527s run aground in the states

Introduction

With $51 million in the bank for 2005 so far, 527 committees are riding high in the off-year election cycle. On the campaign trail, though, many of these political nonprofit organizations are running afoul of state regulators and election authorities.

So-called 527 committees—nicknamed for the section of the tax code under which they receive a tax exemption—can spend money in support of specific issues but not for the election of particular candidates. Some have been fined, forced to open their books or left to dissolve after months of battling state officials.

Take the Club for Growth, for example. The popular free-market political group—a top earner among 527s with $2.6 million raised so far this year—is being sued by the Federal Election Commission for failing to register as a political committee with the agency while spending money to influence congressional races.

Other 527 groups have found themselves in similar hot water with local officials because those in charge either sidestepped or misunderstood strict state campaign finance laws. Some alleged infractions include illegally contributing corporate money to state races, supporting a candidate rather than advocating an issue, forgetting to register with the state along with the IRS, and failing to disclose financial donors to the appropriate authorities.

The IRS has taken note of the nonprofits operating in state races as well. A recent IRS inspector general’s report criticized 527s that describe themselves as “state and local political committees” to avoid filing the appropriate forms with the IRS and state election authorities—leaving the public in the dark about who is paying for what in political races. “We identified some degree of noncompliance by both new and existing Section 527 political organizations in filing their applicable public disclosure reports,” the report noted. “Our audit tests showed that an estimated 580 Section 527 political organizations may have started receiving contributions or making expenditures before notifying the IRS of their existence.”

However, the federal rules governing 527s can’t be the groups’ sole consideration. The organizations cannot neglect filing with state authorities, said Frances Hill, the director of the graduate-level tax law program at the University of Miami law school.

“The states are sovereign over conduct of state elections,” Hill told the Center for Public Integrity. “You have to notify the states you are doing business in the states.”

Out West

The rules governing 527s can seem opaque, even to experienced state politicians. Jack Jewett, a former Republican Arizona state legislator, found himself in trouble with state officials after co-founding a nonprofit group to align with moderate politicians.

In November 2003, the Club for Growth announced at a news conference that it would open an Arizona chapter and call on state Republicans to support the conservative leadership or be voted out at the polls. According to Jewett, the group was targeting Republicans who had broken with the majority to support a bipartisan budget plan.

Jewett decided to fight back. He and fellow-Republican Grant Woods, a former Arizona attorney general, formed their own 527—Mainstream Arizona—to “promote moderate political philosophies and align those philosophies with officeholders.”

But Jewett’s group soon came under fire—not from his intended opponents, but from state authorities. After Mainstream Arizona sent out mailers in August 2004 supporting a slate of moderate candidates, the state’s Citizens Clean Elections Commission looked into the organization, beginning an inquiry that would lead to months of legal wrangling, a $5,000 fine, and the eventual dissolution of the group.

Mainstream Arizona’s mistake was that it had registered with the IRS as a 527, but not with the state. “Because this was a state race—it was not a federal race—there were additional rules they needed to follow,” said Andrea Esquer, a spokeswoman for the Arizona Attorney General’s Office.

Up North

Another group that has had problems with often complicated campaign laws is 21st Century Democrats, a 527 operating in several battleground states. The group registered with the Federal Election Commission and the IRS, but did not file the correct forms in the state of Minnesota. The lapse earned the committee the state’s largest-ever campaign finance fine—more than $400,000.

Any 527s contributing to a state party “either have to register or in lieu of registering, they can provide the recipient committee with a statement that meets Minnesota’s reporting requirements,” Jeanne Olson, executive director of Minnesota’s Campaign Finance and Public Disclosure Board, told the Center. “A statement must accompany the contribution.”

The state’s House Minority Leader, Democrat Matt Entenza, also came under attack for his $300,000 contribution to the group. Republican critics charged that the minority leader was hiding funds for his and others’ campaigns; 21st Century Democrats supported voter registration drives and supplied staff to help Minnesota Democrats—many of whom served with Entenza in the state legislature.

The group has since contested the fine, and on June 30, 2005, an administrative law judge ruled that the campaign board wrongly denied 21st Century Democrats the right of appeal in late 2004.

No officials from 21st Century Democrats responded to requests for comment on this story.

Back East

In Pennsylvania, a 527—the Republican State Leadership Committee—found itself under uncomfortable scrutiny when it shifted some corporate money to the state party. The practice is illegal in the Keystone State.

The group donated $480,000 to Tom Corbett, the Republican candidate for state attorney general, a few weeks before the polls opened, triggering an investigation by state election officials. It later made another $90,000 contribution to Corbett, just days before the election.

A month after the election, court and state officials ordered the RSLC to disclose that its donation to Corbett, now the attorney general, was composed mostly of money from Aubrey K. McClendon, the chairman of Oklahoma-based Chesapeake Energy Corp. Like 21st Century Democrats, the RSLC had not filed complete disclosure forms with the state.

“It is somewhat of a gray area,” said Brian McDonald, a spokesman for the Pennsylvania Department of State. “In Pennsylvania’s election code itself, there is no mention of a 527. We just have to go on what the law states.”

The RSLC has run into trouble before: in August 2004, the group was fined $20,000 by the Louisiana Board of Ethics for failing to disclose its advertisement expenditures. The group also agreed to pay a $10,000 fine in June 2005 levied by North Carolina’s Elections Board for a $100,000 contribution the 527 had made to the state Republican Party, much more than the maximum $4,000 allowed.

Calls to RSLC’s offices in Washington, D.C., seeking comment for this story were not returned.

More trouble ahead?

Such gray areas leave even experienced politicians perplexed from time to time. Jewett, for one, thought he was abiding by 527 and state election rules. He had consulted his lawyers and believed that Mainstream Arizona’s actions were totally legal. “The language we used was: We were aligning with these folks, but we did not say ‘elect these folks,'” he told the Center.

Meanwhile, the IRS has accepted a key recommendation of its inspector general’s report: it will address 527s that are active in state races. Agency officials in Washington, D.C., plan to review state campaign finance laws and serve notice to the political nonprofits that are “operating beyond the scope of their authorized activities.”

Congress also has offered a slew of bills—one in the Senate and two in the House—addressing the 527 issue. However, all three have stalled, and a floor vote has not been managed on any of them so far.

With little help coming from Washington, state election officials are looking at another cycle of 527 activity in their races in 2006—and beyond.

“It is quite costly for states to enforce their own laws when you have well-financed entities with sophisticated lawyers who can evade state laws,” Hill said. “Many states do not have much of an election office. It is going to be somewhat of an unequal battle.”