even before the evidence of a growing trend was established, proponents

of campaign finance reform recognized the potential for such growth and responded quickly by

redirecting their efforts toward addressing issue advocacy.

During the 1980s and early 1990s, pressure had been building in Congress to address concerns

about the role of money in politics, primarily involving the high costs of seeking office and the

concomitant need for private sources of campaign funds. Those interested in campaign finance

“reform”—generally characterized by favoring greater regulation—had focused their efforts

during much of this time on two issues: the rising costs of elections to federal office and the

growing funding role played therein by political action committees. The most prominent

legislative proposals came to feature provisions to curb, if not eliminate, PAC money as a funding

source in federal elections, and to impose voluntary spending limits in congressional elections, in

exchange for candidates’ receiving either public funding or some form of cost-reducing public

benefit (such as postal or broadcast rate reductions).

These provisions were key elements in comprehensive reform bills passed by the House and

Senate in the 101st, 102nd, and 103rd Congresses.16 While other aspects of campaign finance law

were included in these measures, such as ones dealing with party soft money, 17 the major point of

contention was the insistence of the reform advocates on spending limits and public funding or

benefits. The dynamics of the debate over PACs shifted over time, and even that provision

eventually became relatively less a point of contention.

On September 7, 1995, during the 104th Congress, Senators John McCain and Russell Feingold

introduced their first campaign finance reform bill, establishing themselves as the leading reform

advocates in the Senate. That bill, S. 1219, was the successor to the reform bills that had passed in

the previous three Congresses, and it reflected the same pre-1996 consensus among advocates of

campaign finance reform that prioritized curbing the high cost of congressional elections and

replacing the need for private funds, especially PACs, with other funding sources. (S. 1219 also

expanded on the earlier bills’ treatment of party soft money, with inclusion of stricter curbs on the

raising and spending of soft money by national and state and local political parties.)

Following the watershed election of 1996, in which unregulated campaign activity appeared to

overshadow the regulated activity, the leading reform advocates in Congress responded with

significant changes in their proposed legislation at the start of the 105th Congress. In S. 25,

introduced by Senators McCain and Feingold, and its companion measure H.R. 493, offered by

Representatives Christopher Shays and Martin Meehan, provisions were added to their 104th

(...continued)

http://www.annenbergpublicpolicycenter.org/ISSUEADS/02_01_2001_1999-2000issueadvocacy.pdf.

16

In the 101st Congress—S. 137 and H.R. 5400; in the 102nd Congress—S. 3 and H.R. 3750; and in the 103rd

Congress—H.R. 3 and S. 3. Only the 102nd Congress bills were reconciled in conference (as S. 3) and sent to the

President, who vetoed it on May 9, 1992.

17

Party soft money, since prohibited by BCRA, most commonly took the form of funds raised by national parties from

sources not permissible in federal elections and transferred to states where such sources were permissible in state

elections, and which could be arranged in a manner suggesting an attempt to at least indirectly influence federal

elections.

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Congress bills to redefine “express advocacy” to allow federal regulation of more election-related

activity. By the fall of 1997, following the most intensive congressional activity on campaign

finance reform since the 1970s, a revised S. 25 was offered. As modified by floor amendment, S.

25 featured provisions addressing the issues of party soft money and issue advocacy. The

provisions on congressional spending limits and public benefits, and on PACs, the key elements

of reformers’ objectives for at least the previous 10 years, were eliminated from the bill entirely.

Thus, in one year’s time, the very nature of the campaign finance debate had shifted from an

attempt to improve the existing regulatory system to saving it from becoming meaningless in the

face of newly emerging campaign practices. This debate, started in the wake of the 1996

elections, would continue until the enactment of the Bipartisan Campaign Reform Act (BCRA) in

2002.

Emergence of the 527 Issue

Not only was 1996 the year in which issue advocacy emerged, but it was also the year in which

the IRS began issuing several private rulings on the types of activities that qualify as influencing

an election for purposes of IRC § 527.18 Under these rulings, it became apparent that some of the

issue advocacy activities described above could qualify as election-influencing activities under

IRC § 527. Thus, these rulings helped create an awareness that groups participating in these issue

advocacy activities, while arguably not required to report to the FEC, could still qualify for the

benefit of tax-exempt status under IRC § 527.

After the 1996 election, media and congressional attention turned to groups with 527 status that

were engaging in activities aimed at influencing federal elections without conforming to FECA

rules. Sporadic news accounts of their activities tended to categorize them simply as tax-exempt

groups, without the more specific label as a 527.19 One 1997 news account, on the activities of

Triad Management Services, Inc., notably did make specific reference to 527 status. The article

began as follows:

Call it the Cayman Islands of the campaign finance world. Several politically active nonprofit groups are abandoning their traditional tax-exempt status with the IRS and

reclassifying themselves as political groups, taking a bold gamble that they will still remain

outside of the reach of federal election law.

The groups have found a safe haven exactly at the point at which the tax code intersects with

federal election laws. Switching their tax status may allow generous tax breaks for their

largest donors while thickening the veil of secrecy over the groups’ activities.

Two of the groups making the switch are Citizens for Reform and Citizens for the Republic

Education Fund—non-profit arms of the controversial Triad Management Services, Inc., a

conservative consulting and fundraising organization that will soon be the subject of the

Senate’s investigative hearings into the 1996 elections.20

18

See Priv. Ltr. Rul. 9652026 (October 1, 1996); Priv. Ltr. Rul. 9725036 (March 24, 1997); Priv. Ltr. Rul. 9808037

(November 21, 1997); Priv. Ltr. Rul. 199925051 (March 29, 1999).

19

Carles R. Babcock and Ruth Marcus, “For Their Targets, Mystery Groups’ Ads Hit Like Attacks from Nowhere,”

Washington Post, March 9, 1997, at A6; Leslie Wayne, “A Back Door for the Conservative Donor,” New York Times,

May 22, 1997, at A24; Jill Abramson and Leslie Wayne, “Nonprofit Groups Were Partners to Both Parties in Last

Election,” New York Times, October 24, 1997, at A1, A28.

20

Damon Chappie and Amy Keller, “Several Political Groups Seek IRS Safe Haven,” Roll Call, October 20, 1997, pp.

(continued...)

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The emerging 527 groups also received some attention during the Senate Governmental Affairs

Committee’s investigation of illegal or improper activities in connection with the 1996 federal

election campaigns.21 In 1998, during the 105th Congress, Senator Joseph Lieberman introduced a

bill—S. 1666—to, among other things, “seek to better define the limits on the election-related

activities of tax exempt organizations.” In his floor statement, Senator Lieberman made reference

to 527 groups:

A number of 501(c)(4) groups active in federal election campaigns apparently have switched

their tax status to Section 527, which offers tax benefits with fewer restrictions on political

activity. At the same time, these groups claim they are not subject to FECA because they

don’t engage in express advocacy of particular candidates, even though FECA defines the

groups it covers in essentially the same terms as Section 527.22

During this time period, 527s were established by such groups as the Sierra Club and NAACP

and as new entities, such as Citizens for Better Medicare, all to engage in election-related issue

advocacy campaigns.

527 Activity in 2000

By 2000, issue advocacy had emerged as the thorniest issue of the ongoing campaign finance

debate, owing to the conundrum based on prevailing judicial interpretation of Supreme Court

precedent. That interpretation permitted regulation of only those communications containing

express advocacy (i.e., communications containing explicit terms urging the election or defeat of

clearly identified federal candidates). By avoiding such terms, groups arguably could promote

their views and issue positions in reference to particular elected officials, without triggering the

disclosure and source restrictions of FECA.

It was into this environment of rapidly evolving methods of alleged circumvention of federal

election law restrictions that a group called Republicans for Clean Air entered during the

presidential primaries of 2000. As described in a March 3, 2000, news account,

A mysterious group called Republicans for Clean Air is broadcasting more than $2 million

worth of television commercials in presidential primary states attacking Senator John

McCain and defending Texas Gov. George W. Bush’s environmental record.23

While that article identified the sponsor of the ad (Texas businessman Sam Wyly), it did not label

the group as a 527 organization. Its activities did, however, call attention to that section of the

code in dramatic enough fashion that, within weeks, news accounts were focusing specifically on

527 groups. A New York Times account, at the end of March 2000, identified groups with 527

status across the political spectrum and analyzed the advantages of various vehicles under the tax

(...continued)

1, 24.

21

Notably, in 2005, a U.S. district court ordered Triad, generally considered to have been the forerunner of the 527

groups at issue, to pay a fine to the FEC for failing to register as a political committee, FEC v. Malenick, D.D.C., No.

02-1237, (July 26, 2005). See Kenneth P. Doyle, “FEC Enforcement: After Decade-Long Pursuit by FEC, Court Orders

Triad to Pay Fine,” BNA Money & Politics Report, July 27, 2005.

22

144 CONG. REC. 1568 (1998) (statement of Sen. Lieberman).

23

John Mintz, “‘Clean Air’ Group Clouds the Airwaves,” Washington Post, March 3, 2000, at A19.

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code for waging issue advocacy campaigns.24 A Wall Street Journal article in May 2000 outlined

how the newly discovered 527 vehicle was by then being used to create soft money leadership

PACs for elected officials.25 In a few months, the 527 issue had burst on the scene.

