Political Groups Change Status to Avoid Disclosure
By Susan Schmidt, Washington Post,
Political groups that want to keep their finances secret are changing
their tax status in order to avoid having to reveal their donors and
spending, making an end-run around a new law intended to crack down on
anonymous political activity.
The law, which took effect July 1, was aimed at groups that engage in
political activity but claim they do not have to report their finances
to federal election officials because they are not backing or opposing
The first major change in the campaign finance laws in more than two
decades, it was passed after an outcry over the growing number of
groups known as "527s," after the section of the tax code
covering political committees. It instructed such groups, called
"stealth PACs" by their critics, to register with the Internal
Revenue Service and, by Oct. 15, to disclose their contributors and
But instead of complying with the new law, a number of groups are
instead reconstituting themselves under other provisions of the tax
code that do not force them to reveal their donors and require far
less--and less frequent--reporting overall.
GOP election lawyer Benjamin Ginsberg said his firm's 527 clients are
converting to nonprofit status in droves to avoid the new disclosure
rules. "We'd be running out of fingers and toes" trying to
count the number, he said.
Nonprofit status allows the groups to continue to engage in such
activity as running "issue ads" highly critical or laudatory
of individual candidates. But as nonprofits, they have to publicly
report only their overall receipts and spending, not individual
donors, and such reports would be due long after the election is over.
"It is clear that those who want to stay secret will have lawful
vehicles to remain secret," said GOP election lawyer Jan Baran.
For example, Citizens for Better Medicare, a group financed largely by
the pharmaceutical industry, is in the process of changing its tax
status to nonprofit.
The group, which identifies itself on its Web site as "a
broad-based, bipartisan group representing the interests of patients,
seniors, pharmaceutical research companies, doctors" and others,
said on its registration form that it is in fact related to PhRMA, the
drug industry's trade group, meaning that they share "substantial
common membership" or "substantial common direction or
But by changing its tax status, the group, which has run millions of
dollars in television ads opposing the Clinton administration's
Medicare prescription drug plan, will not have to detail its corporate
support and spending in later filings.
"It's unfortunate though not that surprising that some of these
stealth PACs are reorganizing under the tax code in order to keep the
source of their money secret," said Leslie Phillips, a spokeswoman
for Democratic vice presidential nominee Joseph I. Lieberman, a
sponsor of the legislation in the Senate. "If their primary
purpose remains election activity . . . then that's an abuse of the
tax code and the public subsidy of tax exemption."
Even as the law was being debated, it was clear that groups determined
to keep their donors secret would have an escape hatch by moving to a
different section of the tax code. However, proposals to cover more
kinds of advocacy groups were opposed by unions and some conservative
Some groups that publicly announced the formation of 527s early this
year have now jettisoned the idea. Shape the Debate, a nonprofit group
associated with former California governor Pete Wilson (R), ran ads
early this year attacking Vice President Gore's campaign finance
record, but dropped plans to create a 527.
Liberal-leaning groups are also staying clear of the new 527 rules as
well. One of them is Business Leaders for Sensible Priorities, a group
bankrolled by Ben and Jerry's Homemade Ice Cream founder Ben
Cohen. The group announced early in the year it would form a 527
committee to work in 10 congressional districts promoting more money
to schools and less to the military. Duane Peterson, an official of
the organization, said this week the idea was dropped, though he said
it was not because of the new disclosure rules.
"Prospective donors want to give to a cause or an issue, but
they'd just as soon not have their names or addresses on the
Internet," said GOP lawyer Cleta Mitchell.
Conservative groups complain that the law unfairly targets them
because unions--which account for a large amount of the outside
spending on behalf of Democrats--are not subject to the reporting
rules. Some groups are simply refusing to register, challenging the
law's constitutionality in federal court instead. The National
Federation of Republican Assemblies, a conservative group, is lead
plaintiff in a federal lawsuit filed in Mobile, Ala. The group's
lawyer, Mark Braden, said 10 to 15 other organizations are expected to
join the case.
Among those that have registered under the new law is a group that
helped spur its formation, Republicans for Clean Air. The previously
unknown entity poured $2.5 million into the GOP primary campaign in
commercials praising Texas Gov. George W. Bush and attacking his
opponent, Arizona Sen. John McCain. It turned out the group was
entirely financed by two Texas brothers, Charles and Sam Wyly, who are
longtime Bush backers.
Kenneth Gross, a lawyer who represents 527 groups, said the new law
will reveal some previously unknown political activity, because not
all groups will want to go to the trouble of seeking nonprofit status.
"I don't think there are going to be any great revelations,"
he said. "If you are hellbent on not disclosing, you can find a
way to do it."
Some groups that choose to file their reports monthly have already
disclosed donors and spending. For example, the League of Conservation
Voters reported receiving $885,000 in July, including $625,000 from
Rockefeller family heir Alida Messenger. The Sierra Club's 527
reported taking in $50,000--a single check from San Francisco
investment banker William Hambrecht--and spending $152,000 in
July. The Sierra Club has been running ads critical of Bush.
2000 The Washington Post