[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]







     DISCLOSURE OF POLITICAL ACTIVITIES OF TAX-EXEMPT ORGANIZATIONS

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 20, 2000

                               __________

                             Serial 106-103

                               __________

         Printed for the use of the Committee on Ways and Means


                    U.S. GOVERNMENT PRINTING OFFICE
68-223 DTP                  WASHINGTON : 2001

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402




                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma                JIM McDERMOTT, Washington
JERRY WELLER, Illinois               JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri              RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 8, 2000, announcing the hearing.................     2

                               WITNESSES

U.S. Department of the Treasury, Joseph Mikrut, Tax Legislative 
  Counsel........................................................    27
Joint Committee on Taxation, Lindy Paull.........................    42

                                 ______

Castle, Hon. Michael N., a Representative in Congress from the 
  State of Delaware..............................................    15
Center for Responsive Politics, Larry Makinson...................    70
Doggett, Hon. Lloyd, a Representative in Congress from the State 
  of Texas.......................................................     7
Hill, Frances R., University of Miami, School of Law.............    73
Lieberman, Hon. Joseph I., a United States Senator from the State 
  of Connecticut.................................................    13
McCain, Hon. John, a United States Senator from the State of 
  Arizona........................................................    10
Mitchell, Cleta Deatherage, Sullivan & Mitchell, P.L.L.C.........    87
Moramarco, Glenn J., Brennan Center for Justice, New York 
  University School of Law.......................................    60
Potter, Hon. Trevor, Brookings Institution, and Wiley, Rein & 
  Fielding.......................................................    81
Troy, Leo, Rutgers University....................................    98

                       SUBMISSIONS FOR THE RECORD

Alliance for Justice, John Pomeranz, letter......................   119
OMB Watch, statement.............................................   122
Walden, Hon. Greg, a Representative in Congress from the State of 
  Oregon, statement..............................................   128

 
     DISCLOSURE OF POLITICAL ACTIVITIES OF TAX-EXEMPT ORGANIZATIONS

                              ----------                              


                         TUESDAY, JUNE 20, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 2:03 p.m., in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                Contact: (202) 225-1721
FOR IMMEDIATE RELEASE,

June 8, 2000

No. OV-19

  Houghton Announces Hearing on Disclosure of Political Activities of 
                        Tax-Exempt Organizations

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on proposals for enhanced public 
disclosure relating to political activities of tax-exempt 
organizations. The hearing will take place on Tuesday, June 20, 2000, 
in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 2:00 p.m.
      
    Oral testimony at this hearing will be from both invited and public 
witnesses. Invited witnesses will include a representative of the U.S. 
Department of the Treasury. Also, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee or for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    Under current law, various tax-exempt organizations participate in 
the political process. Depending on the tax law provision granting a 
particular organization its exemption, that participation can include 
direct or indirect intervention in political campaigns, direct or 
grass-roots lobbying, and dissemination of analyses with a call to 
action. The public often has little or no information regarding the 
contributors to, or the nature and extent of, the political activities 
of these organizations.
      
    The Internal Revenue Service Restructuring and Reform Act of 1998 
(P.L. 105-206) directed the Joint Committee on Taxation and the 
Treasury Department to report on additional disclosures by tax-exempt 
organizations that would be in the public interest. The Joint 
Committee's report was delivered in January of this year as required 
and makes a number of recommendations for enhanced disclosure of tax-
exempt organization political activities. The Treasury Department has 
yet to submit its report.
      
    In announcing the hearing, Chairman Houghton stated: ``The public 
is entitled to know about the activities of organizations given special 
tax-exempt status by our laws. Unfortunately, current laws permit 
various organizations to shield their political activities from public 
scrutiny and accountability. This hearing will explore options for 
providing increased disclosure by all tax-exempt organizations 
participating in the political process.''
      

FOCUS OF THE HEARING:

      
    This hearing will examine various proposals for enhanced disclosure 
relating to the political activities of tax-exempt organizations, 
including organizations described in Internal Revenue Code sections 
501(c)(4), (5), and (6) and section 527.

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Traci Altman or Pete Davila at (202) 225-1721 no later than the close 
of business, Tuesday, June 13, 2000. The telephone request should be 
followed by a formal written request to A.L. Singleton, Chief of Staff, 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. The staff of 
the Subcommittee on Oversight will notify by telephone those scheduled 
to appear as soon as possible after the filing deadline. Any questions 
concerning a scheduled appearance should be directed to the 
Subcommittee on Oversight staff at (202) 225-7601.
      
    In view of the limited time available to hear witnesses, the 
Subcommittee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing. All persons requesting to be heard, whether they are scheduled 
for oral testimony or not, will be notified as soon as possible after 
the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
      
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Subcommittee are required to submit 200 copies, along with 
an IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, 
of their prepared statement for review by Members prior to the hearing. 
Testimony should arrive at the Subcommittee on Oversight office, room 
1136 Longworth House Office Building, no later than Friday, June 16, 
2000. Failure to do so may result in the witness being denied the 
opportunity to testify in person.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Wednesday, 
July 5, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Oversight office, room 1136 Longworth 
House Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                


    Chairman Houghton. The hearing will come to order. Good 
afternoon, ladies and gentlemen. We are here to discuss today 
how political activities by tax-exempt organizations are 
disclosed to the American public. The headlines usually focus 
on Federal election law. But on a taxwriting Committee, we are 
concerned about the obligation of tax-exempt groups to operate 
in the sunshine.
    I believe that the best way to handle political activities 
by tax-exempt organizations is to minimize regulation and to 
maximize disclosure.
    As with my constituents, and everyone I am sure in this 
room, I read newspapers and see ads on television about 
political races. It is difficult to know what to make of an 
advertisement without knowing who is behind it, who is paying 
for it.
    When it comes to the public's right to know who is doing or 
saying what, it makes no difference whether an organization is 
tax-exempt under section 501(c) or under section 527 of the 
Internal Revenue Code. We need disclosure by section 527 
organizations, but when 501(c) groups intervene in the 
political process they also should disclose what they are doing 
and who is paying. We cannot shy away from the task of striking 
a balance between the rights of individuals and groups to 
participate in the political process and the public's right to 
know, just because it is a difficult process.
    So I am pleased that several of my colleagues, the Treasury 
Department, the Joint Committee on Taxation, and several 
academics and election law attorneys will be giving us the 
benefit of their best thinking. Your insights will be helpful 
to us as we try to come to terms with this issue before the 
July 4 break.
    I am pleased to yield to my friend and colleague, Mr. 
Coyne, for any comments he would like to make.
    Mr. Coyne. Thank you, Mr. Chairman. I welcome these 
hearings and I hope they will lead to the enactment of 
legislation that will provide the public with information on 
the activities and funding sources of Tax Code section 527 
political organizations. We do not know how many tax-exempt 
527s exist today. These entities are not required to apply for 
tax exemption with the Internal Revenue Service or to report 
their financing or their activities,less in rare instances some 
net investment tax is due.
    Similarly, the public does not know who or what special 
interest is behind the issue ads that these organizations run 
in newspapers or on television. These political slush funds, as 
they have become known, undermine our election process and our 
tax-exempt laws. There is a simple way of preventing abuse by 
these organizations. Let the public know the truth about 
section 527 organizations, their purpose, funding sources, and 
political activities.
    I commend Subcommittee Chairman Houghton for his leadership 
on this issue. Today's hearing was organized by a bipartisan 
group of people and we did this with the goal of providing a 
hearing record which will support full public disclosure of 
organizations involved in political activities. I hope that the 
bipartisanship that went into selecting today's witness list 
that is with us today will continue.
    H.R. 4168 is within the jurisdiction of the Ways and Means 
Committee and provides a targeted and fair solution to the 
problem. The Doggett bill, sponsored by Congressman Lloyd 
Doggett, would merely require Code section 527 political 
organizations to file publicly disclosable reports, including 
the names of contributors and expenditures, with the IRS. The 
bill is designed to mirror the filing and disclosure rules that 
political parties and campaign Committees must follow under 
Federal election laws administered by the FEC. The penalties 
for noncompliance mirror the existing Tax Code penalties 
applicable to other exempt organizations that fail to file 
required returns or to provide the public with full disclosure.
    The substance of H.R. 4168 has been before the Committee 
for a vote twice and on the floor for a vote twice. In each 
instance, the legislation was defeated by the Majority party 
leadership. It is time to end the political games and have 
disclosure reforms enacted into law. This should be done before 
the upcoming elections in November.
    The Senate has approved on a bipartisan basis the 
legislation supported by House Democrats. As Senator McCain 
said on the Senate floor on June 8 of this year, and I quote, 
``There isn't an American who is well informed who does not 
know that this system has lurched completely out of control 
when people are allowed to engage in the political system and 
give unlimited amounts of money and have it undisclosed.'' .
    In conclusion, I understand that the Committee will be 
marking up Chairman Houghton's disclosure bill later this week 
and that the Republican leadership intends to bring a 
disclosure bill to the floor before the July 4 recess. Everyone 
agrees that the abuse of our tax and election laws by section 
527s is growing and it must be stopped. The only question is 
when, and I hope that we will do that now. Thank you, Mr. 
Chairman.
    Chairman Houghton. Thank you very much.
    If any of the other members of the panel have statements to 
make, if they could make them rather briefly because we have 
got a lot of work to do this afternoon. Have you got anything?
    Mr. McNulty. I will make it very brief, Mr. Chairman. I am 
a cosponsor of the Doggett bill. I associate myself with the 
remarks of Congressman Coyne and I look forward to hearing from 
these distinguished panels.
    Mr. Hayworth. Mr. Chairman, I just want to welcome the 
first panel, especially my senior Senator. I look forward to 
hearing the testimony and getting to work on truly full 
disclosure. I am especially interested in Governor Castle's 
take on this.
    Mr. Lewis of Georgia. Thank you very much, Mr. Chairman. 
Mr. Chairman, I am pleased that you called this hearing today 
on section 527, political organizations. I look forward to 
working with you on a bipartisan basis to address the mess 
created by these organizations.
    I also want to thank our first panel witnesses for 
testifying today and for all their hard work on this important 
issue. In particular, I want to commend my good friend and 
colleague, Lloyd Doggett, for his effort to close the 527 
loophole. I am a strong supporter of his bill, H.R. 4168.
    Every person in America realizes the importance and the 
necessity of fixing our system of financing elections. Closing 
the 527 political organization loophole is an important step 
toward that goal. These organizations can take unlimited money, 
almost from any source, even foreign money, and make 
expenditure without any disclosure to anyone. It is a sham, it 
is a shame, and it is a disgrace.
    H.R. 4168 will require simple disclosure by these secretive 
political organizations. The American people have a right to 
know. They have a right to know who is funding political 
campaigns in this country. They have a right to know who is 
behind attack ads. The American people have a right to a free 
and fair election process. It is time to close this loophole.
    Again, Mr. Chairman, I commend the efforts of Senators 
McCain and Lieberman for getting the amendment passed in the 
Senate. I hope this hearing is a step toward the House also 
passing legislation to close this loophole. Mr. Chairman, I 
look forward to working with you on this important issue and 
again I want to thank you for having the vision and the stick-
to-it-tiveness and dedication toward holding this hearing. 
Thank you very much.
    Chairman Houghton. Thanks very much, Mr. Lewis.
    Ms. Dunn.
    Ms. Dunn. Thank you, Mr. Chairman. So we can get to our 
witnesses quicker, I would like to ask unanimous consent to 
insert my comments in the record and thank all you gentlemen 
for the hard work you have done on what I think could be a very 
important disclosure law if we can make this work. I yield 
back.
    [The opening statement of Mr. McDermott follows:]

Opening Statement of Hon. Jim McDermott, a Representative in Congress 
from the State of Washington

    Mr. Chairman, Thank you for holding this hearing, I am 
anxious to delve into this issue here and at the full committee 
later this week. Mr. Chairman, the ideals of Jefferson and 
Madison, that any citizen may contest the offices that we hold, 
are under siege. It may seem dramatic to invoke the founding 
fathers today, and I do not do it lightly, however the problems 
of campaign finance reform are dramatic ones. The premise of a 
republic is that all citizens have a voice in their government. 
And yet, with each cycle, we see that our system is 
increasingly becoming one where only the very wealthy have that 
voice, and the poor and middle classes are effectively 
consigned to the political bleachers.
    The issues of campaign finance reform are complicated and 
contentious, and we will not address all the issues here today. 
However, by addressing the organizations that operate under 
section 527 of the tax code, we have chosen to investigate some 
of the most egregious excesses in the system. There are many 
legitimate organizations that have used this tax law for many 
years. However, recently, there has been much attention spent 
on the organizations who seek to exploit section 527 in their 
efforts to funnel massive amounts of money into politics, 
bypassing the letter and the spirit of campaign finance laws. I 
am looking forward to tackling this issue and bringing more 
transparency and accountability to these ``527 organizations''.
    I would like to commend my colleague and friend from Texas, 
Mr. Doggett, for his work on this issue. I would also like to 
add that I hope that this is the start of a series of campaign 
finance reform measures, such as soft money, that the Ways and 
Means Committee addresses, and not the annual attempt to ``fix 
the system''.
    Thank you.
      

                                


    Chairman Houghton. Thank you. We have got a star-studded 
panel out here. We are appreciative of your being here. Lloyd, 
would you start? Mr. Doggett.

 STATEMENT OF HON. LLOYD DOGGETT, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. Doggett. Thank you very much, Mr. Chairman, for your 
consistent courtesy and fairness, you and Mr. Coyne and the 
Members of the Committee. Before I made my first speech this 
year of many on 527s, I made an appeal to all Members of this 
Committee and to the Republican Caucus to make the cleanup of 
the worst excesses of the campaign mess a bipartisan endeavor. 
Though that initial offer was not successful, I remain very 
hopeful that given the tremendous interest and good intentions 
of Chairman Houghton, the significant success of Senators 
McCain, Lieberman, and Feingold, and securing Senate approval 
of 527 legislation as well as the active and very constructive 
participation of our colleague Mike Castle, that we can yet 
produce a bipartisan victory for reform in time for this year's 
election.
    I would respectfully suggest that achieving modest but 
meaningful reform that can actually be approved now should be 
the overriding concern of this Subcommittee.In short, what can 
we do now that will make this year's election a little bit 
cleaner?If we do not recommend legislation that can be approved 
and effective immediately, no matter how perfect it might be, I 
don't believe we will have accomplished anything meaningful.
    In that regard, I am pleased that Chairman Houghton has 
worked with Chairman Archer to schedule a markup of this 
legislation the day after tomorrow, and that Mr. Castle and 
others who might otherwise have supported my recent motion to 
recommit have been successful in securing a public pledge from 
the House leadership, voiced on June 9 by Majority Leader Armey 
who previously testified to this Committee that action on 527s 
was unnecessary, that we will now be voting on this important 
issue next week.
    That pledge must be fulfilled with a fair rule for 
bipartisan legislation that permits reasonable debate and a 
vote to send this legislation to the Senate so that they can 
consider it shortly after the July 4 recess.
    Time is strongly on the side of those who insist on 
obstruction. We must not permit them to run out the clock on 
reform this year.
    As a starting point for prompt action on this very tight 
timetable, I recommend that you consider H.R. 4168, the 
Underground Campaign Disclosure Act, which now has over 200 
House cosponsors. The language for the previous amendments and 
motions that I have offered has been drawn from this measure 
that I filed in April. The bill is quite similar to the 527 
amendment adopted in the Senate. They have got a couple of 
things that I think ought to be in this measure, and I have got 
a few that are in mine that are not in their's that I think are 
worthy of consideration.
    The first of those is the requirement, not in the Senate 
amendment, for electronic filing with immediate public 
disclosure. A second advantage is directed to the concern that 
I know you have, Chairman Houghton, that we have comprehensive 
coverage. I would require disclosure of whether 527 
contributions are coordinated with a candidate's agents or 
Committee as well as disclosure from any non-person or entity, 
such as a 501(c)(5) union or a 501(c)(6) association that is 
donating to a 527. This disclosure would include identifying 
information such as business purpose and tax status.
    A third advantage that I believe my language contains 
relates to penalties. I believe that we need the filing and 
disclosure penalties contained in the Internal Revenue Code 
section 6685 and 7207 with regard to failure to file or filing 
false documents, and I have also applied the gift tax. The 
latter has served as a deterrent to the misuse of 501(c)(4) 
organizations and the lack of an existing gift tax deterrent 
for 527 groups is apparently one of the reasons that so many 
interests prefer 527s. The Senate amendment offers a couple of 
desirable features that I have not included that I hope you 
will include--the filing of the initial notice shortened to 24 
hours and the requirement that an electronic address be 
included as well.
    During the last 3 months, at the same time that those in 
the House who are dependent on secrecy have been able to block 
disclosure, they have been able to raise and spend unlimited 
amounts of money to influence this year's election. That 
reality, continuing to seek more and more money from hidden 
donors even as we gather here in a bipartisan fashion this 
afternoon, demands one further improvement in this legislation. 
Any effective reform bill will require that those involved in 
the money chase this year disclose where they found the money. 
The effective date provision should require that organizations 
report on transactions since the beginning of this tax year. 
Without such language, there will be a mad race to collect more 
secret money just before the disclosure bill is signed into 
law, after which we will only learn that the 527 has a huge 
amount of cash on hand but not from whence it came.
    Finally, 527s have been properly called the high-
performance soft money. The ability to raise unlimited, 
undisclosed, unaccountable amounts of money have really made 
them the political superweapon of this year.
    RMIC is not just the sound of a frog. It is also the 
acronym for a Committee spearheaded by Mr. DeLay which 
reportedly has targeted donors interested in giving half a 
million to 3 million dollars each. I don't seek to limit his 
activities in any way, or that of any other interested person; 
only to require that he report, as all of us must do, 
individuals who gave, how much, and for what.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thanks very much, Mr. Doggett.
    [The prepared statement follows:]

Statement of Hon. Lloyd Doggett, a Representative in Congress from the 
State of Texas

    Before I made my first speech on 527's, I made an appeal to 
all members of this Committee and to the Republican caucus to 
make the cleanup of the worst excesses of this campaign mess a 
bipartisan endeavor. Though that initial offer was not 
successful, I remain hopeful that the tremendous interest and 
good intentions that you have voiced, Chairman Houghton, 
combined with the success of Senators McCain, Lieberman, and 
Feingold in securing Senate approval of 527 legislation as well 
as the active participation of our colleague Mike Castle can 
yet produce a bipartisan victory for reform in time for this 
year's election.
    I believe achieving modest but meaningful reform that can 
actually be approved now must be the overriding concern of this 
Subcommittee--what can we do that will make this year's 
election a little cleaner? If we do not recommend legislation 
that can be approved and effective immediately, we will have 
accomplished nothing worthwhile.
    In that regard, I am pleased that Chairman Houghton has 
worked with Chairman Archer to schedule a markup on this 
legislation the day after tomorrow. Moreover, Mr. Castle and 
others, who might otherwise have supported my recent Motion to 
Recommit, have been successful in securing a public pledge from 
the House Leadership voiced on June 9 by Majority Leader Armey, 
who had previously testified to our Committee that action on 
527's was unnecessary, that we will now be voting on this issue 
next week. That pledge must be fulfilled with a fair rule for 
bipartisan legislation that permits reasonable consideration of 
alternatives and a vote to send legislation that the Senate can 
consider for action after the July 4 recess. Time is strongly 
on the side of those who insist on obstruction; we must not 
permit them to ``run out the clock'' on reform.
    As a starting point for prompt action on this timetable, I 
recommend that you begin with HR 4168, The Underground Campaign 
Disclosure Act, which now has over 200 cosponsors. The language 
for the previous amendments and motions I have offered has been 
drawn from this measure that I filed in April. This bill is 
quite similar to the 527 amendment adopted in the Senate. It 
offers an advantage over the Senate amendment in requiring 
electronic filing with immediate public disclosure. A second 
advantage is directed to the concern that I know you have 
Chairman Houghton for comprehensive coverage. I would require 
disclosure of whether 527 expenditures are ``coordinated with a 
candidate, agent, or committee;'' as well as disclosure from 
any non-person (or entity) such as a 501(c)(5) union or a 
501(c)(6) association that is donating to a 527. This 
disclosure would include identifying information, including tax 
status and business purpose. A third advantage relates to 
penalties. I believe it is important to include the existing 
filing and disclosure penalties to which other tax-exempts are 
subject under IRC Sec. 6685 (relating to willful failure to 
comply with public inspection requirements) and Sec. 7207 
(relating to willfully filing false or fraudulent documents). I 
have also sought to apply the gift tax. The latter has been a 
deterrent to the misuse of 501(c)(4) organizations and the lack 
of an existing gift tax deterrent for 527 groups is apparently 
one of the reasons so many special interests prefer them over 
(c)(4)'s.
    The Senate amendment offers two desirable features that I 
had not included, but favor: filing of the initial notice is 
shortened from my 10 days to 24 hours, and that notice must 
include an electronic address, certainly a necessity in today's 
world.
    During the last three months at the same time those in this 
House dependent on secrecy have been able to block disclosure, 
they have continued to raise and spend unlimited amounts of 
money to influence this year's election. That reality--
continually seeking more and more money from hidden donors--
even as we gather here this afternoon, demands a further 
improvement in 527 legislation. Any effective reform bill will 
require those involved in the money chase this year to disclose 
where they have found it. The effective date provision should 
require that organizations report on transactions since the 
beginning of this tax year. Without such language, there will 
be a mad race to collect more secret money just before a 
disclosure bill is signed into law, after which we will only 
learn that the 527 has a huge amount of cash on hand but not 
from whence it came.
    527's have been properly called ``high performance soft 
money.'' The ability to raise unlimited, undisclosed, 
unaccountable amounts of money has made 527's the political 
superweapon of the 2000 elections. RMIC is not just a sound of 
a frog; it is also the acronym for a committee, spearheaded by 
Mr. DeLay, which reportedly has targeted donors interested in 
giving half a million to three million undisclosed dollars 
each. I don't seek to limit any of his activities--only to 
require that he report as all of us do who gave, how much, and 
for what.
      

                                


    Chairman Houghton. Senator McCain.

STATEMENT OF HON. JOHN McCAIN, A UNITED STATES SENATOR FROM THE 
                        STATE OF ARIZONA

    Senator McCain. Thank you very much, Mr. Chairman. I would 
ask that a statement by Senator Feingold, who sponsored this 
legislation with Senator Lieberman and me, be made part of the 
record.
    Chairman Houghton. Without objection.
    [The prepared statement follows.]

