FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Mr. Coyne, and distinguished Members of the Subcommittee:

I appreciate the opportunity to discuss with you today the issue of disclosure of political activities of tax-exempt organizations. At the outset, I would like to emphasize that the Administration strongly supports efforts to require greater disclosure of political campaign contributions and expenditures as part of its on-going efforts to achieve comprehensive campaign finance reform. Some of the disclosure proposals raise issues outside the tax code - such as Federal election laws issues - which are generally beyond the expertise of the Treasury Department. However, recent developments involving so-called "section 527" organizations show the interplay between the Federal election laws and tax code rules. I will focus my remarks today on issues that arise under the Internal Revenue Code.

In general

Twenty-seven different types of tax-exempt organizations are described in section 501(c) of the Internal Revenue Code. These organizations - which cover a wide range of nonprofit entities, including charities, social welfare organizations, labor unions, business leagues, and social clubs - generally are exempt from Federal income tax (other than with respect to certain unrelated business income). In addition, section 527 provides a limited tax-exempt status to certain "political organizations," meaning parties, committees, funds, and other organizations that are organized and operated primarily for the purpose of accepting contributions or making expenditures to influence the selection of an individual to public office. Section 527 entities are exempt from tax on political contributions they receive (and certain other political fundraising receipts), but are subject to tax on their investment income.

The different tax-exempt organizations are subject to different rules under the Internal Revenue Code with respect to their "political" (in the broad sense of the term) activities. In particular, the tax code differentiates "lobbying" with respect to legislation from "political campaign intervention" (sometimes referred to as "electioneering"), even though both types of advocacy activities are commonly thought of as being "political." In discussing the rules governing participation by tax-exempt entities in political activities and disclosure of such activities, it is necessary to keep in mind the different types of tax-exempt entities and to distinguish lobbying from political campaign intervention.

Organizations described in section 501(c)(3) are commonly referred to as "charities." Compared to other tax-exempt organizations, charities are eligible for the most preferred tax-exempt status under the Code. That is, not only are charities generally exempt from tax at the entity level, they also have access to tax-exempt financing and are eligible to receive contributions that are deductible for Federal income, estate, and gift tax purposes. At the same time, charities are subject to the most stringent rules with respect to their advocacy activities. Section 501(c)(3) expressly provides that charities are prohibited from intervening in any political campaign on behalf of (or in opposition to) any candidate for public office; and charities may not engage in more than "insubstantial" lobbying in an attempt to influence legislation.

Although charities are absolutely barred from intervening in a political campaign on a partisan basis, charities may engage in some election-related activities - such as voter registration efforts or sponsoring a debate - provided that the activities are not biased towards a particular candidate. Section 501(c)(3) is violated when a charity intervenes in a political campaign "on behalf of (or in opposition to) any candidate." However, in cases where the charity does not directly provide financial support to a candidate, or explicitly endorse or oppose a candidate, the determination of whether prohibited political campaign intervention has implicitly occurred is made by the IRS on the basis of all facts and circumstances. In this regard, the IRS does not use the Federal election law "express advocacy" standard (which is discussed below).

Because a tax-exempt charity may not engage in political campaign intervention consistent with its section 501(c)(3) status, there generally is no disclosure regime provided by the Internal Revenue Code for prohibited political campaign activities of charities. If a charity improperly engages in political campaign intervention, the charity's tax-exempt status under section 501(c)(3) may be revoked, in which case the IRS will notify the public that contributions to the entity no longer are tax-deductible. Moreover, penalty excise taxes may be imposed by the IRS under section 4955 in addition (or as an alternative) to revocation of tax-exempt status. When penalty excise taxes are imposed under section 4955 as a result of improper political campaign intervention, disclosure of this fact is required on the charity's annual information return, which is filed with the IRS and which must be made available to the public upon request.

