The Real Story Behind 501(c)(4)s and 527s – Part II

by Kellye

In an update to the previous post (Part 1), Representative Chris Van Hollen of Maryland filed a lawsuit last week on August 21 against the U.S. Treasury Department.  This lawsuit would force the IRS to change its criteria for approval of organizations desiring 501(c)(4) status to what Congress had intended when it created that status and to enforce the law as written (click here for article). Specifically, an organization desiring 501(c)(4) status must be “operated exclusively for the promotion of public welfare.” Congress never intended section 501(c)(4) to be used by political groups to gain tax-exempt status.

After Congress decided to reform campaign finance in the early 1970’s with the passage of the Federal Election Campaign Act (FECA) and its amendments, Congress created section 527 of the IRS tax code to deal with political groups in 1975. This section of the code has its own set of rules in qualifying for tax-exempt status. Political committees (Republican National Committee, Democratic National Committee, and all the various Senate and House fund-raising committees), PACs and Super PACs fall into the 527 category. These groups are regulated by the Federal Election Commission (FEC) because their purpose is political.

However, the term “527 group” is commonly used to refer to an independent 527 group that is not regulated by the FEC due to another loophole created by the IRS over 33 years ago. Even though the purpose of these groups is political, they do not expressly advocate the election or defeat of a candidate. Unlike PACs and the political committees mentioned above, these 527 groups don’t donate to or work directly with a candidate’s campaign. Even before the Citizens United and decisions, 527 groups could accept unlimited money from anyone or any entity (including corporations and unions). Foreign contributions to 527 groups are not prohibited. There are also no spending limits for these groups.

By the 1990’s, the use of 527 groups was common. In 2000, Congress passed a law that forced 527 groups to become more transparent by requiring them to register with the IRS and file periodic reports of contributions and expenditures. Prior to passage of this law, these groups were operating as stealth political action committees. Unlike 501(c)(4) groups, all 527 groups must disclose their donors when they make their periodic reports to the IRS. The IRS releases this information to the public.

A common misunderstanding is that corporations and unions were not contributing any money for political purposes prior to Citizens United. In reality, the only restrictions were that they could not contribute money from their general treasuries to advocate for the election or defeat of a candidate or, after the Bipartisan Campaign Reform Act (BCRA) was passed in 2002, to pay for “electioneering communications” and make “soft money” donations to political parties. They had always been allowed to contribute general treasury funds to 527 and 501(c)(4) groups for other things, such as issue ads. However, after BCRA, no corporate or union general treasury money could be used to fund “issue ads” that clearly identified a federal candidate, targeted the candidate’s electorate, and were broadcast within 30 days of a primary or 60 days of a general election (since these ads would fall under the definition of “electioneering communications”).

After BCRA was passed in 2002 and the ability of political parties to raise money was significantly curbed, the two parties had to find another way to finance their independent political activities. The use of the 527 entity provided a good vehicle for doing so. All types of 527 organizations became much more important and more widely used. In particular, groups wanting to conduct certain kinds of political activity and avoid FEC oversight chose to create independent 527 entities.

After the Citizens United and decisions, the independent 527 group lost its status as the entity of choice for independent political activity and its usage declined significantly in the elections of 2010 and 2012. Super PACs and 501(c)(4)s have become the preferred entities for conducting independent political activities. A group will use a 501(c)(4) if it doesn’t want to disclose its donors and a Super PAC if disclosure isn’t a concern. Several 527 groups have changed their status and have registered with the FEC as Super PACs after these two Supreme Court decisions.

For more information about 501(c)(3), 501(c)(4), and 527 groups and the current IRS controversy, see Matt Bernius’ very informative article (click here).


One response to “The Real Story Behind 501(c)(4)s and 527s – Part II

  1. Pingback: Highlights of Campaign Finance Part 3 | citizens for truth

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