Statement of Hon. Russ Feingold, a United States Senator from the State 
of Wisconsin

    I am very pleased that the subcommittee is holding this 
hearing. This is an extremely important topic for the future of 
our campaign finance laws, and for the confidence of the 
American people in their elected officials. We need to act 
quickly to end the secrecy that so-called 527 organizations and 
those that act through them now enjoy. I commend the Members of 
the House and Senate who have seen the need to act in this area 
and have worked so hard to make sure the issue gets the 
attention it deserves. In particular, my colleagues Senators 
Lieberman, Levin, and McCain deserve a great deal of credit for 
leading the fight on this issue in the Senate, where we won an 
important, and to some surprising, victory a few weeks ago.
    I hope that the Ways and Means Committee and the full House 
will promptly pass a bill that, if nothing else, will end the 
veil of secrecy behind which 527s now hide. There is of course, 
much more that can and should be done on the campaign finance 
issue generally and to strengthen disclosure in particular. I 
note with pride that the chairman of this subcommittee is a 
strong supporter of the Shays-Meehan campaign finance reform 
bill. I am confident he will act to make sure that the views of 
reformers are heard during the upcoming House consideration of 
this disclosure issue. I want to make it very clear that none 
of us who support reform are under any illusion that a positive 
resolution of the 527 problems is all that needs to be done to 
cure the ills of the campaign finance system. It is a crucial 
first step, but only a first step. Our fight in the Senate for 
more far reaching reform, including a ban on soft money, will 
continue.
    At the same time, we cannot let our desire for more 
sweeping reform, or for broader disclosure, prevent us from 
dealing with the 527 problem in this Congress, and hopefully in 
the next few weeks. 527s are the only groups not affiliated 
with candidates or parties whose reason for being is to 
influence elections. And 527s are the only entities involved in 
the political process that can operate entirely in secret. 
Something has to be done about this right away. The American 
people have a right to know who these groups are, what they are 
up to, and who is funding them. There is no justification for 
secret money in elections.
    These 527 groups are now openly and proudly flouting the 
election laws by running phony issue ads and refusing to 
register with the FEC as political committees or disclose their 
spending and contributors. It is time that Congress called a 
stop to this, not to try to keep anyone from speaking or 
otherwise participating in elections, but to give the American 
people information that they desperately need and deserve about 
who is behind the ads that already flooding our airwaves, six 
months before the election.
    There is no reason that our tax laws should give protection 
to any group that refuses to play by the election law rules. 
For that reason, I have cosponsored and wholeheartedly endorse 
S. 2582, a bill introduced earlier this year by Senators 
Lieberman, Levin, McCain, and others to restrict the tax exempt 
status available under section 527 of the Internal Revenue Code 
only to those groups that register and report with the FEC. But 
at the very least, the public deserves more information on the 
financial backers and activities of groups that benefit from 
this tax exempt status, and that is what the amendment we 
passed in the Senate a few weeks ago attempts to provide.
    Time and time again when we debate reform on the floor of 
the Senate, the opponents of the McCain-Feingold bill say that 
they favor full and complete disclosure of campaign 
contributions and spending. All members of Congress who 
confidently proclaim that full disclosure is the answer to our 
campaign finance problems should realize that they cannot be 
consistent in that view if they don't support this bill to 
require disclosure by 527s. All we seek now, with respect to 
the 527s that are spending millions of dollars to influence 
elections, is disclosure, the most basic and common sense 
component of our campaign finance laws. It is said that 
sunshine is the best disinfectant. Here is our chance to throw 
some sunshine on this latest effort to cast a dark cloud on our 
campaign finance system.
    We know that many members of Congress are involved in 
raising money for 527s. Recently, there was a very disturbing 
report in the Washington Post about the Senate Majority Leader 
urging hi-tech companies to contribute to a new group called 
Americans for Job Security that is now running ads supporting 
one of our colleagues who is up for reelection. Americans for 
Job Security is almost certainly claiming a tax exemption under 
section 527, but at the same time it will not disclose its 
contributors or its spending. And we all know of the highly 
publicized connections between the Majority Whip in the House, 
Mr. DeLay, and various 527 organizations.
    These groups pose a special danger to the political 
process. If members of Congress can organize them or raise 
money for them, the real possibility of corruption emerges. 
What is the difference between a million dollar contribution 
directly to a candidate and a million dollar contribution 
requested by a candidate that plans to run ads to support that 
candidate or, more likely, attack his or her opponent? There 
really is no difference when you come right down to it. Right 
now, however, the first contribution is illegal, as it should 
be, and the second contribution is not. Our amendment doesn't 
prohibit that second contribution, it just asks that is be made 
public.
    As groups proliferate, the chances of scandal increase as 
well. It won't be long before reports of legislative favors 
received by big donors to 527 groups start making the 
headlines. Or foreign money, or money derived from organized 
crime, making its way into our election process by way of 527s. 
The 527 loophole is a ticking time bomb of scandal.
    Money, politics, and secrecy is a dangerous mixture. The 
lease we can do is address the secrecy ingredient in this 
potion. There is no justification whatsoever for allowing these 
groups to operate under the radar. Citizens deserve to know who 
is behind a message that is being delivered to them in the heat 
of a campaign. These groups that hide behind apple pie names 
are trying to obscure their identities from the public. The 
public is entitled to that information. And it is entitled to 
withhold a tax exemption from any group that refuses to provide 
the information.
    One of the questions that is going to be examined in this 
hearing and in the coming days prior to the promised House vote 
before the July 4th recess is whether the disclosure we seek of 
527s should be required of other actors in the political 
process. I believe it should, but I must caution this 
subcommittee. Our amendment dealing with 527s is absolutely 
fair and balanced. And it is constitutional. Any additional 
disclosure that we seek from others must also be balanced, and 
constitutional. If you're going to cover labor, you have to 
cover business, including for-profit corporations. And if 
you're going to cover those groups you really need to look at 
advocacy groups that received a tax exemption under section 
501(c)(4) of the tax code.
    The question of requiring disclosure by 501(c)(4)'s raises 
special concerns. The principle of freedom of association, long 
recognized by the Supreme Court as a critical component of our 
First Amendment freedoms, prohibits the government from seeking 
the membership list of organizations that are engaged in public 
advocacy.
    I believe if we limit the disclosure of both expenditures 
and contributors to public communications that mention 
candidates close to an election we can overcome those 
constitutional concerns. A recent study of advertisements shown 
during the 1998 elections found that a very, very small 
percentage of ads that mentioned candidates in the 60 day 
period before an election were actually true issue ads instead 
of election ads dressed up as issued ads.
    Congress has the constitutional power, I believe, to 
require disclosure by groups running such ads to protect the 
integrity of the election process and provide information to 
voters on who is behind the messages that are attempting to 
influence their votes. At the same time, any disclosure 
provision that seeks information from advocacy groups engaged 
in true issue advocacy must give the group the option of making 
the expenditures that will be disclosed from a separate account 
or fund and disclosing only the contributors to the fund. Such 
a provision would allow groups to keep their general membership 
list confidential, which the Supreme Court has said is their 
right.
    Once again, Chairman Houghton, I thank you for holding this 
hearing and I urge you and the Ways and Means Committee to act 
expeditiously to at the very least close the 527 loophole this 
year.
      

                                


    Senator McCain. I thank you and Congressman Coyne and 
distinguished Members of this Subcommittee. I will be brief, 
uncharacteristically. When Senators Feingold, Lieberman, and I 
initiated debate on this matter on the Senate floor, I began 
that discussion with quotes from two different newspapers that 
have divergent views but on this matter agree.
    On July 13, 1998, the Wall Street Journal, in an editorial 
that derided broader campaign finance reforms, specifically 
made the following observation: ``this week the House begins 
debate on campaign finance reform. If there is one thing all 
the players agree on, it is the need for better disclosure of 
contributions and a crackdown on violators.'' .
    the New York Times recently noted, quote: ``all candidates 
and office holders have an ethical duty to fully disclose their 
campaign finance activities and to abide by contribution limits 
designed to protect the political system from corruption. These 
are basic principals that lawmakers should be able to agree 
upon and quickly.'' Simply put, disclosure is only a first step 
but it is needed and long overdue.
    As that process continues, I am hopeful that the Committee 
will keep the following principles in mind. First, the 
legislation needs to be bipartisan and balanced. As such, it 
should affect both Republican and Democrat groups alike. 
Second, it must be constitutional.
    Some proposals, Mr. Chairman, that are being discussed 
raise constitutional questions. These questions must be dealt 
with before we pass any such legislation. We must not in haste 
overreach and pass a bill that is destined to be immediately 
struck down by the courts.
    Many current proposals raise questions regarding freedom of 
speech, freedom of association, the right to petition the 
Congress, and whether the precedent set in NAACP versus Alabama 
is being violated. In NAACP versus Alabama, the court said that 
the governmental purpose for disclosure, in this case to 
protect the political system from corruption, must be achieved 
in the most narrow manner possible. By focusing just on 527s, 
the legislation already adopted by the Senate clearly passes 
constitutional muster while honing in on the most egregious 
examples of those seeking to avoid the public scrutiny.Unlike 
business and labor groups, 527 organizations tend to obscure 
all of their activities and source of contributions, especially 
those that are politically related.
    We must also be careful not to demand excessive information 
that violates the privacy of individuals or the groups they 
choose to associate themselves with. For instance, the current 
Smith-McConnell legislation would mandate that the affected 
organizations disclose the names and annual salaries of 
virtually all employees who participate in political advocacy. 
This sweeping and overreaching mandate would clearly violate 
the right of certain individuals to participate in 
organizations of their choosing and I believe clashes with the 
NAACP Versus Alabama decision.
    Further, Mr. Chairman, any bill must contain a clearly 
written severability clause. If any one action is found to be 
constitutional, the remainder of the statute must be allowed to 
stand.
    Third, we must look responsibly to expanding legislation to 
cover not just 527 organizations but also to cover 501(c)(4)'s, 
(c)(5)'s, and (c)(6)'s. I believe this can be done 
constitutionally and responsibly and done in a manner that 
would give the public greater knowledge without harming any 
organization's fundraising ability.
    One such proposal has been developed by Senator Snowe. I 
would hope the Subcommittee would closely examine that proposal 
and consider it as a starting position when discussing this 
manner.
    Last, Mr. Chairman, let's not let the perfect be the enemy 
of the good. Greater disclosure is not a black-or-white issue. 
We can and should all agree that greater disclosure is better 
than the status quo as it exists today; and, yes, while we work 
to develop the best bill possible, we must also move forward 
expeditiously. Quick passage of this measure this year, before 
more and more money is spent undisclosed and in the dark of 
night, is vitally important.
    I look forward to working with Congressman Castle, with 
you, Mr. Chairman, with Congressman Coyne, with Congressman 
Doggett, and all others who are interested in true and 
meaningful reform and not for political advantage.
    I have been, Mr. Chairman, involved in lobbying reform, 
gift ban reform, line-item veto, and a number of other reform 
measures. They were only achieved at the point where we decided 
to act in a bipartisan fashion and came up with measures that 
would stand the scrutiny of the American public and the 
American media.
    I look forward, Mr. Chairman, to working with all 
interested parties and I believe that the overwhelming 
sentiment in favor of the disclosure of the egregious and 
outrageous and obscene procedures that are going on in American 
politics today compels us to act quickly and expeditiously. And 
I say to my dear friend from Arizona, I want full disclosure 
too, but if you allow full disclosure of everything to be the 
enemy of disclosing the most egregious processes that are going 
on today, you will be doing a great disservice to the American 
people and the voters in the upcoming election.
    I thank you, Mr. Chairman.
    Chairman Houghton. Thanks very much, Senator.
    Senator Lieberman.

STATEMENT OF HON. JOSEPH I. LIEBERMAN, A UNITED STATES SENATOR 
                 FROM THE STATE OF CONNECTICUT

    Senator Lieberman. Thanks, Mr. Chairman, Congressman Coyne, 
Members of the Committee. I appreciate very much the 
opportunity to be with you. I am particularly honored to be 
here with Congressmen Doggett and Castle and Senator McCain, 
who is our godfather. He might be called the commanding officer 
in the war to clean up our campaign finance laws. I am just 
reporting for duty here today, Mr. Chairman.
    You have heard much today and will continue to hear, I am 
sure in greater depth, about the twisted and unjust logic of 
the 527 loophole--how groups benefit from the public subsidy of 
a tax exemption but then hide the source of their funding from 
the American public, or claim to be an organization influencing 
elections under one law and then turn around and deny exactly 
that under another.
    What I want to focus on today briefly is the latest canard 
that has been launched against this campaign finance reform. 
And it is that it is wrong to target 527s and not other tax-
exempt groups.
    I believe deeply in the cleansing tide of disclosure, 
whether the contributing organization involved is a labor 
union, a business association, a for-profit company or a tax-
exempt organization. In fact last year a majority of the Senate 
voiced its suport for something quite close to full disclosure 
in the Snowe-Jeffords amendment to the McCain-Feingold bill.
    Obviously if we can enact such comprehensive disclosure, we 
should. But we can't let this become, as Senator McCain has 
said, an all-or-nothing proposition. There are real differences 
between 527 organizations and other tax exempts and these 
differences, I think, justify closing the 527 loophole even if 
we cannot enact broader reform.
    Let me give two reasons why I believe that. First and 
foremost, section 527 organizations under the Tax Code that 
this Committee has jurisdiction over are different because they 
are the only tax exempts that exist primarily to influence 
elections. That is not my characterization. That is the 
statutory definition. 527s are not lobbying organizations. They 
are not public-interest issue organizations. They are not labor 
or business associations. They are election organizations, 
plain and simple. You can't say the same about the AFL-CIO or 
the Chamber of Commerce or Handgun Control or the NRA, whose 
primary purpose is to advocate a policy position or represent 
specific constituencies. So I say respectfully to anyone who 
will argue that these 527 groups are just like other tax 
exempts, take a look at the Tax Code; that is not true.
    I also believe that while the fullest disclosure bill we 
can pass is clearly the best result, disclosure by 527 
organizations is more needed than disclosure by other tax 
exempts. When the AFL-CIO or the Chamber of Commerce runs an 
ad, we pretty much know who is behind it and where the money 
comes from--union member dues in the case of the labor 
organization and business member dues in the case of the 
Chamber. These groups provide the basic information the public 
needs to evaluate the motivation and credibility of the 
messenger.
    The absolute opposite is the case with 527s. The public 
cannot know what hidden agenda may lie behind the message 
because so many 527s have unidentifiable names and are funded 
by sources that no one knows anything about. 527s are the most 
egregious abuse of our campaign laws that we have seen during 
this election cycle. We all seem to agree that the American 
people have an absolute right to know the identity of those 
spending money to influence their vote. So why let more time go 
by allowing these self-proclaimed election groups to operate in 
the shadows? Let us work together across party lines to turn 
the kleig lights of public disclosure on 527 organizations. 
Thanks, Mr. Chairman.
    Chairman Houghton. Thanks very much, Senator.
    [The prepared statement follows:]

Statement of Hon. Joseph I. Lieberman, a United States Senator from the 
State of Connecticut

    Thank you Mr. Chairman and Members of the Committee for the 
opportunity to testify before you today on this issue so 
central to the fair working of our Democracy. As you may know, 
Senators Levin, Daschle, McCain, Feingold and I introduced 
legislation last month to close what has become known as the 
527 loophole. Two weeks ago, the Senate adopted an amendment--
thanks in large part to the legislative skill and persistence 
of Senators McCain and Feingold--that adds that legislation to 
the Defense Authorization bill.
    Others on this panel will discuss in greater depth the 
twisted and unjust logic of the 527 loophole--how groups 
benefit from the public subsidy of a tax exemption but then 
hide the source of their funding from the American public--or 
claim to be an organization influencing elections under one 
law, while denying it under another.
    What I want to focus on today is the latest canard launched 
against our proposal: that it's somehow wrong to target 527s 
and not other tax exempt groups. I believe deeply in the 
cleansing tide of disclosure, whether the contributing 
organization involved is a labor union, a business association, 
a for-profit company or a tax-exempt organization. Last year, 
the Senate adopted something close to full disclosure--the 
Snowe-Jeffords amendment--in the McCain-Feingold bill and, it 
was one of the grounds on which opponents of reform have 
attacked that bill. If we can enact such disclosure, we should. 
But this is not an all or nothing equation. There are real 
differences between 527 organizations and other tax exempts, 
and these differences justify closing the loophole, even if we 
can't enact broader reform.
    First and foremost, Section 527 organizations are different 
because they are the only tax-exempts that exist primarily to 
influence elections. That's not my characterization. That's the 
statutory definition. 527s are not lobbying organizations. They 
are not public-interest issue organizations. They are not labor 
organizations or business organizations. They are election 
organizations, plain and simple. You can't say the same about 
the AFL-CIO or the Chamber of Commerce, or Handgun Control or 
the NRA, whose primary purpose is to advocate a policy position 
or to represent specific constituencies. So I say to anyone who 
claims these groups are just like other tax-exempts, ``read the 
tax code.''
    The fact is, disclosure by 527 organizations is more 
important than disclosure by other tax exempts. When the AFL or 
the Chamber of Commerce runs an ad, we know exactly who is 
behind it and where their money came from: union member dues in 
the case of the AFL, and business member dues in the case of 
the Chamber. These groups provide the basic information the 
public needs to evaluate the motivation of the messenger.
    The absolute opposite is the case with 527s. The public 
can't know what hidden agenda may lie behind the message 
because so many 527s have unidentifiable names and are funded 
by sources no one knows anything about.
    In the best of all possible worlds, all money supporting 
election-related activity would be disclosed. But we should not 
allow our inability to achieve that goal now to stand in the 
way of closing the most egregious abuse of our hard-won 
campaign laws that we have seen during this election cycle. We 
all agree the American people have an absolute right to know 
the identity of those trying to influence their vote. So why 
let another day go by allowing these self-proclaimed election 
groups to operate in the shadows. Let's work together, across 
party lines, to close the 527 loophole.
      

                                


    Chairman Houghton. Mr. Castle.

   STATEMENT OF HON. MICHAEL N. CASTLE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF DELAWARE

    Mr. Castle. Chairman Houghton, Ranking Member Coyne, and 
distinguished Members of the Subcommittee, I am pleased to be 
here as well.
    Current campaign laws are wholly unable to adequately 
regulate the torrent of political advertising by groups 
exploiting loopholes in both our election and tax laws. Huge 
sums of money are being spent to influence the election system, 
whether it is an individual spending tens of millions of 
dollars of his own money to win the election, or political 
parties spending millions in soft money to aid candidates.
    While spending by individuals has been protected by Supreme 
court rulings and the problem of soft money continues because 
of a lack of will by Congress to address it, we now have a 
troubling new trend in campaign spending by groups operating 
under unique designations in our Tax Code such as section 527.
    The average American is now bombarded by new advertising by 
groups with names such as Citizens for Better Medicare and 
Shape the Debate, who are spending large sums of money without 
disclosing their donors. Citizens for Better Medicare, a 
section 527 political organization not registered with the 
Federal Election Commission, has spent an estimated $25 million 
to $30 million on political ads. According to the Annenberg 
Public Policy Center at the University of Pennsylvania, the ad 
campaign is the costliest to date during the 1999/2000 
campaign.
    Whether or not we agree with the message of any ad 
campaign, I hope we could agree that voters have a right to 
know who is paying for any campaign-related ad. Our 
Constitution protects every American's right to be heard; yet 
today voters are faced with new-style political organizations, 
operating free from coverage by Federal election law, that are 
spending millions on campaign ads without having to disclose 
the true identities of their donors.
    Disclosure is fundamentally fair to the public candidates 
and democracy in America. We must close these loopholes now. 
There is no reason to delay. The 2000 general election cycle is 
fast approaching and unknown political groups are expanding at 
a rapid pace that will be a dominant force in the 2000 
election.
    As this chart, which is over there in larger print shows, 
issue ad spending dramatically increases in the weeks before 
the election. We are on the road to doubling such expenditures 
in this election cycle. With this storm cloud of new campaign 
spending on the horizon, it is vitally important that we are 
here today to find a way to improve our laws to include full 
and equal disclosure for organizations that truly engage in 
electioneering activity. Congress must find common ground on 
this issue and resolve it in a bipartisan, bicameral manner as 
soon as possible.
    The focus of debate and most legislation this year has only 
targeted the much-talked-about section 527 stealth 
organizations. These groups organize as a political 
organization under section 527 of the Tax Code which allows 
them to avoid disclosure of their donors. Reform must shed 
light on the 527 groups, but I want to emphasize that any 
legislation must fairly address campaign style ads by other 
groups as well. The 527-only approach might end some current 
abuses but only will provide a short-term solution. Inevitably, 
perhaps as early as this fall campaign, the same groups now 
operating under section 527 will regroup in some other form and 
continue to anonymously impact our elections.
    Last week when a Federal election expert was asked where 
these groups would go if the 527 loophole was closed, he said, 
``That is for my paying customers.'' My bill, H.R. 4621, the 
Accountability and Disclosure Act of 2000, seeks to address 
this fundamental issue by requiring disclosure by organizations 
and all other groups that engage in sham issue ads.
    As this chart shows, virtually all of these groups can now 
fund election-related ads without disclosure under Federal 
election law.
    It is also important to know just how many of those groups 
exist. You are talking about hundreds of thousands of them, as 
you can see on the chart. These organizations do not disclose 
their donors because, like 527 organizations, they use the 
definitions in current law to argue that they do not have to 
adhere to Federal election rules because they do not advocate 
the victory or defeat of a candidate. If reform focuses only on 
the 527 designation, these groups may shift to another tax 
designation and continue to pay for campaign ads while avoiding 
the current inadequate Federal disclosure requirements. We will 
find ourselves confronting the same problems next year.
    We need to make this legislation as effective and fair as 
possible with the understanding that there is not a perfect 
permanent solution. It has been said that legislation that goes 
beyond the 527 groups and includes activities by 501(c) groups 
would be a poison pill. Some argue that the right of 
individuals and groups to be heard makes disclosure unfair or 
impractical. I fully understand these concerns; but is it right 
to allow groups to blatantly influence elections by using 
loopholes in current law to run campaign advertising by calling 
it issue advocacy?
    We can protect real issue advocacy and pass a fair bill to 
shed light on groups who are plainly seeking to influence 
elections. We can and should do this now. Legislation must be 
drafted that strikes a balance between the right to free speech 
and the right to a fair election. A well-balanced approach must 
carefully improve the current definitions of what constitutes 
political advertising and other efforts to influence a Federal 
election. My legislation was drafted in a way that would cover 
any group who spends $10,000 in a year on election-related 
communications to disclose its donors who have contributed 
$1,000.
    Legislation on this subject navigates in precarious waters 
and a number of vital questions must be handled carefully:
    First, what is a definition of a political ad? A political 
ad can be defined as any ad that seeks to influence an election 
by naming a Federal candidate in a defined period before an 
election. I am sure everyone can distinguish between a real 
issue ad and one that seeks to influence an election. I think 
we can fairly define them in law.
    Second, should disclosure focus on periods right before 
elections? Whether it be 90 days before the election or 60 days 
before a primary, time periods could be established as to when 
disclosure is most needed. My legislation does not limit 
disclosure by time periods, but I would be willing to consider 
this approach.
    Third, what other political activities should be covered? 
We should study improved disclosure of all election-related 
political activity that occurs through broadcast and cable TV, 
radio print polling, and Internet activities if it falls under 
a carefully defined definition of election-related activity.
    Fourth, how should we treat groups that engage in issue 
advocacy? Many organizations engage in issue advocacy but 
election-related issue advocacy is another matter. All groups 
who engage in election-related communications should be treated 
fairly. We can protect groups and the rank-and-file members who 
are not engaging in political advertising.
    Fifth, when should new disclosure standards go into effect? 
It should go into effect immediately, to help make the 2000 
elections more fair and open.
    In conclusion, we can protect the rights of the rank-and-
file members of business, labor, and nonprofit groups to 
express their views on all issues while also improving 
disclosure of election-related advertising and other efforts 
intended to influence an election. I thank you, Mr. Chairman.
    Chairman Houghton. Thanks very much, Mr. Castle.
    [The prepared statement follows:]

