Elections Commissions Step Up Enforcement of 527s

Maria J. Armstrong
Bricker & Eckler LLP
February 2007

In recent years, both the United States Congress and the Ohio General Assembly enacted sweeping campaign finance reforms that aimed to limit political contributions and regulating the use of unrestricted funds in political messaging. The enactment of the Bipartisan Campaign Reform Act (“BCRA”) at the federal level, as well as the Amended Substitute House Bill 3 at the state level, placed greater restrictions on direct political contributions. By presenting a new definition and regulation of “electioneering communications,” these laws restrict the time and purpose for usage of the “soft money” funds, which are not limited or restricted under election law.

Despite these new regulations, various interests and political supporters found other ways to disseminate their message. Numerous “527 organizations” were created to engage in political messaging at both the state and federal level and have been very active. In response, both the Ohio Elections Commission (“OEC”) and the Federal Elections Commission (“FEC”) have recently reviewed activity by these types of groups and taken action to regulate them.

What is a 527?

From a legal perspective, a 527 organization is a “political organization created to receive and disburse funds to influence or attempt to influence the nomination, election, appointment or defeat of a candidate for public office.” These organizations are named for the provision in the Internal Revenue Code, 26 U.S.C. §527, that grants them tax-exempt status. Political parties, campaign committees, political action committees, and candidate funds all get tax-exempt status by operation of Section 527 and are all technically “527 organizations.”

As used in common parlance, 527s are known as political organizations that operate to influence elections and enjoy a tax-exempt status, but avoid the reporting and oversight of the FEC or OEC. The Internal Revenue Code does not regulate “political contributions,” and 527s can accept “donations” of any amount from any source, including foreign contributors and corporations under the tax laws. However, when a 527 engages in certain political activity, it triggers the various election laws. The Internal Revenue Service regulates all 527s, but not all 527s are regulated by the Elections Commissions.

At both the state and federal level, certain activity triggers the application of election laws by requiring registration and reporting as a political action committee (“PAC”) under Ohio law, or as a separate segregated fund (“SSF”) under federal law. If the organization engages in activity that qualifies it as a PAC or SSF, it remains a tax-exempt 527 organization, but also falls within the purview of the FEC, the OEC, or both. In addition to registration and reporting requirements, PACs and SSFs are required to abide by contribution and expenditure limits and cannot accept corporate or foreign money.

A fact-specific analysis applied on a case-by-case basis determines whether a certain organization must register as a PAC or SSF. In general, if the major purpose of an organization is to influence an election, that organization is a PAC or SSF and is subject to regulation by the FEC and/or the OEC. The FEC or OEC can examine an organization’s political and non-political expenditures, the organization’s activities, its stated goals, and its solicitation material, among many other things, to determine whether or not the organization qualifies as a PAC or SSF.

Enforcement Activities Against 527 Organizations

Both the OEC and the FEC recently cracked down on groups that tried, unsuccessfully, to operate outside the election laws. At the state level, the OEC recently resolved a case involving a group, Citizens for a Strong Ohio, and its activities related to a statewide judicial race. In that case, the OEC reviewed certain television commercials and concluded that the organization had crossed the line into partisan political activity. Despite arguments that the messages presented by Citizens for a Strong Ohio were issue-based, non-partisan, and protected by the First Amendment, the OEC ruled that the organization operated as a PAC and should have registered and reported as such. The OEC also found that Citizens violated Ohio law by exceeding campaign contribution and expenditure limits applicable to PACs.

At the federal level, the FEC recently concluded several major investigations of 527 organizations including Swift Boat Veterans, POWs for Truth, League of Conservative Voters 527 and 527 II, and MoveOn.org Voter Fund. In each case, the FEC reviewed statements that the organizations made to prospective donors, the public statements that the organizations made on their website and in other literature, the organizations’ planning documents, and statements made on television and through other media. For all three 527s, the FEC found that the organization’s major purpose was to influence federal elections, and ruled that each should have registered and reported with the FEC as an SSF. The three organizations paid penalties to the FEC of $299,500, $180,000, and $150,000 respectively.

On January 31, 2007, the FEC issued a Supplemental Explanation and Justification to explain federal rules regarding any group that may influence federal elections without complying with federal election law. 11 C.F.R. Part 100. The Explanation makes clear that any group whose major purpose is to influence federal elections must register as an SSF and abide by all applicable campaign finance restrictions. The FEC made clear that federal elections regulations and the FEC’s enforcement authority were not limited to 527 organizations, noting that any organizations (including a 501(c) organization) that operates to influence an election can be subjected to FEC investigation and enforcement of election laws.

Conclusion

Political activity of all types is drawing more scrutiny now than ever before. With recent enforcement activity at the state and federal level, the ability to operate as a 527 and remain unregulated by election laws has diminished significantly. Any entity that wishes to engage in political or quasi-political activity should carefully consider the state and federal election laws and tax laws. Whether it involves hard dollars and direct candidate contributions, or soft money and political speech, the organization should be aware of the policies when forming the group and disseminating its message to the public.