In recent years, the terms "527 organizations," "527 groups," and "527s" have been used interchangeably to describe groups that intend to influence federal elections in ways that may be outside the scope of federal election law. The terms stem from the fact that these organizations are provided tax-exempt status under Section 527 of the Internal Revenue Code (IRC). These groups have become the subject of controversy due to the different definitions used in federal election law and tax law as to what constitutes political or election-related activity and the lack of uniform opinion as to what election law itself regulates or may permissibly regulate. Strictly speaking, IRC § 527 provides tax-exempt status to many more organizations than just those that are colloquially referred to as 527s. The section applies not only to organizations that are active in federal elections, but also to organizations involved in state and local elections and certain non-electoral activities. While IRC § 527 applies to a broad range of organizations, only the groups colloquially referred to as 527s (i.e., those groups that intend to influence federal elections in ways that may be outside the scope of federal election law) are the focus of current controversy. This report discusses this limited subset of organizations exempt under IRC § 527 and uses the terms 527 organizations , 527 groups , and 527s interchangeably to refer to them. 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. Indeed, political committees—whether political parties, political action committees (PACs), or candidate committees—have tax-exempt status under IRC § 527. 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). These groups were shrouded in mystery because no disclosure was required under either the tax or election laws at that time. Financial activity in federal elections is governed by the Federal Election Campaign Act (FECA) of 1971, as amended, (2 U.S.C. §431 et seq .) as well as by certain court rulings. Generally, FECA imposes limitations and prohibitions on money from certain sources and requires public disclosure of money raised and spent in federal elections. Due to the Supreme Court striking down spending limits as unconstitutional in its landmark 1976 Buckley v. Valeo ruling, federal law does not impose mandatory limits on campaign spending by candidates or groups. Key features of federal election law regulation include the following: Source Prohibitions —Unions and corporations are prohibited from making contributions or expenditures in federal elections. The corporate ban was first enacted in 1907, the labor ban in 1943. While union treasury and corporate money may not be used in federal elections, a separate segregated fund (i.e., political action committee (PAC)) may raise voluntary contributions from designated classes of individuals, to give or spend in federal elections. [2 U.S.C.§ 441b] Foreign nationals are also prohibited from contributing or spending money in any American election, at the federal, state, or local level, with an exemption for permanent resident aliens (i.e., green card holders). [2 U.S.C.§ 441b] Contribution Limits —Contributions to candidates, parties, and PACs in federal elections are limited (e.g., for an individual—$2,300 per candidate, per election; $5,000 per year to a PAC; and an aggregate of $108,200 in a two-year election cycle to all federal candidates, parties, and PACs). Most PACs and party committees may give a candidate $5,000 per election. (Parties may also make coordinated expenditures to pay for campaign services or advertisements for and with the cooperation of a candidate, subject to formula-based limits, indexed for inflation.) [2 U.S.C.§ 441a] Disclosure Requirements —Candidates, PACs, and parties involved in federal elections must register with the FEC and file periodic reports on receipts and expenditures, itemizing for amounts over $200. [2 U.S.C.§ 432-437] Only money raised and spent according to the requirements and restrictions of federal law may be used to influence an election for federal office. Such funds are often referred to as hard money . FECA defines both "contribution" and "expenditure" as monies or anything of value "for the purpose of influencing any election for Federal office." In order to preserve the law's regulation of contributions and expenditures against invalidation for constitutional vagueness, the Supreme Court in Buckley v. Valeo construed the terms "contribution" and "expenditure" to encompass only funds donated for or spent for express advocacy (that is, voter communications using explicit phrases and words such as "vote for," "vote against," "elect," and "defeat"). Likewise, the Court construed the term "political committee" to include only "organizations that are under the control of a candidate or the major purpose of which is the nomination or election of a candidate." In so doing, the Buckley Court established the "major purpose test," which determines whether or not an organization, if it raises more than $1,000 in "contributions" or makes more than $1,000 in "expenditures," is subject to regulation under FECA as a "political committee." Neither FECA nor the Supreme Court, however, has yet defined precisely how to ascertain the major purpose of an organization. Indeed, how the major purpose test works, and to what groups it applies, are at the heart of a debate concerning the circumstances under which non-party organizations, including 527s, can constitutionally be considered FECA regulated "political committees." For example, some observers proffer that it is relevant to examine an organization's activities beyond express advocacy to ascertain its major purpose, while others maintain that Supreme Court precedent still limits FECA regulation through the designation of "political committee" status to only those organizations engaging in express advocacy. Prior to 1975, the Internal Revenue Code was silent as to the tax treatment of organizations whose primary purpose is influencing elections. The Internal Revenue Service (IRS) did not generally require these organizations to file tax returns or pay taxes. It appears this was because the IRS treated contributions to political organizations as gifts, which meant that the organizations did not have taxable income. By the early 1970s, it became apparent that these organizations had sources of income other than contributions, such as investment income and gain from the sale of donated property. In 1973, the IRS announced it would begin requiring political committees and parties with investment and other types of income to file tax returns and pay taxes. Parties and committees were taxed as corporations, trusts, or partnerships, depending on the surrounding circumstances. In 1975, Congress responded to the IRS action by adding Section 527 to the Internal Revenue Code ( P.L. 93-625 ; 88 Stat. 2108). Section 527 as enacted by P.L. 93-625 is similar to the current version, with the exception of the reporting requirements that currently exist (these are discussed below in the section on P.L. 106-230 and P.L. 107-276 and in the Appendix ). Section 527 applies to "political organizations" which are those organizations, including a party, committee, association, or fund, that are organized and operated primarily to directly or indirectly accept contributions and/or make expenditures for an "exempt function." An exempt function is the influencing or attempting to influence the selection, nomination, election, or appointment of an individual to a federal, state, or local public office, to an office in a political organization, or as a presidential or vice-presidential elector. Section 527 political organizations are subject to tax only on "political organization taxable income." This is the organization's gross income, excluding "exempt function income," less $100 and any allowable deductions. Exempt function income is any amount received, to the extent that it is segregated to use for an exempt function, as contributions of money or other property, membership dues, fees, or assessments, proceeds, which are not received in the ordinary course of business, from political fundraising and entertainment events or from the sale of campaign materials, and proceeds from conducting a bingo game. The tax rate is generally the highest corporate income tax rate. Under IRC § 527(h), however, income of the principal campaign committee of a congressional candidate is taxed using the graduated corporate tax rate schedule. This special rule does not apply for campaign committees of candidates for state or local office. Under P.L. 93-625 , political organizations only had contact with the IRS if they were required to file a tax return because they had taxable income. Thus, the law was properly thought of as addressing the tax treatment of these organizations, rather than regulating them. The lack of reporting requirements may have been because, at the time of the law's enactment, political organizations were generally thought of as candidate funds and political parties and committees (i.e., the same types of entities that, when involved in federal elections, are regulated by FECA). During the 1996 election cycle, a new phenomenon was seen in campaigns for President and Congress that marked a turning point both in the way in which campaigns for federal office are conducted and in efforts to regulate the flow of money in federal elections. Political parties and interest groups had in 1995 and 1996 made broadcast communications that discussed candidates' merits in conjunction with particular issue positions, which, while technically not meeting federal election law criteria for election-related activity, were widely viewed as intending to influence federal races. As public policy messages without express advocacy language, such activities were labeled issue advocacy .