What's A 527, Anyway? A Primer

Swift Boat Veterans ad

In 2004, an independent group called Swift Boat Veterans for Truth produced a TV ad in which Vietnam vets challenged Democratic presidential candidate John Kerry's war record. Film still from ad hide caption

itoggle caption Film still from ad

A Brief History of Independent Money's Role In Political Campaigns

1907: Corporate money outlawed in federal elections following scandal in Theodore Roosevelt's campaign; ban is extended in 1940s to cover union treasury funds as well.

1980: Moral Majority leads effort to turn out Christian voters for Republicans.

1980: National Conservative Political Action Committee, an independent PAC, runs attack ads that help to unseat several Democratic senators.

1988: Racially charged "Willie Horton ad," paid for by Citizens United, hurts Democrat Michael Dukakis in the 1988 presidential contest.

1996: Independent groups launch personal attacks on various political candidates, calling it "issue advertising."

2000: Republicans for Clean Air, a 527 organization created by two backers of George W. Bush, attacks John McCain in Republican primaries.

Congress reacts by forcing all 527s to disclose donors.

2002: Independent groups proliferate in congressional races.

McCain-Feingold law bans big "soft money" to national party committees, pushing wealthy donors toward 527 and 501c groups.

2004: Liberal strategists create the 527s America Coming Together and Media Fund, which reap millions in donations but ultimately have little impact on election.

Americans for Jobs, a 527 supported by donors to Democratic presidential hopeful Richard Gephardt, airs ads that damage rival Democrat Howard Dean before the Iowa caucuses.

Low-budget 527 Swift Boat Veterans for Truth attacks Democrat John Kerry in a TV ad that draws major media coverage.

501(c)4 Progress For America scores with a powerful Sept. 11th-themed ad for President Bush.

2005: Federal Election Commission investigates and fines prominent 527s for violating election law.

Liberals, frustrated by ineffective 527s, start reorganizing.

2008: Democrat Barack Obama and Republican John McCain criticize 527s in terms that chill donors, leave organizers uncertain how to proceed.

The Secret Money Project is an ongoing investigation into the role that independent groups will play in this year's presidential and congressional races. The law does not hold these groups accountable in the same way as it does candidates or political parties. In many cases, the source of the groups' money remains secret. Here, a primer on the who, what, when, where and how of independent groups.

What's the Secret Money Project all about?

Modern presidential and Senate campaigns aren't just contests involving two (or three, or four) candidates. The political parties are active, of course, and beyond that, all sorts of interest groups want to play.

Some groups are ideological; others want legislative favors or policy breaks in Washington.

These groups all have one thing in common: The law doesn't hold them accountable in the same way it does candidates or political parties. In particular, most independent groups can raise any amount of money from any source, and it stays secret.

The goal of the Secret Money Project is to cover these outside groups with some of the same scrutiny that news organizations normally give to the candidates.

Do these outside groups have any influence?

Sometimes, and the wealthiest groups don't always have the biggest impact. Some examples: Environmental groups on the left, and anti-abortion groups on the right, are known for their ability to work the grassroots to find and mobilize voters.

In 2004, the relatively low-budget group Swift Boat Veterans for Truth produced a TV ad in which Vietnam veterans challenged Democrat John Kerry's accounts of his conduct during the war. Although Swift Boat Vets went on to raise more money for more ads, it was that initial spot that knocked the Kerry presidential campaign off its game plan.

But two of the biggest, best-financed groups in '04, America Coming Together and the Media Fund, were seen as failures. Both employed top Democratic consultants and drew millions of dollars from wealthy liberal donors. ACT did grassroots work. The Media Fund ran ads criticizing President Bush. Both groups disbanded after President Bush won re-election.

Who pays for all this?

In 2004, the most prominent funders were multi-millionaires or billionaires, such as financier George Soros for Democrats and homebuilder Bob Perry for Republicans.

