Testimony of Scott E. Thomas 

Chairman, Federal Election Commission 

Before the Senate Committee on Rules and Administration 

March 8, 2005

Mr. Chairman, Senator Dodd, and members of the Committee, I thank you for 

inviting me to testify today on S. 271. Generally speaking, this bill would require some 

additional organizations registered under section 527 of the Internal Revenue Code to 

register as “political committees” with the Federal Election Commission and comply with 

the provisions of the Federal Election Campaign Act, including its contribution 

limitations and reporting provisions. 

This is an important legislative proposal. Non-party “political committees” 

registered with the FEC must accept contributions of no more than $5,000 per year from 

any permissible source, and must not accept any contributions from corporations or labor 

organizations. Those groups that have resisted “political committee” status are most 

concerned about such funding restrictions, no doubt. In the 2004 election cycle, we saw 

numerous reports of unregistered groups spending tens of millions of dollars in the 

aggregate on hard-hitting communications attacking specific candidates, yet as a recent 

study by the Campaign Finance Institute found, a large share of the donations used by 

such 527’s in 2004 were actually well in excess of the contribution limits. The ability of 

donors to give huge amounts to groups run by well-connected Washington operatives 

raises the specter of special access to elected policy makers. 

Last year, Vice Chairman Toner and I sponsored a proposal somewhat similar to 

S. 271 which failed to win the support of our colleagues at the Commission. So, it should 

come as no surprise that I view S. 271 as a positive step toward dealing with what I 

believe has become a major and damaging loophole in the statute. 

 To help explain how we got where we are today, I would like to provide some 

background on the treatment of 527s, both by statute and, more recently, by the Federal 

Election Commission, before I specifically discuss S. 271. Although I serve as Chairman 

of the Commission, the views I offer here are my own and reflect ideas that led to my 

work on the unsuccessful Thomas/Toner proposal. Commissioner Mason may present a 

somewhat different perspective and, between the two of us, we hope to offer the 

Committee a balanced view of the competing thoughts before the FEC as it grappled with 

the difficult problem on 527s in the electoral process. In fairness to all my colleagues, I 

hope the Committee will seek written comments from any of them who wish to add to the 

record of this proceeding. 

Definition of “Political Committee” in FECA and 527 “Political Organizations” in 

the Internal Revenue Code

 The Federal Election Campaign Act defines a “political committee” as “any club, 

association or other group of persons” that receives contributions or makes expenditures 
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aggregating in excess of $1,000 during a calendar year. 2 U.S.C. § 431(4). The terms 

“contribution” and “expenditure” are defined to reach funds given or paid “for the 

purpose of influencing any election for Federal office.” 2 U.S.C. §§ 431(8)(A), (9)(A). 

On its face, the term “political committee” would reach even a law firm that makes a 

single $2,000 contribution to a federal candidate and thus require its registration as a 

“political committee” with the Federal Election Commission. 

 In Buckley v. Valeo, 424 U.S. 1, 79 (1976), though, the Supreme Court added an 

additional condition to the definition when it construed the term “political committee” to 

cover only “organizations that are under the control of a candidate or the major purpose

of which is the nomination or election of a candidate” (emphasis added). Later, in 

FEC v. Massachusetts Citizens for Life, 479 U.S. 238, 262 (1986), the Supreme Court 

clarified that “should MCFL’s independent spending become so extensive that the 

organization’s major purpose may be regarded as campaign activity, the corporation 

would be classified as a political committee. . . . As such it would automatically be 

subject to the obligations and restrictions applicable to those groups whose primary 

objective is to influence political campaigns” (emphasis added). 

 For years the FEC has allowed groups whose major purpose is campaign activity 

or influencing political campaigns, and who have crossed the $1,000 threshold under the 

statute, to separate out their federal activity and only report that activity to the FEC. 

11 C.F.R. § 102.5. To assure that non-federal funds (‘soft money’ sources) are not used 

to subsidize the federal share of allocable expenses like overhead and generic voter 

mobilization, the FEC has adopted regulations that require certain percentages to be used 

for the federal/non-federal split. 

 Meanwhile, § 527 of the Internal Revenue Code provides tax exempt treatment 

for certain income received by a “political organization” which is defined as a “party, 

committee, association, fund, or other organization (whether or not incorporated), 

organized and operated primarily for the purpose of directly or indirectly accepting 

contributions or making expenditures, or both, for an exempt function.” 26 U.S.C. 

