What is a 527?
Congress added section 527 to the Internal Revenue Code in 1975, to clarify the tax status of political committees. Their tax status was unclear because there had never been anything in the tax code to tell the Internal Revenue Service (IRS) how to treat them. In practice, the IRS already treated political committees as tax-exempt organizations by not requiring them to pay income taxes on the contributions they received. The people who made those contributions had to pay taxes, though, because the IRS treated political contributions as gifts, which were covered in the tax code.13
Section 527 applied only to political committees and ensured that contributions to them would not count as taxable income if they were solicited for the "exempt function" of electioneering, defined as influencing the election of candidates to public office. The section also provided that contributions to 527 political committees would no longer be treated as taxable gifts (but neither would they be treated as tax-deductible gifts).14
Candidate committees, party committees, and PACs registered with the IRS as 527s and with the FEC as political committees. Section 527 was passed just months after the 1974 FECA amendments, and in those pre-Buckley days Congress assumed that 527s would always be subject to those amendments, raising and spending hard money and filing disclosure reports with the FEC.
Congress was overly optimistic. Less than a year after section 527 was added to the tax code, the Supreme Court's Buckley decision significantly restricted the scope of FECA regulations. The 1974 FECA counted issue advocacy as an activity under the exempt function of electioneering, meaning that organizations doing issue ads had to register with the FEC as 527 political committees and file disclosure reports. Then the Buckley court said issue advocacy was not political, that only express advocacy counted as political spending.15
But if issue advocacy could not be regulated by the FECA because it was not political, did it still count as an exempt function of electioneering under the tax code? That question remained unanswered for another twenty years.
The answer came in the late 1990s, after the Sierra Club and other tax-exempt groups went to the IRS with another definition of issue advocacy. They argued that, whatever the Supreme Court had said in Buckley, their issue ads were electioneering because they were intended to influence the outcome of elections. The IRS agreed and retained issue advocacy as an exempt function under the tax code.16
The IRS ruling opened a regulatory gap between the FECA and the tax code. New 527s formed to make issue-advocacy expenditures enjoy the same tax-exempt status as older ones. But these new "stealth PACs" were not counted as political committees under the FECA, so they did not have to register or file disclosure reports with the FEC and could raise money outside FECA restrictions on the size and sources of contributions.
In 2000, Congress made it harder for 527s to evade disclosure by requiring them to report their donors to the IRS. That fell far short of the FECA requirement, though, as the IRS had no way to make those reports public. Congress took a bigger step in 2002 by passing BCRA, which expanded the FECA's regulation of campaign spending. BCRA's new "electioneering communications" category included the express advocacy the FECA had always covered, and added sham issue ads that aired within thirty days of a primary election and within sixty days of a general election. All groups making electioneering communications, even those that were not registered as political committees, had to finance their ads with hard money and had to file disclosure reports with the FEC.17
The tightened regulations aside, 527s were still the best way to take the place of party soft money in 2004. Sham issue ads did have to be financed with reportable hard money when aired within BCRA's thirty- and sixty-day reporting windows, but nonreportable soft money could still pay for them outside those windows. And some 527s made very large expenditures just before the reporting windows in the 2004 presidential primaries.18