As a general rule, section 501(c)(3) provides that no more than an insubstantial amount of the activities of a charity may be attempting to influence legislation. More specifically, the Code and regulations contain three sets of overlapping rules governing such "lobbying" efforts by charities. One set of rules applies to public charities that elect to be governed by a specific, numeric test (based on dollar amounts of expenditures by the charity) to determine whether their lobbying activities are substantial. Another set of rules applies to charities that choose to be subject to a facts-and-circumstances test of whether their lobbying activities are substantial relative to their other activities. A third set of rules applies to private foundations, which generally are subject to penalty excise taxes on their lobbying expenditures even if the foundation's lobbying activities are not so substantial as to jeopardize its tax-exempt status.

The definition of "lobbying" for purposes of section 501(c)(3) is essentially the same under the three sets of rules governing charities. In short, "lobbying" includes directly contacting members of a legislative body (or their staffs) to support or oppose legislation (so-called "direct lobbying"), as well as urging the public to contact legislative bodies, or otherwise attempting to influence public opinion, with respect to specific legislation (so-called "grassroots lobbying"). All facts and circumstances surrounding a communication generally are taken into account in determining whether "lobbying" has occurred, although discussions of broad social or policy issues (even issues likely to be addressed by a legislature) generally do not constitute "lobbying" for purposes of section 501(c)(3) if the discussion does not advocate for or against a specific legislative proposal.

For communications that fall within the section 501(c)(3) general definition of "lobbying," exceptions are provided when an organization makes available certain nonpartisan analysis, study, or research, or provides technical advice to a governmental body in response to a written request. In addition, for purposes of section 501(c)(3), "lobbying" does not include certain communications between a public charity and its members, nor does the term include direct lobbying by a charity with respect to legislation which might affect the existence, powers and duties, tax-exempt status, or deduction of contributions to the organization (so-called "self-defense lobbying").

Under current law, charities disclose their lobbying activities to the IRS and the general public by reporting on their annual information return (Form 990) the amount of their lobbying expenditures for the taxable year. In addition, charities which elect to be subject to the section 501(h) numeric test of "substantiality" must allocate their expenditures between "direct" and "grass roots" lobbying. Non-electing charities must disclose their general methods of lobbying, such as the use of media advertisements or direct contacts with legislators, and the amounts expended using each method. In addition, to the extent that a charity engages in non-partisan analysis of legislation as part of its major program services, such activities are described on the Form 990.

If a charity improperly engages in "substantial" lobbying, the charity's tax-exempt status under section 501(c)(3) may be revoked, and such a sanction would be disclosed to the general public. Moreover, penalty excise taxes may be imposed by the IRS under sections 4911 or 4912 in cases of excess lobbying expenditures, and imposition of these penalties would be reported on the charity's Form 990.

The annual information return (Form 990) required to be filed by a charity with the IRS and made publicly available contains a variety of information about the charity's operations for the taxable year, including a description of its major programs, gross income and expenses, assets and liabilities, and total contributions received. When filing this return with the IRS, charities also attach a list that identifies the names and addresses of all substantial contributors (generally meaning persons who contribute $5,000 or more to the charity during the year). However, section 6104(d)(3) expressly provides that, in the case of a public charity, public disclosure is not required of its contributor list. The Form 990 is required to be filed within four and one-half months following the end of the organization's taxable year. An organization that fails to file a complete and accurate Form 990 is subject to a penalty of $20 for each day the failure continues, up to a maximum penalty per return of $10,000 or (if less) five percent of the organization's gross receipts for the year. Similar penalties also may be imposed if an organization fails to make its Form 990 (or its exemption application) publicly available.

Nonprofit organizations that are described in section 501(c) but which are not charities include section 501(c)(4) social welfare organizations, section 501(c)(5) labor and agricultural organizations, section 501(c)(6) business leagues, and section 501(c)(7) social clubs. These non-charities generally are exempt from tax on dues and contributions, related-function income, and investment income, but are subject to tax on certain unrelated business income. Contributions to non-charities generally are not deductible to the donor for Federal income, estate, or gift tax purposes. However, in some instances, contributions or dues may be deductible by the payor as a trade or business expense, provided that the payment is not allocable to political campaign or lobbying activities conducted by the recipient organization.