When the 527 issue emerged in 2000, Congress was enmeshed in consideration of BCRA, and

opinion was still evolving about whether and how Congress could regulate activity that was not

express advocacy. With the emergence of 527s, Congress was confronted with the practice of

election-related issue advocacy by groups receiving the benefit of tax-exempt status under the

IRC. Rather than short-circuit the debate on regulating non-express advocacy activity and begin

yet another on the also-complicated issue of differing definitions of political organization under

the IRC and political committee under the FECA, Congress adopted a different approach by

having regulation triggered not by the nature of the activity but by the nature of the entity

engaging in it. By simply requiring disclosure to the IRS by groups with tax-exempt 527 status in

P.L. 106-230 (discussed in next section), Congress thus kept the debate going about standards for

regulation under the election law and addressed what was seen as the most urgent need at that

point.

Sponsors of what was ultimately to become BCRA recognized the need for this action as a

provisional measure. In prepared testimony for the House Ways and Means Subcommittee on

Oversight, Senator Feingold stated,

I hope that the Ways and Means Committee and the full House will promptly pass a bill that,

if nothing else, will end the veil of secrecy behind which 527s now hide. There is, of course,

much more that can and should be done on the campaign finance issue generally and to

strengthen disclosure in particular.... I want to make it very clear that none of us who support

reform are under any illusion that a positive resolution of the 527 problems is all that needs

to be done to cure the ills of the campaign finance system. It is a crucial first step, but only a

first step. Our fight in the Senate for more far reaching reform, including a ban on soft

money, will continue. At the same time, we cannot let our desire for more sweeping reform,

or for broader disclosure, prevent us from dealing with the 527 problem in this Congress, and

hopefully in the next few weeks. 26

Congress’s Response to 527s and Issue Advocacy

The 106th and 107th Congresses passed two laws addressing disclosure by 527 organizations and

one law, BCRA, which addressed, among other things, the larger question of election-related

issue advocacy.

24

John M. Broder and Raymond Bonner, “A Political Voice, Without Strings,” New York Times, March 29, 2000, at

A1, A18.

25

Leadership PACs refer to PACs set up and maintained by elected officials to promote not only their political

philosophies but their political ambitions also. Greg Hitt, “‘527 Groups’ Use Tax Loopholes to Promote Politicians,”

Wall Street Journal, May 25, 2000, at A28.

26

Disclosure of Political Activities of Tax-Exempt Organizations: Hearing Before the Subcomm. on Oversight of the

House Comm. on Ways and Means, 106th Cong. 10 (2000) (statement of Sen. Feingold).

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527 Disclosure Requirements: P.L. 106-230 and P.L. 107-276

Prior to 2000, the only time an organization exempt from tax under IRC § 527 had to disclose

information to the IRS was if it had taxable income. Congress added disclosure requirements in

2000 (P.L. 106-230; 114 Stat. 477) and 2002 (P.L. 107-276; 116 Stat. 1929).27 As a result of these

two laws, the general rule is that IRC § 527 political organizations are required to report

information to the IRS, the FEC, or a state. Table A-1, in the Appendix, summarizes the

disclosure requirements as they currently exist.

The first disclosure requirement added by P.L. 106-230 is that IRC § 527 organizations must

notify the IRS of their existence within 24 hours of formation unless an organization expects to

have annual gross receipts of less than $25,000 or is required to report to the FEC as a political

committee. P.L. 107-276 amended the requirement by adding an exemption for political

committees of state and local candidates and state and local committees of political parties.

In addition to the initial notification requirement, P.L. 106-230 also included a provision that

requires the periodic disclosure of contributions and expenditures to the IRS.28 Under this

provision, any organization that accepts a contribution or makes an expenditure for a Section 527

exempt function during the year is required to file a disclosure report with the IRS on either a

quarterly or monthly basis. A periodic report must include (1) the name, address, occupation, and

employer of any contributor who made a contribution during the reporting period and gave at

least $200 during the year, along with the amount and date of the contribution; and (2) the

amount, date, and purpose of each expenditure made to a person if the total annual expenditures

to that person was at least $500, along with the person’s name, address, occupation, and

employer. The disclosure requirements do not apply to any political organization that is required

to report to the FEC as a political committee, is a state or local committee of a political party or a

political committee of a non-federal candidate, or expects to have gross receipts of less than

$25,000. They also do not apply to independent expenditures, which are expenditures that

expressly advocate for a candidate but are made without the candidate’s involvement or

cooperation. Additionally, P.L. 107-276 added an exemption for state and local political

committees if they are required to report similar information to a state.

P.L. 106-230 and P.L. 107-276 also changed the rules for when political organizations must file

tax and information returns. Under prior law, a political organization only filed a tax return if it

had political organization taxable income and never had to file an information return. P.L. 106230 required any organization with at least $25,000 in gross receipts to file a tax return,

regardless of whether it had political organization taxable income, and required that any

organization that filed a tax return also file an information return. P.L. 107-276 amended both of

these provisions. With respect to tax returns, P.L. 107-276 reversed the change made by P.L. 106230, so that currently only organizations with taxable income are required to file a tax return.

27

The bill that became P.L. 106-230, H.R. 4762, was approved by a vote of 385 to 39 in the House on June 28, 2000,

and by a vote of 92 to 6 in the Senate on June 29, 2000. It was signed into law on July 1, 2000. The bill that became

P.L. 107-276, H.R. 5596, was passed by unanimous consent in the House on October 16, 2002, and in the Senate on

October 17, 2002. It was signed into law on November 2, 2002.

28

In 2002, a U.S. district court held that most of the disclosure provisions were unconstitutional. National Fed’n of

Republican Assemblies v. United States, 218 F.Supp.2d 1300 (S.D.Ala. 2002), as amended by 2002 U.S. Dist. LEXIS

20845 (S.D.Ala. 2002). In 2003, however, the Court of Appeals for the Eleventh Circuit reversed and remanded the

decision with instructions to dismiss for lack of jurisdiction. Mobile Republican Assembly v. United States, 353 F.3d

1357 (11th Cir. 2003).

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With respect to information returns, P.L. 107-276 requires that a political organization file a

return if it has gross receipts of at least $25,000 ($100,000 if a qualified state or local political

organization) unless it is a state or local committee of a political party or a political committee of

a state or local candidate, a caucus or association of state or local officials, an authorized

committee under FECA § 301(6) of a candidate for federal office, a national committee under

FECA § 301(14) of a political party, a congressional campaign committee of a political party

committee, or required to report to the FEC as a political committee.

Under P.L. 106-230, the initial notification of Section 527 status, the expenditures and

contributions disclosures, and the information return must be made publically available by the

organization and the IRS, and the IRS must post the names and addresses of all organizations on

the Internet. P.L. 107-276 imposes an additional requirement that the IRS post all electronically

submitted disclosure reports on the Internet and also required the IRS to improve its online

database. While P.L. 106-230 had required that the tax returns be made public, this was

eliminated by P.L. 107-276.

Finally, P.L. 107-276 grants the IRS the authority to waive any notification or disclosure penalty

if the failure was due to reasonable cause and not willful neglect.

Bipartisan Campaign Reform Act of 2002 (BCRA)

On March 27, 2002, H.R. 2356, the Bipartisan Campaign Reform Act of 2002 (BCRA), was

signed into law by President Bush, as P.L. 107-155 (116 Stat. 81). Title II of BCRA addressed the

express advocacy issue, but in a limited fashion, in large measure to enhance its chances of

withstanding judicial scrutiny. Without amending FECA’s definition of “political committee,”

“expenditure,” or “contribution,” Title II created a new term in federal election law,

“electioneering communications”—political advertisements that refer to clearly identified federal

candidates, broadcast within 30 days of a primary or 60 days of a general election. Generally, the

law prohibits such communications from being funded with union or corporate treasury funds,

and disbursements of over $10,000 and donors of $1,000 or more are required to be disclosed to

the FEC. BCRA did not address interest group involvement in such other election-related

activities as broadcasts prior to the specified period before an election, public communications

through non-broadcast methods, voter identification, and get-out-the-vote and registration drives.

Shortly after BCRA was enacted, plaintiffs filed suit arguing that key portions of the new law

violated the First Amendment and other provisions of the U.S. Constitution. Due to its regulation

in the area of express advocacy, some commentators predicted that Title II, in particular, was

potentially vulnerable to being struck down. In December 2003, however, the Supreme Court, in

McConnell v. FEC,29 largely upheld the entire law, including Title II. 30 In upholding Title II, the

Court determined that its decision in Buckley v. Valeo construed FECA’s disclosure and reporting

requirements, as well as its expenditure limitations, to apply only to funds used for

communications that contain express advocacy of the election or defeat of a clearly identified

candidate.31 The McConnell Court held that neither the First Amendment nor Buckley, however,

29

McConnell v. FEC, 540 U.S. 93 (2003).

30

For further discussion of McConnell v. FEC, see CRS Report RL32245, Campaign Finance Law: A Legal Analysis

of the Supreme Court Ruling in McConnell v. FEC, by (name redacted).

31

Buckley, 424 U.S. at 80.

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prohibits BCRA’s regulation of “electioneering communications,” even though electioneering

communications, by definition, do not necessarily contain express advocacy. The Court

determined that when the Buckley Court distinguished between express and issue advocacy it did

so as a matter of statutory interpretation, not constitutional command. Moreover, the Court

announced that, by narrowly reading the FECA provisions in Buckley to avoid problems of

vagueness and overbreadth, it “did not suggest that a statute that was neither vague nor overbroad

would be required to toe the same express advocacy line.”32 “[T]he presence or absence of magic

words cannot meaningfully distinguish electioneering speech from a true issue ad,” the Court

observed. 33 The Supreme Court in McConnell also specifically noted that even with the

electioneering provisions of BCRA intact, IRC Section 501(c) and 527 organizations would

continue to be involved in federal election activity. Such interest groups, according to the Court,

“remain free to raise soft money to fund voter registration, GOTV activities, mailings, and

broadcast advertising (other than electioneering communications).”34

The activities not addressed by BCRA in Title II have loomed particularly large in the wake of

Title I’s prohibition on national political party use of non-federally-permissible funds (i.e., soft

money) to pay for voter mobilization activities. Groups wishing to engage in these activities and

still avail themselves of the unlimited sources of money no longer available to political parties

may qualify for tax-exempt status under IRC § 527.