§ 527(e)(1)(emphasis added). “Exempt function,” in turn, is defined as the “function of 

influencing or attempting to influence the selection, nomination, election, or appointment 

of any individual to any Federal, State, or local public office or office in a political 

organization, or the election of Presidential or Vice-Presidential electors.” 26 U.S.C. 

§ 527(e)(2) (emphasis added). In McConnell v. FEC, 540 U.S. 93, 174 n. 67 (2003), the 

Supreme Court observed that “Section 527 ‘political organizations’ are, unlike § 501(c) 

groups, organized for the express purpose of engaging in partisan political activity.” The 

Court further observed that 527 groups “by definition engage in partisan political 

activity.” Id. at 177. 

 The Internal Revenue Code 527 provisions cover “political committees” that 

report to the FEC, committees that report to state or local election offices, as well as some 

groups that register and report with no election office. In the 2000 election cycle, several 

notable 527 groups actively promoting or attacking candidates were claiming they did not 

have to operate under FECA “political committee” restraints (or even state or local 
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election law restraints). In 2000 and 2002, Congress responded by adding IRS-based 

disclosure responsibilities for the larger 527s to the extent they were not already reporting 

to either the FEC or a state or local election office. 26 U.S.C. § 527(i), (j). 

527 Activity in the 2004 Elections That Possibly Should Have Been Regulated Under 

“Political Committee” Rules

 There is little doubt that 527 organizations not registered with the FEC had a 

major impact on the 2004 federal elections. According to the Campaign Finance Institute 

(CFI), “Federal 527” groups (defined as groups that were “primarily or very substantially 

involved in federal elections”) spent over $398 million on the 2004 elections. In 

addition, these 527 groups received $405 million in net contributions for 2004, an 

increase of $254 million since the 2002 election cycle. Of most significance, much of the 

funding for these groups came from individuals who gave far in excess of $5,000 per 

year. Indeed, the CFI study found that “[t]he number of $100,000+ donors rose from 66 

in ’02 to 265 in ’04. The top 25 $2 million+ individual donors provided $142 million or 

56% of all individual contributions to 527s in ’04.” CFI concluded that “[I]f 527s 

become fully accepted and institutionalized, they could play even larger financial roles in 

the future, including the presidential election in 2008.” “BCRA and the 527 Groups,” 

Weissman and Hassan, Campaign Finance Institute (February 9, 2005). Left unchanged, 

the current state of affairs will breed constant inquiry about who the big donors are, what 

‘special interests’ they have, and what efforts they have undertaken to get help from 

elected leaders in Washington. 

 The primary legal argument used by organizations avoiding “political committee” 

status is that the $1,000 threshold for “contributions” received or “expenditures” made 

should hinge on whether express advocacy is present in a particular communication. The 

Court in Buckley, however, plainly applied the express advocacy test only to groups 

whose major purpose is not to influence elections. The Buckley Court confined the term 

“political committee” to those groups whose major purpose is influencing elections and 

noted that expenditures of such groups are “by definition. . . campaign related.” 424 U.S. 

at 79. The Court then stated, “But when the maker of the expenditure is. . . a group other 

than a ‘political committee’. . . the relation of the information sought to the purposes of 

the Act may be too remote. . . . [W]e construe ‘expenditure’ for purposes of [the 

independent expenditure reporting provision for persons other than political committees] 

to reach only funds used for communications that expressly advocate . . . the election or 

defeat of a clearly identified candidate.” 424 U.S. at 79-80. 

I should note at this juncture that the FEC has not foundered completely over this 

express advocacy argument. While I cannot say what the FEC has done in the 

enforcement track regarding the 2004 election cycle, I want to assure the Committee that 

so far the six commissioners have reached consensus on ways to analyze political 

committee status so that there is some possibility of an FEC response to the 2004 activity. 
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The Thomas/Toner Proposal to Treat 527s as Political Committees Under FECA

 Early last year, Vice Chairman Toner and I introduced a regulation proposal 

designed to address apparent confusion regarding the application of FECA provisions to 

527s. Under Thomas/Toner, 527 organizations that crossed the $1,000 federal threshold 

by running ads promoting or attacking federal candidates or parties, or by engaging in 

partisan voter mobilization activities, would have been political committees under FECA, 

and therefore would have had to register with the FEC and abide by the hard dollar 

fundraising restrictions for their federal activity. We sought to have these regulations in 

place for at least the post-nomination phase of the 2004 elections. 