Statement of Hon. Michael N. Castle, a Representative in Congress from 
the State of Delaware

    Chairman Houghton, Ranking Member Coyne, Members of the 
Subcommittee, I want to thank you for giving me this 
opportunity to testify on the importance of improving 
disclosure of political advertisements by tax exempt 
organizations. Current campaign laws are wholly unable to 
adequately regulate the torrent of political advertising by 
groups exploiting loopholes in both our election and tax laws. 
Huge sums of money are being spent to influence the election 
system regardless of whether it is an individual spending tens 
of millions of his own money to win an election, or political 
parties spending millions in soft money to aid candidates.
    While spending by individuals has been protected by Supreme 
Court rulings and the problem of soft money continues because 
of a lack of will by Congress to address it, we now have a 
troubling new trend in campaign spending by groups operating 
under unique designations in our tax code such as Section 527. 
The average American is now bombarded by new advertising by 
groups with names such as ``Citizens for Better Medicare'' and 
``Shape the Debate,'' who are spending large sums of money 
without disclosing their donors.
    ``Citizens for Better Medicare,'' a Section ``527'' 
political organization not registered with the Federal Election 
Commission, has spent an estimated $25 million to $30 million 
on political ads. According to the Annenberg Public Policy 
Center at the University of Pennsylvania, the ad campaign is 
the costliest to date during the 1999-2000 campaign. Whether or 
not we agree with the message of any one ad campaign, I hope we 
could agree that voters have a right to know who is paying for 
any campaign-related ad. The Shays-Meehan and the McCain-
Feingold legislation would truly reform the broken campaign 
finance system by addressing the problem of soft money 
donations and issue ads in a comprehensive manner. 
Unfortunately, Congress has not been able to pass this 
important legislation.
    However, we must improve disclosure of campaign spending as 
an important first step toward fixing the system. Our 
Constitution protects every American's right to be heard. Yet 
today, voters are faced with new-style political organizations, 
operating free from coverage by federal election law, that are 
spending millions on campaign ads without having to disclose 
the true identities of their donors. Disclosure is 
fundamentally fair to the public, candidates and democracy in 
America.
    We must close these loopholes now. There is no reason to 
delay. The 2000 general election cycle is fast approaching, and 
unknown political groups are expanding at a rapid pace and will 
be a dominant force in the 2000 election. As Chart #1 
(attached) shows, issue ad spending dramatically increases in 
the weeks before an election.
    We are on the road to doubling such expenditures this 
election cycle. With this storm cloud of new campaign spending 
on the horizon, it is vitally important that we are here today 
to find a way to improve our laws to include full and equal 
disclosure for organizations that truly engage in 
electioneering activity.
    This issue affects each and every person in this room, 
regardless of party, and more importantly it affects each and 
every American's right to vote in a fair election. Congress 
must find common ground on this issue and resolve it in a 
bipartisan, bicameral manner as soon as possible. Between now 
and the July 4th recess we have a window of opportunity that 
has been opened by the hard work of members in both parties and 
chambers. We must act on it now.
    The focus of debate and most legislation this year has only 
targeted the much-talked-about Section 527 ``stealth 
organizations.'' These groups organize as a political 
organization under Section 527 of the tax code which allows 
them to avoid disclosure of their donors.
    Reform must shed light on the 527 groups, but I want to 
emphasize that any legislation must fairly address campaign-
style ads by other groups as well. The 527-only approach might 
end some current abuses, but it would only provide a short-term 
solution.
    Inevitably, perhaps as early as the fall campaign, the same 
groups now operating under Section 527 will regroup in some 
other form and continue to anonymously impact our elections. 
Last week, when a Federal Election expert was asked where these 
groups would go if the 527 loophole was closed, he said, 
``that's for my paying customers.'' My bill, H.R. 4621, ``The 
Accountability and Disclosure Act of 2000,'' seeks to address 
this fundamental issue by requiring disclosure by 527 
organizations and all other groups that engage in ``sham issue 
ads.'' These other entities are also designated under Title 26 
of the Internal Revenue Code. Some of these groups include:

     501(c)(4)(social welfare and lobby groups),
     501(c)(5)(labor groups) and
     501(c)(6) (trade associations, business leagues, 
and Chambers of commerce)

    As this chart shows (Chart #2, attached), virtually all of 
these groups can now fund election-related ads without 
disclosure under federal election law. It is also important to 
note just how many of these groups do exist. These 
organizations do not disclose their donors because like 527 
organizations they use the definitions in current law to argue 
that they do not have to adhere to Federal Election rules 
because they do not advocate the victory or defeat of a 
candidate.
    If reform focuses only on the 527 designation, these groups 
may shift to another tax designation and continue to pay for 
campaign ads while avoiding the current inadequate federal 
disclosure requirements. We will find ourselves confronting the 
same problems next year. We need to make this legislation as 
effective and fair as possible, with the understanding that 
there is not a perfect, permanent solution.
    It has been said that legislation that goes beyond the 527 
groups and includes activities by 501(c) groups would be a 
poison pill. Some argue that the right of individuals and 
groups to be heard makes disclosure unfair or impractical. I 
fully understand these concerns, but is it right to allow 
groups to blatantly influence elections by using loopholes in 
current law to run campaign advertising by call it issue 
advocacy? We can protect real issue advocacy and pass a fair 
bill to shed light on groups who are plainly seeking to 
influence elections. We can and should do this now.
    Legislation must be drafted that strikes a balance between 
the right to free speech and the right to a fair election. A 
well-balanced approach must carefully improve the current 
definitions of what constitutes political advertising and other 
efforts to influence a federal election. My legislation, The AD 
Act, was drafted in a way that would cover any group which 
spends $10,000 dollars in a year on election related 
communications to disclose its donors, who have contributed 
$1000.
    Legislation on this subject navigates in precarious waters 
and a number of vital questions must be handled carefully. 
First, what is the definition of a political ad? A political ad 
could be defined as any ad that seeks to influence an election 
by naming a federal candidate in a defined period before an 
election. I am sure everyone can distinguish between a real 
issue ad and one that seeks to influence an election. I think 
we can fairly define them in law.
    Second, should disclosure focus on periods right before 
elections? Whether it be 90 days before the election or 60 days 
before a primary, time periods could be established as to when 
disclosure is most needed. My legislation does not limit 
disclosure by time periods, but I would be willing to consider 
this approach.
    Third, what other political activities should be covered? 
We should study improved disclosure of all election-related 
political activity that occurs through broadcast and cable TV, 
radio, print, polling and Internet activities if it falls under 
a carefully defined definition of election-related activity.
    Fourth, how should we treat groups that engage in issue 
advocacy? Many organizations engage in issue advocacy, but 
election related issue advocacy is another matter. All groups, 
who engage in election related communications, should be 
treated fairly. We can protect groups and their rank and file 
members who are not engaging in political advertising.
    Fifth, when should new disclosure standards go into effect? 
It should go into effect immediately to help make the 2000 
elections more fair and open.
    I strongly favor the principles of equal treatment I 
outlined in my legislation, The AD Act. However, I do 
understand that too broad of an approach could threaten 
legislation in the short time we have to act. Our desire to 
improve disclosure in the election process comes right up 
against the important pillar of freedom of speech. We can 
balance these important principles.
    We must require disclosure by 527 organizations and provide 
meaningful coverage of activities by other groups that are 
clearly election-related and political in nature.
    We can protect the rights of the rank and file members of 
business, labor, and nonprofit groups to express their views on 
all issues, while also improving disclosure of election-related 
advertising and other efforts intended to influence an 
election. Thank you Chairman Houghton for your commitment to 
this important issue. I look forward to your Subcommittee's 
consideration of bipartisan, fair campaign finance disclosure 
legislation.
[GRAPHIC] [TIFF OMITTED] T8223.001

[GRAPHIC] [TIFF OMITTED] T8223.002

      

                                


    Chairman Houghton. I know we indicated to your staffs that 
there would be no questions, but it is so tempting that you 
gentlemen are here. Maybe you wouldn't mind if we asked maybe 
one or two questions of you. I would like to ask Mr. Coyne if 
he would like to ask.
    Mr. Coyne. Thank you, Mr. Chairman. Welcome, Senator 
McCain, and the other panelists. Thank you for your testimony. 
Senator McCain, as I understand part of your proposal, you 
support a clear and objective standard for each of the three 
following entities: Requiring disclosure of expenditures and 
contributors; number two, by organizations that spend $10,000 
or more a year on express advocacy mass media election hearing 
ads; and three, several months before a general election or a 
primary. I just wonder why is--that is essentially Senator 
Snowe's proposal, S. 79. Why is that preferable to a more 
expanded inclusion?
    Senator McCain. Congressman Coyne, in a perfect world I 
would like to see and would hope that we could adopt the 
broadest possible coverage of organizations or individuals who 
are involved in any political campaign. I am worried about 
NAACP versus Alabama and the Court's interpretation there, and 
I believe that in a perfect world, all of those things that you 
just described should be enacted into law.
    But I also worry, in all due respect to some of my friends, 
that in our efforts to make it so encompassing, we then fail to 
gain sufficient support for passage of legislation. As my 
friend Senator Lieberman pointed out, 527s are different. They 
are different. There is never any time when those people who 
are involved in that are disclosed. In the case of Chamber of 
Commerce, the dues payers are disclosed, and so forth, and so 
forth.
    But, finally, I really believe that Senator Snowe's 
proposal does pass constitutional muster; and that is, within 
30 days of a primary or within 60 days of a general election, 
that the use of a name or likenesses of a candidate then should 
be fully disclosed. I hope that the Committee would consider 
that provision.
    Mr. Coyne. Senator Lieberman, I was interested in your 
observation that 527s, as I recall what you pointed out, are 
just essentially political organizations. Could you expand on 
that?
    Senator Lieberman. Thanks, Congressman Coyne. That is, in 
fact, what that section of the Code is all about. There are so 
many other problems in our campaign finance laws, such as soft 
money itself, that started out with good intentions and got 
misused. In this case, 527s were created to make clear that a 
normal full-time organization which has the sole intention of 
affecting elections shouldn't have to pay taxes. And then, 
through misuse of some IRS rulings essentially, a whole group 
of political groups, interest groups on all sides of the 
ideological spectrum, began to get away with claiming they 
deserve the tax protection but didn't need to file under the 
Federal Elections Campaign Act because they weren't saying the 
magic words in their advertising: Vote against this guy, or 
vote for this woman.
    Mr. Coyne. Thank you very much.
    Senator McCain. Congressman Coyne, may I make one 
additional comment? That is why severability is a very 
important part of this legislation, because we are--if it is 
expanded, because it is not clear exactly because of--and you 
will hear differing opinions from panelists who are following 
us as to exactly where you are constitutionally and where you 
aren't. I thank you for allowing me to add that.
    Chairman Houghton. Mr. Hayworth.
    Mr. Hayworth. Thank you, Mr. Chairman. Congressman Castle, 
I regret the fact that your staff took away the second chart. 
My eyes are getting a little bad. Maybe I need my glasses. 
Could you for the record just read the different groups on the 
second chart that you have there in your possession ?
    Mr. Castle. I would be glad to. It doesn't actually name 
the particular organizations, but it goes through the different 
501(c) classifications, a few of them. 501(c)(3)'s are 
charitable organizations. There are 776,577 of them. 501(c)(4), 
social welfare lobby groups, there are 138,998 of them. This is 
nationwide. 501(c)(5) are labor--agriculture organizations, 
63,708 of them. 501(c)(6) are business leagues, chambers of 
commerce, there are 81,489 of these nationwide.
    Obviously my concern is--I don't disagree with anything 
that was said here. I am for whatever we can get done. If we 
can only get done 527s, I am going to try to lead the fight for 
that. But if we can be more comprehensive, if after you hear 
experts today, we can go and reach out and embrace other groups 
in terms of limitation on advertising or at least disclosure 
for advertising, I would like to see that happen. Obviously you 
have hundreds of thousands of organizations and, as the experts 
will tell you, you can shift pretty--I agree, 527s are just 
political organizations, but you can shift pretty quickly from 
a 527 to another organization. Even though there may be greater 
IRS requirements, the ability to advertise anonymously pretty 
much continues. Maybe we can't do it, but maybe we can. I don't 
want to give up in the next week before we bring this to the 
floor without at least looking at that.
    Mr. Hayworth. For a more complete disclosure, you endorse 
the notion of a more complete bill that deals with these other 
organizations where you have different groups will scurry to 
something else.
    Mr. Castle. That is correct. I think it is vital to 
understand that it will never, ever work unless it is entirely 
fair and you include every single organization. The limitations 
have to be on what triggers the disclosure. Is it truly 
political campaign advertising? In my bill they are in excess 
of $10,000. Then you have to show those who have contributed a 
thousand dollars to that political campaign advertising. Can we 
write the definitions to do this? We tried to in a limited 
group in my office with the research we could do. You may reach 
a conclusion we can't. I hope that we can. I think it is worth 
at least looking at.
    Mr. Hayworth. Senator McCain, thank you again, my friend. 
We are very good friends although we may have a bit of a 
disagreement. I don't believe we want to make the perfect the 
enemy of the good, but part of the challenge I have even in a 
bipartisan setting is limiting the action in some way that 
could give one party or another an advantage, and I would just 
like to hear from you again why.
    Senator McCain. I would be curious how you think that 
just--I share Congressman Castle and everyone's desire to 
expand it as much as possible. But there is no way that I know 
of that 527s favor one party or another, one group or another. 
It is an egregious and obscene distortion of everything the 
American people believe in, and it should be eliminated. It is 
like saying we have got certain evils in our society--rape, 
murder, and robbery--and we shouldn't get rid of one of the 
three if we can, for the sake of saying, well, we can't get rid 
of all three. It is ludicrous.
    So if you can make the case to me that somehow 527s favor 
Republicans or Democrats, then I would be more than willing to 
say, well, you know, we shouldn't get rid of them. But there is 
no evidence to that. In fact, it will be exploited, as is the 
case with every other evil in American campaign financing, it 
will be exploited by both sides to a dramatic degree.
    With all due respect for those who say this doesn't go far 
enough so therefore I can't support the elimination of 527, 
then the motivation must be suspect.
    Mr. Hayworth. I thank you, Senator McCain. I do believe 
that we can have a more complete bill. I look forward to 
working with Congressman Castle. We have an honest 
disagreement. I guess the thing that concerns me as a newcomer 
to Washington is how often we allow certain folks to say this 
is a poison pill.
    For example, earlier attempts at campaign finance reform 
that you have made, where labor unions were not required to 
truly protect paychecks for their membership that didn't want 
money going into political campaigns. My concern is that 
somehow we define bipartisan as the will of the majority, 
bending to the whims of the minority. I think if we can have 
true bipartisanship that deals with all of these issues, we 
would be better off. I thank all you gentlemen for coming.
    Senator McCain. In all due respect, again my proposal is 
that if you have paycheck protection for the unions, you should 
also then require disclosure--I mean permission of stockholders 
for corporations that engage in political activities. I think 
that is perfectly fair. I have always supported that.
    Again, in all due respect, to say that somehow you would 
oppose eliminating this most egregious and latest outrageous 
aspect of the abuse of campaign financing in America because it 
doesn't encompass others--and again I don't get that logic. 
That is like accepting one evil in American society because we 
can't get rid of other evils.
    Again, we have a fundamental disagreement. I hope we can 
make progress. I have been involved in reform issues for many, 
many years and I know with some of them you have to work 
incrementally. Again, reiterating my profound and deep 
commitment to supporting the ideas that Congressman Castle has 
that we expand it as far as we can; but if we can't, then I say 
at least get rid of the 527s. I thank you.
    Chairman Houghton. Thanks very much. Mr. Lewis.
    Mr. Lewis of Georgia. Thank you, Mr. Chairman. Mr. Doggett, 
could you tell us whether there is a directory, some book that 
you can go and pick up someplace, an encyclopedia of these 527 
organizations? If the average American wanted to get a list of 
these organizations, these groups, is there any place that you 
can find that list, that directory?
    Mr. Doggett. There is not. We know them only by their 
deeds, and sometimes by inquisitive reporters who are able to 
explore what these Committees are doing. But I tried to find 
out some indication in preparing the legislation, even from the 
Internal Revenue Service, and I don't think they know how many 
527s there are out there.
    Mr. Lewis of Georgia. You are telling Members of the 
Committee that you don't have any idea, but you have some idea, 
how many?
    Mr. Doggett. I don't have an idea of how many there are.
    Mr. Lewis of Georgia. What about other members of the 
panel? Do you have any idea how many of these organizations 
exist?
    Senator McCain. Congressman Lewis, I think as you are 
speaking, several more are being formed right now.
    Senator Lieberman. Congressman Lewis, that is just the 
point. They are so far into the shadows, into the dark, that we 
have no idea until we see them come out under a cloak to 
advertise and try to influence an election, but even then we 
have no way of knowing exactly who they are and who is 
supporting them financially.
    Mr. Lewis of Georgia. Thank you, Mr. Chairman. I thank the 
members of the panel.
    Chairman Houghton. Thanks very much, Mr. Lewis. Mr. 
Watkins.
    Mr. Watkins. Mr. Chairman, I got here a little late. I have 
been very interested in the discussion of all this. Like many 
of my colleagues, I want the cleanest situation going. So where 
the money comes from, I don't have any problem with it being 
disclosed. I always try to disclose.
    I think my good friend from Arizona, Mr. Hayworth, has got 
some points. I understand Senator McCain said well, we will go 
after one section of this, if we can't get it all. But 
sometimes you meet people out there a little more partial, can 
have a greater influence on one party than the other.
    I just think that all parties should be created equal, and 
I think that all of the relationships should be gotten to, not 
just part of them. So I don't have any--I am trying to work 
rationally through this. Ever since I have been in public 
office, I have always revealed every dollar that I have taken, 
so it is something I have always done. And I know there is a 
lot of outside money that seems to be having a great influence 
in today's society. All I know is you end up having to spend 6, 
7 hours a day, raising dollars. That is a terrible way to spend 
time, but you have to do it to fight off the battles.
    I think coming here, I spent less than $100,000, or 200,000 
at the most when I first came, and now it is up to 1.2 million. 
And that is not the fault of just the contributors, it is the 
fault of all these expenses. So I appreciate each of you coming 
and trying to elaborate on this, and I am making some notes 
along the way and trying to come down with what the right 
decision might be.
    Mr. Chairman, that is all I have. I am sorry I was late for 
getting here for the discussion today.
    Senator McCain. Could I respond very briefly? A couple of 
weeks ago there was a fund raiser held, and the head of a union 
local walked up and set a record--I believe it was a record--
and handed a Democratic--I believe it was the Congressional 
Campaign Committee--a $1 million check. That is the last time 
you will ever see that. The next time that union leader, along 
with whoever the businessman is, is going to form up a 527. Why 
get the publicity associated with handing somebody a $1 million 
check? Why not set up a 527? Then no one will ever know.
    My response to you and Congressman Hayworth is there is no 
evidence that 527s will favor one side or another. It will only 
favor those with money. And to somehow assume that this favors 
one side or the other when it is just an egregious, egregious 
insult, I mean, I promise not to go through my diatribe about 
soft money, but the 527s are really something that if you ask 
any average American citizen whether they believed it is 
possible to do that today, they would be incredulous. I know 
they are incredulous because I ask them. So I thank you, 
Congressman Watkins.
    Mr. Watkins. Appreciate your comment.
    Senator Lieberman. Mr. Chairman, if I may add just a word 
about Mr. Watkins' concern. The evidence that we have is 
incomplete, but we can see your concern about the possible 
partisan impact of focusing in on 527s. There is certainly 
nothing in the tax law that would suggest that. We see 
organizations, both on the left and right, who are beginning to 
use it. It happens that right now, some of the more prominent 
elected officials who seem to have 527 organizations associated 
with them are Republicans. But I will tell you, just as John 
said a short while ago, if we don't close this loophole, there 
will be as many or more Democratic elected officials who will 
have 527s before this is over.
    So, unfortunately, this is an equal opportunity abuse, and 
if we don't close it, it is going to be abused by everybody.
    Chairman Houghton. Mr. Neal?
    Mr. Neal. Thank you. Senator McCain, are you troubled by 
the fact that you are more popular with some Democrats in 
Massachusetts than Republicans in Arizona?
    Senator McCain. Actually, I am very flattered and honored 
to have the support of Republicans and Democrats alike. 
Libertarians and vegetarians as well. I thank you. I had a 
wonderful--I have had a wonderful time in your State, and it is 
a very lovely State and some wonderful people there.
    Mr. Neal. Jeez, it is nice to hear a Republican say that. 
The whole idea, the singular idea that dates all the way back 
to campaign finance reform, was the notion of disclosure. It 
runs through every piece of legislation. It is noted in Buckley 
v.Vaelo where the Court holds the position that disclosure is 
the great disinfectant. And yet we find ourselves now with an 
element trying to thwart the whole notion of disclosure and 
allowing the public to make up their own minds.
    Let me ask you a specific question, Mr. Doggett. What type 
of information campaigns are you concerned about that involve 
527 organizations. What are they doing?
    Mr. Doggett. I think these are the kind of organizations 
that tend to fill our airwaves with hate and our mailboxes with 
junk mail that distort things, and I share completely the views 
that have been expressed by my colleagues here today that this 
needs to be bipartisan, that it is not designed to favor one 
party over another.
    I support the suggestion that Senators McCain and Lieberman 
have made, and I believe Mr. Castle has joined a letter on it 
that we look at this Snowe provision that the Senate adopted in 
the past as one way of doing it.
    But I will just give you an example of the most recent one 
that I have seen which concerns our colleague, Congressman Mike 
Forbes, and this is a mailer that I suppose went to Democratic 
households. It says Congressman Mike Forbes stood with Newt 
Gingrich 100 percent on the Contract With America, and it is 
very interactive. It allows the recipient to write back on 
which of Mike Forbes' conservative votes make you the proudest 
to say whether you agree--your yes or no on whether his right 
to support Newt Gingrich in the Contract With America was good, 
and his support of the Christian Coalition. The only 
identifying mark anywhere on here is RMIC, and unless you know 
that RMIC in Arlington, Virginia is Tom DeLay's Republican 
Majority Issues Committee, you wouldn't know that it is he who 
is complaining of support for Newt Gingrich.
    I would not in any way limit the free speech rights of Mr. 
DeLay or anyone else to put out this kind of literature. I only 
seek to have them disclose who paid for it, how much they spent 
on it, and who they are. And I think that is just part of fair 
play, and I think this may be done this month. New York seems 
to be kind of the testing grounds.
    So, Senator McCain, for all these great 527s this year, I 
think we had some Texans up there doing it, too. It is going to 
happen in Texas or Washington or Massachusetts, and one time it 
may be a Republican ally and another time it may be a 
Democratic ally. This is our best chance, day after tomorrow in 
this Committee, less than 48 hours away, and a week away from 
action on the floor of the House, to fine-tune this 
legislation, and to pass something that will do something about 
this and all the hate ads before November.
    Senator McCain. Congressman Neal, could I make one 
additional comment? The reason why I quoted the Wall Street 
Journal, the Wall Street Journal has been one of the strongest 
opponents of McCain-Feingold-Shays-Meehan, but even the Wall 
Street Journal has said full disclosure in Shrink versus 
Missouri, the Supreme Court decision upholding the $1,000--
constitutionality of the $1,000 contribution limit--even the 
dissenting Justices Kennedy and Thomas both said that you have 
got to have disclosure as the answer, but remember, only as 
related to election activity.
    That is why I caution my friends as to how far the reach of 
this full disclosure is, because constitutionally it can only 
be as related to election activity. I thank you.
    Mr. Castle. May I respond a little bit further, too? I 
don't disagree with anything anybody has said. I am one of 
those who, if we can't get done the more expanded views that I 
had that we should include some of the 501(c) groups, I will go 
back to the 527s in a minute. But I understand with Snowe-
Jeffords, for example, it does not include printed matter, as 
an example.
    And I am very concerned about whatever you are going to do 
in this Committee in the next 2 or 3 days. I want to see all 
this be as comprehensive as possible, and maybe that is a wish 
list that is too large and it needs to be pared down, but I 
think we need to look at the specific kind of political matter 
that is being dealt with. We need to look at the particular 
groups that are being dealt with. We need to look at dates. We 
need to look at a whole variety of issues, a lot of which have 
been discussed here today. And fortunately you have some 
wonderful panelists who are probably getting a little tired of 
waiting, I might add, who are following us, who can add to all 
this as well. I hope when you make your decision, you make it 
as comprehensive as you can but within the bounds of everything 
we have heard here, particularly from the other three 
witnesses, that which is enforceable under our Constitution 
today.
    Mr. Neal. Superb testimony. If I could close on this with 
Senator Lieberman perhaps. You said, correctly summing things 
up, that disclosure would allow the voter to properly evaluate 
the message.
    Senator Lieberman. Yes. In other words, it would tell us 
who is behind the message, answering our basic right to know. 
If your mind is being propagandized and your vote attempted to 
be influenced, it seems fair to know who is paying for it.
    Mr. Neal. Thank you, Mr. Chairman.
    Chairman Houghton. Thanks very much. Mr. McDermott?
    All right. Well, gentlemen, thank you so much. I really 
appreciate it, and we will try to follow your advice.
    On the second panel we have Lindy Paull, chief of staff, 
Joint Committee on Taxation, and Joseph Mikrut, tax legislative 
counsel, Department of Treasury. Thank you very much for 
joining us today.
    Mr. Mikrut, would you like to begin your testimony.

