Interests behind 527 groups seeking ways around new law

Introduction

Though the law forcing certain tax-exempt political groups to disclose their donors and expenditures is just days old, some of the interests behind the groups are already seeking ways around it.

“I have no intentions of submitting to this,” said William Wilson, spokesman for the Council for Responsible Government, one of the Section 527 groups affected by the disclosure law signed by President Clinton on July 1. “I won’t let John McCain or anyone else tell us who we can and can’t support. No one will roll over on this.” Wilson said Section 527 groups plan to contest the law before the November election.

Senator McCain, R-Ariz., has long been a supporter of campaign finance reform.

During the Republican presidential primary campaign, he was targeted by one of the 527 groups – named for the section of the Internal Revenue Code that provides their tax exemption – that condemned his environmental record while praising that of McCain’s then-rival, Texas Governor George W. Bush. Bush denied any connection with the group.

McCain filed a complaint with the Federal Communications Commission, arguing that the stealth group, Republicans for Clean Air, did not exist before the ads ran, and exists only on paper. The complaint is still pending. After passing the House, it was McCain who managed the bill in the Senate, where it passed 92-6 on June 29, becoming the first campaign finance reform legislation enacted into law in 21 years.

The IRS amendment will not end interest group-run advertisements in campaigns—but will fill a specific disclosure gap in the system opened by Section 527 groups. Section 527 groups are now required to register with the Internal Revenue Service within 24 hours of being created and file monthly or quarterly reports, at their option, reports disclosing all their contributions and expenditures.

July 12 IRS notice

According to a July 12 notice from the IRS, IR-2000-49, current 527 groups must register with the IRS before the end of July. The law does not restrict political activity, but seeks to increase responsibility and transparency for political speech. The IRS said in its news release that it is “working on procedures to make copies of the forms available for public inspection as soon as possible.”

James Bopp, attorney for the Republicans Majority Issues Committee, the 527 group tied to Majority Whip Tom DeLay, R-Texas, is another who might resist the new law. He told the Center that his Section 527 clients — he won’t say how many there are — were considering three options: continuing as they are and following the new law, reorganizing to avoid disclosure or suing the government in an attempt to strike down the law. Like Wilson, Bopp argued that the law violates freedom of speech by forcing groups of citizens to disclose how much they spend on their advertisements. “I’m never surprised when politicians get together and move to shut up citizens who want to talk about their voting records,” Bopp said.

Anthony Corrado, co-chair of the new Campaign Finance Institute, a D.C.-based think tank, agrees that the disclosure law might be on thin ice: “Basically, this law is certainly constitutionally challengeable on the grounds that it requires disclosure of spending that doesn’t meet a strict standard of electioneering, and as a result, it is to be expected that they will take it to court. They will argue that issue ad expenditures don’t have to be disclosed,” said Corrado, professor of government at Colby College in Waterville, Maine.

The Section 527 law and its repercussions

Although the new law requires Section 527 groups to report their contributions and expenditures, groups formed under other sections of the Internal Revenue Code are able to avoid reporting, offering other places in the shadows for donors.

Business coalitions, labor unions and interest groups can conduct the same type of political advertising as Section 527 groups while avoiding the new requirements, so long as they don’t spend more than 50 percent of their budget on political activities, according to IRS rulings. These other groups’ large donors won’t be able to avoid gift taxes, as are large donors to Section 527 groups (one of the main attractions of using this tax section in the first place). But reorganization as an interest group or association would enable a Section 527 group to run campaign-related messages without detailing specific contributors or expenditures.

“Groups that want to continue to raise and spend money will continue to do so,” Corrado said. “They will either disclose their money or they will restructure to avoid disclosure . . . All this bill does or says is tell us where the money comes from. It doesn’t discourage this type of activity at all.”

How the law works

The IRS will be the warehouse for all disclosure information required by the new law. The IRS is to be notified of a new group within 24 hours of being created, and within five days the agency will add the new group to a public list. This information is to be available on the Internet and at every IRS office.

Section 527 groups that receive more than $25,000 annually will require disclosure reports filed monthly or quarterly, at their option. These reports will disclose contributions greater than $200 and expenditures of more than $500. Annual tax returns will also be made public.

The IRS is trying to figure out how to manage this enormous task. An IRS spokeswoman told the Center that the IRS is “working as rapidly as possible to comply with the new law. Our first priority is to set up ways for the IRS to be notified of these groups’ existence and then make these notices public.” The spokeswoman said that optimistically, some registration information could be available on the IRS website by mid-July.

Further campaign finance reform
House and Senate members recognize that shutting the Section 527 loophole will not stop all the gaps in the campaign finance law. Representative Amo Houghton, R-N.Y., author of the 527 legislation, said, “regulating so-called 527 groups is a good start, but our fear is that closing one loophole will simply open others.” McCain and others say they are going to work for further reform of the campaign finance system to limit soft money contributions and increase disclosure of all political advertising during an election cycle. The president asked Congress to “put public interest over special interest and pass real campaign finance reform” by passing “the bipartisan legislation sponsored by Senators McCain and Feingold and Representatives Shays and Meehan” limiting soft money and increasing disclosure. Representatives Christopher Shays, R-Conn. and Martin Meehan, D-Mass., and Senators McCain and Russ Feingold, D-Wis., failed in the last session of Congress to abolish soft money, but are trying to use recent public support for further reform.