527 Organizations

by Michael Jablonski

Georgia State University

527 groups attained infamy in the 2004 election for highly controversial attack ads in battleground states. The 2004 election marked the first extensive appearance of what came to be known as “527s” in national elections. The name derives from a section of the Internal Revenue Code 1 exempting contributions to political organizations from federal income taxation.  Although most political organizations were taxed under section 527, the section number was used in the media to describe non-candidate and non-party organizations established to circumvent contribution and expenditure limits imposed by McCain-Feingold reforms that took effect in 2003.

The Bipartisan Campaign Reform Act of 20022, popularly called McCain-Feingold after the originators of the regulatory scheme, Sens. John McCain and Russ Feingold, prohibited unlimited contributions to political parties participating in federal elections. Big donors shifted contributions that had formerly been directed to political parties to non-profit corporations engaged in issue advocacy advertising.  Issue advocacy ads attacked or promoted positions taken by identified candidates but did not urge voting for or against the candidate. The distinction between issue advocacy and express advocacy in political advertising was created by the Supreme Court in the 1976 Buckley v. Valeo decision subjecting express advocacy to federal regulation while applying First Amendment protection to ads educating voters.3 Contributions regulated by federal law are called “hard money,” while all other funds constitute “soft money.” The 1974 Federal election Campaign Act limited the size of contributions to federal campaigns by individuals, Political Action Committees, and political parties; contributions from corporations, unions, and financial institutions were prohibited.  527s spent soft money that could no longer be directly contributed to political parties.

Large donors and corporations argued that they were not governed by McCain-Feingold restrictions on expenditures when advertisements avoided terms expressly urging the election or defeat of a candidate (“vote for”; “vote against”).  The Supreme Court in McConnell v. Federal Election Commission4 upheld provisions of McCain-Feingold allowing federal regulation of issue advocacy ads within 30 days of a primary or 60 days of a general election, The FEC issued a Notice of Proposed Rulemaking on March 11, 2004 to determine whether its definition of a regulated political entity should be extended to 527 groups not connected to a party or candidate, followed by contentious public hearings on April 14-15.5 The FEC avoided the issue by voting to delay a decision on regulation until after the 2004 election.

The delay, in the words of a joint press release issued by the Bush Campaign and the Republican National Committee, “has given the ‘green light’ to all non-federal ‘527s’ to forge full steam ahead in their efforts to affect the outcome of this year’s Federal elections and, in particular, the presidential race.”6 527s operated in the 2004 election as a mechanism to distribute primarily negative campaign messages, but without any restriction on the amount raised or spent. Swift Boat Veterans for Truth was formed as a 527 in 2004 by Col. Bud Day, retired Rear Admiral Roy Hoffman, and John O’Neill, a Houston attorney who had commanded swift boats, among others. The group released four television ads critical of Sen. Kerry during the 2004 campaign. The first, called “Any Questions?”, was released in  in three battleground states on May 4, 2004. The spot presented 13 veterans who claimed to have known John Kerry in Vietnam, characterizing him as lying, dishonest, and lacking leadership skills. The ad concludes with one veteran saying, “John Kerry cannot be trusted.”7  The remaining ads attacked Sen. Kerry’s participation in Vietnam Veterans Against the War, disputed his narrative about an ambush on the swift boat, and claimed he renounced his military medals.

MoveOn.org, a liberal group, began as a bipartisan effort protesting the impeachment of Pres. Clinton in 1998. In 2004 it fielded a multitude of ads devised by Hollywood directors (John Sayles, Rob Reiner) featuring stars (such as Scarlett Johansson and Matt Damon), but also crowd-sourced spots through a nationally-promoted contest asking ordinary people to develop attack ads. More than 1500 people submitted entries to the “Bush in 30 Seconds” contest. The contest winning entry, as judged by visitors to the website, was used as paid political advertising by the organization.

Both Swift Boat Veterans and MoveOn.org are examples of the way in which 527s benefited from being tax-exempt organizations not subject to McCain-Feinberg restrictions on political donations and expenditures.  Big donors had been limited to contributions of not more than $1000 per election cycle to candidates before McCain-Feingold, but they could contribute unlimited amounts to political parties. McCain-Feingold doubled the individual candidate contribution limit while applying the limits not just to candidates, but also to political parties.  Big donors and corporations could no longer contribute large amounts of money to parties. George Soros, the financier dedicated to defeating George Bush, contributed $2.5 million to MoveOn.org, as well as $7.5 million to another 527, America Coming Together.8 The Swift Boat Veterans ad blitz was boosted by $9.4 million in contributions from Perry Homes, Contrain Corp., and BP Capital, three donors prohibited from participating directly in federal campaigns because of the ban on corporate money.9  Big donor contributions like this constituted “hard money” because they exceeded the amount that could be directly contributed to a campaign or a party.