 STATEMENT OF JOSEPH M. MIKRUT, TAX LEGISLATIVE COUNSEL, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Mikrut. Thank you, Mr. Chairman and Mr. Coyne and 
Members of the Subcommittee and Full Committee.
    I appreciate the opportunity to discuss the issue of 
disclosure of political activities of tax exempt organizations. 
This Subcommittee has, over the last several years, built an 
impressive record of examining the Federal tax rules applicable 
to tax exempt organizations. At the outset, I would like to 
emphasize that the Administration strongly supports efforts to 
require greater disclosure of political campaign contributions 
and expenditures as part of its ongoing efforts to achieve 
comprehensive campaign finance reform. Some of the disclosure 
and reform proposals raise issues outside of the Internal 
Revenue Code, such as the Federal election law issues and 
constitutionality issues, which are generally beyond the 
expertise of the Treasury Department.
    However, recent developments involving so-called 527 
organizations show the interplay between Federal election law 
and tax law rules. I will focus my remarks today on issues that 
arise in the Internal Revenue Code principally in three areas. 
First, the tax treatment of the organizations and their 
contributors; second, the activities that these organizations 
can or cannot engage in; and third, the disclosure rules 
applicable to the organizations and their contributors.
    I would like to focus on three types of entities. First 
charities, as defined in 501(c)(3) of the Code, tax exempt 
nonprofits such as described in 501(c)(4), (c)(5) and (c)(6), 
and political organizations described in section 527.
    Organizations described as 501(c)(3) are commonly referred 
to as charities. Compared to other tax exempt organizations, 
charities are eligible for the most tax-preferred treatment. 
They are generally exempt from tax at the entity level, can 
received tax deductible contributions and have access to tax-
exempt financing.
    At the same time, charities are subject to the most 
stringent rules with respect to their advocacy activities. 
Charities are prohibited from intervening in any political 
campaign on behalf of, or in opposition to any candidate and 
may not engage in more than an insubstantial amount of lobbying 
in an attempt to influence legislation. 501(c)(3) status is 
violated when a charity intervenes in a political campaign on 
or behalf, or in opposition to, any candidate. The 
determination of whether this prohibited activity occurs 
generally is based on a facts-and-circumstances test.
    Because a charity may not engage in political campaign 
intervention, there generally is no disclosure regime provided 
by the Internal Revenue Code for prohibited political campaign 
activities of charities. When a charity improperly engages in 
political intervention and loses its tax-exempt status, the IRS 
will inform the public of this loss of exemption. Moreover, 
penalty excise taxes may be imposed by the IRS under section 
4955 as an alternative to revocation. The imposition of this 
penalty is disclosed to the public.
    As a general rule, 501(c)(3) provides that no more than an 
insubstantial amount of activities of a charity may be 
attempting to influence legislation or lobbying. Although there 
are three sets of overlapping rules governing lobbying, the 
determination of whether lobbying exists definitionally is the 
direct contact of members of a legislative body or their staff 
to support or oppose legislation (so-called direct lobbying), 
or the influencing or urging of the public to contact 
legislative bodies (so-called grassroots lobbying).
    Charities must disclose their lobbying activities to the 
IRS and the general public by reporting of their annual 
information return form 990, the amount and extent of their 
lobbying expenditures for the taxable year. If a charity 
improperly engages in substantial lobbying, their tax status is 
jeopordized and potential penalties may be applied. These also 
are disclosed. The annual information return form 990 required 
to be filed by a charity is made public and contains a variety 
of information about the charity's operations for the taxable 
years.
    When filing this return with the IRS, charities also must 
attach a list that identifies the names and addresses of all 
substantial contributors, generally those who contribute more 
than $5,000 for the year. This list is not publicly available. 
Any organization that fails to complete an accurate form 990 or 
fails to make it publicly available is subject to a penalty.
    Nonprofit organizations, include and are described in 
501(c)(4) as social welfare organizations; (c)(5), labor and 
agriculture organizations; (c)(6), business leagues; and 
(c)(7), social clubs. These nonprofits generally are exempt 
from tax on dues and contributions, related function income and 
investment income. Contributions to noncharities generally are 
not deductible to the donor for Federal income, estate or gift 
tax purposes. However, in some instances, contributions or dues 
may be deductible by the payor as a trade or business expense. 
Noncharities generally are not restricted by the Internal 
Revenue Code from engaging in political campaign activities. 
However, political campaign activities cannot be the primary 
activity of the entity.
    To the extent that a noncharity engages in any political 
campaign activities, the organization is subject to tax on the 
lesser of its investment income or the amount expended on 
political campaign activities. The objective of this rule is to 
prevent organizations from using tax-free investment income to 
fund political campaign intervention. Noncharities must 
indicate on their form 990 the amount of expenditures for 
political campaign intervention and must indicate whether they 
filed a form 1120 POL. This is a form on which they report 
their investment income and pay tax.
    Form 1120 POL does not list the contributors to the 
organization or the recipients of the disbursements and the 
return is not made public.
    Noncharities are not subject to any specific tax provision 
that restricts their lobbying activities. Indeed, lobbying may 
be the primary activity of some tax exempt organizations. In 
general, the only theoretical limit is that the lobbying 
activities must somehow further the entities' nonprofit 
purposes. Noncharities generally have the same form 990 filing 
requirements as charities.
    Finally, section 527 governs the tax treatment of political 
organizations, meaning a party, Committee, association fund, or 
other organization to organize and operate primarily for the 
purpose of directly or indirectly accepting contributions or 
making exceptions for the purpose of 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 or political 
organization, or the election of the president or vice 
president electors, whether or not such individual or electors 
are selected, nominated, elected or appointed.
    When enacted, section 527 clarified the tax treatment of 
political organizations, providing that contributions received 
by the entity or the fund are not subject to tax while 
investment income and any income from events that are not 
political in nature are subject to tax at the highest corporate 
rate.
    In addition, contributions to section 527 political 
organizations are exempt from Federal gift tax. In determining 
whether a particular activity constitutes the organization's 
exempt function for purposes of section 527, the IRS examines 
all relevant facts and circumstances to determine if there is a 
sufficient nexus between the activity and the election of a 
public official.
    The scope of finance campaign-related activities under 
section 527 is broader than the definition of express advocacy 
under the Federal Election Campaign Act. Thus section 527 
applies to express advocacy in the FEC sense as well as issue 
advocacy not subject potentially to FEC regulation. Issue 
advocacy includes the conduct or funding of biased voter 
education efforts, targeted voter registration efforts, or 
grassroots lobbying intended to influence an election, although 
the organization does not expressly advocate the election or 
opposition of any particular candidate.
    The general issues presented by section 527, and 501(c)(3), 
and (4), (5) and (6) organizations are the following: It 
appears that the general tax rules applicable to 501(c)(3), 
(4), (5) and (6) and 527 entities is appropriate. Contributions 
to 527 organizations are not deductible Federal income tax 
purposes, and even in cases where contributions to a section 
501(c)(3) or (4) organization may be deductible as a business 
expense or charitable contribution, no deduction is allowed for 
the portion applicable to political activities. Essentially 
what we are discussing today are the definitional and 
disclosure rules applicable to these entities.
    Mr. Chairman, in summary, what I would like to point out is 
that the Administration supports enhanced disclosure by 
political organizations as part of its ongoing efforts to 
achieve comprehensive campaign tax reform. Just as the current 
Tax Code rules do not distinguish between express advocacy and 
issue advocacy, so too should the disclosure requirements 
governing political organizations, either under the Internal 
Revenue Code or the Federal election laws, not depend on 
formalistic distinctions between cases which are obviously 
designed to influence elections.
    The important public interest to be served by disclosure is 
equally applicable to all political organizations, regardless 
of whether they attempt to influence Federal elections through 
issue or express advocacy. As several recently introduced bills 
demonstrate, there are alternative approaches for achieving 
consistency in the disclosure obligations. The Treasury looks 
forward to working with you, Mr. Chairman, and Mr. Coyne, and 
Members of the Subcommittee to craft legislation to achieve 
this end.
    Chairman Houghton. Thank you, Mr. Mikrut.
    [The prepared statement follows:]

Statement of Joseph Mikrut, Tax Legislative Counsel, U.S. Department of 
the Treasury

    Mr. Chairman, Mr. Coyne, and distinguished Members of the 
Subcommittee:
    I appreciate the opportunity to discuss with you today the 
issue of disclosure of political activities of tax-exempt 
organizations. At the outset, I would like to emphasize that 
the Administration strongly supports efforts to require greater 
disclosure of political campaign contributions and expenditures 
as part of its on-going efforts to achieve comprehensive 
campaign finance reform. Some of the disclosure proposals raise 
issues outside the tax code--such as Federal election laws 
issues--which are generally beyond the expertise of the 
Treasury Department. However, recent developments involving so-
called ``section 527'' organizations show the interplay between 
the Federal election laws and tax code rules. I will focus my 
remarks today on issues that arise under the Internal Revenue 
Code.

                      Internal Revenue Code Rules

In general

    Twenty-seven different types of tax-exempt organizations 
are described in section 501(c) of the Internal Revenue 
Code.\1\ These organizations--which cover a wide range of 
nonprofit entities, including charities, social welfare 
organizations, labor unions, business leagues, and social 
clubs--generally are exempt from Federal income tax (other than 
with respect to certain unrelated business income). In 
addition, section 527 provides a limited tax-exempt status to 
certain ``political organizations,'' meaning parties, 
committees, funds, and other organizations that are organized 
and operated primarily for the purpose of accepting 
contributions or making expenditures to influence the selection 
of an individual to public office. Section 527 entities are 
exempt from tax on political contributions they receive (and 
certain other political fundraising receipts), but are subject 
to tax on their investment income.
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    \1\ Unless otherwise indicated, all section references are to the 
Internal Revenue Code of 1986, as amended.
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    The different tax-exempt organizations are subject to 
different rules under the Internal Revenue Code with respect to 
their ``political'' (in the broad sense of the term) 
activities. In particular, the tax code differentiates 
``lobbying'' with respect to legislation from ``political 
campaign intervention'' (sometimes referred to as 
``electioneering''), even though both types of advocacy 
activities are commonly thought of as being ``political.'' In 
discussing the rules governing participation by tax-exempt 
entities in political activities and disclosure of such 
activities, it is necessary to keep in mind the different types 
of tax-exempt entities and to distinguish lobbying from 
political campaign intervention.

                               Charities

Exempt Status

    Organizations described in section 501(c)(3) are commonly 
referred to as ``charities.'' \2\ Compared to other tax-exempt 
organizations, charities are eligible for the most preferred 
tax-exempt status under the Code. That is, not only are 
charities generally exempt from tax at the entity level, they 
also have access to tax-exempt financing and are eligible to 
receive contributions that are deductible for Federal income, 
estate, and gift tax purposes.\3\ At the same time, charities 
are subject to the most stringent rules with respect to their 
advocacy activities. Section 501(c)(3) expressly provides that 
charities are prohibited from intervening in any political 
campaign on behalf of (or in opposition to) any candidate for 
public office; and charities may not engage in more than 
``insubstantial'' lobbying in an attempt to influence 
legislation.
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    \2\ ``Charities'' include public charities (such as churches, 
schools, hospitals, and organizations that receive their support from a 
broad range of public sources) and private foundations (which generally 
are closely controlled and, thus, are subject to special rules under 
the Code).
    \3\ However, contributions to a charity are not deductible if 
earmarked for lobbying activities. See Treas. Reg. Sec. 1.170A-1(j)(6). 
In addition, no deduction is allowed for out-of-pocket expenditures 
made on behalf of a charity (other than a church) if the expenditure is 
made for lobbying purposes. See section 170(f)(6).

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Political intervention by charities

    Although charities are absolutely barred from intervening 
in a political campaign on a partisan basis, charities may 
engage in some election-related activities--such as voter 
registration efforts or sponsoring a debate--provided that the 
activities are not biased towards a particular candidate.\4\ 
Section 501(c)(3) is violated when a charity intervenes in a 
political campaign ``on behalf of (or in opposition to) any 
candidate.'' However, in cases where the charity does not 
directly provide financial support to a candidate, or 
explicitly endorse or oppose a candidate, the determination of 
whether prohibited political campaign intervention has 
implicitly occurred is made by the IRS on the basis of all 
facts and circumstances. In this regard, the IRS does not use 
the Federal election law ``express advocacy'' standard (which 
is discussed below).\5\
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    \4\ See, e.g., Rev. Rul. 80-282, 1980-2 C.B. 178. Special rules 
apply to private foundations under section 4945(f).
    \5\ See, e.g., Rev. Rul. 78-248, 1978-1 C.B. 154.
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    Because a tax-exempt charity may not engage in political 
campaign intervention consistent with its section 501(c)(3) 
status, there generally is no disclosure regime provided by the 
Internal Revenue Code for prohibited political campaign 
activities of charities. If a charity improperly engages in 
political campaign intervention, the charity's tax-exempt 
status under section 501(c)(3) may be revoked, in which case 
the IRS will notify the public that contributions to the entity 
no longer are tax-deductible. Moreover, penalty excise taxes 
may be imposed by the IRS under section 4955 in addition (or as 
an alternative) to revocation of tax-exempt status. When 
penalty excise taxes are imposed under section 4955 as a result 
of improper political campaign intervention, disclosure of this 
fact is required on the charity's annual information return, 
which is filed with the IRS and which must be made available to 
the public upon request.\6\
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    \6\ See section 6104(d) and Treas. Reg. Sec. 301.6104(a)-3(a).

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Lobbying by charities

    As a general rule, section 501(c)(3) provides that no more 
than an insubstantial amount of the activities of a charity may 
be attempting to influence legislation. More specifically, the 
Code and regulations contain three sets of overlapping rules 
governing such ``lobbying'' efforts by charities. One set of 
rules applies to public charities that elect to be governed by 
a specific, numeric test (based on dollar amounts of 
expenditures by the charity) to determine whether their 
lobbying activities are substantial.\7\ Another set of rules 
applies to charities that choose to be subject to a facts-and-
circumstances test of whether their lobbying activities are 
substantial relative to their other activities.\8\ A third set 
of rules applies to private foundations, which generally are 
subject to penalty excise taxes on their lobbying expenditures 
even if the foundation's lobbying activities are not so 
substantial as to jeopardize its tax-exempt status.\9\
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    \7\ See sections 501(h) and 4911, which provide that an 
``electing'' charity's total lobbying expenditures in any year may not 
exceed 20% of the first $500,000 of the organization's exempt purpose 
expenditures, with decreasing percentages for additional exempt purpose 
expenditures (subject to a $1 million cap for total lobbying 
expenditures). A separate limit equal to 25% of the overall permissible 
lobbying amount applies to grass roots lobbying.
    \8\ See, e.g., Treas. Reg. Sec. 1.503(c)(3)-1(c)(3)(ii); Haswell v. 
United States, 500 F.2d 1133 (Ct. Cl. 1974).
    \9\ See section 4945(d)(1) and (e).
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    The definition of ``lobbying'' for purposes of section 
501(c)(3) is essentially the same under the three sets of rules 
governing charities. In short, ``lobbying'' includes directly 
contacting members of a legislative body (or their staffs) to 
support or oppose legislation (so-called ``direct lobbying''), 
as well as urging the public to contact legislative bodies, or 
otherwise attempting to influence public opinion, with respect 
to specific legislation (so-called ``grassroots lobbying''). 
All facts and circumstances surrounding a communication 
generally are taken into account in determining whether 
``lobbying'' has occurred, although discussions of broad social 
or policy issues (even issues likely to be addressed by a 
legislature) generally do not constitute ``lobbying'' for 
purposes of section 501(c)(3) if the discussion does not 
advocate for or against a specific legislative proposal.
    For communications that fall within the section 501(c)(3) 
general definition of ``lobbying,'' exceptions are provided 
when an organization makes available certain nonpartisan 
analysis, study, or research, or provides technical advice to a 
governmental body in response to a written request.\10\ In 
addition, for purposes of section 501(c)(3), ``lobbying'' does 
not include certain communications between a public charity and 
its members, nor does the term include direct lobbying by a 
charity with respect to legislation which might affect the 
existence, powers and duties, tax-exempt status, or deduction 
of contributions to the organization (so-called ``self-defense 
lobbying'').\11\
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    \10\ The ``nonpartisan analysis'' exception may apply, even if the 
communication advocates a particular position, provided that there is a 
sufficiently full and fair exposition of the facts to enable the 
recipient to form an independent opinion and the communication does not 
``directly encourage'' the recipient to take action. See Treas. Reg. 
Sec. 56.4911-2(c)(1)(ii) and (vi).
    \11\ See sections 4911(d) and 4945(e).
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    Under current law, charities disclose their lobbying 
activities to the IRS and the general public by reporting on 
their annual information return (Form 990) the amount of their 
lobbying expenditures for the taxable year. In addition, 
charities which elect to be subject to the section 501(h) 
numeric test of ``substantiality'' must allocate their 
expenditures between ``direct'' and ``grass roots'' lobbying. 
Non-electing charities must disclose their general methods of 
lobbying, such as the use of media advertisements or direct 
contacts with legislators, and the amounts expended using each 
method. In addition, to the extent that a charity engages in 
non-partisan analysis of legislation as part of its major 
program services, such activities are described on the Form 
990.
    If a charity improperly engages in ``substantial'' 
lobbying, the charity's tax-exempt status under section 
501(c)(3) may be revoked, and such a sanction would be 
disclosed to the general public. Moreover, penalty excise taxes 
may be imposed by the IRS under sections 4911 or 4912 in cases 
of excess lobbying expenditures, and imposition of these 
penalties would be reported on the charity's Form 990.