But in 2008, the mega-rich have mostly stepped back from the limelight for various reasons. One notable exception is Sheldon Adelson, who is underwriting the conservative group Freedom's Watch. Other funders include unions – the Service Employees International Union (SEIU) stands out – and a new crop of somewhat less affluent hedge-fund managers and other investors.

Our knowledge is hampered by the lack of disclosure. Just two types of groups have to report their finances to the government: political action committees, under campaign finance laws, and Section 527 organizations, under the Internal Revenue Code. (More on the arcana of tax categories is below.)

Most outside groups avoid those two categories and have little or no financial transparency.

Do independent groups help candidates they favor?

Candidates never say that these groups help at all because it's politically prudent to stay quiet. But the Bush administration gave ambassadorships to some Republican donors who were prominent supporters of Swift Boat Vets and other outside groups.

This year both major party presidential candidates are trying to quash independent activity.

Democrat Barack Obama gave his fundraising team an edict to stay away from the outsiders. That's helped dry up money and seemed to put a couple of liberal start-ups out of business.

Republican John McCain is a long-time critic of outside groups; he wrote the law requiring disclosure by so-called 527 organizations. He renewed his attacks this year, but then said he couldn't be "a referee" for their messages. Some took that as a signal that as an under-financed candidate, he wouldn't mind the help.

Do these groups break the rules?

The law says independent groups can't coordinate with candidates, and lax rules have gotten stronger this year. But it doesn't take a genius to figure out what a candidate needs. Independent groups can do their own polls and devise advertising strategies to complement what the candidate and party are doing. And these outside groups can also make the political hits that candidates wouldn't want associated with their campaigns.

Are these the "527" groups that Obama and McCain talk about?

Some are, but most aren't. "527" has two meanings. In political shorthand (which includes Obama's and McCain's statements), the term "527" applies to almost all independent groups, especially those that go negative. But legally, the designation applies to relatively few groups under tax law.

Which leads us to the dreaded question about tax status...

Does tax status really matter?

Yes, especially in terms of raising and disclosing money.

A quick rundown of rules set by the IRS, Federal Election Commission, Congress and Supreme Court:

Sec. 527 political organizations can support or attack candidates. No contribution limits, but mandatory disclosure of donors to the IRS.

501c3 charities are limited to promoting issues and causes, not candidates. No contribution limits, no disclosure. Contributions are tax-deductible.

501c4 advocacy groups can engage in campaign politics. But under IRS rules, they can't use that as their primary purpose. No contribution limits, limited disclosure. Donors cannot deduct their contributions.

"MCFL" organizations are incorporated 501c4s that don't accept any corporate or union money. The designation comes from a Supreme Court ruling, known as Massachusetts Citizens For Life, which gives them special status: Although they're corporations, they can run ads promoting or attacking candidates within 60 days before an election, or 30 days before a primary.

Now, a hairsplitting complication added by the Supreme Court in a 2007 ruling, Wisconsin Right To Life: Corporations, unions, and 527s and 501c4s using corporate or union money can buy TV and radio ads that identify candidates during the 60-day pre-election period (or 30 days pre-primary). But the ads can only deal with the candidates in an issue-related context. So instead of saying that Senator Jones is "unfit to be president," an ad would have to say, "Call Senator Jones and tell him to stop opposing the apple-pie-and-motherhood bill." This ruling blurs the advantage of MCFL status, since it lets corporation- and union-financed ads onto TV during that pre-election period.

And finally, a couple of actors who aren't defined by tax status:

Political action committees, registered with the FEC, are "hard money" operations. Of all groups listed here, they have the most restrictions – no corporate or union contributions, no contributions exceeding $5,000 per election, mandatory disclosure. But restrictions on raising money mean freedom on spending it. PACs can explicitly advocate for or against a candidate, and aren't limited by proximity to election day.

Individuals, under a 1976 Supreme Court decision , can spend as much as they want, if they do it independently. But the spending counts as "independent expenditures," which must be disclosed to the FEC.

If all of these rules, exceptions and nuances make sense to you, law firms in Washington want to talk with you.

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