527s collectively raised as much as $430 million during the 2004 election, an increase of 150% from the 2002.10 The number of 527 groups increased 63% between 2002 and 2004. “Many of the groups were barely-disguised surrogates for the political parties run by political professionals closely associated with the political parties,” according to Public Citizen. “Many of their donors were the major soft money donors to the political parties prior to BCRA.”11 527 advocacy was supposed to be independent of political campaigns but several of the groups maintained ties to candidates.   Kerry’s campaign, for example, employed a former special projects director at MoveOn.org, Ken Exley, as director of online communications. Ben Ginsberg resigned as counsel for the Bush campaign after discovery that he had represented Swift Boat Veterans for Truth and Karl Rove contributed financially. The Republican National Committee filed a complaint with the FEC on May 5, 2004 accusing four 527s of coordinating with the Kerry campaign. Democrats filed FEC complaints on August 20, 2004 charging coordination between Swift Boat Veterans for Truth and the Bush campaign.

527s supporting Democratic issues raised four times more money than groups supporting Republicans, although Republican groups spent three times more on radio and TV in the final weeks.12

Soft money that McCain-Feingold sought to exclude from campaigns flowed to 527 groups for advertising in battle ground states like Ohio, Pennsylvania, and Florida. According to Public Citizen, 52 people gave 44% of all the money collected by 527s in 2004, with 24 of them responsible for 35% of the entire amount of 527 funding.13 Peter Lewis, an insurance executive, donated $3 million to America Coming Together (ACT) to “lead the fight against George Bush’s radical right-wing agenda.”14 George Soros gave up to $23 million to nine 527s, including as much as $2.6 million to the MoveOn.org Voter Fund.15 Three Texas oilmen, including T. Boone Pickens, contributed $10.5 million collectively to Swift Boat.

While 527s prominently raised contributions from multimillionaires, they also raised significant money from small donors. Contributions of under $5000 amounted to slightly more than $15 million of 527 funds in 2004.16 ACT, for example, mined a small donor database of 150,000 individuals that brought in $11 million in contributions. ACT was also distinctive among 527s because it concentrated on registration and voter turnout rather than attack advertising.17 MoveOn.org formed a PAC in 2004 to participate in direct political activity such as voter registration, get out the vote, and canvassing.18

In response to the activities of 527s, the FEC issued new rules in August 2004 requiring 527s to register as a “political committee” with the FEC if it raised money to expressly advocate the election or defeat of a candidate. Political committees would be required to adhere to regulations requiring that election expenditures be paid in hard money. They would also be prohibited from accepting unregulated soft money. Moreover, any 527 engaging in broadcast advertising would be required to pay half of its administrative expenses in hard money. The new regulations, however, would not take effect until after the 2004 election.19  The 2004 election cycle, as a result, remains the only one in which 527s operated openly as unregulated entities. The new regulation, when combined with settlement of complaints against 527s for actions in 2004, severely curtailed the use of hundreds of millions of dollars to purchase advertising in derogation of campaign laws.20

Resolution of the complaints filed against 527s did not come quickly. None of the charges of illegal political activity by 527s that had been filed with the FEC were resolved until well after the election. Although the FEC initiated rule-making proceedings to regulate 527s in March 2004, it did not adopt regulations until after the 2004 election.  The refusal of the FEC to provide guidance to 527s as to permissible political activity meant that the agency decided which activities were prohibited on a case-by-case basis. Investigations did not start until after an alleged violation occurred, which meant that attack advertising had commenced by the time the FEC looked at it.21

It took years for the FEC to resolve the complaints. It was not until 2006 that the FEC concluded cases against 527s for their activity in the 2004 election cycle.  Swift Boat Veterans for Truth paid $299,500 to settle allegations that the attacks on John Kerry constituted express advocacy regulated under McCain-Feingold. The FEC found that 90 percent of the organization’s disbursements were targeted in battleground states and that the $9.4 million spent on 5 television ads and $1.1 million on mass mail expressly advocated the defeat of John Kerry. While the FEC did not find that MoveOn.org expressly advocated the election or defeat of a clearly identified federal candidate, it did engage in express advocacy through 25 television ads bought in battleground states for $14.6 million. The ads criticized the leadership of George Bush, using phrases like “Face it. George Bush is not on our side”.  MoveOn.org paid   $150,000.  The League of Conservation Voters was found to have broadcast radio and television ads, and it distributed printed materials through canvassers, expressly advocating the defeat of Georgia Bush and the election of John Kerry. It was fined $180,000.22

The Club for Growth settled the lawsuit filed against it by the FEC in September 2007 for $350,000. The suit charged that the major purpose of Club for Growth was to influence federal elections, which it did by candidate research, polling, TV ads, and other communications identifying specific candidates. Since it received and spent more than $1000 for this purpose, it should have registered with the FEC as a political organization. At the time, the settlement was the largest ever obtained by the FEC for a case in litigation.23

Other 527 organizations paid fines for activity later adjudged to constitute express advocacy: Environment2004 ($16,000), Empower Illinois Media Fund ($3,000), Progress for America Voter Fund ($750,000), America Coming Together ($775,000), National Association of Realtors ($78,000).24

1 88 Stat. 2108 (1975), codified as IRC § 527, 26 USC § 527 (1994).

