When election season rolls around, Americans are inundated with TV ads, brochures, and phone calls from controversial groups looking to affect a candidate’s campaign or shift the momentum of a piece of legislation.
Super PACs certainly fall in this category. They are the big brother of political action committees in that they can raise an unlimited amount of contributions from most entities — individuals, unions, and corporations — so long as they don’t expressly advocate either way for a candidate, or coordinate with a candidate’s campaign or a political party.
527s maintain their nonprofit status, according to IRS rules, through influencing the selection, nomination, election or appointment of candidates for a local, state, or public office, without expressly advocating the election or defeat of said candidates. The IRS includes presidential or vice-presidential electors as part of the exemptions.
However, the drawback of the 527 status is the disclosure of donor names. The IRS created the 527 designation specifically to permit organizations and committees to collect contributions for political activity. This means a 527 must report donors and contributions much like a candidate who files a campaign contribution report to state and federal election commissions.
Super PACs that apply for 527 status do so knowing their donor list is exposed , but accept greater freedom to engage in election activities and an unlimited funding potential. However, there is another route some Super PACs choose to go.
Some Super PACs choose 501(c)(4) nonprofit status, which is meant for organizations that primarily focus on social welfare. Like 527s, 501(c)(4)s can raise an unlimited amount of funds, but unlike its counterpart, 501(c)(4)s don’t have to disclose their donor lists.
It is an attractive option for Super PACs to funnel money from secret donors — known as “dark money.”
The 501(c)(4) tax-exempt status was created as part of the Tariff Act of 1913, which set aside tax-exemptions for “civic and commercial” organizations at the behest of the U.S. Chamber of Commerce.
Organizations that file as a 501(c)(4) must do one of two activities as its primary activity:
Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.
Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
In the case of conservative Super PAC American Crossroads, the group raises funds to support conservative policies, but it runs a 501(c)(4) known as Crossroads GPS which works to “educate, equip and mobilize millions of regular Americans” on issues such as immigration reform and education.
Crossroads GPS does not have to reveal its donors, but American Crossroads does. And, while both organizations seem similar in purpose, the 501(c)(4) status allows an organization to lobby and advocate for legislation that’s relevant to its cause.
501(c)(4)s maintain donor anonymity, but 527s are the vehicle to wield unrestrained political influence over the electoral and legislative processes.
Using this IRS classification, both organizations have raked in tons of money from wealthy and high influential donors in recent years. Roll Call reported that just within the first six months of 2013, 527s received $98 million in donations.
During the 2010 mid-election season, 501(c)(4)s beat out 527s by a 3-2 margin, spending $95 million in donations, according to the Center for Public Integrity.
Two key court cases have led to the frenzied spending from outside groups using either the 527 and 501(c)(4) status in recent years:
Buckley v. Valeo: struck down limitations on campaign expenditures, on independent expenditures by individuals and groups, and on expenditures by a candidate from personal funds
Citizens United v. Federal Election Commission: held that the First Amendment prohibits the government from restricting political independent expenditures by corporations, associations, or labor unions as had been expressed in the Bipartisan Campaign Reform Act, known as the McCain-Feingold Act.
Both cases opened the floodgates for the creation of SuperPACs, but also allowed 501(c)(4)s to spend funds on political races, even though the organizations cannot primarily engage in politics.
Add to the fact that certain lobbying efforts are covered under 501(c)(4) status, many political organizations have found an unrestricted avenue for significantly influencing election and legislation outcomes.
Additionally, some organizations have found a way to utilize both tax-exempt statuses to maximize election spending and grassroots activities.
Consider the gubernatorial recall and subsequent re-election of Governor Scott Walker. Outside donors from both conservative and liberal groups contributed several million dollars to either elect or defeat Walker.
However, many of the groups were configured in such as way as to exploit each of the organizational statuses. According to a report from PolicyMic, the Republican Governor’s Association, which is a 527, created a PAC called “Right Direction Wisconsin” in favor of Walker.
On the other hand, the liberal organization, Greater Wisconsin Committee, is a 501(c)(4) that runs the Greater Wisconsin PAC, and a 527 called the Greater Wisconsin Political Fund, which worked to replace Walker in 2012. The organization also reportedly received funding from the Democratic Governor’s Association, another 527 organization.
In any case, the classification of a political or issue advocacy group as a 527 or 501(c)(4) is just the beginning for certain organizations to exert influence over local, state, or federal elections and legislation. Even though 501(c)(4)s are not supposed to primarily engage in political activity, current legal precedent has created an ambiguous loophole that some organizations use to find a way around IRS limitations.