527 Activity in 2000 - 2006 Federal Elections

2000 Elections

Enactment of P.L. 106-230 meant that data on the financial activity of 527 groups would become

available for the first time, at least for the period after July 1, 2000, when the law took effect.

Reports filed with the IRS under the new law showed receipts of $73.5 million and expenditures

of $103.0 million (the $30 million difference owing largely to cash-on-hand at the start of the

law’s coverage). Of particular relevance, however, was the financial activity of groups solely

involved in federal elections. An examination of reports of all groups filing with the IRS by

PoliticalMoneyLine found that “key groups” (i.e., those that were clearly related to federal

elections) had receipts of $61.3 million and expenditures of $88.6 million. Among these key

groups, $39.7 million was raised by Democratic-oriented groups and $21.6 million by

Republican-oriented groups.35

The largest and most prominent 527 group during the 2000 elections was Citizens for Better

Medicare, which spent an estimated $40-$65 million on issue advocacy.36 The aggregate totals,

however, do not include this group’s activity, as it stopped accepting contributions as of July 1,

32

McConnell, 540 U.S. at 192.

Id. at 193.

34

Id. at 187-188.

33

35

PoliticalMoneyLine, Money in Politics Databases: 527 Groups, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2000.

36

Cigler, Allan J., “Interest Groups and Financing the 2000 Election,” in Financing the 2000 Election, p. 180 (David B.

Magleby, ed., 2002).

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2000, and switched to section 501(c)(4) status (where limited disclosure rules apply).37

Prominent, established interest groups, such as the Sierra Club and the NAACP, also established

527s for the 2000 election.38

Tables 1 and 2 provide data on the largest 527 groups filing with the IRS under the new statute

and the largest donors to those groups in the 2000 election cycle, as compiled by

PoliticalMoneyLine.

Table 1.Top Ten 527s in 2000 Elections, Ranked by Receipts

Name

Receiptsa

1. Pro Choice Vote

$12, 364,150

2. Planned Parenthood Votes

$ 7,217,204

3. Bush-Cheney 2000, Inc. - Recount Fund

$ 7,211,773

4. New York Senate 2000

$ 6,337,785

5. Gore-Lieberman Recount Committee

$ 3,685,287

6. Democratic Legislative Campaign Cttee.

$ 3,542,722

7. Republican Leadership Council

$ 3,059,730

8. Working Families 2000

$ 2,954,655

9. EMILY’s List Non-federal

$ 2,810,939

10. Democratic Governor’s Assn.

$ 2,016,475

Source: PoliticalMoneyLine, 2000 Cycle 527 Committees, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2000.

a.

Figures represent gross receipts, reflecting some double-counting due to transfers among affiliated

committees.

Table 2.Top Ten Donors to Key 527s in 2000 Elections

Name

Total Donationsa

1. Jane Fonda

$11,955,000

2. Pro-Choice Vote

$ 8,233,648

3. AFSCME

$ 1,655,071

4. AFL-CIO

$ 1,442,755

5. Dem. Congressional Campaign Cttee.

$ 1,429,935

6. DNC Services Corp.

$ 1,110,000

7. Alida Rockefeller Messinger

$ 970,000

8. Service Employees Intl. Union

$ 925,250

9. Steven T. and Michele Kirsch

$ 750,000

37

CAMPAIGN FINANCE INSTITUTE TASK FORCE ON DISCLOSURE, ISSUE AD DISCLOSURE : RECOMMENDATIONS FOR A NEW

APPROACH A8-A9 (2001).

38

Cigler, supra note 36, p. 182.

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Name

10. Mr. And Mrs. John A. Harris, IV

Total Donationsa

$ 652,500

Source: PoliticalMoneyLine, 2000 Cycle Large Donors to PoliticalMoneyLine’s Key 527 Groups, at

http://www.tray.com/cgi-win/irs_ef_527.exe?DoFn=&sYR=2000.

a.

Excludes transfers.

2002 Elections

Reports filed with the IRS showed receipts of $215.2 million and expenditures of $229.5 million

in the 2002 election cycle. The “key groups” identified by PoliticalMoneyLine had receipts of

$183.6 million and expenditures of $193.6 million; this represented more than double the level of

spending by key groups in 2000. Among these key groups, $104.3 million was raised by

Democratic-oriented groups and $78.2 million by Republican-oriented groups.39

Tables 3 and 4 provide data on the largest 527 groups filing with the IRS under the new statute

and the largest donors to those groups in the 2002 election cycle, as compiled by

PoliticalMoneyLine.

Table 3.Top Ten 527s in 2002 Elections, Ranked by Receipts

Name

Receiptsa

1. Democratic Governor’s Association

$16,115,035

2. Michael Steele for Maryland Cttee.

$ 8,781,418

3. College Republican National Cttee.

$ 8,435,903

4. Democratic Legislative Campaign Cttee.

$ 7,421,456

5. IMPAC 2000

$ 6,948,686

6. Republican Governors Association

$ 6,729,860

7. EMILY’s List Non-federal

$ 6,662,333

8. AFL-CIO COPE Treasury Fund

$ 5,533,588

9. New American Optimists

$ 4,621,154

10. New Democratic Network—Non-fed.

$ 4,235,722

Source: PoliticalMoneyLine, 2002 Cycle 527 Committees, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2002.

a.

Figures represent gross receipts, reflecting some double-counting due to transfers among affiliated

committees.

Table 4.Top Ten Donors to Key 527s in 2002 Elections

Name

1. Gordon Humphrey

Total Donationsa

$ 3,950,968

39

PoliticalMoneyLine, Money in Politics Databases: 527 Groups, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2002.

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Name

Total Donationsa

2. AT&T

$ 2,667,240

3. Democratic Congressional Campaign Cttee.

$ 2,500,329

4. AFSCME

$ 2,452,000

5. Sierra Club

$ 2,305,000

6. Democratic National Committee

$ 2,094,826

7. Woodland Group Indiana L.L.C.

$ 1,805,000

8. Mr. And Mrs. John A. Harris, IV

$ 1,715,000

9. Stephen L. Bing

$ 1,677,090

10. Republican National Committee

$ 1,539,900

Source: PoliticalMoneyLine, 2002 Cycle 527 Committees, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2002.

a.

Excludes transfers.

2004 Elections

In the 2004 elections, several factors produced an exponential rise in both the financial level and

importance of 527 organizations: the unresolved issue of whether federal election regulation

reached beyond the “express advocacy” standard, the examples set by 527s in the 2000 and 2002

elections, the ban on party soft money in BCRA, and the extraordinary level of voter interest and

intensity regarding the 2004 presidential election. According to a December 2004 study by the

Center for Public Integrity,

Although the 527 committees have been operating on the fringes of American politics for at

least the past three election cycles, election 2004 was the first time they played a major role,

perhaps a decisive role, in determining the outcome of a national election.40

Reports filed with the IRS showed receipts of $582.1 million and expenditures of $595.5 million

in the 2004 election cycle. The “key groups” identified by PoliticalMoneyLine had receipts of

$431.5 million and expenditures of $434.9 million; this represented more than double the level of

spending by key groups in 2002. Among these key groups, $264.0 million was raised by

Democratic-oriented groups and $165.7 million by Republican-oriented groups.41 Tables 5 and 6

provide data on the largest 527 groups filing with the IRS under the new statute and largest

donors to those groups in the 2004 election cycle, as compiled by PoliticalMoneyLine.

Table 5.Top Ten 527s in 2004 Elections, Ranked by Receipts

Name

1. ACT NOW PAC Non-federal Account

Receiptsa

$79,795,487

40

Center for Public Integrity, 527s in 2004 Shatter Previous Records for Political Fundraising, at

http://www.publicintegrity.org/527/report.aspx?aid=435.

41

PoliticalMoneyLine, Money in Politics Databases: 527 Groups, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2004.

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Section 527 Political Organizations

Name

Receiptsa

2. Joint Victory Campaign 2004

$71,811,666

3. The Media Fund

$59,414,183

4. Progress for America Voter Fund

$44,929,178

5. Service Employees Intl. Union (SEIU)

Political Education and Action Intl. Fund

$40,237,236

6. Republican Governors Association

$33,848,421

7. Democratic Governors Association

$24,172,761

8. AFSCME Special Acct.

$22,227,050

9. Swift Boat Veterans and POWs for Truth

$17,008,090

10. College Republican National Cttee.

$12,780,126

Source: PoliticalMoneyLine, 2004 Cycle 527 Committees, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2004.

a.

Figures represent gross receipts, reflecting some double-counting due to transfers among affiliated

committees.

Table 6.Top Ten Donors to Key 527s in 2004 Elections

Name

Total Donationsa

1. Victory Campaign 2004

$70,019,391

2. George Soros

$27,030,105

3. Peter B. Lewis

$23,997,220

4. Stephen L. Bing

$13,952,682

5. Herbert M. and Marion O. Sandler

$13,510,679

6. Service Employees Intl. Union (SEIU)

$ 9,777,589

7. AFSCME

$ 8,793,700

8. Bob J. Perry

$ 8,090,000

9. US Chamber of Commerce (and local branches)

$ 5,688,000

10. T. Boone Pickens

$ 5,620,000

Source: PoliticalMoneyLine, 2004 Cycle Large Donors to PoliticalMoneyLine Key 527 Groups, at

http://www.tray.com/cgi-win/irs_ef_527.exe?DoFn=&sYR=2004.

a.

