The "527" Fuss Explained

By Joseph E. Sandler and Neil P. Reiff

(For Campaigns & Elections, August 2004)

For much of this election cycle, controversy has swirled around the rise of a new class of organizations that now operate in the political world, the so-called 527 groups. Some politicos condemn them; others defend them. Many consultants and operatives want to form them, see them formed, or think they do.

But what exactly are 527s, what is the controversy about and what is the state of play? What follows is a brief primer. (Disclosure: our law firm represents Democratic party committees and 527 groups.)

What is a section 527 group anyway?

Section 527 is actually the section of the Internal Revenue code that allows all partisan political organizations to take contributions without paying taxes on them, to the extent the money is used on political purposes. Technically, every political committee at any level -- from the Republican National Committee (RNC) or Kerry for President or Jones for dogcatcher -- is a section 527 organization.

In the current vernacular, it is used to refer to groups that are political organizations for federal tax purposes but not under campaign finance laws, particularly federal campaign finance laws. And if such an organization is not a political committee for purposes of federal campaign finance laws, there is basically no legal limitation on the source or amount of contributions to the organization.

How can it be that an organization has a political function for tax purposes -- thus qualifying as a section 527 organization -- but is not a political committee for purposes of federal campaign finance law? The reason is that the legal tests are different.

With respect to the tax law test, the Internal Revenue Service issued a series of rulings in the late 1990's that essentially liberalized what a 527 group can do with tax-exempt money. The rulings held that such activities as voter guides and issue advocacy advertisements, which are explicitly targeted and designed to influence elections, are "exempt function" activities for a section 527 organization. That means they are activities that are legally permissible under the tax laws for such a group.

The campaign finance law test hinges on interpretations of the Federal Election Campaign Act. At what point, under this law, will a political group's spending become subject to the campaign finance restrictions that apply to traditional federal political committees like the RNC? This is a hotly debated question, but some courts have insisted that an organization will not be considered a political committee if it does not spend more than $ 1,000 for a federal candidate.

What constitutes such an expenditure? Running ads in favor of President George W. Bush or U.S. Sen. John Kerry? Again, this is contentious point, but many lawyers insist that spending for political ads or communications mentioning a federal candidate are not restricted if two conditions are met: (1) the communication is not coordinated with a federal candidate or party committee and (2) the communication does not "expressly advocate" the election or defeat of that candidate.

By undertaking issue advertising and similar activities that have an electoral focus, but are neither coordinated with candidates nor contain express advocacy, section 527 groups "thread the needle" between tax law and campaign finance law. They are political for tax purposes, but not for purposes of campaign finance law.

So when people talk about a 527, they mean an organization that can take largely unlimited contributions from any source and can spend them on advertising or other communications that praises or criticizes candidates without expressly advocating anyone's election or defeat independently of any affected candidate or party committee.

What has Congress done about them?

Though 527s enjoy significant freedom from regulation, Congress has addressed them on several occasions. In 2000, Congress passed a law requiring 527 groups to file reports with the IRS that publicly disclosed their contributions and spending. A year later Congress enacted the Bipartisan Campaign Reform Act (BCRA), which affects 527s in two significant ways. It forbids party officials and staff from raising funds for 527 groups, and limits the ability of federal candidates and their campaigns to raise such funds.

Secondly, the electioneering provisions of BCRA prohibit 527 groups from using corporate or labor union contributions to run broadcast (including radio) or cable ads mentioning a federal candidate within 30 days of a primary or convention, or within 60 days of a general election in which that candidate is running. In addition, the Federal Election Commission (FEC) has issued detailed rules spelling out what isn't allowed. These new rules are much stricter than those previously in place.

What is the controversy?

A principal element of BCRA was to ban the raising and spending of "soft" money by national party committees. Following enactment of BCRA, it was expected that the Republicans -- who traditionally enjoyed a hard money advantage -- would retain that advantage. What was not expected was the rise of several well-funded 527 groups engaged in partisan voter mobilization, issue advertising and communications criticizing Bush.

In response, the RNC joined forces with their former foes -- campaign finance overhaul organizations that supported BCRA -- to launch an attack on the legality of 527s. Arguing that the groups are an end-run around BCRA, the unlikely coalition urged the FEC to enact rules effectively banning 527s from any partisan campaign activity or communications mentioning federal candidates.

In March the FEC began a rulemaking proceeding to consider this matter. The restrictive rules the commission proposed would have extended to nonprofit organizations. As a result, there was an outpouring of opposition from progressive nonprofits across the country. In turn, the RNC organized its own campaign to generate comments in favor of the proposed rules. In all, the FEC received more than 100,000 comments, far more than for any other proposal considered in its 30-year history.

After all this excitement, the FEC appears to have passed on issuing any new regulations in the near future. One Democrat favored new rules, and one Republican, breaking ranks, opposed them. The other four generally opposed taking action months before the presidential election.

Angry with this inaction, the RNC and Bush -- Cheney campaign filed a complaint with the FEC against several of the Democratic-leaning 527s, the Kerry campaign and 527 group donors, arguing that they were not lawful and that their activities had been unlawfully coordinated with the presidential campaign. The FEC has not taken action and, given the commission's procedures, it is highly unlikely there will be any resolution prior to the election.

What is Next?

Having failed to "beat 'em," the GOP has decided to "join 'em." Republican officials and operatives announced that they are going to start more of their own 527 groups. As it seems there will be no formal changes in the law or rules before Election Day, 527s on either side of the aisle continue to operate under the current rules.

If you are thinking about forming a 527 here are some key points to remember:

• 527s can receive contributions from any source without limit, except from foreign nationals and foreign companies.
• If a 527 gets contributions from corporations or labor unions, and doesn't segregate those funds, or is itself incorporated, it will not be able to run targeted broadcast or cable ads that refer to a federal candidate within 30 days of a primary election or convention or 60 days or a general election.
• The broadcast ban above does not cover other forms of communications such as newspapers, phone banks, mail or canvassed literature.
• A 527's activities cannot be coordinated -- as defined by FEC rules -- with any federal candidate or party committee.
• Contributions to a 527 are not tax-deductible for the donor. However, unlike a 501(c)(4), contributions are not subject to a gift tax.
• Contributions to and spending by a 527 are all publicly disclosed.

The 527 saga is still being written. Stay tuned.