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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 specific candidates.

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 spending.

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 control."

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 organizations.

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 Company

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