Excludes transfers.

Fundraising by 527s in 2004

In studying the activity of groups active in the 2004 elections, analysts have in part sought to

understand what impact the prohibition on party soft money in BCRA had in the upsurge in

donations to 527s in the 2004 elections. Certainly there had been the expectation by skeptics prior

to BCRA’s passage that the soft money ban would in fact lead to more unregulated money

flowing to outside groups. In the one major study thus far on sources of 527 funding in 2004, the

Campaign Finance Institute found that while this did occur to some extent, the groups “replaced

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Section 527 Political Organizations

part, but not the majority of soft money banned by the McCain-Feingold law.”42 Looking at the

big picture, the study contrasted what it found to be a $273 million increase in 2004 receipts by

527s over 2002 receipts, with the $591 million it found had been raised in soft money by all party

committees in 2002:

...[s]ince the 527s raised only $273 million more in 2004 than in the last year of party and

candidate soft money, this 527 money failed to replace $318 million of the $591 million.43

Notwithstanding that conclusion, however, there is no doubt that BCRA did not put an end to

very large donations by wealthy individuals and entities. The Center for Public Integrity study

found that more than one-fourth of all receipts of 527s in 2004 came from the top 15 individual

donors.44 Moreover, the Campaign Finance Institute found that 73 of the 113 donors who gave at

least $250,000 to 527s in 2004 had given soft money to the political parties in 2000 or 2002.45

The same study, however, found that these donors gave three times more to the 527s in 2004 than

they had to the parties in 2000 and 2002 combined, indicating that soft money donations had not

merely transferred to 527s.46

Of the $405 million in 527 receipts found by the Campaign Finance Institute, $256 million was

from individual donors, $112 million was from labor unions, and $30 million was from

businesses (including corporations, trade associations, and unincorporated entities). The business

level actually dropped slightly from 2002, but the union level doubled and the individual

component rose sevenfold.47

Spending by 527s in 2004 and Its Impact

It appears that few observers would disagree with preliminary findings of a study by Brigham

Young University that 527s had “a substantial impact on the 2004 campaign ground and air

wars.”48 It found that major Democratic-leaning groups (the Media Fund, AFL-CIO, and

MoveOn) kept the presidential race close in the spring and summer of 2004, but that Republicanleaning groups (notably Swift Boat Veterans For Truth and Progress for America) organized later

in the election had substantial impact in the fall campaign. Noting that 527s placed a much

greater emphasis on voter mobilization and registration (i.e., the ground war) than they had

before, the findings stated that “the big story of 2004, in addition to the tremendous ground

strategy run by the Republican National Committee, was the ground work of the liberal America

Votes coalition.” Led by America Coming Together, the largest 527, this coalition included the

Sierra Club, the League of Conservation Voters, Planned Parenthood, NARAL Pro-Choice

America.

42

Campaign Finance Institute (CFI), New CFI Study of “527” Groups, at http://www.cfinst.org/pr/

prRelease.aspx?ReleaseID=63.

43

Steve Weissman and Ruth Hassan, “BCRA and the 527 Groups,” in The Election After Reform: Money, Politics and

the Bipartisan Campaign Reform Act, p. 81 (Michael J. Malbin, ed., 2006).

44

Center for Public Integrity, 527s in 2004 Shatter Previous Records for Political Fundraising, supra note 40.

45

CFI, New CFI Study of “527” Groups, supra note 42.

46

Id.

47

Weissman and Hassan, BCRA and the 527 Groups, supra note 43, pp. 11-12.

48

Center for the Study of Elections and Democracy, Brigham Young University, 527s Had a Substantial Impact on the

Ground and Air Wars in 2004, Will Return, at http://csed.byu.edu/PressReleases/

Dec%20%2016%20CSED%20Press%20Release%20%282%29.doc.

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Still, it remains open to debate and a topic for further study whether the legal prohibition against

coordinating their activities with candidates and political parties limited the potential

effectiveness of the major 527s in 2004. Since some observers credit the Bush victory in 2004 in

part to the clarity of its campaign “message,” the ability to coordinate the messages being

communicated, whether by campaigns or by sympathetic outside groups, could well have had an

impact on the final outcome. 49 (Coordinating the 527’s messages with a candidate’s campaign

would have constituted an in-kind contribution to the candidate, thus placing the organization in

legal jeopardy.) It may well be that the most novel aspect of 527 activity in 2004 related to the

voter mobilization efforts, an area traditionally dominated to a large extent by the political parties.

There seems to be widespread agreement that here at least, 527 activity had a clear impact on the

election.

2006 Elections

Reports filed with the IRS showed receipts of $361.3 million and expenditures of $395.6 million

in the 2006 election cycle; these figures are likely to climb once final reports are filed for 2006.

The “key groups” identified by PoliticalMoneyLine had receipts of $215.2 million and

expenditures of $234.7 million; while this was roughly half the level of financial activity in 2004,

this represented an increase over 2002 (the last comparable midterm election). Among these key

groups, $109.4 million was raised by Democratic-oriented groups and $103.0 million by

Republican-oriented groups, near parity between the parties for the first time since disclosure was

instituted in 2000.50

Tables 7 and 8 provide data on the largest 527 groups filing with the IRS under the new statute

and the largest donors to those groups in the 2006 election cycle, as compiled by

PoliticalMoneyLine.

Table 7.Top Ten 527s in 2006 Elections, Ranked by Receipts

Name

Receiptsa

1. Republican Governors Association

$40,763,546

2. Democratic Governors Association

$28,045,313

3. SEIU Political Education and Action Intl. Fund

$22,367,120

4. Republican State Leadership Committee (RSLC)

$19,122,544

5. AFSCME Special Acct.

$17,410,657

6. EMILY’s List - Non-federal

$11,775,201

7. Democratic Legislative Campaign Committee

$ 8,676,292

8. America Votes, Inc.

$ 8,094,443

9. Club for Growth

$ 6,346,665

10. Progress for America Voter Fund

$ 6,175,025

49

Kenneth P. Doyle, “Leaders Say Nonparty Groups Obeyed Law But Had Major Impact on 2004 Campaign,” Money

& Politics Report, February 9, 2005.

50

PoliticalMoneyLine, Money in Politics Databases: 527 Groups, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2002.

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Source: PoliticalMoneyLine, 2006 Cycle 527 Committees, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2006.

a.

Figures represent gross receipts, reflecting some double-counting due to transfers among affiliated

committees.

Table 8.Top Ten Donors to Key 527s in 2006 Elections

Name

Total Donationsa

1. Bob J. Perry

$12,300,000

2. Service Employees Intl. Union

$10,239,703

3. Andrew Jerrold and Margaret Perenchio

$ 5,450,000

4. George Soros

$ 4,067,500

5. AFSCME

$ 3,720,000

6. US Chamber of Commerce (and local branches)

$ 3,692,000

7. Linda Pritzker

$ 2,946,000

8. Peter B. Lewis

$ 2,684,458

9. National Education Association

$ 2,370,980

10. Richard and Betsy DeVos

$ 2,060,000

Source: PoliticalMoneyLine, 2006 Cycle Large Donors to PoliticalMoneyLine Key 527 Groups, at

http://www.tray.com/cgi-win/irs_ef_527.exe?DoFn=&sYR=2006.

a.

Excludes transfers.

Summary of 2000 - 2006 Data

Table 9 summarizes data compiled by PoliticalMoneyLine on spending and receipts by 527

organizations clearly involved in federal elections.

Table 9. Receipts and Disbursements by Federal-Related 527s: 2000-2006

(dollars in millions)

Receipts

Election Cycle

Total Spending

Democraticoriented 527s

Total

Republicanoriented 527s

2000

$88.6

$61.3

$39.7

$21.6

2002

$193.6

$183.6

$104.3

$78.2

2004

$434.9

$431.5

$264.0

$165.7

2006

$234.7

$215.2

$109.4

$103.0

Source: PoliticalMoneyLine, PoliticalMoneyLine’s Key 527 Groups, at http://www.tray.com/cgi-win/

irs_ef_527.exe?DoFn=&sYR=2000.

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Efforts to Regulate 527s

During and since the 2004 elections, efforts to address the activity of 527 organizations operating

outside the regulatory framework of the FECA have been underway on several fronts: in the

courts, at the FEC, and in Congress. Supporters of BCRA have led these efforts, insisting that

existing federal election law requires that groups working for the election or defeat of candidates

for federal office must register as political committees and comply with all aspects of that law,

regardless of the nature of the specific activities in which they engage. These BCRA advocates

have expressed dismay over the FEC’s failure to issue regulations to enforce that view of the law

and have filed court challenges to the activities of prominent 527 groups on that basis.

Concerns about this issue have by no means been limited to BCRA supporters. The Bush-Cheney

campaign filed its own lawsuit to block activities of some prominent 527 groups during the 2004

elections; both the House Administration and Senate Rules and Administration Committees held

hearings in 2004 and 2005; both committees reported bills to regulate 527 organizations under

FECA in the 109th Congress; and the House passed such legislation on two occasions in 2006.

While concern about the 527s has been voiced across the political spectrum, to some extent those

concerns have different origins. BCRA supporters have tended to see the enormous amounts of

money raised and spent in recent elections as a result of what they argue is the FEC’s failure to

enforce existing law, and they have also launched an effort to replace the agency with what they

see as a more effective enforcement body.51 BCRA critics, however, insist that what has occurred

has been the predictable result of the ban on soft money activity by the national parties, thus

redirecting massive amounts of unregulated money to outside groups that are less accountable to

the political system.

