527 Groups and Campaign Activity: Analysis Under Campaign Finance and Tax Laws

527 Groups and Campaign Activity: Analysis
Under Campaign Finance and Tax Laws
L. Paige Whitaker and Erika Lunder
Legislative Attorneys
American Law Division
Summary
During recent election cycles, there has been controversy regarding the increased
campaign-related activity of 527 groups and to what extent they are regulated under
federal law. The controversy stems from the intersection between the Federal Election
Campaign Act (FECA), which regulates “political committees,” and Section 527 of the
Internal Revenue Code (IRC), which provides tax-exempt status to “political
organizations.” Some groups that qualify for beneficial tax treatment as “political
organizations” seemingly intend to influence federal elections in ways that may place
them outside the FECA definition of “political committee.” This report refers to this
subset of Section 527 political organizations as 527 groups or 527s. Considerable
debate has been generated about the extent to which FECA currently regulates 527
groups as “political committees” and the constitutional parameters of such regulation.
The 527 Reform Act of 2007 (H.R. 420 and S. 463) would amend FECA to generally
treat all Section 527 political organizations active in federal elections as “political
committees.”
Background
Campaign-related activity by entities commonly referred to as 527 groups or 527s
has increased over the past several election cycles. These groups are a subset of the
political organizations that qualify for tax-exempt status under Section 527 of the Internal
Revenue Code (IRC).¹ Beginning in earnest in the late 1990s, 527 groups have funded
broadcast communications that discuss the position of federal candidates on public policy
issues, but carefully avoid expressly advocating for or against a candidate. Although
these “issue advocacy” communications are widely viewed as intending to influence
elections, some argue that they are not regulated — and cannot be constitutionally
regulated — by the Federal Election Campaign Act (FECA) due to an interpretation of
the Supreme Court’s campaign finance law jurisprudence only permitting regulation of
communications expressly advocating for the election or defeat of a clearly identified

¹ Examples of other § 527 political organizations include candidate committees, party
committees, political action committees (PACs), and organizations involved in state and local
elections or activities related to non-elective offices.

candidate. It was also in the late 1990s that the Internal Revenue Service (IRS) issued
several private rulings indicating that some issue advocacy activities qualify as “exempt
function” activities under IRC § 527,² thereby permitting these groups to qualify for §

527 status. As a result, 527 groups have been able to utilize this “regulatory gap”

between the IRC and FECA: while their issue advocacy and campaign activities are
sufficient to qualify for § 527 tax-exempt treatment, arguably, they are not sufficiently
election-related to trigger regulation under FECA.³
By the 2000 election cycle, as the campaign activity of 527s continued to grow, they
were often referred to as “stealth PACs” because they were not reporting to the Federal
Election Commission (FEC), and only had contact with the IRS if they had to file a tax
return. In response, Congress amended IRC § 527 in 2000 and 2002 to generally require
that most § 527 political organizations report information to the IRS, the FEC, or a state.⁴
Section 527 political organizations that are not FEC-regulated political committees are
generally required to report to the IRS their existence within 24 hours of formation and
periodically disclose information on contributors who have given at least $200 during the
year and expenditures made to persons who have received at least $500 during the year,
in addition to annual information and tax return requirements.⁵ There are exceptions for
small organizations, state and local candidate political committees, and state and local
political party committees, among others.⁶
Following enactment of the Bipartisan Campaign Reform Act of 2002 (BCRA),⁷
which amended FECA and eliminated the flow of unregulated money to political parties,
the prominence of 527 groups continued to increase. As unregulated political party soft
money was no longer available, there was greater reliance on 527 groups to help
candidates compete in increasingly expensive election campaigns.
Regulating 527 Campaign Activity
Statutory Provisions. FECA regulates “political committees,” which it defines
to include “any committee, club, association, or other group of persons which receives
contributions aggregating in excess of $1,000 during a calendar year or which makes
expenditures aggregating in excess of $1,000 during a calendar year.”⁸ In addition, FECA
defines both “contribution” and “expenditure” as monies or anything of value “for the

