The Congressional sponsors of the Bi-Partisan Campaign Finance Reform Act (“BCRA”) intended that the act would stem the flow of soft, or unregulated, money to the national political parties. However, soft money quickly found a new channel to influence national elections through “Section 527” groups. 26 U.S.C. § 527 defines political organizations as a party, committee, or association that is organized and operated primarily for the purpose of influencing the selection, nomination or appointment of any individual to any federal, state or local public office, or office in a political organization. While § 527 also governs the formation of political candidate’s election and political action committees, special interest groups may form political organizations that are exempt from many of the campaign finance regulations imposed by the Federal Election Commission (“FEC”). These special-interest political organizations are those that most now refer to as “527’s”.
Several efforts are currently underway to limit the ability of 527’s to raise and spend soft money to influence national elections. These efforts have included applying pressure on the FEC to enact new regulations to capture 527 organizations within the scope of the current campaign finance laws. Parallel efforts within the Senate and House of Representative are attempting to restrict 527’s with new regulations or, alternatively, to include them within the current laws. Finally, a lawsuit, filed by the Bush-Cheney ’04 reelection committee, is slowly working its way through the Federal District Court for the District of Columbia. That suit seeks to force the FEC to adopt standards for 527’s that meet Congress’ intent in passing the BCRA and in the Supreme Court’s decision upholding most of the BCRA’s major provisions in McConnell v. FEC. However, even if each of these efforts proves successful at stopping 527’s from raising soft money, other means of raising soft money to finance campaigns exist for donors to exploit in future elections.
Benefits of 527’s Instead of Other Organizations
Under Internal Revenue Service (“IRS”) rulings issued in the 1990’s, 527’s may engage in voter mobilization efforts, issue advocacy, and other activities that fall short of expressly advocating the election or defeat of a candidate for federal office. IRS rulings do not limit how much 527’s can raise to fund those activities because they are “exempt function” activities. Under these rulings, the IRS considers 527’s to be political organizations and not political committees; the distinction removes 527’s from FEC campaign finance regulation. As long as the 527 does not spend more than $1000 for a federal candidate, the FEC or courts will not consider a 527 to be a political committee. However, that limit does not prevent 527’s from behaving like a political committee. Groups organized as 527’s may buy political ads or other communications mentioning a political candidate as long as the communication is not coordinated with a national party committee or candidate. Furthermore, the communication cannot “expressly advocate” the election or defeat of any candidate for federal office.
527’s and their Role in the 2004 Election
In the spring prior to the 2004 Presidential election, liberal groups, such as America Coming Together (ACT) ("mobilizing voters to defeat George W. Bush"), The Media Fund ("media buying organization supporting a progressive message and defending Democrats from attack ads") and the MoveOn.org Voter Fund engaged in a major campaign similar to that of the presumptive Democratic Presidential nominee, Senator John Kerry. Many of these funds received financial contributions both from billionaires, such as George Soros, and from average Americans. In response, the GOP loudly protested to the FEC by claiming that 527’s violated the campaign finance regulations in the BCRA and the original Federal Election Campaign Act (“FECA”). The FEC frustrated the GOP efforts when, on May 13, 2004, the FEC voted to delay a decision on regulating 527 committees under the BCRA until after the election. Thus, Republicans began vigorously to pursue their own 527 fundraising efforts and quickly matched the Democratic-leaning groups with 527 organizations such as the Swift Boat Veterans for Truth.
Both sides were tremendously successful in raising soft money through their 527’s. According to the Center for Public Integrity, at least fifty-three 527’s that focused "largely or exclusively on the Presidential election" raised over $246 million. In total, 527’s spent over $500 million during the 2004 election. Ten donors gave at least $4 million each to various 527’s, and two donors each contributed over $20 million.
The FEC has Attempted to Limit § 527 Soft-Money Donations
The FEC attempted to respond to complaints from both parties about rampant fundraising abuse 527’s during the 2004 election. The FEC approved, in August 2004, new regulations that effect during the upcoming 2006 election cycle. These regulations would require “nonparty political organizations” to cover at least half of their operating and administrative costs with federally regulated, or “hard,” money. Within these rules, the FEC also stated that it considers any group that raises money by announcing their support or opposition of a federal candidate to be political committees. Being designated as a political committee subjects those groups to a contribution limit of $5000 per donor.