FEC-Proposed Rules in 2004 and Constitutional Concerns

On March 11, 2004, the FEC issued a Notice of Proposed Rule Making (NPRM), which

presented various approaches for classifying 527 organizations as regulated “political

committees” under FECA.52 On April 14, 2004, the FEC held two days of hearings regarding the

NPRM and received a record 150,000 public comments. The FEC voted to defer consideration of

the NPRM for 90 days in May 2004, but when that deadline expired in August, the Commission

considered two alternative final rule proposals, neither of which garnered the requisite votes of

four of the six commissioners. Hence, the FEC did not adopt any new regulations prior to the

November 2004 presidential election that would have addressed the key issues relevant to the

regulation of 527 organizations, and with the exception of the political committee rules adopted

in October 2004, discussed below, it has not adopted any such new regulations as of the date of

this report.

Proposal to Redefine Political Committee

FECA generally defines a political committee as any group that receives contributions or makes

expenditures exceeding $1,000 in the aggregate during a calendar year.53 It further defines

51

See H.R. 421 (Meehan-Shays) and S. 478 (McCain-Feingold) in the 110th Congress.

Federal Election Commn., Notice of Proposed Rulemaking, 69 Fed. Reg. 11,736 (March 11, 2004).

53

2 U.S.C. § 431(4).

52

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Section 527 Political Organizations

contributions and expenditures to apply when any gift or purchase is made “for the purpose of

influencing any election for Federal office.”54 In interpreting the definition of political committee,

the Supreme Court in its 1976 decision, Buckley v. Valeo, cautioned that the phrase “for the

purpose of influencing” an election or nomination has the “potential for encompassing both issue

discussion and advocacy of a political result.”55 Therefore, in order to avoid overbreadth, the

Court found that “it need only encompass organizations that are under the control of a candidate

or the major purpose of which is the nomination or election of a candidate.”56 As has been

discussed, the second part of the court’s determination has come to be known as the “major

purpose test.”

In its NPRM, the FEC discussed whether and how it should amend its regulations promulgated

under FECA defining when an entity is considered a nonconnected political committee (a PAC

which is not sponsored by another entity, such as a corporation or labor union). Current FECA

regulations, at 11 CFR § 100.5(a), do not expressly incorporate the Supreme Court’s “major

purpose test” within the definition of “political committee.” The NPRM proposed to redefine

political committee to encompass the “major purpose test” so that, under the proposed

regulations, whether an organization is a political committee would be determined by a two-part

test: whether it receives contributions or makes expenditures aggregating over $1,000 per

calendar year, and whether it has “the major purpose of nominating or electing a federal office

candidate.”57

In defining how the FEC would ascertain whether an organization has “the major purpose of

nominating or electing a federal office candidate,” the proposed regulation set forth three

alternative tests for comment and consideration by the regulated community. As stated in the

NPRM, the FEC did not make a final decision on a proposed regulatory test, and hence, sought

comment on the three alternatives it was considering: whether an organization has spent $10,000,

$50,000, or 50% of its total annual disbursements on a combination of contributions, expenditures

(including independent expenditures), electioneering communications, and federal election

activities.58 FECA defines “federal election activity” to include (1) voter registration drives in last

120 days of a federal election; (2) voter identification, Get-Out-the-Vote (GOTV) drives, and

generic activity in connection with an election in which a federal candidate is on the ballot; (3)

public communications that refer to a clearly identified federal candidate and promote, support,

attack, or oppose a candidate for that office (regardless of whether they expressly advocate a vote

for or against); or (4) services by a state or local party employee who spends at least 25% of paid

time in a month on activities in connection with a federal election.59

The FEC also sought comment on a fourth alternative method of determining whether an

organization has “the major purpose of nominating or electing a federal office candidate,” that

would specifically only apply to 527 organizations. The fourth alternative consisted of two “subalternative” tests: Alternative 2-A would consider that all 527s have the major purpose of

nominating or electing federal office candidates, with five exceptions: (1) if the 527 is the

54

2 U.S.C. §§ 431(8),(9).

Buckley v. Valeo, 424 U.S. 1, 79 (1976).

56

Id. (emphasis added). In a subsequent opinion, the Court reaffirmed the applicability of this “major purpose” test. See

FEC v. Massachusetts Citizens for Life, Inc., 479 U.S. 238 (1986).

57

Federal Election Commission, Notice of Proposed Rulemaking, 69 Fed. Reg. 11,736, 11,756 (2004).

58

Id. at 11756-57.

59

2 U.S.C. § 431(20).

55

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campaign organization of an individual seeking nomination, election, appointment, or selection to

a non-federal office; (2) if the 527 is organized solely for the purpose of promoting the

nomination or election of a candidate to a non-federal office; (3) if the 527 is a group of persons

whose election or nomination activities relate solely to elections where no candidate for federal

office appears on the ballot; (4) if the 527 operates solely within one state and, pursuant to state

law, must file financial disclosure reports with the state government, showing all activities within

that state; or (5) if the 527 is organized solely for the purpose of influencing the nomination or

appointment of individuals to a non-elected office or to political party leadership positions. In

contrast, Alternative 2-B would categorize any 527 organization as meeting the major purpose

test, without any exemptions.60

If the FEC promulgates regulations classifying certain 527 organizations (other than party

committees, FEC-registered political committees, and candidate committees) as political

committees, they would be subject to FECA regulation. That is, for example, such organizations

would be required to register with the FEC and file disclosure reports;61 corporations and labor

unions would be required to use separate segregated funds (political action committees or PACs)

instead of unregulated treasury funds, to make contributions to the organizations;62 and

individuals would be limited to contributing no more than $5,000 annually to such

organizations. 63 Further, such organizations could contribute no more than $5,000 per candidate

per election.64

Those opposing the proposed regulations argue that they risk subjecting too many organizations,

for example, 501(c) non-profit groups, to the status of political committee and thus, erroneously

and unconstitutionally subjecting them to FECA regulation. Furthermore, they argue, such

regulation will threaten grassroots advocacy. On the other hand, those favoring greater regulation

by the FEC reject the argument that it will chill speech by non-profit groups because 501(c)

organizations cannot, by definition, have a major purpose of influencing federal elections. Hence,

proponents maintain, non-profits would not fall within the proposed definition and accordingly,

would not be subject to FECA regulation.65

Proposal to Redefine “Expenditure”

In addition to proposing options for redefining what constitutes a political committee, the NPRM

presented options for amending FECA regulations to redefine the term expenditure. The

definition of expenditure is also critical for determining which organizations and activities are

subject to the FECA regulation of contribution limits, source restrictions, and disclosure

requirements. 66 In Buckley, the Supreme Court found that the ambiguity of the operative phrase,

“for the purpose of influencing any election for Federal office,” created constitutional problems

as applied to expenditures made by individuals other than candidates, and organizations other

60

Federal Election Commission., Notice of Proposed Rulemaking, 69 Fed. Reg. 11,736, 11,757. (2004).

See 2 U.S.C. §§ 432, 433, 434.

62

See 2 U.S.C. § 441b(a), (b).

63

See 2 U.S.C. § 441a(a)(1)(C).

64

See 2 U.S.C. § 441a(a)(2)(A).

61

65

See, e.g., Federal Election Commission, Transcript from Hearing on Political Committee Status (April 14, 2004),

(visited January 8, 2007) http://www.fec.gov/pdf/nprm/political_comm_status/trans_04_14_04.pdf.

66

Id. at 11756-57.

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than political committees. 67 Therefore, in order to avoid the vagueness and potential overbreadth

of the statutory definition, Buckley adopted a narrow construction so that FECA’s definition of

expenditure only applies to “funds used for communications that expressly advocate the election

or defeat of a clearly identified candidate.”68

Over time, many in the campaign finance reform community observed that the Court’s express

advocacy test articulated in Buckley failed to provide a meaningful distinction between true issue

ads and campaign ads. Indeed, when the Supreme Court considered the constitutionality of BCRA

in its 2003 decision, McConnell v. FEC,69 it concluded that certain communications can have the

purpose or effect of influencing elections regardless of whether they contain express advocacy.

Clarifying the express advocacy standard, the court determined that it is not a constitutional

barrier in ascertaining whether an expenditure is “for the purpose of influencing any Federal

election.” That is, according to the court, “[i]n narrowly reading the FECA provisions in Buckley

to avoid problems of vagueness and overbreadth, we nowhere suggested that a statute that was

neither vague nor overbroad would be required to toe the same express advocacy line.”70

In view of the Supreme Court’s jurisprudence in this area, in its NPRM, the FEC also proposed to

amend the definition of expenditure to include

a payment, distribution, loan, advance, or deposit of money or anything of value made by, or

on behalf of any person for a public communication, as defined in 11 C.F.R. § 100.26, is an

expenditure if the public communication:

(a) Refers to a clearly identified candidate for Federal office, and promotes or supports,

or attacks or opposes any candidate for Federal office; or

(b) Promotes or opposes any political party.71

Those opposing the proposed amended definition of expenditure argue that the importation of the

“promote, support, attack or oppose” standard risks categorizing as political committees many

non-party groups that make public communications, thereby potentially creating a problem of

overbreadth. On the other hand, those favoring the change to the definition maintain that it is

sufficiently narrowly tailored and would pass constitutional muster.72

2004 FEC Rule and Related Litigation

While the FEC was unable to adopt new regulations central to the issues of 527 regulation, as a

compromise, in October 2004, it adopted a new regulation relevant to political committees. 73

Accordingly, this new rule was in effect during the November 2004 presidential election. Entitled

67

Buckley, 424 U.S. at 77.

