Washington Libertarian Review

Political commentary from the State of Washington with a libertarian perspective.

Thursday, January 13, 2005

Campaign financing revisited: 527s vs 501(c)s

In a recent post I linked to a very good article by a North Carolina libertarian about using 527 political organizations to avoid some rather onerous campaign financing laws. A few days later, while cleaning out my briefcase I came across "Bush's Secret Stash" by Nicholas Confessore, published in the Washington Monthly last May, which I had been intending to read for months, and which discusses the Bush campaign's use (they will deny it for reasons that will become apparent) of 501(c) organizations instead of 527s.

For those who wonder about such things, "501" and "527" both refer to provisions of the United States Tax Code (that's right, not the Elections Code) which deal with exemptions to the income tax code for certain types of activities. Section 501 deals mostly with presumptively non-political non-profits such as charities (such as the American Association of Retired People) or trade associations (such as the Building Industry Association of Washington) while section 527 deals explicitly with political organizations (such as MoveOn.org). For both the campaign financing "safe harbor" they offer is generally limited to "issue advocacy" as opposed to "candidate advocacy."

Between the two, the important distinction is in the nature of reporting that the code requires of each organization, and also the entity to which the report is made. 527s must report to both the FEC and the IRS, while 501(c)s must report solely to the IRS, because their "primary purpose" is understood to be apolitical.

Lest you think that the IRS could be a more troublesome overseer than the FEC, Confessore writes: "when it comes to checking up on nonprofits, the IRS makes the notoriously lax FEC look like a band of jackbooted thugs. Given that there are 1.4 million tax-exempt organizations in the United States, and enough personnel to inspect about 2,000 of them per year, the chance of a random audit is about one in 700. In practice, the IRS rarely investigates a nonprofit unless somebody files a complaint. And even then, privacy concerns constrain the IRS from revealing whether or not it has opened an investigation, and indeed whether or not it has come to any judgment."

Obviously, I do not advocate breaking the law. But the Internal Revenue Code does indeed contemplate that 501(c)s can engage in "some" issue advocacy, and there is no bright line. So, it seems to me at least (and without doing the legal research) that "good government" issues, such as for example fair and accurate elections, even though they may involve a particular political party or candidate, may well be the proper subject of a 501(c).


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