Disclosure of contributors to charities

    The annual information return (Form 990) required to be 
filed by a charity with the IRS and made publicly available 
contains a variety of information about the charity's 
operations for the taxable year, including a description of its 
major programs, gross income and expenses, assets and 
liabilities, and total contributions received.\12\ When filing 
this return with the IRS, charities also attach a list that 
identifies the names and addresses of all substantial 
contributors (generally meaning persons who contribute $5,000 
or more to the charity during the year). However, section 
6104(d)(3) expressly provides that, in the case of a public 
charity, public disclosure is not required of its contributor 
list. The Form 990 is required to be filed within four and one-
half months following the end of the organization's taxable 
year.\13\ An organization that fails to file a complete and 
accurate Form 990 is subject to a penalty of $20 for each day 
the failure continues, up to a maximum penalty per return of 
$10,000 or (if less) five percent of the organization's gross 
receipts for the year.\14\ Similar penalties also may be 
imposed if an organization fails to make its Form 990 (or its 
exemption application) publicly available.\15\
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    \12\ The annual information-reporting requirement does not apply to 
churches and small charities which normally have annual gross receipts 
below $25,000. See section 6033(a)(2); Rev. Proc. 83-23, 1983-1 C.B. 
687.
    \13\ An organization may request up to two 90-day extensions of 
time to file its Form 990 (for a maximum extension of up to six 
months).
    \14\ Section 6652(c)(1)(A). Higher penalties (i.e., $100 per day, 
up to a maximum of $50,000) apply to organizations having annual gross 
receipts over $1 million.
    \15\ Section 6652(c)(1)(C) and (D).
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                             Non-charities

Exempt Status

    Nonprofit organizations that are described in section 501(c) but 
which are not charities include section 501(c)(4) social welfare 
organizations, section 501(c)(5) labor and agricultural organizations, 
section 501(c)(6) business leagues, and section 501(c)(7) social clubs. 
These non-charities generally are exempt from tax on dues and 
contributions, related-function income, and investment income, but are 
subject to tax on certain unrelated business income.\16\ Contributions 
to non-charities generally are not deductible to the donor for Federal 
income, estate, or gift tax purposes.\17\ However, in some instances, 
contributions or dues may be deductible by the payor as a trade or 
business expense, provided that the payment is not allocable to 
political campaign or lobbying activities conducted by the recipient 
organization.\18\
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    \16\ Certain organizations--such as social clubs described in 
section 501(c)(7)--are exempt from tax on dues and certain other 
amounts paid by members, but are subject to tax on their investment 
income and any income received from non-members.
    \17\ There are limited exceptions to this general rule for certain 
contributions made to war veterans groups, domestic fraternal 
societies, and certain nonprofit cemetery companies. See sections 
170(c)(3), (c)(4), and (c)(5). The IRS' position is that, in the 
absence of a specific statutory exception, gifts to non-charities are 
subject to the Federal gift tax. See Rev. Rul. 82-216 C.B. 1982-1 C.B. 
220.
    \18\ See section 162(e)(3). Corporations and businesses generally 
are prohibited by section 162(e)(1) from deducting political campaign 
and lobbying expenditures; and section 162(e)(3) ensures that section 
162(e)(1) is not circumvented by a business simply making dues payments 
to a membership organization which, in turn, conducts political 
campaign or lobbying activities on behalf of its members. However, a 
non-charity such as a business league may elect to pay a ``proxy'' tax 
on its political campaign or lobbying expenditures, in which case dues 
paid by its members could be deducted as a business expense without 
regard to the political campaign or lobbying expenditures made by the 
organization. See section 6033(e).

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Political campaign intervention

    Non-charities generally are not restricted by the Internal Revenue 
Code from engaging in political campaign activities. However, political 
campaign activities cannot be the primary activities of an entity 
described in section 501(c), such as a section 501(c)(4) social welfare 
organization.\19\ If the primary activities of an organization are 
conducting or funding political campaign activities, such an 
organization may be eligible for the limited tax-exempt status under 
section 527 (see below).
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    \19\ See Rev. Rul. 81-95, 1981-1 C.B. 332.
---------------------------------------------------------------------------
    To the extent that a non-charity engages in any political campaign 
activities, the organization (or a separate segregated fund through 
which it funds such activities) is subject to tax on the lesser amount 
of its investment income or the amount expended on political campaign 
activities.\20\ The objective of this rule is to prevent organizations 
from using tax-free investment income to fund political campaign 
intervention. For this purpose, the test for determining whether 
political campaign activities have been funded or conducted by the 
organization is generally the same as for purposes of section 
501(c)(3)--that is, the question is whether, based on all the 
surrounding facts and circumstances, there has been an attempt to 
influence an election for public office by supporting or opposing one 
or more candidates.\21\
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    \20\ See section 527(f).
    \21\ See Rev. Rul. 81-95, supra.
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    Non-charities must indicate on their Form 990 the amount of 
expenditures for political campaign intervention and indicate whether 
they filed a Form 1120-POL, which is required if their net investment 
income and political campaign expenditures both exceed $100. Form 1120-
POL is a one-page form indicating the amount of investment income, 
expenses attributable that income, and the amount of tax due. There is 
no listing on the Form 1120-POL of contributors to the organization or 
recipients of disbursements. In contrast to the Form 990, which is an 
information return, the Form 1120-POL is a tax return that is not 
publicly available. Form 1120-POL is required to be filed within two 
and one-half months after the end of the organization's taxable 
year.\22\
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    \22\ An organization may request a six-month extension of time to 
file Form 1120-POL.

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Lobbying activities

    Non-charities described in section 501(c) are not subject to any 
specific Internal Revenue Code provision that restricts their lobbying 
activities. Indeed, lobbying may be the primary activity for some tax-
exempt organizations, such as a social welfare organization or a 
business league. In general, the only theoretical limit is that the 
lobbying activities must somehow further the entity's nonprofit 
purposes.
    Non-charities with members who may be deducting their dues payments 
as business expenses are required to indicate on their Form 990 the 
amount of their lobbying expenditures, which would be non-deductible if 
directly incurred by the member. Other non-charities generally do not 
specifically report lobbying expenditures on the Form 990, but may 
describe their lobbying activities if part of a major program of the 
organization.

Disclosure of contributors

    As with charitable organizations, non-charities described in 
section 501(c) generally must report on their Form 990 the total amount 
of dues and contributions received by the organization during the 
taxable year. In addition, non-charities provide a list of their major 
contributors (generally meaning persons who make gifts of $5,000 or 
more during the year) to the IRS, but this list is not publicly 
available.

Section 527 political organizations

    Section 527 governs the tax treatment of ``political 
organizations,'' meaning a party, committee, association, fund, or 
other organization (whether or not incorporated) organized and operated 
primarily for the purpose of directly or indirectly accepting 
contributions or making expenditures (or both) for an ``exempt 
function.'' Section 527 uses the term ``exempt function'' rather than 
``political campaign intervention,'' although there is significant 
overlap in the tax code meaning of these terms. Section 527(f)(2) 
defines the term ``exempt function'' as--

        ``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 or 
        office in a political organization, or the election of 
        Presidential or Vice-Presidential electors, whether or not such 
        individual or electors are selected, nominated, elected, or 
        appointed.''

    Section 527 clarifies the tax treatment of ``political 
organizations'' by providing that contributions (and certain 
political fundraising receipts) received by the entity (or 
fund) are not subject to an entity-level tax, yet the entity's 
(or fund's) investment income and any income from events that 
are not political in nature is subject to tax, generally at the 
highest corporate income tax rate.\23\ Moreover, another 
section of the Code--section 2501(a)(5)--specifically provides 
that contributions to section 527 political organizations are 
exempted from the Federal gift tax.\24\
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    \23\ A special rule provides that principal campaign committees of 
candidates for Congress are subject to tax at graduated corporate 
rates. Section 527(h).
    \24\ If, however, a contribution is made of appreciated property to 
a section 527 entity, then the contributor is treated as if he sold the 
property at its fair market value and contributed the proceeds to the 
section 527 entity. Section 84. In this way, built-in (untaxed) gains 
cannot be used to fund political campaign activities.
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    In determining whether a particular activity constitutes 
``exempt function'' activity for purposes of section 527, the 
IRS examines all facts and circumstances to determine if there 
is a sufficient nexus between the activity and the election of 
an individual to a public office.\25\ The IRS generally applies 
the same standard used to test whether particular activities 
amount to ``political campaign intervention'' for a section 
501(c) organization when determining whether ``exempt 
function'' activities are conducted for purposes of section 
527.\26\ In both the section 501(c) and section 527 context, 
the scope of campaign-related activities is broader than the 
definition of ``express advocacy'' under the Federal Election 
Campaign Act (FECA) \27\ (see discussion below). Thus, the 
section 527 definition of ``political organizations'' covers 
not only traditional political parties and candidate committees 
subject to regulation under the FECA, but also covers other 
organizations (and unincorporated funds) which are organized 
and operated primarily to conduct activities in an attempt to 
influence an election--at the Federal, State, or local level--
even though these organizations may not engage in ``express 
advocacy'' in the FECA sense. In other words, section 527 
covers ``political organizations'' that are commonly referred 
to as ``issue advocacy'' organizations for Federal election law 
purposes,\28\ because such organizations conduct (or fund) 
biased voter education efforts, targeted voter-registration 
efforts, or grassroots lobbying intended to influence an 
election, although the organization does not expressly advocate 
the election (or defeat) of a particular candidate. The IRS has 
ruled that, because such biased campaign-related activities 
constitute ``political campaign intervention'' under long-
standing interpretations of section 501(c)(3), an entity or 
fund organized and operated primarily to conduct such 
activities is treated as a section 527 entity.\29\
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    \25\ See Hill, Frances R. ``Probing the Limits of Section 527 to 
Design a New Campaign Finance Vehicle,'' Tax Notes, at 387-402 (January 
17, 2000).
    \26\ See, e.g., PLR 9808037 (Nov. 21, 1997)(``;It follows that any 
activities constituting prohibited political intervention by a section 
501(c)(3) organization are activities that must be less than the 
primary activities of a section 501(c)(4) organization, which are, in 
turn, activities that are exempt functions for a section 527 
organization.''); PLR 199925051 (March 29, 1999)(``;similar analysis'' 
applies under sections 501(c)(3), 501(c)(4), and section 527 to 
determine if ``voter guides cross over the line from simply educating 
voters to attempting to influence their votes'').
    \27\ 2 USC 431 et seq.
    \28\ There is no statutory or regulatory definition of ``issue 
advocacy'' for FECA purposes. The term ``issue advocacy'' is used in 
the FECA context to describe all political activities that fall outside 
the scope of ``express advocacy.'' See Hill, supra, at 395.
    \29\ In recent years, a number of entities have sought recognition 
from the IRS of their section 527 status by describing their intended 
election-related activities and acknowledging that their primary 
objective was to influence elections, although the organizations were 
specifically prohibited by their organizational documents (or a 
resolution passed by the governing board) from expressly advocating the 
election or defeat of any candidate. Based on such representations from 
the organizations, the IRS concluded that they were ``political 
organizations'' under section 527. See, e.g., PLR 9725036 (March 24, 
1997)(although factual and educational, the content, timing, and 
targeting of the material was intended to influence the electoral 
process); PLR 199925051 (March 29, 1999)(materials distributed and 
techniques used resemble public education and issue advocacy materials 
and techniques often used by section 501(c)(3) and 501(c)(4) 
organizations; however, because materials and techniques were 
admittedly designed to influence elections and were biased in their 
presentation, they constituted section 527 ``exempt function'' 
activities).
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    To ensure that tax-exempt organizations which conduct some 
political campaign activities but not as their primary 
activity--e.g., a social welfare organization--cannot use tax-
free investment income to fund such activities, section 527(f) 
imposes a tax on the organization's investment income, up to 
the amount of its ``exempt function'' expenditures within the 
meaning of section 527. This tax imposed under section 527(f) 
operates so that section 527 organizations and section 501(c) 
entities receive consistent treatment with respect to their 
campaign-related activities.\30\
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    \30\ For purposes of the section 527(f) tax, certain separate 
segregated funds, such as a PAC, established by a section 501(c) 
organization are treated as separate organizations (sec. 527(f)(3)).
---------------------------------------------------------------------------
    Political organizations described in section 527, as well 
as section 501(c) organizations, are required to file a Form 
1120-POL with the IRS for any taxable year in which the 
organization has both investment income and ``exempt function'' 
expenditures (within the meaning of section 527) exceeding 
$100. As mentioned previously, Form 1120-POL is a one-page form 
which does not list contributors to the organization, nor does 
it identify the recipients of disbursements made by the 
organization. The Form 1120-POL is not disclosable to the 
general public. In contrast to charities and non-charities 
described in section 501(c), political organizations do not 
file an annual information return (Form 990).

                       Federal Election Law Rules

    The Federal Election Campaign Act (FECA) requires public 
disclosure of Federal campaign finances, limits campaign 
contributions by individuals, political parties, and other 
special interests, and regulates spending in campaigns for 
Federal office in order to inform the electorate and prevent 
corruption of the political process.\31\
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    \31\ See Buckley v. Valeo, 424 U.S. 1 (1976).

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Contribution limits

    The FECA prohibits certain individuals and entities (such 
as corporations, labor organizations, Federal government 
contractors, and foreign nationals) from making contributions 
or expenditures to influence Federal elections. In addition, 
the FECA generally limits the amounts that may be contributed 
by individuals and groups to candidates (and their authorized 
committees), political party committees, and other political 
committees.\32\ However, the FECA dollar-amount contribution 
limits do not apply to so-called ``independent expenditures,'' 
which are expenditures for communications (such as newspaper, 
TV, or direct mail advertisements) which expressly advocate the 
election or defeat of a clearly identified candidate, but which 
are made independently from the candidate's campaign (i.e., the 
expenditure is not made with the cooperation or consent of, or 
at the request or suggestion of, the candidate or the 
campaign).\33\ Although there is no limit on the amount of such 
``independent expenditures,'' the law requires all persons 
making such independent expenditures to report them to the 
Federal Election Commission (FEC) and to disclose the sources 
of the funds they used.\34\ In contrast with independent 
expenditures, expenditures which are coordinated with the 
candidate's campaign are, for FECA purposes, treated as in-kind 
contributions subject to the general contribution limits.\35\
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    \32\ 2 USC 441a, 441b, 441c, 441e.
    \33\ Individuals and entities (such as corporations) that are 
prohibited from making contributions to influence Federal elections are 
likewise prohibited from making ``independent expenditures.''
    \34\ 2 USC 434(b) and (c). See also Colorado Republican Federal 
Campaign Committee v. FEC, 518 U.S. 604 (1996).
    \35\ 2 USC 441a(a)(7)(B)(i).

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Reporting and disclosure

    The FECA requires political committees (including political 
party committees, campaign committees, and political action 
committees (PACs)) to register and file periodic reports with 
the FEC disclosing the funds they raise and spend.\36\ Each 
political committee is required to file a statement of 
organization with the FEC, generally within 10 days after 
establishment. The statement must include the name and address 
of the committee, the names and addresses of its Treasurer \37\ 
and the custodian of its books and accounts. Thereafter, each 
political committee must file periodic reports of its receipts 
and disbursements. During an election year, a political 
committee generally has the option of filing quarterly or 
monthly reports, and must also file special pre-and post-
election reports. During a non-election year, quarterly filers 
automatically switch to a semi-annual reporting schedule.\38\
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    \36\ 2 USC 431(17), 433, 434.
    \37\ FECA requires each political committee to designate a 
Treasurer, who must authorize all expenditures and keep detailed 
records of all contributions received and disbursements made on behalf 
of the committee. 2 USC 432.
    \38\ 2 USC 434(a)(4). The reporting schedule for authorized 
committees of a candidate is described in 2 USC 434(a)(2) and (3).
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    Each report must disclose the amount of cash on hand at the 
beginning of the reporting period, the committee's total 
receipts (for the reporting period and the calendar year to 
date), including the total contributions received from 
political committees and other sources, and an itemized list of 
contributors, including each person (other than a political 
committee) whose aggregate contributions during the calendar 
year exceed $200.\39\ Each report must also disclose the 
committee's total disbursements (for the reporting period and 
the calendar year to date), including all contributions to 
candidates and other political committees, and all independent 
expenditures. The report must identify each person who receives 
aggregate disbursements of $200 or more during the calendar 
year, and report the date, amount, and purpose of each 
disbursement.\40\ The FEC makes all statements of organization 
and periodic reports available to the public within 48 hours 
after receipt.\41\
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    \39\ For each contribution, the committee must report the full name 
and address of the contributor, the contributor's occupation and 
employer, the date of receipt and the amount of each contribution, and 
the aggregate contributions received from the same contributor during 
the calendar year. 2 USC 431(13) and 434(b)(3).
    \40\ In the case of independent expenditures, the report must also 
state whether the independent expenditure is in support of, or in 
opposition to, a candidate, as well as the name and office sought by 
the candidate, and a certification, under penalty of perjury, whether 
the expenditure is made in cooperation, consultation, or concert with 
any political committee, or at the request or suggestion of any 
candidate or authorized committee. 2 USC 434(b)(6)(B).
    \41\ Federal Election Commission, Twenty Year Report at 4 (1995).
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    In addition to required disclosure by political committees, 
the FECA requires any person who makes independent expenditures 
in an aggregate amount of more than $250 during a calendar year 
to report to the FEC detailed information regarding the 
identities of contributors, and the amount and purpose of such 
independent expenditures.\42\ In addition, any person who 
finances communications expressly advocating the election or 
defeat of a clearly identified candidate, or solicits any 
contribution through public advertisements or direct mail must 
indicate who paid for the communication and whether it is 
authorized by the candidate or authorized committee.\43\
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    \42\ 2 USC 434(c).
    \43\ 2 USC 441d.
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    Since 1998, the FEC has permitted filers to submit reports 
electronically by modem or via the Internet. The FEC scans all 
reports filed with the FEC to make digital images of the 
documents, and makes the digital images available in the FEC's 
Public Records Office and on the Commission's Internet web 
site.\44\ Also available on the FEC's web site is a searchable 
database of campaign finance information.\45\ Visitors may 
search this database for information regarding contributions by 
individuals and political committees to House, Senate, and 
Presidential campaigns, political parties, and PACs in the 
1997-98 and 1999-2000 election cycles. By querying this 
database, visitors can search for contributions made by a 
specific individual, contributions received or made by a 
specific political committee, and contributions received by a 
specific campaign. Results of these queries are linked to the 
imaging system so visitors can view the actual financial 
reports filed by the campaigns or committees.
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    \44\ The FEC's Public Records Office continues to make available 
microfilm and paper copies of these reports. See Federal Election 
Commission, Annual Report 1998, at 7-9.
    \45\ The Internet address is: www.fed.gov/finance--reports.html

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Express advocacy standard

    Although some uncertainty remains, the current prevailing 
view of the courts appears to be that, in the absence of 
coordination with a candidate's campaign, only communications 
that contain express words advocating the election or defeat of 
a candidate--such as ``vote for,'' ``support,'' ``defeat,'' and 
certain other ``magic words''--are subject to the requirements 
of FECA, including the restrictions on contributors eligible to 
fund such communications, the contribution limits, and public 
disclosure requirements for funds raised and spent on such 
communications.\46\ Accordingly, individuals, entities, and 
groups--including section 527 political organizations--that 
attempt to influence Federal elections, but that refrain from 
``express advocacy,'' may be able to avoid the FECA reporting 
and disclosure requirements.\47\
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    \46\ See Maine Right to Life Committee v. FEC, 98 F.3d 1 (1st Cir. 
1996); FEC v. Christian Action Network, 92 F. 3d 1178 (4th Cir. 1997); 
FEC v. Christian Coalition, 52 F. Supp. 2d 45 (D.D.C. 1999). But see 
FEC v. Furgatch, 807 F.2d 857 (9th Cir. 1987)(``;express advocacy'' 
subject to regulation under FECA need not include any of the words 
listed in Buckley but ``must, when read as a whole, and with limited 
reference to external events, be susceptible of no other reasonable 
interpretation but as an exhortation to vote for or against a specific 
candidate''). See also Buckley v. Valeo, 424 U.S. at 44, n.52 (limiting 
the application of certain provisions of the FECA to ``communications 
containing express words of advocacy of election or defeat, such as 
'vote for,' 'elect,' 'support,' 'cast your ballot for,' 'Smith for 
Congress,' 'vote against,' 'defeat,' 'reject.''')
    \47\  To avoid the FECA reporting requirements, a section 527 
organization must also avoid making contributions directly to candidate 
committees or making coordinated expenditures. 2 USC 441a(a)(8) and 
441a(a)(7)(B). It is unclear whether a section 527 organization that 
engages in both ``express advocacy'' and ``issue advocacy'' would be 
treated as a ``political committee'' under the FECA and, thus, subject 
to disclosure rules with respect to ``soft money'' contributions it 
receives, even though no limits as to source or amount apply to such 
contributions. See Hill, supra at 395, 400-01.
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                        Lobbying Disclosure Act

