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Demystifying Political Fund Raising

by Morris Sullivan

This is the first presidential election to be held under the Bipartisan Campaign Reform Act (McClain-Feingold) legislation, which carried with it new campaign finance rules that ban national political parties from raising or spending unlimited soft money. Thus the 2004 presidential campaign was supposed to be relatively free of influence from big-buck soft-money influence.

This year, political contributions to candidates are limited to $2,000. However, independent political organizations are free to raise money in whatever amount they choose, depending on how they want to operate and what form they take. Most of these organizations have some nonprofit status, either under section 501 or 527 of the IRS code, and their activities determine whether or to what extent they may be regulated by the Federal Election Commission (FEC).

TrueMajority, for example, is a 501(c)3 nonprofit corporation. Such nonprofits cannot directly participate in a political campaign, but can educate people about political topics and promote a political agenda, as long as it is issue-specific, not candidate-specific.

However, TrueMajority also has a related political action committee (PAC). TrueMajorityACTION PAC can raise hard money to support a particular candidate. "Hard money" includes donations from individuals or PACs in amounts of $2,000 or less. Hard money can be used to pay for any campaign expense in a federal election, so it is also considered more valuable by the political parties than "soft money."

PACs have been in existence since the 1940s and have to register with the Federal Election Commission. They most often represent businesses or business interests (Microsoft PAC; National Board of Realtors PAC), labor (Teamsters PAC), or ideological interests (National Rifle Association PAC).

A PAC may collect money from the group's employees or members and make contributions in the name of the PAC to candidates and political parties that they feel promote and support their interests. Such committees can give $5,000 to a candidate per election (primary, general or special) and up to $15,000 annually to a national political party. They may receive up to $5,000 each from individuals, other PACs and party committees per year.

The so-called 527 organizations–named after Section 527 of the IRS code under which they operate–have caused most of the stir during this year's presidential campaign. These are tax-exempt organizations that can raise money for political activities such as voter mobilization drives, and to advocate for their pet issues.

Section 527 was added to the IRS code in 1974 to provide an exemption from federal income and gift tax for political organizations. In 1996, the IRS was asked whether issue advocacy organizations could qualify as a 527. The IRS determined they could, whether or not they were registered with the Federal Election Commission.

A 527 group may be a political party or political action committee that engages in activities expressly advocating the election or defeat of a federal candidate. Under those cases, however, it must file regular disclosure reports with the Federal Election Commission. If a 527 doesn't advocate the election or defeat of a particular candidate, then it doesn't have to file with the FEC.

As long as it avoids FEC-regulated activities, a 527 can raise unlimited "soft money." Soft money is contributed to the parties by individuals, companies or labor unions in amounts that may exceed the $2,000 donation limit on hard money. According to law, soft money can't be used to pay for candidate expenses, advertising or other ordinary campaign costs in a federal election.

However, soft money can advance a particular political campaign in a way that skirts the legal limits on how much money individuals or organizations are allowed to contribute to political campaigns. For example, it can pay for thinly veiled advertising that doesn't name a specific candidate by name, but focuses so narrowly on a particular issue tied to a particular campaign–the war in Iraq, for example–that it becomes obvious which candidate in what election the ad supports or opposes.

In essence, a 527 can raise unlimited amounts of money from virtually any source and use it for almost any political purpose, except as donations made directly to federal candidates. They operate tax-free, and avoid regulation by state or federal election authorities.

In 1998, new 527 organizations started running ads that attacked candidates but avoided using key words like "oppose" or "vote for," which would have subjected them to scrutiny from the FEC. The ads flooded the campaign trail, but there were no requirements to disclose who they were, where they got their money, or what their motives were.

In 2002, McClain-Feingold made most soft money contributions to political parties illegal. Consequently, many soft money-funded activities like issue-advertising and voter mobilization efforts have largely been taken over by 527 groups.

There are more than 20,000 active 527s. Most, however, don't seek to influence the presidential election, but have a narrower orientation: Citizens for a Better Fire District, for example, supports a measure to increase taxes for their Turner, Oregon fire department; or there's the Iowa First Foundation, which wants to bring about "civic betterments" for the people of Iowa.

Since the 2000 law that requires disclosure of their income and expenditures, 527s accounted for almost $450 million in political spending.

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527 Committees and Internet Activists in the 2004 Presidential Campaign