Non-charities generally are not restricted by the Internal Revenue Code from engaging in political campaign activities. However, political campaign activities cannot be the primary activities of an entity described in section 501(c), such as a section 501(c)(4) social welfare organization. If the primary activities of an organization are conducting or funding political campaign activities, such an organization may be eligible for the limited tax-exempt status under section 527 (see below).

To the extent that a non-charity engages in any political campaign activities, the organization (or a separate segregated fund through which it funds such activities) is subject to tax on the lesser amount of its investment income or the amount expended on political campaign activities. The objective of this rule is to prevent organizations from using tax-free investment income to fund political campaign intervention. For this purpose, the test for determining whether political campaign activities have been funded or conducted by the organization is generally the same as for purposes of section 501(c)(3) - that is, the question is whether, based on all the surrounding facts and circumstances, there has been an attempt to influence an election for public office by supporting or opposing one or more candidates.

Non-charities must indicate on their Form 990 the amount of expenditures for political campaign intervention and indicate whether they filed a Form 1120-POL, which is required if their net investment income and political campaign expenditures both exceed $100. Form 1120-POL is a one-page form indicating the amount of investment income, expenses attributable that income, and the amount of tax due. There is no listing on the Form 1120-POL of contributors to the organization or recipients of disbursements. In contrast to the Form 990, which is an information return, the Form 1120-POL is a tax return that is not publicly available. Form 1120-POL is required to be filed within two and one-half months after the end of the organization's taxable year.

Non-charities described in section 501(c) are not subject to any specific Internal Revenue Code provision that restricts their lobbying activities. Indeed, lobbying may be the primary activity for some tax-exempt organizations, such as a social welfare organization or a business league. In general, the only theoretical limit is that the lobbying activities must somehow further the entity's nonprofit purposes.

Non-charities with members who may be deducting their dues payments as business expenses are required to indicate on their Form 990 the amount of their lobbying expenditures, which would be non-deductible if directly incurred by the member. Other non-charities generally do not specifically report lobbying expenditures on the Form 990, but may describe their lobbying activities if part of a major program of the organization.

As with charitable organizations, non-charities described in section 501(c) generally must report on their Form 990 the total amount of dues and contributions received by the organization during the taxable year. In addition, non-charities provide a list of their major contributors (generally meaning persons who make gifts of $5,000 or more during the year) to the IRS, but this list is not publicly available.

Section 527 governs the tax treatment of "political organizations," meaning 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." Section 527 uses the term "exempt function" rather than "political campaign intervention," although there is significant overlap in the tax code meaning of these terms. Section 527(f)(2) defines the term "exempt function" as -

Section 527 clarifies the tax treatment of "political organizations" by providing that contributions (and certain political fundraising receipts) received by the entity (or fund) are not subject to an entity-level tax, yet the entity's (or fund's) investment income and any income from events that are not political in nature is subject to tax, generally at the highest corporate income tax rate. Moreover, another section of the Code - section 2501(a)(5) - specifically provides that contributions to section 527 political organizations are exempted from the Federal gift tax.

In determining whether a particular activity constitutes "exempt function" activity for purposes of section 527, the IRS examines all facts and circumstances to determine if there is a sufficient nexus between the activity and the election of an individual to a public office. The IRS generally applies the same standard used to test whether particular activities amount to "political campaign intervention" for a section 501(c) organization when determining whether "exempt function" activities are conducted for purposes of section 527. In both the section 501(c) and section 527 context, the scope of campaign-related activities is broader than the definition of "express advocacy" under the Federal Election Campaign Act (FECA) (see discussion below). Thus, the section 527 definition of "political organizations" covers not only traditional political parties and candidate committees subject to regulation under the FECA, but also covers other organizations (and unincorporated funds) which are organized and operated primarily to conduct activities in an attempt to influence an election - at the Federal, State, or local level - even though these organizations may not engage in "express advocacy" in the FECA sense. In other words, section 527 covers "political organizations" that are commonly referred to as "issue advocacy" organizations for Federal election law purposes, because such organizations conduct (or fund) biased voter education efforts, targeted voter-registration efforts, or grassroots lobbying intended to influence an election, although the organization does not expressly advocate the election (or defeat) of a particular candidate. The IRS has ruled that, because such biased campaign-related activities constitute "political campaign intervention" under long-standing interpretations of section 501(c)(3), an entity or fund organized and operated primarily to conduct such activities is treated as a section 527 entity.