    The Lobbying Disclosure Act \48\ requires certain 
individuals and organizations that lobby the Federal government 
(either on behalf of clients or on the organization's own 
behalf) to register with the Clerk of the House of 
Representatives and the Secretary of the Senate, and to file 
semi-annual reports detailing their lobbying activities. The 
stated purpose of the Act is to promote public awareness of 
efforts by paid lobbyists to influence the public 
decisionmaking process of the legislative and executive 
branches of the Federal government.\49\
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    \48\ 2 USC 1601 et seq.
    \49\ In general, the Act is a disclosure statute and does not 
restrict lobbying activity. However, the Act provides that section 
501(c)(4) organizations that engage in lobbying activities are not 
eligible to receive Federal award, grant, or loan funds. 2 USC 1611.
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    In general, an organization that engages in lobbying 
activities on its own behalf is subject to the registration and 
reporting requirements of the Act if it (1) has at least one 
employee who spends 20 percent of his or her time on lobbying 
activities and (2) expends (or expects to expend) more than 
$20,500 \50\ for lobbying activities in any six month 
period.\51\ Among the information required to be reported semi-
annually are the general areas (e.g., communications, 
education, health issues) and specific issues (e.g., specific 
bills before Congress or specific executive branch actions) on 
which the organization lobbied, the Houses of Congress or 
Federal agencies contacted, and a good faith estimate of the 
total expenses incurred in carrying out the lobbying 
activities. The registration forms (Form LD-1) and semi-annual 
reports (Form LD-2) are publicly available.\52\
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    \50\ This amount is indexed for inflation. 2 USC 1603.
    \51\ Registration is generally required within 45 days after an 
organization first makes a lobbying communication. Each registrant must 
disclose its name, address, and a description of its business, the 
general areas in which it expects to engage in lobbying, and the 
identity of certain organizations that contribute to and control its 
lobbying activities, and certain other information. 2 USC 1603.
    \52\ 2 USC 1604, 1605.
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    Lobbying is broadly defined under the Act to include any 
oral or written communication with certain Federal executive or 
legislative branch officials \53\ regarding (1) the 
formulation, modification, or adoption of Federal legislation, 
(2) the formulation, modification or adoption of a federal 
rule, regulation, executive order, or any other program, policy 
or position of the Federal government, (3) the administration 
or execution of a Federal program or policy, and (4) the 
nomination or confirmation of a person to a position that is 
subject to Senate confirmation.\54\ The Act excepts from the 
definition of lobbying certain categories of communications, 
including communications by churches, and various 
communications of a public nature (such as testimony before a 
Congressional committee, communications made on the public 
record in a public proceeding, and mass media 
communications).\55\
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    \53\ To constitute lobbying under the Act, the communication must 
be directed to Members of Congress, Congressional staff and certain 
other legislative branch employees, the President, the Vice President, 
employees of the Executive Office of the President, and certain 
executive branch officials and employees, political appointees, and 
certain high-ranking members of the uniformed services. 2 USC 1602(3) 
and (4).
    \54\ The definition of lobbying under the Act is both more 
inclusive and less inclusive than the Internal Revenue Code definition. 
For example, although the Act does not apply to ``grassroots'' lobbying 
or lobbying at the State or local level, it applies to efforts to 
influence not only legislation, but also a broad range of policy-
related matters at the Federal level.
    \55\ 2 USC 1602(8). Unlike section 4911(d) of the Internal Revenue 
Code, the Act contains no specific exception for ``self-defense'' 
lobbying. However, depending on the form of the communication, a self-
defense communication may fall within one of the other exceptions under 
the Act.
---------------------------------------------------------------------------
    To reduce the recordkeeping burden on organizations (such 
as for-profit entities, certain tax-exempt membership 
organizations, and certain public charities) that are already 
required under the Internal Revenue Code to track expenditures 
for lobbying,\56\ the Act generally permits such organizations 
to use the Internal Revenue Code definition for purposes of 
reporting the amount of their lobbying expenditures during the 
semi-annual reporting period.\57\ However, such organizations 
must use the Act's definition of lobbying for purposes of 
providing a narrative description of their lobbying activities 
before the legislative branch.\58\
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    \56\ For example, for-profit entities must keep track of lobbying 
and political expenditures, which are not deductible under section 
162(e) of the Code. Tax-exempt membership organizations that receive 
deductible dues must keep track of the portion of membership 
contributions attributable to lobbying and political activities, and 
pay a proxy tax or inform members what portion of their dues is 
nondeductible under section 162(e). See section 6033(e). Public 
charities that have made an election under section 501(h) of the Code 
must track expenditures for ``attempts to influence legislation'' as 
defined under section 4911(d).
    \57\ 2 USC 1610. Although ``non-electing'' public charities must 
also track expenditures for lobbying as defined under section 
501(c)(3), the Act does not provide a similar exception for them. The 
special rule allowing certain organizations to report expenditures 
using the Internal Revenue Code definitions does not apply to lobbyists 
paid by outside clients.
    \58\ Non-electing public charities and private foundations are 
required to use the Act's definition for all purposes. Because the 
lobbying activities covered by the Act are different from the 
``attempts to influence legislation'' which are prohibited under 
section 4945(e) of the Code, private foundations may be required to 
register under the Act.
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       Proposals for increased disclosure by section 527 entities

    Several bills have been introduced in the 106th Congress to 
expand the reporting and disclosure requirements governing 
section 527 political organizations. The bills, however, 
generally would not apply to section 527 organizations that 
attempt to influence State and local, but not Federal, 
elections. Some of these proposals would amend the Internal 
Revenue Code to require section 527 organizations to file 
periodic disclosure reports with the IRS and make such reports 
publicly available.\59\ The information to be disclosed would 
parallel the contents of disclosure reports currently filed 
under FECA with respect to ``express advocacy''--that is, the 
name, address, occupation, and name of employer of each person 
who contributed more than $200 to the organization during the 
reporting period, and the name and address of each person to 
whom disbursements were made of more than $200 during such 
period.\60\ These proposals generally follow the reporting 
periods and multiple filing deadlines under the current-law 
FECA disclosure regime (which vary based on whether a Federal 
election or primary is held during the year). At least one bill 
would require the IRS to develop procedures for submission in 
electronic form of disclosure reports.\61\ Some proposals would 
allow political organizations the option of filing disclosure 
reports with the FEC as an alternative to filing such reports 
with the IRS. Other introduced bills take a different overall 
approach. These proposals would not amend the Internal Revenue 
Code, but instead would modify the Federal election laws to 
require periodic disclosure to the FEC of contributors to, and 
expenditures made by, section 527 political organizations.\62\
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    \59\ See H.R. 4168 (Doggett) and S. 2583 (Lieberman).
    \60\ See H.R. 4168, which would also require reports to be filed 
shortly after a political organization is established, including 
identifying all persons who are in a position to ``exercise substantial 
direct or indirect influence'' over the organization. Similarly, S. 
2583 would require notification to be filed with the IRS shortly after 
the organization is established, identifying officers, key employees, 
and related entities. S. 2583 would require disclosure of the identity 
of persons who receive disbursements from the organization only if they 
receive $500 or more during the calendar year.
    \61\ See H.R. 4168.
    \62\ See H.R. 4621 (Castle). Another bill, H.R. 3688 (Moore), would 
amend section 527 of the Internal Revenue Code to require that 
political organizations which attempt to influence Federal elections 
must certify to the IRS that they are in compliance with FECA 
disclosure requirements, and the bill also would amend FECA to impose 
specific statutory disclosure requirements for any entity that claims 
section 527 status for Internal Revenue Code purposes. See also S. 2582 
(Lieberman), which would not add any specific disclosure rules to the 
Internal Revenue Code but would simply amend section 527 to provide as 
a general rule that a political organization which attempts to 
influence Federal elections is described in section 527 only if it is a 
``political committee'' for purposes of FECA.
---------------------------------------------------------------------------
    To prevent avoidance of the disclosure objectives, one 
proposal provides that the new disclosure requirements to be 
incorporated into the Internal Revenue Code would apply to all 
organizations that satisfy the section 527 definition of a 
political organization ``without regard to whether such 
organization claims a tax exemption under section 527.'' \63\ 
This would prevent a political organization from evading the 
new disclosure requirements, while claiming essentially the 
same tax treatment under general principles of the Code outside 
of section 527 (as discussed below). Thus, the new disclosure 
requirements would apply to all organizations (and funds) that 
are organized and operated primarily to influence Federal 
elections. However, other than H.R. 4621, which directly amends 
the FECA (as well as the Federal Communications Act \64\), the 
introduced bills referred to above generally would not apply to 
entities, tax-exempt or taxable, that engage in some campaign-
related activities but not as their primary activity.\65\
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    \63\ H.R. 4168.
    \64\ The amendments made by H.R. 4621 to the Communications Act 
would require disclosure as part of certain broadcast political 
advertisements of the name of the person(s) responsible for such 
advertisements, and would also make publicly available information 
regarding donors to entities which place such advertisements.
    \65\ Another recently introduced bill, S. 2742 (Smith), would 
impose on section 527 entities disclosure requirements similar to H.R. 
4168, and the bill also would impose on section 501(c)(5) labor (but 
not agricultural) organizations and section 501(c)(6) business leagues 
similar disclosure requirements if the organization spends more than 
$25,000 during the calendar year for communications to the general 
public which mention an election for Federal office, a candidate for 
Federal office, an individual holding Federal office, or a political 
party, or which contain the likeness of such candidate or individual.
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    The sanction for non-disclosure would vary under the 
introduced bills. Under H.R. 4168, the penalty for non-
disclosure would be the same as that imposed under current-law 
on large organizations that fail to file an accurate Form 
990.\66\ In addition, under H.R. 4168, the gift tax exclusion 
under current-law section 2501(a) for contributions made to 
political organizations would not apply to contributions made 
to organizations that are not in substantial compliance with 
the bill's disclosure requirements. Under S. 2583, the penalty 
for inadequate disclosure would be that all the political 
organization's contributions (and other political fundraising 
receipts), minus the costs directly connected with the 
production of such income, would be subject to tax. Under other 
bills, the consequences of nondisclosure are unclear, because 
these bills would simply deny section 527 status to entities 
that are not subject to the FEC reporting, which would not 
necessarily result in any adverse tax consequences (see 
below).\67\
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    \66\ See footnote 14 supra.
    \67\ See H.R. 3688 and S. 2582.
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                    Issues Presented by Current Law

Tax Treatment

    Section 501(c) nonprofits and 527 organizations generally 
receive the proper tax treatment under current law with respect 
to their advocacy activities. The current-law tax rules provide 
appropriate and consistent treatment of political organizations 
and other organizations that engage in electioneering 
activities by generally ensuring that only after-tax dollars 
are used to fund such collective activities. Contributions to 
section 527 organizations are not deductible for Federal income 
tax purposes, and even in cases where contributions to a 
section 501(c) organization may be deductible as a business 
expense, no deduction is allowed (or a proxy tax is imposed) 
for the portion allocable to political activities.
    The limited tax-exempt status provided by section 527 for 
the political entity itself does not represent a significant 
tax subsidy. Arguably, section 527 merely codifies the same tax 
treatment that would result under general tax principles--i.e., 
contributions to political organizations would be excludable as 
``gifts'' under section 102 or under a common-law ``conduit'' 
theory.\68\ If, instead of pooling their funds, political 
supporters collectively decided to underwrite advocacy 
activities but each supporter separately wrote a check to pay 
for an advertising campaign, no additional level of tax would 
be imposed on that collective activity. However, individuals 
who used their investment income to pay for political 
advertising would pay tax on that income. Section 527 produces 
the same result by taxing all investment income of political 
organizations, as well as taxing other nonprofit organizations 
on their investment income to the extent they incur political 
campaign expenses. In effect, the tax consequences under 
current-law rules generally are the same regardless of whether 
electioneering activities are conducted collectively through a 
nonprofit entity or by a group of individuals without the use 
of a separate legal entity or segregated fund.\69\
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    \68\ See H.Rpt. No. 1502, 93rd Cong., 2nd Sess. at 104 
(1974)(legislative history to section 527 indicating that conduct and 
financing of political activity generally is not a trade or business); 
Rev. Proc. 68-19, 1968-1 C.B. 810(treating receipts of political 
organizations as ``gifts''); Rev. Rul. 74-21, 1974-1 C.B. 14 (modified 
and clarified in Rev. Rul. 74-475, 1974-2 C.B. 22)(political 
organizations should be taxed on their investment income). However, 
some of the ``exempt function'' income received by section 527 entities 
from political fundraising activities where there is a quid pro quo 
transaction (such as with income from bingo games and sales of 
political material) would, in the absence of the specific statutory 
provision, not be exempt from tax at the entity level as ``gifts'' or 
under a ``conduit'' theory. Under general tax principles, the question 
with a political organization would be what expenses could be claimed 
against such income as off-setting deductions.
    \69\ The Code provides similar treatment for collective 
recreational activities conducted through section 501(c)(7) social 
clubs, which likewise receive non-deductible contributions, do not pay 
tax on member dues, but do pay tax on their investment income.
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    If there is any significant tax subsidy granted to section 
527 political organizations, it is because contributions (if 
greater than the general $10,000 gift-tax exclusion amount) are 
provided a special exemption from the Federal gift tax under 
section 2501(a)(1)(5). Absent section 2501(a)(1)(5), 
contributions to such organizations would technically be 
subject to the gift tax, although it is not clear under common 
law whether all political contributions would be viewed as 
gratuitous gifts subject to the gift tax regime.\70\ 
Nonetheless, the presence of a gift tax subsidy may provide the 
basis for regulation of constitutionally protected advocacy 
activities conducted by nonprofit organizations.\71\
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    \70\ With respect to political contributions made prior to the 
enactment of sections 527 and 2501(a)(5), two Federal courts held that 
such contributions were not subject to the Federal gift tax, under the 
rationale that the political organization receiving the contribution 
may be viewed as the means to the end of the contributor, who wishes to 
express shared political views. See Carson v. United States, 641 U.S. 
864 (10th Cir. 1981); Stern v. United States, 436 F.2d 1327 (5th Cir. 
1971).
    \71\ See Regan v. Taxation With Representation, 461 U.S. 540 
(1983)(upholding constitutionality of lobbying restrictions on 
charities); Cammarano v. United States, 358 U.S. 498 (1954)(denial of 
business-expense deductions for lobbying is constitutional).

---------------------------------------------------------------------------
Definitional issues

    Under the Internal Revenue Code, difficult line-drawing 
sometimes is required under current law to determine whether 
particular advocacy activities, taking into account all facts 
and circumstances, constitute implied political campaign 
intervention. The tax code consistently uses such a facts-and-
circumstances test for all nonprofits to determine whether 
political campaign intervention has occurred. The IRS 
recognizes that material may ``reflect a dual character'' in 
that it may contain elements of grass roots lobbying with 
respect to legislation and, at the same time, be biased in 
favor of a candidate.\72\ This presents subtle line-drawing 
problems in particular cases, similar to the issues that arise 
with charities, as well as with taxable businesses, when trying 
to distinguish ``lobbying'' with respect to legislation from 
discussions of broad social issues.\73\
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    \72\ See, e.g., PLR 9725036 (March 24, 1997); PLR 199925051 (March 
29, 1999).
    \73\ With respect to taxable businesses, section 162(e)(1)(C) 
disallows a deduction for amounts paid in connection with attempts to 
influence the general public with respect to elections or legislative 
matters. See Treas. Reg. Sec. 1.162-20(c)(4). At the same time, 
expenditures incurred for advertising which presents views on economic, 
financial, social, or other subjects of a general nature may be 
deductible as a trade or business expense, provided that the 
advertising keeps the taxpayer's name before the public and is related 
to the patronage the taxpayer might reasonably expect in the future. 
See Treas. Reg. Secs. 1.162-20(a)(2) and 1.162-20(c)(5).
---------------------------------------------------------------------------
    There may have been the implicit assumption in 1974, when 
section 527 was enacted, that political organizations generally 
would be subject to the FECA regime, which had been enacted 
just three years earlier and also referred to contributions and 
expenditures for ``the purpose of influencing any 
election.''\74\ However, in the aftermath of the Supreme 
Court's 1976 decision in Buckley v. Valeo, the scope of the 
FECA has been shrinking. As Federal courts during the mid-and 
late-1990's adopted a narrow interpretation of communications 
covered by the FECA, it became easier for entities to admit 
before IRS that they had an agenda to influence elections (and 
thereby obtain certainty in their tax law treatment) yet still 
claim that they were immune from FEC regulation because they 
did not engage in ``express advocacy.''
---------------------------------------------------------------------------
    \74\ See 2 USC 431(8)(A) and 431(9)(A).
---------------------------------------------------------------------------
    The narrow, ``express advocacy'' standard used by some 
courts in applying the FECA regime avoids the difficult and 
sometimes subtle determinations that are required under a 
facts-and-circumstances approach. In the FECA context--which 
does not involve a tax subsidy issue--it remains an open 
question whether the ``express advocacy'' standard is 
constitutionally mandated.\75\ However, the ``express 
advocacy'' standard is inherently under-inclusive; and if used 
in the tax code, effectively would allow tax-free funds to 
subsidize political campaign intervention. Therefore, the 
``express advocacy'' test is not the appropriate standard for 
tax code purposes. At the same time, the tax code's broader 
facts-and-circumstances approach results in a broad class of 
entities being eligible for section 527 status as ``political 
organizations,'' when only a subset of such organizations 
currently are subject to FECA disclosure rules.
---------------------------------------------------------------------------
    \75\ See footnote 46 supra. If the ``express advocacy'' standard is 
constitutionally mandated when no tax subsidy is involved, then the 
presence of such a subsidy potentially may provide a constitutional 
basis for moving beyond the ``express advocacy'' standard and to 
require disclosure with respect to certain ``issue advocacy.'' However, 
under such a ``subsidy'' rationale, it appears that groups must have 
the opportunity to engage in conduct that is not eligible for the 
subsidy--that is, engaging in ``issue advocacy'' but not disclosing 
contributors--without incurring a penalty or being unduly restricted 
beyond the loss of the government tax subsidy. See Regan v. Taxation 
With Representation, 461 U.S. at 553-54 (Blackmun, J., 
concurring)(denial of section 501(c)(3) status for charities that lobby 
is constitutionally permissible, because charities may conduct lobbying 
activities through a controlled section 501(c)(4) entity); FCC v. 
League of Women Voters, 468 U.S. 364 (1984); American Society of 
Association Executives v. United States, 195 F.3d 47 (D.C. Cir. 
1999)(organization can avoid burden on its First Amendment rights by 
splitting itself into two tax-exempt entities, one that refrains from 
lobbying and receives deductible dues, while the other conducts 
lobbying but does not receive deductible dues). See also NAACP v. 
Alabama, 357 U.S. 449 (1958)(compelled disclosure has potential to 
infringe on First Amendment rights of speech and association).

---------------------------------------------------------------------------
Disclosure

    The information required to be furnished to the IRS by 
section 527 organizations under current-law rules generally is 
adequate for tax administration purposes, given the non-
deductibility of contributions to these organizations and the 
fact that their net investment income is subject to tax. As 
with other tax-exempt entities that receive similar tax 
treatment, it may be appropriate to require section 527 
organizations, at a minimum, to file with the IRS (and make 
publicly available) an annual information return.\76\
---------------------------------------------------------------------------
    \76\ In its recent study of disclosure by tax-exempt organizations, 
the staff of the Joint Committee on Taxation recommended that section 
527 political organizations be required to file an annual return 
(regardless of whether they have any taxable income) disclosing 
information regarding their activities and sources of funds received. 
See JCS-1-00, Vol. II, at 94-96 (Jan. 28, 2000).
---------------------------------------------------------------------------
    Under FECA, however, timely periodic disclosure throughout 
an election cycle and disclosure of contributor identities is 
essential to effectuating the goals of that statutory scheme. 
The purpose of the FECA regime is to educate the public and to 
prevent corruption of the electoral process. The objectives of 
the FECA disclosure regime are not being accomplished in the 
case of section 527 organizations which carry out activities 
that are admittedly intended to influence the electoral 
process, yet stop short of the ``express advocacy'' line.

                               Conclusion

    The Administration supports enhanced disclosure by 
political organizations as part of its efforts to expeditiously 
achieve comprehensive campaign finance reform. Just as the 
current tax code rules do not distinguish between ``express 
advocacy'' and ``issue advocacy'' in the electoral context, so 
too should the disclosure requirements governing political 
organizations--under either the Internal Revenue Code or the 
Federal election laws--not depend on formalistic distinctions 
between communications that are obviously designed to influence 
the electoral process.
    In recent years, a significant issue has developed, whereby 
some section 527 political organizations satisfy public 
disclosure requirements, while other section 527 entities with 
the admitted primary purpose of influencing elections can side-
step disclosure requirements by simply avoiding the use of 
certain ``magic words'' in their election advertisements. This 
is an untenable situation. The important public interest to be 
served by disclosure is equally applicable to all section 527 
entities, regardless of whether they attempt to influence 
Federal elections through ``express advocacy'' or ``issue 
advocacy.'' As several recently introduced bills demonstrate, 
there are alternative approaches for achieving consistency in 
the disclosure obligations of section 527 political 
organizations. The Administration appreciates efforts made by 
Members of both parties and looks forward to working with 
Congress to craft legislation that will provide for enhanced 
disclosure of political campaign activities.
      

                                


    Chairman Houghton. Ms. Paull.