Id. at 79-80. In a footnote to the decision, the Court supplied examples of express words of advocacy, “such as, ‘vote

for,’ ‘elect,’ ‘support,’ ‘cast your ballot for,’ ‘Smith for Congress,’ ‘vote against,’ ‘defeat,’ ‘reject.’” Id. at 44, n.52.

69

540 U.S. 93 (2003).

70

Id. at 93.

71

Federal Election Commission, Notice of Proposed Rulemaking, 69 Fed. Reg. 11,736, 11,757 (2004).

68

72

See, e.g., Federal Election Commission, Transcript from Hearing on Political Committee Status (visited January 8,

2007) http://www.fec.gov/pdf/nprm/political_comm_status/trans_04_14_04.pdf.

73

See 11 C.F.R. § 100.57 (2006).

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“Funds received in response to solicitations,” the new rule provides that political groups are

regulated under FECA based on whether they conduct fundraising with solicitations that include

appeals to “support or oppose” the election of a federal candidate. Funds or anything of value

collected as a result of such solicitations are considered a contribution under FECA. Therefore,

any organization with $1,000 or more in such contributions is subject to FECA regulation. 74

Notably, it has been reported that the FEC acknowledged that the new rule failed to address the

key question of if and when, based on their solicitation messages, nonparty groups are required to

register with the FEC as political committees. 75

The new rule also revised its allocation regulations requiring that such regulated organizations

pay at least 50% of their expenses for federal election related activities—such as get-out-the-vote

(GOTV) efforts—with federally regulated hard money. Communications that support or oppose

clearly identified federal candidates must be paid entirely with federally regulated hard money.76

In January 2005, EMILY’s List, a nonconnected political committee, filed suit in U.S. District

Court for the District of Columbia seeking to enjoin the new FEC rule. In its complaint, EMILY’s

List argued that the FEC did not provide proper notice for the new rule and that it violates the

organization’s First Amendment rights, particularly with regard to its state and local election

activities. On February 25, 2005, the court denied the EMILY’s List motion for a preliminary

injunction and upheld the new rule. 77 Citing the Supreme Court’s jurisprudence beginning with

Buckley v. Valeo in 1976, the court found that it is clear that the government has an important

interest in preventing corruption and the appearance of corruption in elections and that the

Supreme Court has upheld FEC action to prevent circumvention of contribution limits designed

to protect that interest. According to the court, “it is apparent that the FEC promulgated these

rules in an effort to close an oft-exploited loophole in federal election law.”78 The court further

determined that the FEC appeared to have followed proper procedures in issuing its new rules,

and concluded that the regulations appeared to pass constitutional muster.

On February 1, 2007, the FEC issued a “Supplemental Explanation and Justification,” entitled

“Political Committee Status,” to more fully explain the basis for its 2004 rule and the reasons it

declined to revise the regulatory definition of political committee in such a manner to specifically

regulate 527 organizations. 79 According to the FEC, Section 527 status under the Internal

Revenue Code is insufficient evidence alone to determine whether an organization is a political

committee under FECA. It found that an organization’s tax status under Section 527 does not

necessarily satisfy “FECA and Supreme Court contribution, expenditure, and major purpose

requirements.”80 In addition, the Commission determined that the IRS’s requirements for granting

74

FECA defines “political committee” as “any committee, club, association, or other group of persons that receives

contributions aggregating in excess of $1,000 during a calendar year.” 2 U.S.C. § 431(4).

75

Kenneth P. Doyle, “FEC Faces Court Battles Over New Rule Imposing Limits on Section 527 Groups,” Money &

Politics Report, January 21, 2005. According to the Money & Politics article, Liz Kurland, of the FEC’s information

division, stated that the effect of the new rule on 527 organizations that were involved in federal elections, but claimed

exemption from FEC regulation, is “going to be kind of a hairy issue, I have to admit.” Id.

76

11 C.F.R. § 100.57(b) (2006).

77

EMILY’s List v. FEC, 362 F. Supp. 2d 43 (D.D.C. 2005), aff’d, 170 Fed. Appx. 719 (D.C. Cir. 2005).

78

Id. at 57.

79

Federal Election Commission, Political Committee Status, (visited February 1, 2007) http://www.fec.gov/law/cfr/

ej_compilation/2007/notice_2007-3.pdf.

80

Id. at 10.

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tax exemption under Section 527 are based on “a different and broader set of criteria” than is used

by the FEC in determining political committee status.81

Pursuant to FECA and Supreme Court precedent, the FEC stated that it will continue to determine

political committee status based on whether an organization received contributions or made

expenditures over $1,000 in a calendar year and whether the organization’s “major purpose” was

campaign activity. To that end, the FEC specifically noted that it will consider whether any of the

organization’s solicitations resulted in contributions “because the solicitations indicated that any

portion of the funds received would be used to support or oppose the election of a clearly

identified Federal candidate,” and will analyze whether any of the organization’s expenditures for

communications, made independently of a candidate, “constituted express advocacy” under its

regulations.82

In concluding, the FEC announced that its recent enforcement actions and guidance, provided

through publicly available advisory opinions and filings in civil enforcement cases, evidence a

“very effective mechanism for regulating organizations that should be registered as political

committees under FECA, regardless of that organization’s tax status.” Moreover, the FEC

announced, its new and amended rules, the “Supplemental Explanation and Justification,” and its

recent enforcement actions “places the regulated community on notice of the state of the law

regarding expenditures, the major purpose doctrine, and solicitations resulting in contributions.”83

FEC Enforcement Action Against Three 527s for 2004 Activities

The FEC has assessed major fines for some 527 activities in recent elections. In several notable

cases, the FEC determined that certain 527s should have registered as political committees and

were subject to FECA regulation. On December 13, 2006, the FEC announced that it had reached

settlements with three 527 organizations accused of violating FECA during the 2004 presidential

election cycle. The League of Conservation Voters 527 and 527II agreed to pay $180,000;

MoveOn.org Voter Fund agreed to pay $150,000; and Swiftboat Veterans and POWs for Truth

agreed to pay $299,500, all in civil penalties. By a unanimous vote of 6 to 0, the FEC determined

that through their public statements, solicitations for contributions, and other public

communications, the organizations had established that they were political committees, but had

failed to register with the FEC, comply with contribution limits and prohibitions, and file

disclosure reports. According to the FEC, “[i]f an organization receives contributions or makes

expenditures in excess of $1,000, and its major purpose is involvement in campaign activity, it

must register with the Commission and abide by the contribution restrictions and reporting

requirements of the Federal Election Campaign Act.”84

The FEC reached similar conclusions in two notable 2007 enforcement actions. In August 2007,

the FEC announced that it had reached a $775,000 settlement agreement with America Coming

Together (ACT) for certain 2004 campaign activities. The FEC determined that ACT, which

maintained both a federal PAC account and a non-federal (527) account, had improperly spent

81

Id. at 11.

Id. at 43, citing 11 C.F.R. §100.22(a) or 11 C.F.R. § 100.22(b).

83

Id. at 44.

84

Federal Election Commission, FEC Collects $630,000 in Civil Penalties from Three 527 Organizations, at

http://www.fec.gov/press/press2006/20061213murs.html.

82

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non-federal funds on federal election activities, including get-out-the-vote (GOTV) efforts that

mentioned clearly identified federal candidates—traditionally a trigger for FECA enforcement.85

In another case, the agency reached a conciliation agreement with The Media Fund (TMF) in

November 2007. The FEC determined that TMF, a 527, had failed to register as a political

committee and had accepted some contributions that exceeded FECA limits or were from

impermissible sources. TMF agreed to pay a $580,000 civil penalty.86 In these and other cases,

the FEC has emphasized the number of enforcement actions taken against 527s and the large

fines assessed in some of those cases. 87 Some campaign finance interest groups have countered

that the agency has been too slow to act on 527 enforcement matters and that even large fines

represented a small share of those organizations’ allegedly illegal campaign spending. 88

Legislative Activity to Regulate 527s

108th Congress

The House Administration Committee began an examination of the role of tax-exempt 527

political organizations since enactment of BCRA. On November 20, 2003, the committee

authorized its chairman to issue subpoenas to compel testimony from several groups that had

declined to testify in its scheduled hearing that day. On May 20, 2004, the committee held an

oversight hearing on the FEC and the 527 rulemaking process, prompted by the agency’s

postponement of a decision on a proposed regulation to redefine “political committee” to include

activity by many 527 groups then in operation. The 527 issue was also addressed on March 1,

2004, at a hearing by the Senate Rules and Administration Committee, which, on July 14, 2004,

also held an oversight hearing on the FEC.

The initial legislative response to the perceived 527 problems came from the sponsors of the

BCRA—Senators McCain and Feingold and Representatives Shays and Meehan—who offered

identical bills in September 2004, at the end of the 108th Congress. The 527 Reform Act of 2004

(S. 2828 and H.R. 5127) sought to bridge the differences in how federal election law and tax law

defined who is covered under the respective statutes, by specifically declaring that 527

organizations under the IRC have the major purpose of influencing elections (unless they have

annual receipts of less than $25,000 or are exclusively devoted to non-federal elections). By thus

adding 527 organizations to the FECA definition of “political committee,” such entities would

have to fully comply with that law’s requirements.

85

Federal Election Commission, “FEC To Collect $775,000 Civil Penalty From America Coming Together,” press

release, August 29, 2007; and Federal Election Commission, Conciliation Agreement in Matters Under Review 5403

and 5466 at http://eqs.sdrdc.com/eqsdocs/000061AA.pdf.

