Loophole allows donors to give without leaving a trace

Introduction

The same day that Democratic presidential candidate Al Gore unveiled his campaign finance reform proposal, an organization with ties to former California Gov. Pete Wilson launched a national attack on Gore by exploiting a tax-law loophole that allows a group to influence elections without having to report its existence to the Federal Election Commission or the Internal Revenue Service.

The organization, Shape the Debate, is one of a growing number this election season that are taking advantage of Section 527 of the Internal Revenue Code, which allows for so-called “issue ads” by groups that are free to receive contributions from any source and invest unlimited resources into campaigns, skirting all donation limits and disclosures.

In television ads, titled “Hypocrisy,” that began running Monday, the California-based Shape the Debate parodies the Jeopardy television game show. With $1.5 million it has raised from donors (Wilson is a prime fund-raiser, the Associated Press reports), the organization attacks Vice President Gore over campaign finance violations, his positions on tobacco, and a 1993 tie-breaking vote to cut Medicare funding.

The ad does not tell viewers to support or oppose Gore, but in the words of Shape the Debates legal counsel, Chip Nielsen, merely “applies pressure” to the candidate.

“Shape the Debate will energize and inform citizens about issues and problems that have approached a critical point,” says Nielsen, who was a counsel in Wilson’s senatorial and gubernatorial campaigns.

Other former Wilson aides in the group include political consultant George Gorton, Wilson’s closest political adviser. He founded “Shape the Debate” and is directing the ad campaign.

The ad is running on CNN political programs, and on cable systems in the four largest California markets as well as in New York and Washington, D.C., the group announced. The ad targets high-interest voters and is to air during political talk shows 30 times a week in each market for the next month.

Gorton told the Center that he wouldn’t reveal the names of contributors because “some donors would face retaliation from the government for criticizing Vice President Gore.” He did indicate that much of the money comes from big-business interests that are regulated by or do business with the government. He said they are fearful of retribution.

Under Section 527, any interest group, wealthy individual, corporation or even foreign national may influence elections without leaving a trace. While the section stipulates that an organization cant directly advocate the election or defeat of a candidate— it can land a solid hit that leaves its position unmistakable.

Ads targeted McCain

The group is only the latest to run issue ads targeting a candidate in the presidential primary and cloaking itself in 527 status. Sam Wyly and his “Republicans for Clean Air” targeted presidential hopeful Senator John McCain right before Super Tuesday in advertisements that ran in New York, Ohio and California. The ads criticized McCain’s environmental record and touted Bush as a more progressive environmentalist.

Wyly and his brother Charles were the two major backers of the ads. Had they not stepped forward, the group would never have had to reveal who was behind the last-minute campaign that affected the Super Tuesday results.

The Annenberg Public Policy Center estimates that thus far in the presidential campaign, more than $114 million has been spent or is committed to be spent on issue advocacy by the political parties and such outsiders as 527s and interest groups. For the 1996 cycle, the public policy center estimated that between $135 million and $150 million was spent.

Group is a “black hole”

A new 527 group is a “black hole.” Like the hypothetical object, from which neither light nor matter can escape, these groups operate with invisibility and anonymity, using a section of the law that is larger than any minor campaign finance loophole.

Political parties, political action committees and candidate-campaign committees were the original incarnation of the 527. They are defined by the IRS as “organized . . . primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for the function of influencing or attempting to influence the selection, nomination, election or appointment of any individual to any federal, state, or local public office . . .”

The language creating the 527 tax section assumed that 527 groups would report all activity—indirect or direct involvement in campaigns—to the FEC. But a “black hole” group doesn’t work under that assumption.

Language makes all the difference. Buckley vs. Valeo, a 1976 Supreme Court case that changed the face of interest-group and political-party politics, defined the language a group must use to be considered subject to FEC juridsiction: “vote for, vote against, elect, defeat, support, reject.” To avoid disclosure and limits, the groups must avoid these words.

Gore has called the “black hole” groups “the equivalent of Swiss bank accounts for campaigns . . . [they hide] donors from the public and use the money raised to fund attack ads.”

The controversy over “black hole” groups started in 1995. In 1997, the IRS conducted 50 audits on tax-exempt interest groups suspected of too much political involvement. To remain tax-exempt under 501©, an interest group cannot use more than one-half its funds for electioneering. The dash for 527 status began because “section 527 requires precisely those campaign-focused activities that jeopardize the exempt status of interest groups,” according to University of Miami Professor Frances Hill.

“There has been a recent surge in creation of 527 funds,” said James V. Lacy of Wewer & Lacy, a law firm specializing in nonprofit organization law for the last 12 years. “Many people are coming into new wealth; this is an election year; people are looking for ways to enter into the political arena.” Lacy’s firm placed an ad in February’s Campaigns and Elections, a magazine aimed at campaigning professionals, advertising its expertise in creating 527 soft money funds.

Foreign donations

The thrill of non-disclosure also entices foreign groups wishing to influence U.S. political races. The campaign finance scandals of 1996 involving foreign donations are about small potatoes compared with the free-flowing currency that potentially can seep into “black hole” groups without limit or record.

A major financial incentive exists as well. Large contributions to “black hole” groups aren’t subject to a gift tax, as with donations to interest groups. James Bopp, Republican attorney for the Republican Majority Issues Campaign, a 527 group formed by associates of Representative Tom DeLay, R-Texas, argues that the gift tax applicable in interest-group tax-exempt status was never enforced to begin with; but if enforced, the tax could go as high as 55 percent.

“The IRS thought that interest groups would just stop their political involvement once they had clamped down on them, but they didn’t. They just change their status,” Bopp told the Center. “The groups were forced to change their status to avoid audits and rulings against them, and so they could continue the political involvement which they had always had,” Bopp said.

“There is no tax application to file, no gift tax, the tax return is simple and doesn’t disclose much at all and isnt publicly available, and you only have to pay tax on invested income,” said Greg Colvin, San Francisco-based tax attorney. He heartily encourages clients to make the move. The 527 organizations must file with the IRS if they earn $100 or more in capital gains taxes, so they try not to earn that much.

Capitol Hill is looking more closely. Senator Joseph Lieberman, D-Conn., and Representative Dennis Moore, D-Kan. have made statements about the lack of disclosure of these new groups and are introducing legislation in their respective chambers to restrain the groups and mandate more disclosure.

The Joint Committee on Taxation has also recommended action to Congress that would require full public disclosure of activity by those organizations. However, even if something were to pass Congress this year, it wouldn’t take effect until after the November election.

Gore, Bush positions

Under Gore’s proposed campaign finance changes, donors would be disclosed for all issue-ad campaigns run 60 days prior to an election. He also urges equal television time for candidates targeted by issue ad campaigns.

George W. Bush’s policy on issue ad campaigning is that he will “preserve the right of individuals and groups— from the Christian Coalition to the Sierra Club — to run issue ads.”

Scott McClellan, press officer for Bush, said that the governor “has been on the receiving end of third party attack ads like NARAL [National Abortion and Reproductive Rights Action League] and Sierra Club throughout the campaign. The governor believes third parties should disclose whos funding their political ads, but recognizes that the Supreme Court has made it clear that this is a First Amendment issue and that the NAACP or Sierra Club cannot be made to disclose their donors.”

“Voters will be inundated with political information from all sides candidates, political parties, interest groups, and these 527s,” Professor David Magleby, an expert on soft money and issue advocacy at Brigham Young University, told the Center. “Groups will enter from every direction and voters wont know what’s hit them and won’t know who’s trying to influence their vote because these groups don’t have to disclose anything.”