 STATEMENT OF LINDY PAULL, CHIEF OF STAFF, JOINT COMMITTEE ON 
                            TAXATION

    Ms. Paull. Thank you, Mr. Chairman, Members of the 
Committee. I am pleased to present the testimony of the Joint 
Committee staff today.
    We have prepared a lengthy background pamphlet with 
whatever data we could assemble for you as well as the present 
law rules that Mr. Mikrut just summarized, and written 
testimony which I ask to be submitted for the record. I will 
simply highlight a few points so that the Committee will have 
adequate time to ask us questions.
    You have heard a lot today about the so-called 527 
organizations named after the Tax Code section 527 that governs 
the tax treatment of political organizations. What is obviously 
covered by section 527s are what you always think of as a 
political organization, those are the candidate campaigns, the 
political parties as well as political action Committees. What 
is less known about section 527 is that it also refers to 
segregated accounts that various tax exempt organizations use 
to make political expenditures. These tax exempt organizations 
generally are those described in sections 501(c)(4) social 
welfare organizations; (c)(5), labor and agricultural 
organizations; and (c)(6), business leagues.
    They have a long history of establishing either a related 
section 527 organization or a segregated account that is 
treated as a 527 organization. So it is not so easy to separate 
out from your consideration 501(c)(4)s, (5)s and (6)s from 527 
organizations because of this long history of engaging in 
political activities through related 527s or through a 
segregated account.
    One of the big issues that you will have to face in trying 
to design disclosure for these organizations is how you 
segregate out educational activities, lobbying activities, and 
political activities. There is no bright line test for these 
various types of activities. As Mr. Mikrut said, the IRS has 
applied a facts-and-circumstance test, and it certainly depends 
heavily on the context in which the activity is conducted.
    An ad might be educational if it is done on an issue 
nationwide, and it might have a political angle if it is done 
and targeted to a specific area where a member may or may not 
be involved in that issue.
    A grassroots effort might be lobbying in one context and 
political in another or a combination of both. We have 
highlighted in our testimony a series of private letter rulings 
the IRS issued over the last 5 years that illustrates the 
difficulty in trying to delineate between these various 
activities and easily characterizing them as clearly one or the 
other. Historically, the line tended to be drawn on the basis 
of whether or not the activity was partisan or nonpartisan. 
Organizations got very clever about trying to design things 
being nonpartisan but having an angle to them based on the 
issues that they picked to educate somebody on.
    The communication, it would matter if the communication was 
to the member of the organization versus to the general public. 
You might want to consider how you would categorize that. Also 
in our written testimony, there is a new breed of 527 
organizations that really stem out of the series of rulings 
that are being created ostensibly to avoid the limits and 
disclosures of the Federal election law. They take the position 
that they are not engaged in any express advocacy, that is the 
advocacy related to a vote for or against, or in support of a 
particular candidate or vote a party--a set of party 
candidates. And they get the advantage of the gift tax 
exclusion for contributions to the organization for their 
activities.
    I would like to summarize a little bit on the disclosure 
rules. While express advocacy, there is a lot of disclosure 
about it, the rest of these activities there is a lot less 
disclosure about it. Under the tax law the section 527 
organizations and the segregated accounts of the tax exempt 
organizations are not required to disclose their contributors. 
They are not required to disclose even the dollar amount of 
their political expenditures. All they disclose is their 
investment income and expenses on their tax return, and their 
tax return is not publicly available so they disclose it only 
to the IRS. They report it only to the IRS.
    The tax exempt organizations that I mentioned, the 
501(c)(3)s, 501(c)(4)s, and (c)(5)s may be required to file an 
1120 POL to report the investment income that is used on 
political activities, but they generally, as Mr. Mikrut said, 
would report their political expenditures on form 990, which is 
open for public inspection and any large contributors over 
$5,000 would be reported to the IRS and not subject to public 
inspection.
    I would say that also the amounts reported to the IRS are 
reported in broad categories, and there is very little 
description as to what those activities involve. So there could 
be issue advocacy, there could be lobbying, there could be 
other political expenditures and there could be education, and 
there isn't very much description at all as to what those 
activities are involved with.
    There is also the possibility that funds might transfer 
from one tax exempt organization to another, very difficult to 
track where the funds are, but those funds could be used 
ultimately to make political activities, to engage in political 
activities.
    I would note another disconcerting trend is if you were to 
watch the expenditures, the money raised and the money actually 
spent by organizations that are involved in some of these 
activities, you will see their expenditures jump way up in 
election years, and it is very difficult to track those 
expenditures because some of them might be laying some 
groundwater in the early part of the year that culminates in 
something that looks more like an issue advocacy involving a 
candidate.
    So let me just summarize by saying that there is very 
little aggregate information reported to the IRS on political 
expenditures. Very little information about exactly what is 
going on. It is very difficult to draw the lines between 
education, lobbying and political activities.
    We, again, as a staff, have been working with your staff, 
and we look forward to continuing to work with you on this 
difficult issue.
    Chairman Houghton. Thank you very much.
    [The prepared statement follows:]

Statement of Lindy Paull, Chief of Staff, Joint Committee on Taxation

                              Introduction

    My name is Lindy Paull. As Chief of Staff of the Joint 
Committee on Taxation (``Joint Committee''), it is my pleasure 
to present the written testimony of the Joint Committee staff 
at this hearing before the Subcommittee on Oversight of the 
House Committee on Ways and Means.\1\ Recent press reports have 
focused on the use of political organizations described in 
section 527 of the Internal Revenue Code of 1986 (``;section 
527 organizations'') to fund political activities that are not 
disclosed to the public under either the general Federal tax 
rules governing disclosure of information by tax-exempt 
organizations or under the Federal election laws.
---------------------------------------------------------------------------
    \1\ This testimony may be cited as follows: Joint Committee on 
Taxation, Testimony of the Staff of the Joint Committee on Taxation 
Before the Subcommittee on Oversight of the House Committee on Ways and 
Means, June 20, 2000 (JCX-60-00), June 20, 2000.
---------------------------------------------------------------------------
    At the outset, let me note that the Joint Committee staff 
in general believes that the public interest would be served by 
greater disclosure of information relating to tax-exempt 
organizations. Our recommendations relating to disclosure of 
information by tax-exempt organizations are contained in our 
study of disclosure provisions relating to tax-exempt 
organizations, which was mandated by the Internal Revenue 
Service Restructuring and Reform Act of 1998.\2\
---------------------------------------------------------------------------
    \2\ See, Joint Committee on Taxation, Study of Present-Law Taxpayer 
Confidentiality and Disclosure Provisions As Required by Section 3802 
of the Internal Revenue Service Restructuring and Reform Act of 1998, 
Volume II: Study of Disclosure Provisions Relating to Tax-Exempt 
Organizations (JCS-1-00), January 28, 2000.
---------------------------------------------------------------------------
    Our testimony today provides an overview of the present-law 
rules governing the tax treatment of section 527 political 
organizations and political activities by tax-exempt 
organizations in general.\3\ In addition, our testimony will 
describe recent Internal Revenue Service (``;IRS'') rulings 
that have led to the development of a new type of section 527 
organization and will discuss how these section 527 
organizations are being used.
---------------------------------------------------------------------------
    \3\ The Joint Committee on Taxation staff has also prepared a 
detailed description of present law for this hearing. See, Joint 
Committee on Taxation, Overview of Present-Law Rules and Description of 
Certain Proposals Relating to Disclosure of Information by Tax-Exempt 
Organizations With Respect to Political Activities (JCX-59-00), June 
19, 2000.
---------------------------------------------------------------------------

                 Background and Overview of Present Law

Federal election law

    The Federal Election Campaign Act of 1971 (``;FECA'') was enacted 
to regulate communications made in connection with Federal elections. 
The FECA, as amended in 1974, 1976, and 1979, imposed restrictions on 
eligible contributors, imposed dollar limits on contributions, required 
disclosure of campaign receipts and expenditures, and set up the 
Federal Election Commission (``;FEC'') to administer and enforce the 
law.
    The FECA applies broadly to cover all money spent in connection 
with or for the purpose of influencing Federal elections. Under the 
FECA, individuals are permitted to contribute up to $1,000 to a 
candidate per election and up to $20,000 per year in contributions to 
the federal accounts of a national party committee. In addition to 
these specific limits, individuals have an aggregate annual Federal 
contribution limit of $25,000. Separate contribution limits also apply 
to multi-candidate political action committees (``;PACs''), other 
political committees, and party committees.
    The FECA requires the filing of reports, which are made publicly 
available. These reports may be required monthly, quarterly, or semi-
annually depending upon whether it is an election year and the nature 
of the reporting organization. Pre-and post-election reports are also 
generally required. These reports require itemized disclosure of 
receipts and expenditures in excess of certain dollar thresholds.
    Political committees are required to register with the FEC and are 
subject to the Federal limitations on the amounts and sources of 
contributions.
    In 1976, the Supreme Court ruled, in the landmark case of Buckley 
v. Valeo,\4\ that the FECA limitations on contributions were 
appropriate to guard against the reality or appearance of improper 
influence stemming from candidates' dependence on large campaign 
contributions. However, the Supreme Court overturned the FECA 
limitations on independent expenditures, on candidate expenditures from 
personal funds, and on overall campaign expenditures. Thus, the 
decision in Buckley v. Valeo permits unlimited spending by individuals 
or groups on communications with voters to expressly support or oppose 
clearly identified Federal candidates, as long as such expenditures are 
made without coordination or consultation with any candidate.
---------------------------------------------------------------------------
    \4\ 424 U.S. 1 (1976).
---------------------------------------------------------------------------
    The Buckley v. Valeo court also limited the scope of the FECA to 
communications that contain express words advocating the election or 
defeat of a political candidate-so-called ``express advocacy.'' Thus, 
express advocacy is subject to the FECA reporting requirements and 
contribution limits. Communications that fall outside of the FECA 
definition of ``express advocacy'' are commonly referred to as ``issue 
advocacy.''
    Issue advocacy is a form of ``soft money.'' Soft money generally 
refers to money that may indirectly influence Federal elections, but is 
raised and spent outside of the purview of the FECA. For example, soft 
money may be spent by state and local political parties on grassroots 
organizing and voter drives that may benefit all party candidates, not 
just state or local candidates.
    All entities are required under the FECA to disclose allocations of 
expenditures between Federal accounts (i.e., express advocacy for 
Federal elections) and non-Federal accounts (including issue advocacy). 
National parties are required to disclose their sources of 
contributions and expenditures for both Federal and non-Federal 
accounts. State and local parties are required to disclose their 
sources of contributions and expenditures with respect to Federal 
accounts only under the FECA. Expenditures for issue advocacy by 
organizations other than national parties are not subject to disclosure 
under the FECA.

Section 527 organizations

    The Internal Revenue Code provides a limited tax-exempt status to 
``section 527 political organizations.'' Section 527 was enacted in 
1975 to clarify the tax treatment of political organizations, such as 
campaign committees and political party organizations. Prior to 1975, 
such organizations generally did not pay any Federal income tax. The 
theory for this treatment was that the contributions made to such 
organizations were gifts that would not be taxable to the recipient.
    In the late 1960's, the IRS became aware that some political 
organizations were accumulating significant funds and were not filing 
tax returns to report their investment income and that funds were being 
diverted from these organizations for the personal benefit of 
candidates. In 1968, the IRS ruled that contributions to candidates and 
political organizations that were diverted from campaign activity were 
income to the candidate; the IRS required political organizations to 
keep extensive records to substantiate that there was no diversion of 
funds. In 1973, the IRS announced that political parties and committees 
were required to file tax returns unless the Internal Revenue Code was 
amended. In its announcement, the IRS stated that the gross income of 
political parties and committees included interest and dividend income, 
income from commercial activities, and gains from the sale of 
appreciated property. This announcement formed the basis for section 
527.
    Under section 527, political organizations are generally exempt 
from Federal income tax on contributions, but are subject to tax on 
their net investment income and certain other income. In addition, 
contributions to section 527 organizations are exempt from Federal gift 
taxes. A section 527 political organization means a party, committee, 
association, fund, account, or other organization (whether or not 
incorporated) organized and operated primarily for the purpose of 
directly or indirectly accepting contributions and making expenditures 
for what is called an ``exempt function.'' An exempt function of a 
section 527 organization is 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 or office in a 
political organization, or the election of Presidential or Vice-
Presidential electors.

Other tax-exempt organizations

    It is important to note that other types of tax-exempt 
organizations may engage in political activities and lobbying 
activities under present law. Tax-exempt organizations that engage in 
political activities generally are subject to tax under section 527 on 
the lesser of their net investment income or their expenditures for 
political activities. However, such organizations are permitted to 
establish a separate segregated fund that is treated as a separate 
organization for purposes of computing the applicable tax under section 
527.
    Tax-exempt organizations (other than charities described in section 
501(c)(3)) generally are permitted to engage in political activities. 
For most tax-exempt organizations, political activities are 
inconsistent with the purposes for which the organizations were formed, 
so the organizations do not engage in any significant amount of such 
activities. However, certain types of tax-exempt organizations (such as 
social welfare organizations described in section 501(c)(4), labor 
organizations described in section 501(c)(5), and business leagues and 
trade associations described in section 501(c)(6)), do engage in more 
extensive political and lobbying activities. For these organizations, 
the only restriction is that the political activities cannot be the 
primary activities of such organizations. Furthermore, these 
organizations are not subject to any specific limit on their lobbying 
activities, as long as the lobbying is germane to the accomplishment of 
the organization's tax-exempt purposes. It is not uncommon for social 
welfare organizations, labor organizations, and business leagues to 
engage in substantial lobbying activities. According to media and other 
reports, some of these organizations are also engaged in substantial 
political activities.
    Charitable organizations described in section 501(c)(3) (for 
example, schools and churches) are not permitted to engage in any 
political activity under present law. However, such organizations may 
engage in unlimited educational activities and in limited lobbying 
activities.

Educational vs. political or lobbying activities of tax-exempt 
organizations

    There is no bright-line test under present law for determining when 
the activities of a tax-exempt organization are political activities, 
lobbying activities, or educational activities. The IRS has stated that 
whether an organization is participating or intervening, directly or 
indirectly, in a political campaign depends upon all of the facts and 
circumstances of each case. Nonpartisan issue advocacy generally is 
considered an educational activity under present law. Partisan issue 
advocacy might be considered a lobbying activity or a political 
activity under present law. Issues often arise as to the character of 
activities relating to voter education, such as the dissemination of 
voter education guides and scorecards. Indeed, the IRS has ruled that 
not only the format and content of materials, but also the timing and 
nature of the distribution of materials are relevant in determining 
whether the materials constitute political activity. Thus, materials 
that might be considered political activity if disseminated in one 
manner may be educational in another context.

Disclosure of information by tax-exempt organizations

    Tax-exempt organizations are required to file an annual information 
return with the IRS (Form 990). The Form 990 contains information 
relating to the activities of the organization for a year. The return 
includes information on the income and expenses of the organization, 
although these items are generally reported in broad categories. While 
tax-exempt organizations are currently required to report their 
expenditures for political activities and lobbying activities on their 
Form 990s, detailed information about such activities need not be 
reported.
    Under present law, certain public disclosure requirements apply 
broadly to all tax-exempt organizations. Thus, section 501(c) 
organizations are required to make a copy of their annual Form 990 
available for public inspection. In addition, such returns can be 
requested from the IRS. However, under present law, section 501(c) 
organizations are not required to disclose the names of their donors.
    Section 527 organizations file an annual income tax return, Form 
1120-POL. The return requires such organizations to report certain 
items of income and expense so that the applicable tax under section 
527 may be calculated. The Form 1120-POL does not require any 
information relating to contributions to and expenditures by the 
section 527 organization. In addition, the Form 1120-POL is not 
publicly disclosed under present law.
    Section 527 organizations are subject to the FECA rules requiring 
reporting and disclosure of contributions and expenditures in excess of 
$200 if they engage in express advocacy for FECA purposes. However, 
certain section 527 organizations (such as those organizations that 
only engage in issue advocacy or that are created solely to influence 
or attempt to influence state or local elections) may not be subject to 
the FECA rules.
    If a non-section 501(c)(3) organization establishes and maintains a 
separate segregated fund under section 527, the fund is required to 
file Form 1120-POL. Form 1120-POL filed for a separate segregated fund 
(or a separate section 527 organization) is not subject to public 
disclosure by the organization or the IRS.

               Recent Trends in Section 527 Organizations

    Historically, section 527 organizations (other than 
organizations created to influence state or local elections) 
were subject to the FECA contribution limits and reporting and 
disclosure requirements because these organizations were 
generally created to engage in the type of express advocacy 
that the FECA regulates.
    In addition, many tax-exempt organizations historically 
argued that the activities in which they engaged were 
educational activities and not political activities. The recent 
trend, however, has been to try to characterize certain 
activities as political, rather than educational. The apparent 
reason for this shift is the gift tax exemption for 
contributions to section 527 organizations. Individuals who are 
willing to make large contributions to fund political 
activities want the benefit of the gift tax exemption accorded 
under section 527. Furthermore, as long as the organization has 
no net taxable income, there will be no tax paid under section 
527.
    As a result, in recent years, a new breed of section 527 
organization has been created for the purpose of engaging in 
political activity which is apparently not subject to the FECA. 
These organizations are created to engage in issue advocacy. 
Many of them are specifically prohibited in their charter from 
engaging in express advocacy. The genesis of these new section 
527 organizations can be traced to a series of IRS private 
letter rulings beginning in 1996. The rulings highlight the 
fine line that the IRS has drawn between permitted educational 
activities (nonpartisan issue advocacy) and political 
activities for section 527 purposes.
    In these rulings, the first of which was issued in 1996, 
the IRS ruled that voter education and grass roots lobbying 
that tax-exempt organizations had contended for many years were 
educational activities could be characterized as political 
activities for section 527 purposes. In the first ruling, in 
1996, the IRS stated that the purpose of a fund (section 527 
segregated fund) maintained by a section 501(c)(4) organization 
was ``equivalent to accepting and expending funds not (emphasis 
added) to expressly advocate for or against candidates, but to 
promote a program of issue advocacy designed to influence the 
public to give more importance to * * * [certain] issues when 
they decide among the candidates.'' \5\ The apparent reason for 
requesting the IRS ruling was to ensure that a large individual 
contributor would be accorded the exemption from gift tax for 
contributions to section 527 organizations.
---------------------------------------------------------------------------
    \5\ PLR 9652026.
---------------------------------------------------------------------------
    In the 1996 ruling, the section 527 fund was used to 
finance issue advertisements and the distribution of voter 
guides on candidate records. The fund's activities were limited 
to the preparation, publicizing, and distribution of 
Congressional voting records and voter guides on Federal 
elected officials and candidates. According to the ruling, the 
voter education materials paid for by the fund would include 
some or all of the following: (1) comparative information about 
the identities and amounts of campaign contributions received 
by the candidates; (2) comparisons of incumbents' voting 
records with their challengers' views on the same subjects; (3) 
information about the past and current affiliations of the 
candidates with certain issues or groups; (4) quotations from 
statements by opposing candidates on the same issues; (5) voter 
guides listing all Federal candidates throughout the country; 
(6) voter guides listing only the major party candidates for 
Federal office; (7) voter guides limited to the Federal 
candidates in a single state or district; (8) voter guides 
comparing the candidates on only one issue, or on many issues; 
(9) voter guides formatted to fit the special characteristics 
of television, radio, newspaper, on-line, or other media; (10) 
voting records on certain issues; (11) materials containing 
messages suggesting that voters should study the candidates' 
records on certain issues carefully, or that one should 
remember to vote on Election Day; and (12) dissemination of 
voting records and voter guides using television, radio, 
newspaper, newsletter, magazines, and other print media, on-
line electronic transmission, mail, telephone banks, facsimile 
transmission, posting of signs, public meetings, rallies, media 
events, door to door canvassing, and other forms of direct 
contact with the public.
    In 1997, the IRS issued another private letter ruling on 
similar facts. In this case, a social welfare organization 
described in section 501(c)(4) was developing an election-year 
voter education program to raise public consciousness about the 
importance of certain issues and about the positions of 
incumbent public officials and candidates on those issues, 
``without engaging in express advocacy for or against any 
identified candidates.'' \6\ The organization intended to 
engage in the dissemination of voter education materials 
(similar to the facts in the 1996 ruling) and grass roots 
lobbying. With respect to grass roots lobbying, three potential 
types of activities would be conducted: (1) a grass roots 
lobbying handout would be used in door to door canvassing, 
targeted to congressional districts and locations within states 
selected with the political interests of the organization in 
mind; (2) mass media advertisements would be prepared, timed to 
be disseminated during a major political party convention, 
listing the legislative proposals introduced in the current 
Congress and urging the public to call and ask Congress to act 
without mentioning a specific bill; and (3) mass media 
advertisements would be targeted to certain congressional 
districts or states where the organization has a political 
interest and would refer to one or two incumbent legislators 
from that district or state, by name, indicated one or more 
votes they cast or positions they took in Congress on issues of 
importance to the organization.
---------------------------------------------------------------------------
    \6\ PLR 9725036.
---------------------------------------------------------------------------
    The IRS ruling noted that the grass roots lobbying in this 
case reflected a dual character by calling for legislative 
action, and also raising public awareness about how the 
identified legislators stand on issues that the organization 
believes voters, based on opinion polling, would take into 
account in making judgments about the positions of the 
candidates. The IRS also stated that all of the grass roots 
lobbying activities described by the organization would have a 
political purpose even though they would not expressly advocate 
the election or defeat of any particular candidate.
    In 1999, the IRS addressed the issue of an organization 
that was organized to engage both in express advocacy and in 
partisan issue advocacy.\7\ Specifically, the organization 
intended to make contributions to the campaigns of certain 
candidates, pay for political advertising expressly advocating 
the election or defeat of named candidates, mass media 
campaigns, ballot initiative campaigns, and litigation 
strategically aimed at altering the political process. The 
organization represented that the main part of its activities 
would involve issue advocacy. According to the ruling, the 
organization would develop and distribute voter guides and 
voting records, mass media advertisements, grass roots 
lobbying, direct mail campaigns, and the active use of ballot 
measures, referenda, initiatives, and other public opinion 
campaigns, all linked to the primary purpose of influencing the 
political process. These activities would occur over several 
election cycles.
---------------------------------------------------------------------------
    \7\ PLR 199925051.
---------------------------------------------------------------------------
    In the 1999 ruling, the organization indicated to the IRS 
that issues would be selected based on a combination of 
legislative priorities of the organization, the organization's 
general public policy agenda, and public opinion research. The 
issues selected would encourage differentiation between 
candidates whose views on selected issues agree with the 
organization and those opposed to such views. Distribution of 
materials and the scheduling of events would be targeted toward 
areas of the states in which the organization had a political 
interest and in which it believed it could have a political 
impact.
    With respect to the voter registration and get-out-the-vote 
activities of the organization, the IRS ruled that such 
activities were partisan. The IRS noted that, while the 
activities were not specifically identified with one candidate 
or party in every case, they were partisan in the sense that 
the organization intended these measures to increase the 
election prospects for candidates with stands favorable to the 
organization. Thus, the IRS concluded that expenditures for 
these activities qualified under section 527.
    The IRS ruling stated that generally, expenditures made in 
connection with ballot measures, referenda, or initiatives are 
not section 527 activities. However, the IRS stated that 
expenditures for such activities could qualify under section 
527 if it can be demonstrated that such expenditures were part 
of a deliberate and integrated political campaign strategy to 
influence the election of certain candidates. The IRS further 
noted that the organization had indicated that its 
participation in such campaigns was for the purpose of linking 
candidates, in the minds of voters, to positions on certain 
issues within the organization's area of interest and 
encouraging voters to give greater weight to these issues when 
making judgments about candidates.

