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Tax loophole stirs debate over political contributions

Experts predict millions of dollars will pass through groups with tax-exempt status ahead of the 2000 presidential election.


© St. Petersburg Times, published October 18, 1999

WASHINGTON -- It is the equivalent of a Swiss bank account for campaigns, a loophole in the tax code that, election lawyers say, allows politicians and special-interest groups to give complete anonymity to their contributors.

In the past two years, political groups have been taking increasing advantage of this loophole to raise millions of dollars for campaign-related advertising and other activities. Such fundraising is generally not subject to public disclosure rules.

And it's all perfectly legal.

The Senate this week will wrestle with this relatively new phenomenon during debate on a campaign finance reform bill.

The bill, sponsored by Sens. John McCain, R-Ariz., and Russell Feingold, D-Wis., would ban the large, unlimited donations to national party committees known as "soft money." A trio of Democratic senators led by Joseph Lieberman of Connecticut plans to offer an amendment requiring complete disclosure from these groups.

"We believe the public has an absolute right to know the identity of those trying to influence our elections," Lieberman and his co-sponsors, Minority Leader Tom Daschle of South Dakota and Carl Levin of Michigan, said in a statement.

Who are these groups? In many cases, the public's only way of knowing is through word of mouth. One notable organization of this type is GOPAC, ex-Speaker Newt Gingrich's former political committee. A few years ago, a federal judge ruled that GOPAC for the most part did not have to file disclosure reports with the Federal Election Commission.

These organizations are not required to incorporate or file public tax returns, as do other tax-exempt organizations, such as charities. In some cases, they can be just a bank account.

There is no disclosure required as long as they stick to running so-called issue ads that do not explicitly endorse a candidate. But the ads, in discussing a candidate's stands on issues, can be clearly negative or positive toward a particular candidate, and in this way influence voters' perceptions.

Meanwhile, there is no way to quantify how much is being raised to influence the political process in this manner, who is donating the money, or how much an individual person or corporation is giving.

"You can call it privacy. You can call it opacity," said Frances Hill, a visiting tax law professor at the University of Pennsylvania who specializes in political organizations.

But Greg Colvin, a tax lawyer in San Francisco who advises liberal-leaning political clients on using the loophole, said there are legitimate reasons for keeping the names of donors private.

"There is in this country a history of rather severe consequences for people who are members of unpopular political groups," he said, citing people who support civil rights, gay rights and abortion rights as having been targets of violence. "There's a place for organizations that can protect privacy."

Colvin said he represents environmental and liberal groups, some of which are gearing up to run advertising in connection with the 2000 election. The organizations, which he declined to name, are also interested in swaying voters in California on certain ballot initiatives.

So how much money will flow secretly through these political organizations in the 2000 elections? Again, with no public disclosure, observers can only guess.

Hill said hundreds of millions of dollars would be an "accurate estimate" of how much money will be raised. "I think the only serious error would be to underestimate the amount," she said.

"People usually don't set them up to spend less than a million," Colvin said of organizations that take advantage of the loophole.

According to the Capitol Hill newspaper Roll Call, former aides to House Majority Whip Tom DeLay of Texas plan to collect $25-million in this manner for an organization called the Republican Issues Majority Committee. The former aides did not return phone calls from the St. Petersburg Times seeking comment.

Another group associated with Rep. J.C. Watts of Oklahoma, the House GOP's fourth-ranking leader, hopes to raise $35-million for pro-Republican television advertising campaigns in the 30 most competitive House races next year, Roll Call reported.

These political organizations are classified as tax-exempt groups under Section 527 of the tax code. Such "527 organizations" are not new; national party committees like the Republican National Committee and Democratic National Committee are also tax-exempt groups under Section 527.

What's new is an interpretation of the law that disclosure of donors is not required. While the RNC and DNC disclose the names of their large "soft money" donors, in accordance with a 1991 requirement by the Federal Election Commission, the new organizations are thumbing their nose at the FEC's regulation.

This brashness is fueled in part by GOPAC's victory a few years ago in federal court. GOPAC is a 527 organization, and the Federal Election Commission had sued the committee to force disclosure of its donors. But a federal judge ruled that for the most part, GOPAC was not required to disclose.

Another development concerned the political activities of tax-exempt social-welfare groups, classified under Section 501(c)4 of the tax code. Such groups are not allowed to act in a partisan manner, but they can educate the public through advertising and other communications about issues of importance to them.

The 1996 elections saw new, creative and possibly illegal uses of 501(c)4 organizations. When these groups got into trouble for appearing overtly political, they simply switched their tax status to Section 527. They remained tax-exempt and now were free to conduct political work -- without having to file any more public tax returns.

The tale of a shadowy political group called Triad Management Services Inc. is a good illustration. In the 1996 elections, it operated two innocuous-sounding social welfare organizations, Citizens for Reform and Citizens for the Republic Education Fund, which in turn paid more than $3-million for television advertising to bolster 29 conservative congressional candidates.

Citizens for Reform paid more than $100,000 for a television campaign against Bill Yellowtail, a Democrat running for Montana's lone U.S. House seat. The ads revealed Yellowtail's history of domestic violence and intoned sarcastically: "Call Bill Yellowtail. Tell him to support family values."

Yellowtail, who had been ahead in the polls, lost to his Republican opponent.

So who was behind Citizens for Reform? In a precursor to what can be expected in 2000, nobody knew.

Only later, in press reports and Senate hearings, was a name revealed. A wealthy Pennsylvanian named Robert Cone, a staunch opponent of abortion rights who formerly co-owned the Graco Children's Products company, turned out to be a major donor. Other backers of the television campaign were never confirmed.

In 1997, after all the controversy, Citizens for Reform and the Citizens for the Republic Education Fund dropped their status as 501(c)4 social welfare organizations. They turned themselves into political committees under Section 527.

Likewise, the Christian Coalition this year reorganized in part as a 527 organization after the IRS denied its application for tax-exempt status under Section 501(c)4.

The IRS had ruled that the coalition's voter guides comparing candidates' stands on the issues were written in a manner that clearly favored Republicans, and were thus impermissibly partisan.

As a 527 organization, the coalition now can continue to distribute voter guides, regardless of their partisanship, although churches that hand out the guides must worry about violating their own status as non-partisan charities.

A further advantage is that donors to the coalition's 527 arm can give large amounts of money without being subject to federal gift taxes, as was the case when they gave more than $10,000 to its previous incarnation.

Will Congress amend this quirk in the tax law and bring these organizations under federal election rules? It is unclear. Although Feingold, one of the Senate co-sponsors of the campaign finance reform bill, said in an interview that he is "very concerned about this growing problem," Senate Republican leaders are adamantly opposed to changing a system that has seemed to favor them.

The House this year approved a strong campaign finance reform measure. But the head of the GOP's Senate campaign arm, Sen. Mitch McConnell of Kentucky, has vowed to filibuster the McCain-Feingold bill in the Senate. And it is uncertain whether reformers have the 60 votes needed to cut off debate.

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