To ensure that tax-exempt organizations which conduct some political campaign activities but not as their primary activity - e.g., a social welfare organization - cannot use tax-free investment income to fund such activities, section 527(f) imposes a tax on the organization's investment income, up to the amount of its "exempt function" expenditures within the meaning of section 527. This tax imposed under section 527(f) operates so that section 527 organizations and section 501(c) entities receive consistent treatment with respect to their campaign-related activities.

Political organizations described in section 527, as well as section 501(c) organizations, are required to file a Form 1120-POL with the IRS for any taxable year in which the organization has both investment income and "exempt function" expenditures (within the meaning of section 527) exceeding $100. As mentioned previously, Form 1120-POL is a one-page form which does not list contributors to the organization, nor does it identify the recipients of disbursements made by the organization. The Form 1120-POL is not disclosable to the general public. In contrast to charities and non-charities described in section 501(c), political organizations do not file an annual information return (Form 990).

The Federal Election Campaign Act (FECA) requires public disclosure of Federal campaign finances, limits campaign contributions by individuals, political parties, and other special interests, and regulates spending in campaigns for Federal office in order to inform the electorate and prevent corruption of the political process.

The FECA prohibits certain individuals and entities (such as corporations, labor organizations, Federal government contractors, and foreign nationals) from making contributions or expenditures to influence Federal elections. In addition, the FECA generally limits the amounts that may be contributed by individuals and groups to candidates (and their authorized committees), political party committees, and other political committees. However, the FECA dollar-amount contribution limits do not apply to so-called "independent expenditures," which are expenditures for communications (such as newspaper, TV, or direct mail advertisements) which expressly advocate the election or defeat of a clearly identified candidate, but which are made independently from the candidate's campaign (i.e., the expenditure is not made with the cooperation or consent of, or at the request or suggestion of, the candidate or the campaign). Although there is no limit on the amount of such "independent expenditures," the law requires all persons making such independent expenditures to report them to the Federal Election Commission (FEC) and to disclose the sources of the funds they used. In contrast with independent expenditures, expenditures which are coordinated with the candidate's campaign are, for FECA purposes, treated as in-kind contributions subject to the general contribution limits.

The FECA requires political committees (including political party committees, campaign committees, and political action committees (PACs)) to register and file periodic reports with the FEC disclosing the funds they raise and spend. Each political committee is required to file a statement of organization with the FEC, generally within 10 days after establishment. The statement must include the name and address of the committee, the names and addresses of its Treasurer and the custodian of its books and accounts. Thereafter, each political committee must file periodic reports of its receipts and disbursements. During an election year, a political committee generally has the option of filing quarterly or monthly reports, and must also file special pre- and post-election reports. During a non-election year, quarterly filers automatically switch to a semi-annual reporting schedule.

Each report must disclose the amount of cash on hand at the beginning of the reporting period, the committee's total receipts (for the reporting period and the calendar year to date), including the total contributions received from political committees and other sources, and an itemized list of contributors, including each person (other than a political committee) whose aggregate contributions during the calendar year exceed $200. Each report must also disclose the committee's total disbursements (for the reporting period and the calendar year to date), including all contributions to candidates and other political committees, and all independent expenditures. The report must identify each person who receives aggregate disbursements of $200 or more during the calendar year, and report the date, amount, and purpose of each disbursement. The FEC makes all statements of organization and periodic reports available to the public within 48 hours after receipt.

In addition to required disclosure by political committees, the FECA requires any person who makes independent expenditures in an aggregate amount of more than $250 during a calendar year to report to the FEC detailed information regarding the identities of contributors, and the amount and purpose of such independent expenditures. In addition, any person who finances communications expressly advocating the election or defeat of a clearly identified candidate, or solicits any contribution through public advertisements or direct mail must indicate who paid for the communication and whether it is authorized by the candidate or authorized committee.

