Posted November 21, 2006 by Meredith McGehee

The 527 Loophole Continues

Harry Reid the new Senate Majority Leader has expressed an interest in reining in 527 groups — a pursuit that will prove unpopular with many of his colleagues.  The independent groups came in all shapes and sizes with a variety of agendas and many played pivotal roles in the midterm elections. 

Recent news stories revealed that Adam Rose, a Westchester real estate developer was one of the main funders behind a series of attack ads run against incumbent Congresswoman Sue Kelly in New York’s 19th congressional district.  Rose, unhappy with Representative Kelly’s vote in favor of a constitutional amendment to ban gay marriage, was able to funnel a half million dollars to a group attempting to unseat her.  A series of harsh attacks ads, funded largely by Rose, ran on radio and television stations around the district in the final weeks of the race. The ads, according to one story, were run through an independent 527 group called Majority Action and “were basically calling her a coddler of pedophiles,” for her role on the page board in the Mark Foley scandal.   Kelly ultimately lost by a mere two percentage points.

Majority Action is just one example of 527 organizations playing an increasingly important — and corrupting — role in politics.  The term “527 organization” refers to groups claiming tax exempt status as “political organizations” under section 527 of the federal tax code, but refusing to register as “political committees” subject to contribution restrictions and rigorous disclosure under federal campaign finance laws.

Earlier this fall, my organization the Campaign Legal Center, a nonprofit that works to uphold campaign finance laws, filed a complaint at the Federal Election Commission (FEC) against the Democratic-leaning Majority Action, as well as against a Republican-leaning 527 group called the Economic Freedom Fund.  The heart of the complaint was that these groups are violating campaign finance laws by failing to register as “political committees” and refusing to abide by contribution restrictions and disclosure requirements applicable to such political committees.

While 527 groups are often used to evade the contribution limits in current law, this Rose/Kelly situation reveals other problems associated with 527s.  The fact is, Mr. Rose could have spent his $500,000 to run these exact same ads himself as an independent expenditure.  But the benefits of using a 527 organization, rather than going the independent expenditure route, are several.  The first is the ability to give money anonymously, at least until the election is over — the tax law disclosure requirements are not nearly as rigorous as those in campaign finance laws.  The last pre-election disclosure report required by section 527 of the tax code covers only money raised or spent through the 20th day preceding the election; any funds raised or spent within the most critical final 20 days of an election are not reported by a 527 organization until 30 days after the election.  By contrast, federal campaign finance law requires that any independent expenditure exceeding $1,000 made within 20 days of an election must be reported within 24 hours.

Second, by using a 527 organization, Rose saved a great deal of money that he otherwise would have had to spend to develop and disseminate a message by himself.  The Majority Action ads paid for with Rose’s funds likely reflected expensive polling, focus groups and/or consultant expertise that Majority Action had already invested in.  Routing money though a 527 avoids substantial costs and hassles that independent spenders face when they run ads on their own.

Thirdly, the more money raised and spent by a 527 organization, the more political clout the people running the 527 organization wield with an official they help elect — so 527 operators have an incentive to encourage would-be independent spenders to instead contribute to the 527 organization.  This leveraging of huge contributions dramatically increases the potential threat of corruption of the candidate who benefits from the 527 spending.

Lastly, 527 organizations can and do spend corporate and union treasury funds on political activities — evading the federal law banning corporate and union contributions, independent expenditures, and electioneering communications.

So, there are benefits to both the funder and the 527 organization, when a funder decides to donate to a 527 rather than make an independent expenditure as an individual.

It is not hard to imagine that the impact of the “pedophile-friendly” ads would have been somewhat different if the press were immediately aware where the bulk of the funds were coming from to pay for the ads.  That is why the 527 loophole continues to be a disservice to candidates and to the voters, and should be closed by the FEC (which thus far has been missing in action on this problem), or if necessary, by Congress.