² See Priv. Ltr. Rul. 9652026 (Oct. 1, 1996); Priv. Ltr. Rul. 9725036 (March 24, 1997); Priv. Ltr.
Rul. 9808037 (Nov. 21, 1997); Priv. Ltr. Rul. 199925051 (March 29, 1999).
³ Richard Briffault, Law and Democracy: A Symposium on the Law Governing Our Democratic
Process: The 527 Problem ... and the Buckley Problem, 73 Geo. Wash. L. Rev. 949, 958-959
(2005).
⁴ P.L. 106-230 and P.L. 107-276.
⁵ See I.R.C. § 527(i), (j), and (k), § 6104(a), (b) and (d), § 6033.
⁶ For more information on the reporting requirements, see CRS Report RS21716, Political
Organizations Under Section 527 of the Internal Revenue Code, by Erika Lunder.
⁷ P.L. 107-155.
⁸ 2 U.S.C. § 431(4)(A).

purpose of influencing any election for Federal office.”⁹ Under FECA, a registered
political committee is required to raise and spend funds subject to FECA contribution
limits, source restrictions, and disclosure requirements.
IRC § 527 provides beneficial tax treatment to qualifying “political organizations.”¹⁰
These are any organization, including a party, committee, association, or fund, that is
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 any
individual to any Federal, State, or local public office or office in a political organization,
or the election of Presidential or Vice-Presidential electors....”¹¹
It is immediately apparent that the IRC definition of “political organization” is
broader than that of FECA’s definition of “political committee” because it includes
organizations intending to influence state and local campaigns and non-elective offices.
With respect to federal election activities, the two terms, based purely on their statutory
definitions, nonetheless appear to encompass the same types of groups. However, there
is a disconnect between them that stems from the Supreme Court’s campaign finance
jurisprudence establishing the constitutional limitations on Congress’s ability to regulate
election activity.
Constitutional Parameters.¹² In order to preserve FECA’s regulation of
contributions and expenditures against invalidation for constitutional vagueness, the
Supreme Court in its 1976 landmark decision, 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 such¹³
as “vote for,” “vote against,” “elect,” and “defeat”). Likewise, the Court construed the
term “political committee” to include only “organizations that are under the control of a¹⁴
candidate or the major purpose of which is the nomination or election of a candidate.”
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 “political¹⁵
committee.”
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

⁹ 2 U.S.C. § 431(8)(A), (9)(A).
¹⁰ For a complete discussion of I.R.C. § 527, see CRS Report RS21716, Political Organizations
Under Section 527 of the Internal Revenue Code, by Erika Lunder.
¹¹ I.R.C. § 527(c)(3). An “exempt function” also includes making certain office-related
expenditures.
¹² For more information, see CRS Report RL30669, The Constitutionality of Campaign Finance
Regulation: Buckley v. Valeo and Its Supreme Court Progeny, by L. Paige Whitaker.
¹³ Buckley v. Valeo, 424 U.S. 1, 44, n. 52 (1976).
¹⁴ Id. at 79.
¹⁵ See 2 U.S.C. § 431(4)(A).

works, and to what groups it applies, are at the heart of a debate concerning the
circumstances under which non-party organizations and non-candidate committees can
constitutionally be considered FECA-regulated “political committees.” 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.¹⁶
These same constitutional concerns do not arise under the IRC. In other words, the
“express advocacy” and “major purpose” tests developed under the Supreme Court’s
campaign finance jurisprudence do not apply in determining whether an entity is a § 527
political organization under the tax laws. Thus, an “exempt function” does not
necessarily involve explicitly advocating for or against a candidate.¹⁷
FEC Rule and Enforcement Action.¹⁸ In 2004, after considering but not
adopting several approaches for classifying 527 groups as political committees under¹⁹
FECA, the FEC adopted a regulation relevant to political committees. The 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.²⁰ Notably, it was 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 — such as 527s — are required to²¹
register with the FEC as political committees.

¹⁶ Compare Edward B. Foley, The “Major Purpose” Test: Distinguishing Between Election-
Focused and Issue-Focused Groups, 31 N.K^Y.L.R^EV. 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) with
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.
K^Y.L.R^EV. 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).
¹⁷ See, e.g., Rev. Rul. 2004-6, 2004-1 C.B. 328 (the IRS, when determining whether an issue
advocacy communication is for an “exempt function,” looks at such things as whether it identifies
a candidate, identifies his or her position on the issue and this has been raised to distinguish his
or hers from others, is timed to an election, targets voters in a particular election, and is not part
of an ongoing series of similar communications by the organization on the same issue).
¹⁸ For more information, see CRS Report RL33888, Section 527 Political Organizations:
Background and Issues for Federal Election and Tax Laws, by R. Sam Garrett, Erika Lunder, and
L. Paige Whitaker.
¹⁹ See 11 C.F.R. § 100.57.
²⁰ 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).
²¹ Kenneth P. Doyle, “FEC Faces Court Battles Over New Rule Imposing Limits on Section 527
(continued...)