 The central premise of our proposal was that 527s, by virtue of their chosen tax 

status, can be presumed to pass the ‘major purpose’ test. After all, by definition, almost 

all 527 organizations admit that they are a “political organization. . .organized and 

operated primarily for the purpose of directly or indirectly accepting contributions or 

making expenditures, or both, for . . . [the] function of influencing or attempting to 

influence the selection, nomination, election, or appointment of any individual to any 

Federal, State, or local public office. . .” 26 U.S.C. § 527(e)(1), (2). In view of their selfdescribed purposes, it appeared to us that a 527’s major purpose almost always was 

“campaign activity.” MCFL, 479 U.S. at 262. In order to avoid overbreadth, though, we 

built in an exception for 527s focused exclusively on non-federal elections, judicial 

selections, internal party races, or ballot questions. 

 The Thomas/Toner proposal also would have revised the Commission’s allocation 

rules and required that all political committees pay for their allocable activities (other 

than allocable fundraising costs or candidate specific costs) using at least 50% hard 

dollars. (Famously, one political committee that reportedly focused on the presidential 

race operated in 2004 with a 2% hard dollar, 98% soft dollar allocation split.) Under our 

proposal, communications that ‘promoted, supported, attacked, or opposed’ a federal 

candidate would have counted toward the long-standing ‘funds expended’ allocation 

formula. (This would have addressed the claim by some FEC-registered groups that only 

communications containing express advocacy should count as federal outlays when 

calculating the federal allocation share.) 

 In May and August of 2004, the Commission considered the Thomas/Toner 

proposal, but it failed by a vote of 2-4 with only myself and Vice Chairman Toner voting 

in favor. One reason given in opposition to our proposal was that the Commission should 

not change rules during the election year because of the burden it might create. Vice 

Chairman Toner and I thought that, on balance, the extraordinary amount of funds likely 

to be raised in excess of the contribution limits by several organizations for obvious 

federal election purposes demanded the Commission’s immediate attention. 

 A second, and more substantive reason given in opposition to the Thomas/Toner 

proposal was that in 2000 and 2002, Congress passed legislation merely requiring 

enhanced IRS-based disclosure and reporting rules for 527 organizations. Moreover, it 
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was argued, Congress considered a measure similar to the Thomas/Toner proposal 

(S. 2582) but did not enact it into law. Accordingly, several Commissioners felt that to 

adopt Thomas/Toner would be to reject a clear congressional judgment. Vice Chairman 

Toner and I thought that the 2004 record of huge donations flowing freely to 527s was 

not before Congress in 2000 or 2002 and that Congress would want the administrative 

agency with the exclusive jurisdiction to administer, interpret and civilly enforce the 

Federal Election Campaign Act to close this damaging loophole. See generally 2 U.S.C. 

§§ 437c(b)(1), 437d(a), and 437g; see also 2 U.S.C. § 438(a)(8) and (d). 

New Commission Regulations

 On August 19, 2004, the Commission adopted new rules dealing with the 527 

problem in a more limited fashion. The new rules do not rely on 527 status to help 

determine a group’s responsibility for registering with the FEC and abiding by the 

contribution limitations. Nor do they apply a ‘promote, support, attack or oppose’ test to 

determine what types of public communications or voter mobilization efforts by 527s 

would count as “expenditures.” Instead, the rules revise the allocation scheme with a flat 

50% federal funds ‘minimum’ for non-party political committees’ administrative 

expenses, generic voter drives, and public communications that refer to a political party 

without any reference to clearly identified candidates. 11 C.F.R. 106.6(c). (Actually, by 

removing the longstanding ‘funds expended’ formula, the new rules effectively set a flat 

rate of 50%.) While the new rules specify that a public communication or voter 

mobilization effort mentioning only federal candidates has to be treated 100% federal, 

they also allow such efforts that only mention non-federal candidates to be funded with 

100% soft money. The new rules also treat all money received in response to a 

solicitation as a “contribution” under the Act if the solicitation “indicates that any portion 

of the funds received will be used to support or oppose the election of a clearly identified 

Federal candidate.” 11 C.F.R. 100.57(a). 

 I did not vote for these new regulations and, speaking personally, I have several 

concerns. In addition to leaving a cloud over what types of communications will cause a 

527 group to cross the $1,000 “expenditure” threshold, there are several other 

shortcomings, in my view. First, the 50% allocation rule will only kick in if the group in 

question qualifies as a “political committee” under the FECA, so its impact will be 

limited if a group can use an express advocacy test to avoid such status. Second, for 

acknowledged political committees that truly focus most of their effort on federal 

candidates, a 50% federal allocation may be too low. As noted, the Commission’s new 

regulations did away with the ‘funds expended’ allocation formula that would have 

covered this situation. Third, if a political committee is clever enough to avoid references 

to particular federal candidates, but includes a reference to a non-federal candidate, 100% 

of the communication or voter drive can be paid with soft money. 