Supporters of campaign-finance reform argue that these regulations are inadequate because they do not address two important issues. First, the new FEC rules fail to define when a group has a primary purpose under § 26 U.S.C. § 527 to influence federal elections. Without this definition, groups that state that their primary purpose is not to influence federal elections do not have to register as a political committee and therefore escape finance regulation. Second, these rules apply only to groups that operate both a Section 527 political committee and a political action committee; these regulations do not apply to 527’s that lack an affiliated political action committee. The FEC rejected other proposed restrictions that had specified when nonparty groups must register with the FEC as political committees.
Congress’ Attempts at Passing § 527 Reform have Stalled
Because the FEC rules failed to allay campaign finance reform supporter’s concerns, Senators McCain and Feingold, the two sponsors of the original Senate version of the BCRA, introduced, in February 2005, s.271 (“the 527 Reform Act”). The 527 Reform Act imposed a more stringent requirement on 527’s than the FEC’s rules by requiring all of them to register as political committees unless they fell within a few, narrow exceptions. By classifying all 527’s as political committees, courts and the FEC would avoid the detailed fact-finding and time-consuming administrative costs that otherwise would be required in determining whether the group falls within the FECA and BCRA. All 527’s would be subject to the campaign finance requirements that PAC’s and election committees must adhere. The 527 Reform Act also would have required those groups that engage in activities that affect both state and federal elections to pay for those activities with at least 50% hard money. Furthermore, s.271 would cap annual contributions to the soft money accounts of federal political committees at $25,000, thereby eliminating multi-million dollar soft money contributions.
One of the most important exceptions exempts non-partisan § 501(c) interest groups because they deal exclusively with issue advocacy and not on attempting to influence federal or state elections. Thus, the 527 Reform Act fails to eliminate a possible future loophole for soft money to influence national elections: the §501(c)(4) group (described infra).
Action on s.271 has stalled, however. After clearing the Senate Rules Committee in April, the legislation failed to appear on the schedule for floor action. Two similar bills, H.R. 513 and H.R. 1316, also stalled in the House of Representatives because House Republican leaders decided to postpone action on the issue. Neither the House nor the Senate is considering any current bills to regulate 527’s.
§ 527 Cases in District Courts have been Delayed
On September 17, 2004, the Bush-Cheney '04 election team filed a complaint in the U.S. District Court for the District of Columbia. This complaint challenged the FEC's failure to issue regulations interpreting the phrase “for the purpose of influencing a federal election” which appears in the statutory definitions of “contribution” and “expenditure.” In its plaintiff’s brief, the Bush-Cheney ’04 team requested that the court require the FEC “to commence proceedings to promulgate such regulations and, by extension, to address whether certain so-called 527 organizations are ‘political committees’ under the Act.”
Bush-Cheney ‘04’s complaint alleged that FECA defined a “political committee” as “any club, committee, association or other group of persons” that receives contributions or makes expenditures aggregating in excess of $1,000 during a calendar year. Under FECA, political committees must register and report with the FEC, and are limited in the sources and amounts of contributions they may make and receive. FECA further defines “contribution” and “expenditure” in terms of funds raised or spent “for the purpose of influencing any election for federal office.” Yet, 527’s are exempt from these provisions as they are not included in the definition of political committees.
In McConnell v. FEC, the Supreme Court expanded FECA’s standard “for the purpose of influencing” beyond merely “express advocacy.” According to Bush-Cheney ’04, the FEC failed to respond to the Court's decision by not adopting any regulations setting forth clear standards for when 527’s must register as political committees.
Bush-Cheney ’04 further alleged that the FEC failed to address this issue through the administrative agency rulemaking process. On March 11, 2004, the FEC published a “Notice of Proposed Rulemaking” that suggested a revision to the definition of political committee that would define 527’s as political committees under FECA. However, Bush-Cheney ’04 contends that the FEC passed fatally weak regulations. The FEC only promulgated rules on two collateral matters and “refused to issue any rule addressing the central question that had prompted the rulemaking in the first place: the definition of a political committee and the requirement for Section 527 groups to register as political committees.”
