Section 527 was added to the IRC in 1975 to provide tax-exempt status to political organizations , as defined in that statute. At that time, it was generally thought that, with respect to groups participating in federal elections, political organizations correlated directly with political committees as labeled by and operating under federal election law. In 2000, however, it came to light that some groups engaged in federal-election-related issue advocacy were claiming exempt status under IRC § 527 while not being regulated under the Federal Election Campaign Act (FECA). The Internal Revenue Service (IRS) did not generally require these organizations to file tax returns or pay taxes. That interpretation permitted regulation of only those communications containing express advocacy (i.e., communications containing explicit terms urging the election or defeat of clearly identified federal candidates). By avoiding such terms, groups arguably could promote their views and issue positions in reference to particular elected officials, without triggering the disclosure and source restrictions of FECA. Bipartisan Campaign Reform Act of 2002 (BCRA)

On March 27, 2002, H.R. Without amending FECA's definition of "political committee," "expenditure," or "contribution," Title II created a new term in federal election law, "electioneering communications"—political advertisements that refer to clearly identified federal candidates, broadcast within 30 days of a primary or 60 days of a general election. Groups wishing to engage in these activities and still avail themselves of the unlimited sources of money no longer available to political parties may qualify for tax-exempt status under IRC § 527. The Bush-Cheney campaign filed its own lawsuit to block activities of some prominent 527 groups during the 2004 elections; both the House Administration and Senate Rules and Administration Committees held hearings in 2004 and 2005; both committees reported bills to regulate 527 organizations under FECA in the 109 th Congress; and the House passed such legislation on two occasions in 2006. BCRA supporters have tended to see the enormous amounts of money raised and spent in recent elections as a result of what they argue is the FEC's failure to enforce existing law, and they have also launched an effort to replace the agency with what they see as a more effective enforcement body. BCRA critics, however, insist that what has occurred has been the predictable result of the ban on soft money activity by the national parties, thus redirecting massive amounts of unregulated money to outside groups that are less accountable to the political system. The fourth alternative consisted of two "sub-alternative" tests: Alternative 2-A would consider that all 527s have the major purpose of nominating or electing federal office candidates, with five exceptions: (1) if the 527 is the campaign organization of an individual seeking nomination, election, appointment, or selection to a non-federal office; (2) if the 527 is organized solely for the purpose of promoting the nomination or election of a candidate to a non-federal office; (3) if the 527 is a group of persons whose election or nomination activities relate solely to elections where no candidate for federal office appears on the ballot; (4) if the 527 operates solely within one state and, pursuant to state law, must file financial disclosure reports with the state government, showing all activities within that state; or (5) if the 527 is organized solely for the purpose of influencing the nomination or appointment of individuals to a non-elected office or to political party leadership positions. These bills included H.R. H.R. Two other 527 bills have also been introduced in the 110 th Congress.
Several prominent groups organized under § 527 of the Internal Revenue Code (IRC) were prominent players in the 2004 presidential election, raising and spending approximately $435 million and being widely seen as having an impact on the outcome of the race. Yet, some so-called "527" organizations remain outside the purview of federal election law. Section 527, added to the IRC in 1975, provides tax-exempt status to federal, state, and local political organizations. At first, it was generally thought that, with respect to federal election activities, political organizations correlated directly with political committees as defined under the Federal Election Campaign Act (FECA). It became clear by 2000, however, that this was not necessarily true because prevailing judicial interpretation of Supreme Court precedent has permitted FECA regulation of only those communications containing express advocacy (i.e., explicitly urging the election or defeat of clearly identified federal candidates). By avoiding such terms, groups could arguably promote issue positions in reference to particular federal elected officials without triggering FECA's disclosure, contribution limits, and source restrictions. Still, the groups qualified for the favorable tax treatment of § 527 organizations because that benefit is not limited to groups that conduct express advocacy.
In 2002, the Bipartisan Campaign Reform Act (BCRA) addressed express advocacy, but regulated only messages broadcast within 30 days of a primary or 60 days of a general election that referred to a federal office candidate. BCRA left unregulated such areas as broadcasts aired before elections and voter mobilization efforts. Groups wishing to engage in these activities and still avail themselves of the unlimited funding sources no longer available to political parties generally qualify for tax-exempt status under IRC § 527. Supporters of BCRA have led the effort to extend federal election law regulation to these types of 527 organizations, seeing the enormous amounts of money raised and spent in recent years as a result of the FEC's failure to enforce existing law. BCRA critics, however, insist that what occurred since 2004 was the predictable result of the ban on soft money activity by national parties, thus redirecting massive amounts of unregulated money to outside groups that are less accountable to the political system; they insist that many of these groups not engaging in express advocacy cannot be constitutionally regulated.
In the 109th Congress, the House twice passed similar bills to add 527 organizations to FECA's political committee definition, unless involved solely in state and local elections. The Senate Rules and Administration Committee reported a similar measure, but the Senate did not act on it. Similar bills (H.R. 420 and S. 463) have been offered in the 110th Congress. Other bills (H.R. 2316; H.R. 1204) that would affect 527s have also been introduced in the 110th Congress. This report explores the evolution of the 527 issue and attempts to address it in the courts, the Federal Election Commission, and Congress. It will be updated periodically to reflect further developments.