 Finally, an organization will be able to avoid the new “contribution” test if its 

solicitations either: (1) avoid signals that the funds sought will be used in the election 

process; or (2) avoid references to particular federal candidates. As a result, the 
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Commission may find itself in the same predicament it has faced for years where groups 

claim they are not raising “contributions” and are not making “expenditures.” 

S. 271

“The 527 Reform Act of 2005” (S. 271) is designed to “clarify and affirm” that 

federal election oriented 527 groups are required to comply with the Federal Election 

Campaign Act. The bill generally requires such 527 groups to register as political 

committees with the FEC and comply with the prohibitions and contribution limits as 

well as the reporting requirements of the FECA. Under this approach, these 527 groups 

can only use ‘hard money’ to finance ads that promote or attack federal candidates, 

regardless of whether the ads expressly advocate the election or defeat of a candidate. 

 The bill also contains several important exceptions. The bill contains an 

exclusion for those 527 organizations that raise and spend money exclusively in 

connection with non-federal candidate elections, or state or local ballot initiatives, or the 

nomination or confirmation of individuals to non-elected offices such as judicial 

positions. Moreover, the bill exempts any 527 organization with annual receipts of less 

than $25,000 from the new 527 registration requirement. The bill does not affect groups 

that claim 501(c) tax status. 

 With respect to allocation rules, the bill establishes that when a 527 group, 

registered as a political committee, makes expenditures for voter mobilization activities 

or public communications that affect both federal and non-federal elections, at least 50% 

of the costs of such activities would have to be paid for with hard money. Importantly, 

the bill provides that with regard to the non-federal funds that can be used to finance a 

portion of voter mobilization activities and public communications affecting both federal 

and non-federal elections, such funds must come from individuals only (not corporate 

and labor organizations) and must be in amounts of not more than $25,000 per year per 

individual donor. 

 For a number of reasons, I believe S. 271 will significantly strengthen the law. 

First, by requiring those federal election oriented 527 organizations currently not 

registered with the FEC to register, the bill will force these entities to play by the same 

rules as other partisan groups. This means they will have to follow the same disclosure 

and receipt restrictions as PACs that have confined themselves to supporting candidates 

with direct contributions. 

 Second, S. 271 strengthens the law by requiring that hard money be used by 

covered 527 groups to finance ads that promote or attack federal candidates and does not 

use the outdated express advocacy test. This is consistent with the conclusion of the 

Supreme Court in McConnell v. FEC that the express advocacy test is not constitutionally 

mandated and, indeed, is “functionally meaningless” in the real world of politics. 540 

U.S. at 193. It also aligns with the Court’s holding that for partisan groups, the ‘promote, 

support, attack, or oppose’ standard in BCRA, see 2 U.S.C. § 431(2)(A)(iii), is not 

unconstitutionally vague. The Court found that these words “ ‘provide explicit standards 
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for those who apply them’ ” and “ ‘give the person of ordinary intelligence a reasonable 

opportunity to know what is prohibited.’ ” 540 U.S. at 170 n. 64 quoting Grayned v. 

City of Rockford, 408 U.S. 104, 108-109 (1972). 

 Finally, S. 271 strengthens the law by ensuring that all allocable activities 

designed to influence federal elections are paid for with at least 50% hard money. Under 

the FEC’s current allocation regulations, there are opportunities to skew ‘time/space’ 

allocations by including references to non-federal candidates and thereby using far more 

soft money than is warranted. S. 271 not only remedies this by imposing a 50% 

minimum of hard money, but further places a limit of $25,000 per year on the 

contributions that can be accepted for that non-federal account. 

 There are several issues of interpretation raised by S. 271, but I believe 

Commissioner Mason will focus on that topic. For your information, the FEC’s legal 

staff has looked at the bill and noted several areas that will warrant careful analysis. As a 

body, the FEC will be happy to work with the Committee to resolve any matters that arise 

during consideration of this legislation. 

Conclusion

 Mr. Chairman, the Bipartisan Campaign Reform Act was a good step forward in 

eliminating the use of soft money in federal elections. To maintain the integrity of that 

statute, though, the 527 loophole should be closed. I believe that S. 271 will achieve that 

result. 

 I thank the Committee for this opportunity to testify.