Since 1998, the FEC has permitted filers to submit reports electronically by modem or via the Internet. The FEC scans all reports filed with the FEC to make digital images of the documents, and makes the digital images available in the FEC's Public Records Office and on the Commission's Internet web site. Also available on the FEC's web site is a searchable database of campaign finance information. Visitors may search this database for information regarding contributions by individuals and political committees to House, Senate, and Presidential campaigns, political parties, and PACs in the 1997-98 and 1999-2000 election cycles. By querying this database, visitors can search for contributions made by a specific individual, contributions received or made by a specific political committee, and contributions received by a specific campaign. Results of these queries are linked to the imaging system so visitors can view the actual financial reports filed by the campaigns or committees.

Although some uncertainty remains, the current prevailing view of the courts appears to be that, in the absence of coordination with a candidate's campaign, only communications that contain express words advocating the election or defeat of a candidate-such as "vote for," "support," "defeat," and certain other "magic words"-are subject to the requirements of FECA, including the restrictions on contributors eligible to fund such communications, the contribution limits, and public disclosure requirements for funds raised and spent on such communications. Accordingly, individuals, entities, and groups - including section 527 political organizations - that attempt to influence Federal elections, but that refrain from "express advocacy," may be able to avoid the FECA reporting and disclosure requirements.

The Lobbying Disclosure Act requires certain individuals and organizations that lobby the Federal government (either on behalf of clients or on the organization's own behalf) to register with the Clerk of the House of Representatives and the Secretary of the Senate, and to file semi-annual reports detailing their lobbying activities. The stated purpose of the Act is to promote public awareness of efforts by paid lobbyists to influence the public decisionmaking process of the legislative and executive branches of the Federal government.

In general, an organization that engages in lobbying activities on its own behalf is subject to the registration and reporting requirements of the Act if it (1) has at least one employee who spends 20 percent of his or her time on lobbying activities and (2) expends (or expects to expend) more than $20,500 for lobbying activities in any six month period. Among the information required to be reported semi-annually are the general areas (e.g., communications, education, health issues) and specific issues (e.g., specific bills before Congress or specific executive branch actions) on which the organization lobbied, the Houses of Congress or Federal agencies contacted, and a good faith estimate of the total expenses incurred in carrying out the lobbying activities. The registration forms (Form LD-1) and semi-annual reports (Form LD-2) are publicly available.

Lobbying is broadly defined under the Act to include any oral or written communication with certain Federal executive or legislative branch officials regarding (1) the formulation, modification, or adoption of Federal legislation, (2) the formulation, modification or adoption of a federal rule, regulation, executive order, or any other program, policy or position of the Federal government, (3) the administration or execution of a Federal program or policy, and (4) the nomination or confirmation of a person to a position that is subject to Senate confirmation. The Act excepts from the definition of lobbying certain categories of communications, including communications by churches, and various communications of a public nature (such as testimony before a Congressional committee, communications made on the public record in a public proceeding, and mass media communications).

To reduce the recordkeeping burden on organizations (such as for-profit entities, certain tax-exempt membership organizations, and certain public charities) that are already required under the Internal Revenue Code to track expenditures for lobbying, the Act generally permits such organizations to use the Internal Revenue Code definition for purposes of reporting the amount of their lobbying expenditures during the semi-annual reporting period. However, such organizations must use the Act's definition of lobbying for purposes of providing a narrative description of their lobbying activities before the legislative branch.

