November 13, 1997 | Read Time: 3 minutes
A small number of non-profit groups have found a controversial way to get around the strict limitations on electioneering that the federal government places on charities and advocacy organizations.
The organizations are relying on a pair of Internal Revenue Service rulings (Letter rulings 9725036 and 9652026) that allowed two advocacy groups set up under Section 501(c)(4) of the Internal Revenue Code to form separate political funds to finance voter-education initiatives under Section 527 of the tax code. Section 527 is the same part of the tax code that governs political parties and political advocacy committees.
Advocacy groups are allowed to do more lobbying than are charities, which are classified under Section 501(c)(3), but they have often felt stifled in their abilities. Unlike charities, they cannot offer donors the right to claim a deduction for their gifts, so they sometimes have fund-raising difficulties. To be able to attract donors and still do advocacy work, many organizations have two branches — one classified as a charity and one as an advocacy group — and then divide up their finances and programs in accordance with restrictions on the two types of groups. But neither kind of organization is allowed to devote all of its efforts to political work and must still avoid overtly partisan ties.
The new I.R.S. rulings are seen by some observers as a way to get around the disadvantages of being an advocacy group — the restriction on partisan activity — while still maintaining powerful benefits. As some lawyers and non-profit groups interpret the rulings, Section 527 groups can offer big donors a break on gift taxes, which contributors would have to pay if they provided an advocacy organization $10,000 or more in a year. (Donors can give $600,000 to Section 527 organizations before the gift tax takes effect.) What’s more, say some non-profit lawyers, just like charities and advocacy groups, such organizations do not have to report the names of their contributors to the federal government or any other entity.
There is a catch for the Section 527 organizations. While they don’t have to worry about the I.R.S. stringently regulating their political activities, they do have to consider another federal regulator — the Federal Election Commission. Some observers say groups that have changed from advocacy-group status to Section 527 should be subject to the commission’s rules limiting or prohibiting certain kinds of political work. The commission also expects to be told the names of donors.
But organizations that have adopted the Section 527 classification say that is not the case: They say as long as they don’t explicitly promote a candidate or party, they don’t have to submit to the commission’s regulation.
Some experts see the new Section 527 approach as a way to prevent disclosure of political contributions. But others disagree.
Among them are: Citizens for Reform and Citizens for the Republic Education Fund. The two groups raised $2-million to $3-million to pay for advertisements in 1996 Congressional races.
Mark Braden, a Washington lawyer who has worked with those organizations, said adopting the 527 status was not intended as a way to escape scrutiny of both the Internal Revenue Service and the Federal Election Commission. “I’m not sure there’s any advantage” to the 527 status, Mr. Braden said. “The reality, from my point of view, is, What’s the difference? You’re filing a different form number.”