2 116 Stat. 81, Pub. L. 107-155 (2002).

3 424 U.S. 1 (1976).

4 540 U.S. 93 (2003)

5 “Political Committee Status” NPRM, 69 Fed.Reg. 48. http://www.fec.gov/pdf/nprm/political_comm_status/04-5290.pdf

6 “Joint Statement by Bush-Cheney Campaign Chairman Marc Racicot and RNC Chairman Ed Gillespie on Today’s FEC Ruling on 527 Groups,” May 13, 2004. http://www.gwu.edu/~action/2004/money/bushrnc051304st.html.

7 “Any Questions?” Script at http://www.swiftvets.com/script.html.  Accessed September 21, 2014.

8 “George Soros Contributions to 527 Organizations, 2004 cycle,” OpenSecrets.org. http://www.opensecrets.org/527s/527indivsdetail.php?id=U0000000364&cycle=2004

9 “Swift Vets & POWs for Truth 2004 Contributors,” OpenSecrets.org, http://www.opensecrets.org/527s/527cmtedetail_contribs.php?ein=201041228&cycle=2004

10 OpenSecrets.org, “527s: Advocacy Group Spending in the 2010 Elections,” n.d., http://www.opensecrets.org/527s/index.php.  Public Citizen estimated 527  spending at $405 million. Public Citizen, “The Last Major ‘Soft Money’ Loophole: Section 527 Groups in the 2004 Federal Elections,” n.d., https://www.citizen.org/documents/TheLastSoftMoneyLoophole.pdf.

11 Public Citizen, “The Last Major ‘Soft Money’ Loophole: Section 527  Groups in the 2004 Federal Elections.” http://www.citizen.org/documents/TheLastSoftMoneyLoophole.pdf

12 Public Citizen, “The Last Major ‘Soft Money’ Loophole: Section 527  Groups in the 2004 Federal Elections.”

13 Public Citizen, “The Last Major ‘Soft Money’ Loophole: Section 527  Groups in the 2004 Federal Elections.”

14 Benjamin S. Feuer, “Between Political Speech and cold, Hard Cash: Evaluating the FEC’s New Regulations for 527 Groups,” 100 NW. U. L. Rev. 925 at 928 (2006).

15 Sablatura, “Reformation of 527 Organizations: Closing the Soft Money Loophole Created by the Bipartisan Campaign Reform Act of 2002,” 814.

16 Weissman, Steve and Ruth Hassan, “”BCRA and the 527 Groups” in Malbin, The Election After Reform: Money, Politics, and Bipartisan Campaign Reform Act (Rowman & Littlefield, 2006).

17 Sara Tindall Ghazal, “Regulating Nonconnected 527s: Unnecessary, Unwise, and Inconsistent with the First Amendment,” Emory LJ 55 (2006): 193-228, at 209.

18 2004 MoveOn PAC Action Archives, http://pol.moveon.org/archive/.

19  Benjamin Feuer, “Between Political Speech and Cold, Hard Cash: Evaluating the FEC’s New Regulations for 527 Groups.” Northwestern University Law Review, 100 (2), 925-966 (2006).

20 Paul S. Ryan, “527s in 2008: The Past, Present, and Future of 527 Organization Political Activity Regulation,” Harvard Journal on Legislation 45 (2008): 471–506.

21 Daniel, “527s in a Post-Swift Boat Era: The Current and Future Role of Issue Advocacy Groups in Presidential Elections.

22 Paul S. Ryan, “527s in 2008: The Past, Present, and Future of 527 Organization Political Activity Regulation,” Harvard Journal on Legislation 45 (2008): 471–506. Kate Phillips, “527 Smackdown”, New York Times blog “The Caucus,” December 13, 2006. http://thecaucus.blogs.nytimes.com/2006/12/13/527-smackdown/

23Club for Growth Agrees to Pay $350,000 Penalty for Failing to Register as a Political Committee,” Federal Election Commission, September 5, 2007. http://www.fec.gov/press/press2007/20070905cfg.shtml

24 Ryan, “527s in 2008: The Past, Present, and Future of 527 Organizations Political Activity Regulation”.