Several bills have been introduced in the 106^th Congress to expand the reporting and disclosure requirements governing section 527 political organizations. The bills, however, generally would not apply to section 527 organizations that attempt to influence State and local, but not Federal, elections. Some of these proposals would amend the Internal Revenue Code to require section 527 organizations to file periodic disclosure reports with the IRS and make such reports publicly available. The information to be disclosed would parallel the contents of disclosure reports currently filed under FECA with respect to "express advocacy" - that is, the name, address, occupation, and name of employer of each person who contributed more than $200 to the organization during the reporting period, and the name and address of each person to whom disbursements were made of more than $200 during such period. These proposals generally follow the reporting periods and multiple filing deadlines under the current-law FECA disclosure regime (which vary based on whether a Federal election or primary is held during the year). At least one bill would require the IRS to develop procedures for submission in electronic form of disclosure reports. Some proposals would allow political organizations the option of filing disclosure reports with the FEC as an alternative to filing such reports with the IRS. Other introduced bills take a different overall approach. These proposals would not amend the Internal Revenue Code, but instead would modify the Federal election laws to require periodic disclosure to the FEC of contributors to, and expenditures made by, section 527 political organizations.

To prevent avoidance of the disclosure objectives, one proposal provides that the new disclosure requirements to be incorporated into the Internal Revenue Code would apply to all organizations that satisfy the section 527 definition of a political organization "without regard to whether such organization claims a tax exemption under section 527." This would prevent a political organization from evading the new disclosure requirements, while claiming essentially the same tax treatment under general principles of the Code outside of section 527 (as discussed below). Thus, the new disclosure requirements would apply to all organizations (and funds) that are organized and operated primarily to influence Federal elections. However, other than H.R. 4621, which directly amends the FECA (as well as the Federal Communications Act), the introduced bills referred to above generally would not apply to entities, tax-exempt or taxable, that engage in some campaign-related activities but not as their primary activity.

The sanction for non-disclosure would vary under the introduced bills. Under H.R. 4168, the penalty for non-disclosure would be the same as that imposed under current-law on large organizations that fail to file an accurate Form 990. In addition, under H.R. 4168, the gift tax exclusion under current-law section 2501(a) for contributions made to political organizations would not apply to contributions made to organizations that are not in substantial compliance with the bill's disclosure requirements. Under S. 2583, the penalty for inadequate disclosure would be that all the political organization's contributions (and other political fundraising receipts), minus the costs directly connected with the production of such income, would be subject to tax. Under other bills, the consequences of nondisclosure are unclear, because these bills would simply deny section 527 status to entities that are not subject to the FEC reporting, which would not necessarily result in any adverse tax consequences (see below).

Tax Treatment

Section 501(c) nonprofits and 527 organizations generally receive the proper tax treatment under current law with respect to their advocacy activities. The current-law tax rules provide appropriate and consistent treatment of political organizations and other organizations that engage in electioneering activities by generally ensuring that only after-tax dollars are used to fund such collective activities. Contributions to section 527 organizations are not deductible for Federal income tax purposes, and even in cases where contributions to a section 501(c) organization may be deductible as a business expense, no deduction is allowed (or a proxy tax is imposed) for the portion allocable to political activities.

The limited tax-exempt status provided by section 527 for the political entity itself does not represent a significant tax subsidy. Arguably, section 527 merely codifies the same tax treatment that would result under general tax principles - i.e., contributions to political organizations would be excludable as "gifts" under section 102 or under a common-law "conduit" theory. If, instead of pooling their funds, political supporters collectively decided to underwrite advocacy activities but each supporter separately wrote a check to pay for an advertising campaign, no additional level of tax would be imposed on that collective activity. However, individuals who used their investment income to pay for political advertising would pay tax on that income. Section 527 produces the same result by taxing all investment income of political organizations, as well as taxing other nonprofit organizations on their investment income to the extent they incur political campaign expenses. In effect, the tax consequences under current-law rules generally are the same regardless of whether electioneering activities are conducted collectively through a nonprofit entity or by a group of individuals without the use of a separate legal entity or segregated fund.

If there is any significant tax subsidy granted to section 527 political organizations, it is because contributions (if greater than the general $10,000 gift-tax exclusion amount) are provided a special exemption from the Federal gift tax under section 2501(a)(1)(5). Absent section 2501(a)(1)(5), contributions to such organizations would technically be subject to the gift tax, although it is not clear under common law whether all political contributions would be viewed as gratuitous gifts subject to the gift tax regime. Nonetheless, the presence of a gift tax subsidy may provide the basis for regulation of constitutionally protected advocacy activities conducted by nonprofit organizations.