Bush-Cheney ’04 thus argues that the FEC’s failure to issue rules addressing the activities of 527’s is “arbitrary and capricious, an abuse of discretion and not in accordance with law.” Bush-Cheney ’04 seeks declarative remedies that the FEC’s failure to issue appropriate regulations implementing the statutory phrase “for the purpose of influencing a federal election” constitutes an unlawfully withheld agency action and an abuse of the FEC's discretion. In addition, Bush-Cheney ’04 wants the court to order the FEC to define political committees under the BCRA and FECA.
Even if successful, the case will not prevent 527’s from influencing the 2006 mid-term elections. The district court has scheduled oral arguments for December 13, 2005. This late date makes it extremely unlikely that the court will be able to rule in enough time for the FEC to create and implement new regulations before the 2006 mid-term Congressional elections.
Regulating 527’s will not stop the Raising of Soft Money
Campaign finance is analogous to a leaking dam: when repairs plug a leak in one location, water flows through another leak in a different part of the dam. In the campaign finance world, when regulations close one of soft money’s loopholes, another loophole opens. The recent negative public focus on 527’s, even with the apparent difficulty in implementing new regulations, has made 527’s less attractive for soft-money donors. In response to the several attempts at regulating 527’s, soft-money donors have begun utilizing a new vehicle for their donations.
The new vehicle for soft money-funded political advocacy is the § 501(c)(4) group, which is a tax-exempt group that is allowed to engage in unlimited lobbying. Groups organized under §501(c)(4) are not the educational, religious, or charitable groups that fall under the traditional §501(c)(3) tax-exempt status. Although the tax code classifies “C4’s” as social welfare organizations and not political organizations, C4’s may engage in partisan campaigning as long as the groups state that partisan campaigning is not the group’s “primary purpose.” C4’s are even more attractive than 527’s because donors are not required to disclose their identities. Thus, C4’s ensure anonymity by major, multi-million dollar contributors. Additionally, as long as the C4 does not receive contributions from unions or corporations, the C4 can claim a special status known as the MCFL exemption that allows the group to run issue advertising in the weeks immediately preceding a national election. The BCRA bans this tactic for many other groups.
The MCFL exemption refers to the United States Supreme Court decision in FEC v. Massachusetts Citizens for Life. There, the Court ruled FEC regulations could not prohibit, under constitutional reasons, a social welfare organization from engaging in express advocacy. As long as the social welfare organization was formed for the purpose of promoting political ideas, did not engage in business activities, had no shareholders or other persons who had a claim on its asset or earnings, and did not receive contributions from corporations and unions, it was able to advocate expressly for a candidate. The Court reasoned that these types of organizations received their financial support only from individuals who knew that the organizations would use those funds to support a particular ideological and political agenda. C4’s thus did not present the danger, which justified the general ban on corporations engaging in express advocacy, of a corporation using wealth accumulated from business activities to promote a political agenda.
Because of rulings such as these, C4’s may supplant and eventually replace 527’s as a means to channel soft money donations into advocating for or against a national candidate. However, C4’s still must have a primary purpose other than express advocacy for such candidates. C4’s could create their own political action committee, however, but those committees would be subject to the same restrictions currently existing within the BCRA.
Conclusion
Although 527’s had a prominent role in the 2004 election, 527’s may not be as prevalent and active in the future. Congress continues to debate legislation to curtail the ability of 527’s to raise unlimited soft money. The FEC may respond to political pressure and implement regulations that explicitly define 527’s as political committees, thereby subjecting them to campaign finance regulations. The federal courts even may hold that the FEC failed properly to draft regulations that would have included 527’s within the scope of the BCRA.
Anecdotal evidence suggests that this focus has resulted in 527’s not meeting their fundraising goals for 2005. For example, America Coming Together, a very active 527 organization during the 2004 election, raised only $4.4 million during 2005 as compared to the nearly $80 million that it raised in 2004. The visibility and importance of the 2004 election as compared to 2005 could explain part of the difference. Another likely explanation, though, is that the amount of attention that 527’s have created, even absent legislation has caused politically active donors to seek alternative means to raise vast amounts of soft money. The 2004 election may have been the year of the 527 group, but the ability of 527’s openly to raise soft money in the future is doubtful. Regulations, legislation, or judicial action eventually will plug that leak. If the goal of campaign finance reform is to ban or restrict all soft-money donations, the regulation of all 527 groups will only close one loophole. It remains open where the next leak will spring from the soft-money dam.
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