86

Federal Election Commission, “Media Fund to Pay $580,000 Civil Penalty,” press release November 19, 2007; and

Federal Election Commission, Conciliation Agreement in Matter Under Review 5440 at http://eqs.nictusa.com/eqsdocs/

000066D5.pdf.

87

As of November 2007, the FEC had reached conciliation agreements with 11 527s and 501(c)(4) organizations

during the past year. Federal Election Commission, “Media Fund to Pay $580,000 Civil Penalty,” press release

November 19, 2007.

88

See, for example, Democracy 21, “Democracy 21 and Campaign Legal Center Statement on FEC Finding that The

Media Fund Illegally Spent Over $50 Million in 2004 Election,” press release, November 19, 2007. Democracy 21

filed an FEC complaint in The Media Fund case.

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109th Congress

Revised versions of the bills offered at the end of the 108th Congress were introduced February 2,

2005, as the 527 Reform Act of 2005: H.R. 513, sponsored by Representatives Shays and

Meehan, and S. 271, sponsored by Senators McCain, Feingold, and Trent Lott.89 The bills

proposed to treat 527 political organizations as political committees under FECA, unless they met

certain specified standards for exemption (such as involvement solely in non-federal elections). In

the revised bills, the “major purpose” standard contained in the 108th Congress bills was dropped,

apparently to address concerns voiced by § 501(c) tax-exempt organizations that their activities

could be subjected to FECA regulation as well. 90 Senate sponsors were bolstered by the addition

of Rules and Administration Committee Chairman Lott, who had opposed BCRA but whose

sponsorship of S. 271 appeared to signal a broadening of support for this aspect of federal

election law regulation.

On March 8, 2005, the Senate Rules and Administration Committee held a hearing on S. 271

(McCain-Feingold-Lott) and on April 27 proceeded to a markup of the bill. While the primary

thrust of S. 271 was to apply the full scope of federal election law regulation to 527s involved in

federal elections (source limits and prohibitions and disclosure requirements), the bill ordered

reported by the Rules and Administration Committee expanded its focus considerably.

Amendments were added to loosen certain hard money restrictions, to lower broadcast rates, and

to free communications over the Internet from election law regulation. On May 17, 2005, an

original bill was reported from the committee as S. 1053, thus supplanting S. 271, and placed on

the Senate’s legislative calendar.

On March 15, 2005, Representatives Mike Pence and Albert Wynn introduced H.R. 1316, the 527

Fairness Act of 2005. Essentially, this bill adopted the converse approach to the perceived 527

problem as was taken by sponsors of the 527 Reform Act of 2005 (i.e., to loosen restrictions on

other players in the political process so that they could assume a greater role and hence offset the

perceived undue role played by the 527s). By so doing, proponents expected that there would be

less of an incentive for political money to flow to 527 groups operating outside the framework of

the FECA.

The House Administration Committee held a hearing April 20, 2005, on H.R. 1316 (Pence-Wynn)

and H.R. 513 (Shays-Meehan). On June 7, H.R. 1316, as amended by a committee substitute, was

ordered reported favorably. 91 The reported version added new provisions, many of which had

been added to S. 1053 in committee before it was reported. On June 29, 2005, the House

Administration Committee held a markup of H.R. 513 (Shays-Meehan), and ordered it reported,

as amended to reflect the sponsors’ changes, without recommendation. 92 This set the stage for a

potential House floor debate on the two contrasting measures: H.R. 1316 and H.R. 513. That

debate never occurred, but on April 5, 2006, the House passed H.R. 513 (Shays-Meehan), as

amended, by a 218-209 vote. As passed, the bill, the 527 Reform Act of 2006, included one floor

amendment, to remove political party coordinated expenditure limits.

89

For a more complete discussion of the legislation, see CRS Report RL32954, 527 Political Organizations:

Legislation in the 109th Congress, by (name redacted) and (name redacted).

90

Amy Keller, “527s Prepare Their Defense,” Roll Call, February 22, 2005.

91

See H.Rept. 109-146 (2005).

92

See H.Rept. 109-181 (2005).

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The text of H.R. 513, as passed, was later added to H.R. 4975, the Lobbying Accountability and

Transparency Act of 2006, which passed the House on May 3, 2006; it also included an

amendment added by the House Committee on Rules to prohibit leadership PAC funds from

being converted to personal use but to allow them to be transferred without limit to national party

committees (as is the case with funds in principal campaign committees). After passing H.R.

4975, the House substituted it for the text of S. 2349, the Senate-passed version of the bill, to

enable a conference with the Senate. The Senate-passed bill did not contain the 527 provisions,

and the Senate resisted considering 527s in the context of ethics reform. This conflict between the

House and Senate kept the issue from being resolved in the 109th Congress.

Another bill offered in the second session reflected a limited regulatory approach. H.R. 4696,

sponsored by Representative Mike Rogers, would prohibit 527 organizations that are not also

political committees under the FECA from making electioneering communications, the most

visible, but hardly the only, form of election-related issue advocacy. Four additional bills were

offered in the 109th Congress, seeking a more limited approach to the 527 issue than reflected in

the bills discussed above. To the extent that what has concerned many observers about 527

groups’ activity is their lack of accountability relative to organizations regulated under federal

election law, these proposals sought to bolster the disclosure requirements in the Internal Revenue

Code and thus offer voters a greater opportunity to know about these groups and who finances

them. These bills included H.R. 471, sponsored by Representative John Larson; H.R. 914,

sponsored by Representative Phil English; and H.R. 1942 and H.R. 2204, sponsored by

Representative Clay Shaw.

110th Congress

BCRA sponsors in the House introduced their legislation to regulate 527s early in the 110th

Congress.93 H.R. 420, sponsored by Representatives Marty Meehan and Christopher Shays, and

S. 463, sponsored by Senators John McCain and Russell Feingold, the 527 Reform Act of 2007,

are identical to the two measures passed by the House in the 109th Congress, as they pertained

strictly to 527s (amendments on party coordinated expenditures and leadership PACs were

omitted). A summary of these bills, compared with current law, follows in Table 10.

Two other 527 bills have also been introduced in the 110th Congress.94 First, a lobbying and ethics

reform bill (H.R. 2316, Conyers) passed by the House in May 2007 would have required

lobbyists to disclose certain contributions to non-political committee 527s.95 However, the

lobbying reform measure that ultimately became law (P.L. 110-81) did not address 527s.96

Second, H.R. 1204 (English) would change periodic disclosure requirements for those 527

organizations that report to the IRS rather than the FEC. The bill would also amend the penalties

93

On campaign finance activity during the 110th Congress, see CRS Report RL34324, Campaign Finance: Legislative

Developments and Policy Issues in the 110th Congress, by (name redacted).

94

The text refers to two bills affecting non-political committee 527s. As noted elsewhere in this report, political

committees, as defined in FECA, are also considered 527s for tax purposes. H.R. 3771 (Sensenbrenner), a bill affecting

political-committee 527s (or state-level equivalents), would permit taxation of state and local candidates’ principal

campaign committees at the same rate as congressional candidates’ principal campaign committees.

95

See H.R. 2316 as passed by the House, Sec. 204.

96

On 110th Congress lobbying reform, see CRS Report RL34166, Lobbying Law and Ethics Rules Changes in the 110th

Congress, by (name redacted).

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for failing to file such reports in a timely manner. Finally, the bill would require that the periodic

disclosure reports filed with the IRS also be filed with the FEC.

Table 10. H.R. 420 (Meehan-Shays) and S. 463 (McCain-Feingold), the 527 Reform

Act of 2007, Compared with Current Law

H.R. 420 (Meehan-Shays)

S. 463 (McCain-Feingold)

Current law

Defines political committee (thus triggering FECA regulation) as:

(A) a committee, club, association, or other group of persons which

receives contributions or makes expenditures aggregating in excess of

$1,000 during a calendar year;

(B) a separate segregated fund (PAC set up by a union, corporation,

trade assoc., or membership group); or

(C) a local committee of a party which makes contributions or

expenditures aggregating in excess of $1,000 in a calendar year,

receives contributions aggregating in excess of $5,000 in a calendar

year, or makes payments exempted from definition of

contribution/expenditure in excess of $5,000 in a cal. year [2 U.S.C. §

431(4)]

No provision

Includes in definition of political committee

any IRC §527 organization, unless it:

has annual gross receipts of less than

$25,000;

is a political committee of a state or local

party or candidate;

•

exists solely to pay certain

administrative expenses or expenses

of a qualified newsletter;

•

is composed solely of state or local

officeholders or candidates whose

voter drive activities refer only to

state/ local candidates and parties; or

•

is exclusively devoted to elections

where no federal candidate is on

ballot, to non-federal elections, ballot

issues, or to selection of non-elected

officials [Sec. 2/1002]

Makes last exemption (above) inapplicable

if the IRC §527 organization spends more

than $1,000 for:

•

public communications that promote,

support, attack, or oppose a clearly

identified federal candidate within one

year of the general election in which

that candidate is seeking office; or

•

for any voter drive effort conducted

by a group in a calendar year, unless:

(1) sponsor confines activity solely to one

state;

(2) non-federal candidates are referred to

in all voter drive activities and no federal

candidate or party is referred to in any

substantive way;

(3) no federal candidate or officeholder or

natl. party official/agent is involved in

organization’s direction, funding, or

spending; AND

(4) no contributions are made by the group

to federal candidates [Sec. 2/1002]

