This topic is monitored by Moritz Law Professor Donald B. Tobin
Analysis and Opinion: 527 Reform Act of 2004
Senators McCain, Feingold, and Lieberman have introduced the 527 Reform Act of 2004. The bill attempts to codify proposals before the FEC to regulate some 527s as political committees. (See our proposal).
The bill defines a political committee as a "committee, club, association or other group" that receives contributions or makes expenditures over $1,000 and has as its major purpose "the nomination or election of one or more candidates." See sec. 2(a). With regard to the expenditure requirement applicable to these "major purpose" groups, the bill defines expenditure as anything of value expended for communication that "promotes, supports, attacks, or opposes a candidate for that office or a political party." Also, various activities that are coordinated with a candidate will be an expenditure. Thus the bill avoids the perils of the express/issue advocacy distinction that is present when considering the definition of expenditure in other contexts. If adopted, it would be fairly clear, what expenditures will cause an organization to meet the $1,000 threshold.
Regarding the "major purpose" requirement, the bill stipulates that "an organization described in section 527," and does not meet certain exceptions, by definition will have as its major purpose the nomination or election of one or more candidates. The bill specifically excludes 527s that are exclusively engaged in non-federal elections. It also excludes 527s that are attempting to influence: 1) the nomination, election, or appointment of candidates to a non-federal office, 2) state ballot initiatives, or 3) the selection appointment, nomination or confirmation of individuals to a non-elected office. See sec. 2.
Thus the basic point of the bill is to regulate 527s engaged in federal elections as political committees. So how does this all work?
First, the question is whether an organization is "an organization described in 527." Section 527 political organizations are entities "organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function." I.R.C. 527(e)(1). The term "exempt function" means activities undertaken to influence an election. Section 527 organizations, thus, by definition, have influencing an election as their primary purpose.
What is particularly interesting about the language in the bill is that it is not clear that the bill applies to just 527 organizations. The bill refers to "an organization described in section 527." Presumably, this means that as long as a group fits the description of one defined in section 527, then it automatically meets the major purpose test in this bill. In other words, a group may claim that it is not a 527, but still be "an organization described in section 527." Such an organization would be regulated under this bill.
So presumably a 501(c)(4) that was improperly engaging in election advocacy as its major purpose could be subject to the act. It could be an organization "described in section 527" For example, a 501(c)(4) that claimed to be a social welfare organization but in fact engaged in sufficient electioneering activity to have as its primary purpose influencing an election would be an organization described in section 527. A 501(c)(4) or (c)(3) that was complying with the law, however, would not be subject to the rule.
Some have argued that this may apply to 501(c)(4)s and (c)(3)s that do not cross the primary purpose threshold. We doubt that this is so. No 501(c)(4) that is operating legitimately according to its tax-exempt status has as its primary purpose engaging in electioneering activities. And if it does, then it makes sense to treat such an organization in the same manner as other organizations that have influencing elections as their primary purpose. It is only those (c)(4)s or (c)(3)s that are pushing the envelop and violating their tax status that might be subject to regulation.
In sum, we applaud the bill's effort to regulate federally focused 527s as political committees and to do so in a way that does not let (c)(4)s and (c)(3)s off the hook just because they have self-selected a different tax status. We note, however, there remains ambiguity in the operative "primary purpose" term. Equating the "major purpose" test in federal campaign finance law with the "primary purpose" test in federal tax law, as the bill does, does not eliminate ambiguity – since tax law has not completely clarified when a group crosses the "primary purpose" line. Consequently, as this bill moves through Congress, we hope that its sponsors will consider adding clarifying language that would specify in more detail what activities would cause a group to have influencing a federal election as its "primary purpose." One place to look for such clarifying language would be last month's proposal from the FEC's General Counsel, which was regrettably rejected at the Commission's August 19 meeting. As we have explained elsewhere, that proposal carefully differentiated between 527s and (c)(4)s in identifying what practices would cause each kind of group to be regulated as a political committee under FECA.