Under the Internal Revenue Code, difficult line-drawing sometimes is required under current law to determine whether particular advocacy activities, taking into account all facts and circumstances, constitute implied political campaign intervention. The tax code consistently uses such a facts-and-circumstances test for all nonprofits to determine whether political campaign intervention has occurred. The IRS recognizes that material may "reflect a dual character" in that it may contain elements of grass roots lobbying with respect to legislation and, at the same time, be biased in favor of a candidate. This presents subtle line-drawing problems in particular cases, similar to the issues that arise with charities, as well as with taxable businesses, when trying to distinguish "lobbying" with respect to legislation from discussions of broad social issues.

There may have been the implicit assumption in 1974, when section 527 was enacted, that political organizations generally would be subject to the FECA regime, which had been enacted just three years earlier and also referred to contributions and expenditures for "the purpose of influencing any election." However, in the aftermath of the Supreme Court's 1976 decision in Buckley v. Valeo, the scope of the FECA has been shrinking. As Federal courts during the mid- and late-1990's adopted a narrow interpretation of communications covered by the FECA, it became easier for entities to admit before IRS that they had an agenda to influence elections (and thereby obtain certainty in their tax law treatment) yet still claim that they were immune from FEC regulation because they did not engage in "express advocacy."

The narrow, "express advocacy" standard used by some courts in applying the FECA regime avoids the difficult and sometimes subtle determinations that are required under a facts-and-circumstances approach. In the FECA context - which does not involve a tax subsidy issue - it remains an open question whether the "express advocacy" standard is constitutionally mandated. However, the "express advocacy" standard is inherently under-inclusive; and if used in the tax code, effectively would allow tax-free funds to subsidize political campaign intervention. Therefore, the "express advocacy" test is not the appropriate standard for tax code purposes. At the same time, the tax code's broader facts-and-circumstances approach results in a broad class of entities being eligible for section 527 status as "political organizations," when only a subset of such organizations currently are subject to FECA disclosure rules.

The information required to be furnished to the IRS by section 527 organizations under current-law rules generally is adequate for tax administration purposes, given the non-deductibility of contributions to these organizations and the fact that their net investment income is subject to tax. As with other tax-exempt entities that receive similar tax treatment, it may be appropriate to require section 527 organizations, at a minimum, to file with the IRS (and make publicly available) an annual information return.

Under FECA, however, timely periodic disclosure throughout an election cycle and disclosure of contributor identities is essential to effectuating the goals of that statutory scheme. The purpose of the FECA regime is to educate the public and to prevent corruption of the electoral process. The objectives of the FECA disclosure regime are not being accomplished in the case of section 527 organizations which carry out activities that are admittedly intended to influence the electoral process, yet stop short of the "express advocacy" line.

The Administration supports enhanced disclosure by political organizations as part of its efforts to expeditiously achieve comprehensive campaign finance reform. Just as the current tax code rules do not distinguish between "express advocacy" and "issue advocacy" in the electoral context, so too should the disclosure requirements governing political organizations - under either the Internal Revenue Code or the Federal election laws - not depend on formalistic distinctions between communications that are obviously designed to influence the electoral process.

In recent years, a significant issue has developed, whereby some section 527 political organizations satisfy public disclosure requirements, while other section 527 entities with the admitted primary purpose of influencing elections can side-step disclosure requirements by simply avoiding the use of certain "magic words" in their election advertisements. This is an untenable situation. The important public interest to be served by disclosure is equally applicable to all section 527 entities, regardless of whether they attempt to influence Federal elections through "express advocacy" or "issue advocacy." As several recently introduced bills demonstrate, there are alternative approaches for achieving consistency in the disclosure obligations of section 527 political organizations. The Administration appreciates efforts made by Members of both parties and looks forward to working with Congress to craft legislation that will provide for enhanced disclosure of political campaign activities.