FEC regulations that took effect Jan. 1, 2005, require PACs (noncandidate, non-party political committees)—including those associated

with non-FECA-compliant 527 groups—that make disbursements for

voter mobilization activities or public communications that affect both

federal and non-federal elections to generally use at least 50% hard

money from federal accounts to finance such activities, but require that

Congressional Research Service

Codifies 2005 FEC regulations and makes

them applicable to 527s not affected by

current rules [Sec. 3/1003]

28

Section 527 Political Organizations

Current law

H.R. 420 (Meehan-Shays)

S. 463 (McCain-Feingold)

public communications and voter drive activities that refer to only

federal candidates be financed with 100% hard money from a federal

account, regardless of whether communication refers to a political

party [11 C.F.R. §106.6]

No limits on funding sources for PACs’ non-federal accounts, but

BCRA added a provision to FECA that imposes some regulation of

special non-federal accounts of state and local party committees that

may undertake certain “federal election activities” using a mix of

federal and non-federal funds. These so-called Levin accounts operate

under several conditions on the use of these funds and the raising of

money for them, including that they accept no more than $10,000 a

year (or less, if state law so limits) from any person and that they use

no funds that were solicited, received, directed, transferred, or spent

by or in the name of a national party, federal candidate or official, or

joint fundraising activities by two or more state or local party

committees [2 U.S.C. §441i(b)]

Allows contributions to non-federal

accounts making allocations (above) only by

individuals and subject to limit of $25,000

per year; prohibits fundraising for such

accounts by national parties and officials

and federal candidates and officeholders

[Sec. 3/1003]

N.A.

States that this act shall have no bearing on

FEC regulations, on any definitions of

political organization in Internal Revenue

Code, or on any determination of whether

a 501(c) tax-exempt organization may be a

political committee under FECA [Sec. 8]

N.A.

Provides special expedited judicial review

procedures, similar to BCRA’s, for a

challenge on constitutional grounds, and

allows any Member to bring or intervene in

any such case [Sec. 9]

Conclusion

If the 110th Congress chooses to address 527s, a key question will be whether additional

regulation should occur via legislation, new FEC or other regulation, or enforcement of existing

regulations. Regardless of how policy change occurs, perhaps most importantly, it remains

unclear whether the courts would uphold additional attempts to regulate 527 activity. Indeed,

whether regulation of 527 activity needs to be limited to only those organizations engaging in

express advocacy is a topic of much controversy and debate. Nevertheless, there is likely to be

continued criticism that activity by 527s in the manner seen in recent elections threatens to

undermine the effectiveness of regulation under federal election law.

Another issue that has received attention is whether, in the event that Congress does require

further regulation of 527 organizations, money might flow to other types of tax-exempt

organizations, such as IRC § 501(c)(4) social welfare organizations and § 501(c)(6) trade

associations.97 These types of organizations may engage in political campaign activity so long as

it is consistent with the organization’s exempt purpose. There are, however, two limitations in the

IRC that would make these organizations less efficient than Section 527 political organizations

for carrying on election-related activities. First, the IRC implicitly restricts the amount of political

97

For more information on the political activity restrictions on tax-exempt organizations, see CRS Report RL33377,

Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements, by (name redacted).

Congressional Research Service

29

Section 527 Political Organizations

campaign activity that these organizations may conduct—specifically, participating in political

campaign activity cannot be the organization’s primary activity. 98 Second, under IRC § 527(f),

IRC § 501(c) organizations are subject to tax if they make an expenditure for an IRC § 527

exempt function. As discussed above, an exempt function is influencing or attempting to

influence the selection, nomination, election, or appointment of an individual to a federal, state,

or local public office, to an office in a political organization, or as a presidential or vicepresidential elector. Under IRC § 527(f), the organization is taxed at the highest corporate rate on

the lesser of the organization’s net investment income or its total amount of exempt function

expenditures. 99 Finally, it should be noted that tax-exempt organizations must also abide by any

applicable election laws. For example, since campaign finance laws ban unions and corporations

from making any contribution or expenditure in connection with federal elections, IRC §

501(c)(5) labor unions and any incorporated tax-exempt organizations are generally prohibited

from doing so, as well.

98

See Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii); IRS Gen. Couns. Mem. 34233 (December 30, 1969).

99

IRC § 501(c) organizations may set up a separate segregated fund under IRC § 527(f)(3). Assuming the fund is set up

and administered properly, it will be treated as an IRC § 527 political organization and the IRC § 501(c) organization

will not be subject to tax.

Congressional Research Service

30

Appendix. Summary of Internal Revenue Code Provisions Applicable to 527

Organizations

Table A-1. Disclosure Requirements under the Internal Revenue Code

Disclosure of Expenditures and

Contributions

Notification of 527 Status

Information Return

Tax Return

IRS Form

Form 8871

Form 8872

Form 990

Form 1120-POL

Description of

Requirement

Organization must notify the

IRS of its existence. Notification

must include the organization’s

name, address, and purpose;

names and addresses of certain

employees and directors; and

name of and relationship to any

related entities.

[IRC § 527(i)]

Organization that accepts a contribution or

makes an expenditure for an exempt function

must file a disclosure report with the IRS.

Report includes (1) name, address, and

employer of a contributor who gives during

the reporting period and has given at least

$200 during the year, and the amount of the

contribution; and (2) the amount and

purpose of each expenditure made to a

person during the reporting period if that

person has received at least $500 during the

year, along with the person’s name, address,

and employer.

[IRC § 527(j)]

Organization must file an

information return with the

IRS. Return includes such

information as the

organization’s revenue sources

and functional expenses.

Contributions of at least

$5,000 must be reported on

the return’s Schedule B.

[IRC § 6033]

Organization with

political organization

taxable income must file

a tax return with the

IRS.

[IRC § 6012(a)(6)]

Frequency

Once—the organization must

notify the IRS within 24 hours

of its formation.

Either on a quarterly basis in a year with a

regularly scheduled election and semiannually in any other year or a monthly basis.

Additional requirements for pre-general

election, post-general election, and year-end

reports.

Annually

Annually

Disclosed to the Public?a

Yes

Yes

Yes

No

Exceptions

Any organization that

- anticipates having gross

receipts of less than $25,000

for any year

- is a political committee of a

state or local candidate or a

state or local committee of a

political party, or

- is required to report to the

Any organization that

- is not required to or did not file a Form

8871, or

- is a state or local political organization that

reports similar information to a state agency.

The requirement also does not apply to any

expenditure that is an independent

expenditure (i.e., an expenditure that

expressly advocates for a candidate but is

Any organization that:

- has gross receipts of less than

$25,000 ($100,000 if a qualified

state or local political

organization);

- is a state or local committee

of a political party or a political

committee of a state or local

candidate,

Any organization with

less than $100 in

political organization

taxable income.

CRS-31

Penalty for failing to file

the return in a timely or

accurate manner

a.

CRS-32

Notification of 527 Status

Disclosure of Expenditures and

Contributions

FEC as a political committee.

made without the candidate’s cooperation).

- is required to report to the

FEC as a political committee,

- is a caucus or association of

state or local officials,

- is an authorized committee

under FECA § 301(6) of a

candidate for federal office,

- is a national committee under

FECA § 301(14) of a political

party, or

- is a Congressional campaign

committee of a political party

committee.

Organization will be subject to

tax on all income for the period

between its formation and the

filing. An organization that fails

to notify the IRS within thirty

days of any material change to

the reported information will

not be treated as a 527

organization for the period

between the change and the

notification.

Organization will be subject to a penalty that

equals the highest corporate tax rate

multiplied by the amount of contributions

and/or expenditures to which the failure

relates.

Organization will be subject to

a penalty of $20 per day, not

to exceed the lesser of

$10,000 or 5% of the

organization’s gross receipts

(for organizations with more

than $1 million in gross

receipts, the penalty is $100

per day and is limited to

$50,000.)

[IRC § 6652(c)(1)(A)]

Information Return

Tax Return

Organization will be

penalized for each

month the return is late

in an amount that equals

5% of the tax due, not to

exceed 25% of the tax

due. [IRC § 6651(a)(1)]b

An organization that is

late in paying its taxes

will be penalized for

each month the payment

is late in an amount that

equals 0.5% of the

unpaid tax, not to

exceed 25% of the

unpaid tax.

[IRC § 6651(a)(2)]

Penalties will not be

assessed if the failure

was due to reasonable

cause, but will be

increased for negligence

or fraud.

[IRC § 6662 and 6663]

The IRS and 527 organization must make Forms 8871, 8872, and 990 publicly available. An organization that fails to do so is subject to a penalty of $20 per day, which

is limited to $10,000 for failures relating to Forms 8872 and 990. The IRS must post electronically-submitted Forms 8871 and 8872 in an on-line database within 48

hours of their filing. The database also includes some organizations’ Forms 8871, 8872, and 990 that were submitted on paper. The database is available at

http://www.irs.gov.

b.

CRS-33

Under IRC § 6652(c)(1)(A), the penalty for failing to file Form 1120-POL is the same penalty that applies for failing to file Form 990. It appears to be the IRS position

that the penalty under IRC § 6651 applies rather than the penalty under IRC § 6652 and that “[a] technical correction may be needed to clarify that penalties under §

6652 that apply to failure to file Form 990 ... do not apply to a failure to file Form 1120-POL.” Rev. Rul. 2003-49, 2003-1 C.B. 903.

Section 527 Political Organizations

Author Contact Information

(name redacted)

Analyst in American National Government

[redacted]@crs.loc.gov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

Erika Lunder

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

Acknowledgments

Now-retired CRS specialist (name redacted) co-authored this report. CRS analyst (name redacted) provided

recent updates.

Congressional Research Service

34

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