In 2007, the FEC issued a “Supplemental Explanation and Justification” 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 groups.²²
According to the FEC, § 527 status is insufficient evidence alone to determine whether
an organization is a political committee under FECA. It found that an organization’s §

527 status does not necessarily satisfy FECA and the Supreme Court’s contribution,

expenditure, and major purpose requirements.²³ In addition, the FEC determined that the
IRS’s requirements for granting tax exemptions under § 527 are based on “a different and
broader set of criteria” than is used by the FEC in determining political committee
status.²⁴
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 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.²⁵ The
FEC concluded that its case-by-case enforcement actions and guidance — provided
through publicly available advisory opinions and filings in civil enforcement cases —
constitute a “very effective mechanism for regulating organizations that should be
registered as political committees under FECA, regardless of that organization’s tax
status.”²⁶
In its first significant 527 enforcement action, in late 2006, the FEC imposed civil
penalties totaling approximately $630,000 on three 527 organizations that had been active
during the 2004 election cycle: MoveOn.org Voter Fund, the League of Conservation
Voters 527, and the Swiftboat Veterans and POWs for Truth, finding that they were
required to register and be regulated as political committees under FECA.²⁷ Proponents
of 527 regulation criticized the ruling as “too little, too late,” while the anti-regulatory
community argued that the FEC enforcement action was an unconstitutional infringement

²¹ (...continued)
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.
²² Federal Election Commission, Political Committee Status, [http://www.fec.gov/law/cfr/
ej _compilation/2007/notice_2007-3.pdf].
²³ Id. at 10.
²⁴ Id. at 11.
²⁵ Id. at 43, citing 11 C.F.R. §§ 100.22(a) or 100.22(b).
²⁶ Id. at 44.
²⁷ Federal Election Commission, Case Summary, Swiftboat Vets and POWs for Truth, Dec. 13,

2006, available at [http://eqs.nictusa.com/eqs/searcheqs?SUBMIT=summary&key=0].

on First Amendment rights of speech and association.²⁸ Because of this tension, this may
be an area of law that is ripe for litigation.
Summary of Selected Legislation in the 110^th Congress
The 527 Reform Act of 2007 (H.R. 420 and S. 463) would amend FECA to define
“political committee” to include any committee, club, association, or group of persons
that has given notice to the IRS of its status as a § 527 political organization. Exceptions
would exist for organizations that
^!are not required to give the IRS such notification (i.e., small
organizations, and state and local candidate and party committees);
^!are exclusively for paying certain office-related expenses or expenses of
qualifying newsletter funds;
^!consist solely of state or local candidates or officeholders so long as the
organization refers only to non-federal candidates or applicable state or
local issues in all of its voter drive activities and does not refer to a
federal candidate or a political party in any such activities; or
^!whose election or nomination activities relate exclusively to elections
where no federal candidate is on the ballot, to non-federal elections or
non-elected offices, or state or local ballot issues. No exception would
exist for an organization that spends more than $1,000 for either (1)
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 (2) voter drive efforts unless the
effort meets strict criteria ensuring the group and its efforts are involved
in non-federal election activities.
In addition, the act would establish allocation and funding rules for certain expenses
relating to federal and non-federal activities by political committees. It expressly provides
that no section of the act would affect FEC regulations, the definition of political
organization, or the determination as to whether a tax-exempt IRC § 501(c) organization
is a political committee. If an action is brought for declaratory or injunctive relief to
challenge its constitutionality, the act would provide for the action to be heard by a three-
judge court convened by the U.S. District Court for the District of Columbia, with direct
appeal to the U.S. Supreme Court; would provide for expedited judicial review; and
would allow any Member of Congress to bring or intervene in such a case.
If enacted, it is likely that the constitutionality of the act will be challenged due to
the fact that, as a result of the act’s requirement that most 527s register with the FEC as
political committees, such groups would be required to use only federally regulated hard
money contributions to fund advertisements that promote or attack federal candidates,
without regard to whether the communications expressly advocate election or defeat of
a clearly identified candidate.

²⁸ Ronald Hrebenar, Kirk L. Jowers, Audrey Perry, The Struggle to Regulate 527s: Through the
FEC, Congress, and the Courts, 12 Nexus J. Op. 97, 116 (2007) (quoting Too Little, Too Late
from FEC on 527s, Posting of Paul Ryan to Campaign Legal Center blog
[http://www.clcblog.org/blog_item-98.html] (Dec. 13, 2006)).