   Measuring the Amount of Issue Advocacy by Tax-Exempt Organizations

    These rulings highlight some of the ways in which section 
527 organizations are being used to engage in activities that 
may not be subject to the FECA. However, it is difficult to 
measure the extent to which these organizations are being used 
for this purpose and the growth in the number and size of such 
organizations.
    Information available from the IRS Statistics of Income 
indicates that the number of Form 1120-POLs filed grew from 
1996 to 1998. In 1996, 4,363 returns were filed for the period 
from December 1994 through November 1995; in 1997, 6,006 
returns were filed for the period from December 1995 through 
November 1996, and in 1998, 5,649 returns were filed for the 
period from December 1996 through November 1997. The number of 
Form 1120-POLs filed during the period were the highest during 
the 1996 election cycle. Data for the 1999 filing year are not 
yet available.
    Total political expenditures reported for non-section 
501(c)(3) organizations on either the Form 990 or Form 1120-POL 
for 1994 were approximately $38 million and for 1995 were 
approximately $29 million. Aggregate data for more recent years 
are not available.
    Based on an informal survey of Form 990 information filed 
by tax-exempt organizations, political expenditures appear to 
increase significantly during election years relative to other 
years for organizations that engage in this type of activity. 
Thus, while it is not possible to assess fully the extent to 
which tax-exempt organizations are attempting to influence the 
political process, it is clear that such organizations are 
engaged in activities intended to influence, directly and 
indirectly, campaigns at the Federal, state, and local level.
    We should also note that the extent of tax-exempt 
organization activity intended to influence the political 
process cannot be measured accurately merely by looking at the 
political expenditures reported by such organizations on their 
Form 990s. Tax-exempt organizations may also engage in lobbying 
activities that are intended to influence elections. In 
addition, many tax-exempt organizations will take the position 
on their Form 990s that the activities in which they are 
engaged are educational, rather than political. As a practical 
matter, the IRS and the general public will not be able to 
discern from the Form 990 the exact nature of activities that 
are characterized as educational because such activities are 
reported in broad and general terms. Thus, the only way in 
which such activities may be challenged under present law is 
through an IRS audit of the return of a tax-exempt 
organization.
    Some organizations have attempted to quantify the extent to 
which section 527 organizations are engaged in partisan issue 
advocacy. One group estimated that approximately $100 million 
has already been spent or committed for issues advertisements 
on a variety of issues during the 1999-2000 election cycle.\8\
---------------------------------------------------------------------------
    \8\ Common Cause, Under the Radar: The Attack of the ``Stealth 
PACs'' on Our Nation's Elections, A Report From Common Cause.
---------------------------------------------------------------------------
    The Annenberg Public Policy Center of the University of 
Pennsylvania has identified 37 organizations that funded, or 
committed to fund, broadcast media issue advertisements between 
January 1999 and early March 2000 costing in excess of $114 
million.\9\ The Annenberg Center estimated that this amount was 
nearly as much as was spent on issue advertising in the entire 
1995-1996 election cycle.
---------------------------------------------------------------------------
    \9\ Issue Ads @APPC. ``http://appcpenn.org/issueads/
2000issuead.html">http://appcpenn.org/issueads/2000issuead.html.
---------------------------------------------------------------------------
    The Annenberg Center also provided information on the types 
of issues advertisements that had been run by various 
organizations.
    One example cited in the Annenberg Center materials was a 
series of television advertisements run in May 1997 as the 
Senate was preparing to vote on the late term abortion ban. The 
ads urged citizens to call their Senators and aired in the 
states of undecided senators. A repackaged version of the ads 
were run in 1998 against a candidate in a Congressional special 
election. The Annenberg Center noted that the ads, which were 
aired as nonpartisan issue advocacy ads in 1997, were aired as 
direct advocacy independent expenditures in 1998.
    In another example cited by the Annenberg Center, an 
organization aired television advertisements on taxes and 
health care in two states with important Senate and House races 
in 1998. The ads advocated against the policy positions of 
incumbent Senators running for reelection and also targeted an 
incumbent House member in one race. In one television ad that 
described the positions of a challenger to one of the incumbent 
Senators, the announcer stated:

     ``Candidate X knows that nothing is more important 
than our health. That's why Candidate X voted to guarantee 
health insurance for people who change or lose their job. And 
Candidate X voted to require insurance companies to cover 
people with pre-existing medical conditions. To help women 
fight breast cancer, Candidate X voted to expand insurance 
coverage for mammography testing for women over fort. Good 
healthcare is important. Call. Tell Candidate X you support his 
efforts to improve health care.''

    Although the Annenberg Center materials do not identify 
whether section 527 organizations or other organizations are 
creating the types of issue advertisements cited in the 
materials, there is a clear trend toward greater use of section 
527 and tax-exempt organizations in general to engage in 
partisan issue advocacy. The present-law disclosure rules for 
tax-exempt organizations do not require organizations to 
disclose the same type of information that is required under 
the Federal election laws. Unless present law is changed, it 
will be difficult for the public to assess the extent to which 
tax-exempt organizations are engaged in political activities.
    [An attachment is being retained in the Committee files.]
      

                                


    Chairman Houghton. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    I would like to ask this of either one of the panelists or 
both. Several of the members have suggested that once the 
secrecy of the 527s may be shut down or eliminated, but that 
will only shift similar activities to other tax-exempt 
organizations. I was just wondering, do you have anything to 
propose that we can guard against that eventuality?
    Ms. Paull. Since some of these activities are already 
ongoing in some of these organizations, some sort of 
encouragement for them to disclose their activities, if you are 
going to go after the 527s to disclose their activities, would 
be useful as a start.
    Mr. Coyne. What kind of disclosure? What would you 
recommend as an item of disclosure from the other tax exempts?
    Ms. Paull. The type of disclosures that some members have 
suggested that once you cross over some sort of threshold for 
the year, you might want to begin disclosing your expenditures 
that come--there is no bright line test as to what is education 
lobbying and political, but you might want to consider 
applying, after you've crossed over some sort of threshold, 
applying the same kind of rules that you would apply to the 
527.
    Mr. Mikrut. Mr. Coyne, it is very easy to apply disclosure 
rules to the 527 organizations because they come forward and 
claim that they are engaging in political activity. So there is 
no question what they are doing. When you look at 501(c)(4)s, 
(5)s and (6)s, the Code prohibits them from primarily engaging 
in those political activities, so there is a question as to 
what extent are they engaging in such activities. If you wanted 
to provide disclosure in those areas, I think it would be very 
important to have a very objective standard as to what 
``political activity'' would be. The standard that the Service 
uses currently under the Code with respect to 527s is 
essentially that of attempting to influence an election. That 
is a somewhat subjective standard and may be difficult to apply 
to a 501(c)(4), (5) or (6).
    If there was something that was more objective that 
actually looked to their activities or looked to the timing of 
their activities, I think that would be easier for the Service 
to administer. In addition, if the disclosures that you want 
relate not only to the expenditures of these organizations but 
also to their contributors, it may be difficult to tie any one 
expenditure to a contributor, unless the amounts are earmarked 
for a fund or go to a specific fund that are used for these 
electioneering activities.
    So in summary, it is very easy to design a disclosure 
regime for 527 organizations so they will disclose their 
political activities. It is more difficult and creates more 
line drawing with respect to organizations that do other things 
besides political activity.
    Ms. Paull. May I insert one more comment. With respect to 
contributors, I think this is where the difficulty is. As I 
mentioned, there is a significant amount of activity right now 
of 501(c)(4), 501(c)(5)s and (6)s, either in a related 527 or 
in a segregated account that is treated as a 527, and the 
transfer of money from one of those organizations to the 
segregated account in the 527, you might be able to report it, 
but you will not know the ultimate source of that money unless 
you go behind the contributions to the organization in some 
way. I just point that out. That seems to be something that is 
missing out of some of the legislation that has currently been 
proposed.
    Chairman Houghton. Thank you.
    Mr. Hayworth.
    Mr. Hayworth. Thank you, Mr. Chairman and thanks to our 
panelists. It is interesting the testimony of the preceding 
panel and the sentiment this afternoon kind of reminds me of a 
game that we see at the arcade with kids--whack a mole--where 
you hit one of the little moles that comes out, bam, you hit 
him, and it gives you a couple of points electronically, and 
then another one pops up.
    And it seems part of what we are doing really even 
transcends the effort by my friend from Texas with reference to 
527s. For example, I am sure that the People's Liberation Army 
of the Communist Chinese is not registered as a 527, that 
actions taken in the 1996 campaign were already clearly 
illegal. And so it is interesting to hear that the most 
egregious form of campaign abuse is with the 527 Committees, 
and note for the record, Mr. Chairman, and all of my colleagues 
in a bipartisan and candid fashion, the greatest abuse of 
campaign finance came with the willful injection of Chinese 
Communist money into the 1996 campaign, and far from the roar 
of the grease paint and the smell of the crowd and the popular 
sentiment of the mainstream press, and despite the best efforts 
of some on this Committee to do their fairly inspired 
productions of Lady Macbeth, with reference to 527s, I would 
submit that now and forever that legacy of shame will not be 
eliminated by any action taken on 527s.
    But to the legislation at hand, Mr. Mikrut, the IRS 
Restructuring and Reform Act of 1998, the RRA directed the 
Department of Treasury to complete a study on the political 
activities of tax-exempt organizations, didn't it?
    Mr. Mikrut. Yes.
    Mr. Hayworth. When was that report to have been completed 
per the RRA?
    Mr. Mikrut. Earlier this year, Mr. Hayworth.
    Mr. Hayworth. What was the specific date?
    Mr. Mikrut. January 22nd.
    Mr. Hayworth. Has the Treasury Department completed this 
study?
    Mr. Mikrut. We have not. The last time I was before the 
Committee, I think, responding to a question from Mr. Thomas, I 
indicated we were hard at work on the study and we hoped to get 
it out at the end of June, and we are still on that schedule.
    Mr. Hayworth. The fact that we are going to bring a bill to 
the floor, you are telling us today that the report will be 
here by the end of June coinciding with the time that we plan 
to bring a bill to the floor?
    Mr. Mikrut. That is the schedule that we are still trying 
to complete it by, Mr. Hayworth.
    Mr. Hayworth. We appreciate the commitment.
    I hope you can give us an idea of Treasury's preliminary 
findings in the report. What, in general, have you found?
    Mr. Mikrut. I think most of the discussion that I can share 
with you today is contained in my written statement and my oral 
statement, Mr. Hayworth. We do agree with some of the things 
that the Joint Committee staff has proposed. For instance, with 
respect to 527 organizations, they have proposed, and we concur 
that there is very little information reporting. These entities 
generally file a form 990 POL, which simply reports the tax on 
their investment income and they do not file a form 990 in 
general. Perhaps that is something that should be examined.
    Mr. Hayworth. Does Treasury believe that other tax exempt 
organizations, namely section 501(c)(4) and (c)(5) and (c)(6) 
organizations should be treated differently with respect to 
disclosure of substantial expenditures for the same types of 
political activities, and why or why not?
    Mr. Mikrut. Differently from what?
    Mr. Hayworth. Differently from the 527s.
    Mr. Mikrut. I think we believe that more disclosure with 
respect to these activities, no matter whether conducted by a 
501(c)(4), (c)(5) or (c)(6) or 527 is good policy.
    We would point out that with respect to a 527, as I 
mentioned earlier to Mr. Coyne, that it is very easy to craft 
rules to provide for disclosure, because these are 
organizations that come forward and volunteer the fact that 
they are political in nature and their activities are 
political. That is not necessarily true for 501(c)(4)s, (5)s or 
(6)s, whose primary goal must be something else, otherwise they 
would lose their status as such.
    Mr. Hayworth. But you said it would be good to have 
disclosure from the 501(c)(4), 501(c)(5)s and (c)(6)s?
    Mr. Mikrut. In trying to craft the rules, the rules may 
have to be different in order to recognize the different nature 
of those types of entities.
    Mr. Hayworth. Mr. Chairman, I think one of our challenges 
is not the perfect being the enemy of the good, but the 
interesting definition of bipartisanship in Washington, D.C. 
which always seems to mandate that the majority must twist and 
bend its will to the whims of the minority, or else there is a 
poison pill, and nothing can be done. I thank you.
    Chairman Houghton. Mr. McNulty.
    Mr. McNulty. I will pass at this time, Mr. Chairman.
    Chairman Houghton. Mr. Thomas.
    Mr. Thomas. Thank you, Mr. Chairman. First of all, thank 
you for letting me sit on the Oversight panel. Having been on 
this Subcommittee in the past, we only have so many choices 
available and it is nice to be back. In my other life, I am 
chairman of House Administration, which oversees all of the 
Federal election campaign laws, and this issue of groups that 
participate, although clearly from a fundamental first 
amendment right participation, the courts have defined it as 
very explicitly advocating the election or defeat of someone, I 
think one of the frustrations that has developed over the years 
is that there are people who can participate in a relatively 
expensive and meaningful way in the process to influence the 
outcome of an election without ever crossing that clear 
constitutional free speech line that the Supreme Court has 
established.
    And so my question is that I recall in previous hearings 
from people who were concerned about this, Common Cause, a 
number of other groups, that it used to be the 501(c)(3)s in 
terms of some of the educational activity which clearly never 
violated the constitutional line of express advocacy of defeat 
or election, but participated in ``educational ways.'' .
    Mr. Mikrut, what I would be curious to know is does the 
Treasury have any information about the evolution of some of 
these entities? That is, did some of them start in the 
501(c)(3) category that this bill tends to look at? And did 
they migrate to 527s because it was a more insulated and 
protective world? Are there 501(c)(4)s, (5)s and (6)s that 
don't participate in 527 world? And are 501(c)(4)s, 501(c)(5)s, 
and (6)s who have created 527s?
    Do we have a chronological or evolutionary feel for what 
has occurred because as you well know, even 5 years ago, nobody 
used the term 527. Now it is the embodiment of all concerned, 
disregarding some of the more traditional ones that 
historically were seen as fudging the line in terms of if not a 
constitutional participation in the election, clearly a 
realistic and physical one.
    Mr. Mikrut. Mr. Thomas, I think there is an explanation by 
those who have looked at this and some of the panelists coming 
up have looked at this on a historical basis. When 527 was 
first enacted in 1974, there was an implicit assumption that 
both their issue advocacy and their express advocacy were 
subject to FEC disclosures. I think the subsequent Buckley v. 
Valeo and lower court interpretations of those standards 
applicable to their first amendment protections have somewhat 
limited, I think, to the view of some, the extent to which 
issue advocacy is disclosable under the FEC rules.
    Mr. Thomas. Clearly the ball is moving and it is a dynamic 
world. If, in fact, you just deal with 527s, is there any 
information about the 501(c)(3)'s involvement with 527s that we 
wouldn't pick up the dynamic of assistance in movement there 
that, in fact, would give us a fuller picture if we looked at 
the 501(c)(3)s as well?
    Mr. Mikrut. I think that is clear, Mr. Thomas, if you 
simply legislated in one area, such as 527s. As you mentioned, 
it is a dynamic process. Doing that may effect a change and 
there may be other activities in 501(c)s.
    Mr. Thomas. I am glad you mentioned that. If we are going 
to try to trace the chain of people who are trying to maximize 
their ability to influence the system, if you just disclose 
527s, I think you would agree we might see significant shift in 
a change in participation in the 501(c)(3)s. I think that is 
one of the reasons that the Chairman is anticipating those 
moves, and therefore making sure that they don't happen.
    But isn't it also true if we, in fact, did what this bill 
does, and I think we should, that there is ultimately a refuge 
from which it may be difficult to get these folks, and that is, 
they can simply create a for-profit structure in which their 
goal may not necessarily be to make a profit, but to, in fact, 
influence the political system through advertising and other 
areas? So for people who are looking for a magic bullet to stop 
this, I really want to create an understanding here that what 
we are trying to do is make sure that people don't take 
advantage of the Tax Code to not only involve themselves, but 
to get a tax break in doing it, but that if you are trying to 
legislate behavior, are you not going to be successful. We are 
trying to make sure that these categories are used for the 
purposes they were intended to be used for, and not to stop 
this kind of participation in the political process because you 
can create a for-profit structure and carry on the same 
activity. I thank the Chairman.
    Chairman Houghton. Thank you.
    Mr. Doggett.
    Mr. Doggett. Thank you. Ms. Paull, back in January, I 
believe, the Joint Committee Staff first made its 
recommendation that additional disclosures from 527 
organizations should be made.
    Ms. Paull. That's correct, Mr. Doggett.
    Mr. Doggett. And those disclosures are somewhat different 
than those incorporated in my bill. You continue to feel 
because of their unique nature, we need additional disclosures 
from 527 organizations?
    Ms. Paull. That's correct, Mr. Doggett.
    Mr. Doggett. I know in that report on page 95, I believe 
the one outside source out of the Committee staff to which you 
referred was the writing of Dr. Frances R. Hill?
    Ms. Paull. Yes, we have.
    Mr. Doggett. And she is one of the leading experts on 527s 
and nonprofits in the country?
    Ms. Paull. She has done a lot of work in this area, yes.
    Mr. Doggett. You heard Senator McCain's testimony. Is there 
anything in your findings or the work of the Joint Committee 
Staff that conflicts with Senator McCain's testimony as you 
heard it?
    Ms. Paull. I think Senator McCain was taking a pragmatic 
approach if I heard it correctly, and--.
    Mr. Doggett. I agree with that.
    Ms. Paull. --trying to be carefully with how far the 
legislation went.
    On page 80 of our pamphlet, you might see the numbers for 
the most recent years we had available, which was not that 
recent because we think that there is lot more activity going 
on since 1995, that there were at least a thousand 501(c)(3), 
(4), (5), the way that this was categorized by the IRS also 
swept in some other organizations, but we don't believe that 
they are involved in this activity, at least 1,000 of those 
organizations who were involved in political activities.
    Mr. Doggett. So you basically believe that your findings 
and testimony is consistent with Senator McCain's?
    Ms. Paull. I think I would go a little further than Senator 
McCain and make sure that the same kind of disclosure that you 
would be asking for for 527s would be done by (c)(4)s, (5)s and 
(6)s in a meaningful way. I think I also noted that it is 
difficult to draw the lines here.
    Mr. Doggett. Mr. Mikrut, while I always wish the Treasury 
Department would produce its report sooner, this has been an 
issue with some other subjects that I am interested in. Isn't 
it correct that how to deal with 527s, that is not the 
principal focus of the Treasury report, and at best, any report 
from the Treasury will be marginally relevant to anything we do 
here in Congress with respect to 527s.
    Mr. Mikrut. We are working and looking at, and the mandate 
was with respect to, all of sections 6103 and 6104, which deal 
with disclosures with respect to all tax-exempt entities, not 
just their political activities.
    Mr. Doggett. And as far as the comment made by our 
colleague earlier about the Chinese Liberation Army, there is 
really, under our existing laws, no way to tell whether this 
attack from RMIC on Mr. Forbes was financed entirely by Chinese 
money, is there?
    Ms. Paull. I don't think we have any way of knowing the 
source of the funding.
    Mr. Doggett. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you very much.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I want to commend you 
for taking on the herculean task in a highly charged political 
year of dealing with this very important issue. All of us want 
to see more disclosure, and all of us want to see the ability 
to understand sources of funding, and all of us would like to 
see this resolved, but it is a challenge because we have a 
murky situation at best with regard to the various kinds of 
nonprofits that can engage in political activity, and again, in 
a political year, it is difficult to weave our way through the 
maze. So I want to thank you for undertaking this task, and I 
am supporting you in it.
    Let me ask the witnesses a few questions to get a better 
handle on the distinctions between 527s and the 501(c)(3), 
501(c)(4)s, 501(c)(5)s. This is an issue that we have talked 
about on the floor. Usually it has been a pretty partisan 
conversation. If we can stick to the facts in our questions and 
answers, I think it would be very helpful.
    First of all, this would be either to you, Mr. Mikrut, or 
to you, Ms. Paull, and perhaps you can have a consensus answer 
that is yes or no.
    First of all, can a 501(c)(4), which is social welfare 
organization in the Code, place an ad on television or in a 
newspaper or magazine or radio that specifically endorses or 
opposes a Federal candidate without losing its tax-exempt 
status?
    Ms. Paull. Yes.
    Mr. Mikrut. Yes.
    Mr. Portman. Will that expenditure be taxed?
    Mr. Mikrut. To the extent of investment income.
    Mr. Portman. The expenditures for that particular ad would 
be taxed.
    Must an organization disclose its expenditures for this ad 
that it did on television or radio to the FEC?
    Ms. Paull. It depends on the ad. I am sorry--.
    Mr. Portman. The situation specifically endorsing or 
opposing a Federal candidate?
    Ms. Paull. Yes.
    Mr. Portman. Let me change the facts. Suppose the same 
organization, and let's call it Americans for Better Weather, 
like we are having here in Washington today, places an ad in an 
election year, and in this case, the ad says candidate A has 
consistently voted for a bill to promote better weather in 
America. Candidate B is not discussed. The ad says candidate A 
has subsequently voted for bills that promote better weather, 
so please call his office and thank him for voting for bills 
that promote better weather. This ad never expressly endorses 
candidate A or mentions candidate B. Will that expenditure for 
the ad be taxed?
    Mr. Mikrut. I believe that is within 527, and therefore 
subject to 527, and would be subject to tax to the extent of 
investment income.
    Ms. Paull. I agree.
    Mr. Portman. Let me give you the facts again a little more 
slowly. This is an ad which says candidate A has voted 
legislation which promotes better weather. The ad does not 
advocate election or defeat of that candidate, and does not 
talk about his opponent. My question to you is would this 
expenditure for this ad be taxed?
    Mr. Mikrut. Again, Mr. Portman, what the IRS tries to apply 
is a facts-and-circumstances test. When you look at the ad in 
the context of an election, is there a nexus between the ad and 
trying to influence an election? Perhaps not directly, but the 
Service looks at it as a total facts-and-circumstances test, 
and under that type of standard, it is likely that such an ad 
may be subject to tax, yes.
    Mr. Portman. It is likely that it may be subject to tax. 
What do you think?
    Ms. Paull. I agree.
    Mr. Portman. Wouldn't some organizations, wouldn't most 
organizations claim that such an ad is educational and 
therefore not a taxable expenditure? It is educational. It is 
saying candidate A has voted to promote better weather 
legislation.
    Ms. Paull. As I said in my testimony, you have to determine 
the whole context here. Is this--have you decided that you are 
not running for reelection and people--.
    Mr. Portman. No, I said it was candidate A.
    Ms. Paull. Taken in the whole context of the election 
atmosphere, it could well be a taxable event and it may not be.
    Mr. Portman. It could be, but it may not be.
    I think the answer to the question from what I can tell, 
from looking at the cases and from trying to read up on this in 
the context of this hearing, is that almost every organization 
in America that does this kind of stuff would say no, it is 
not. It is an educational effort. We are not expressly pushing 
for the defeat or election of a candidate, we are doing an 
education ad. My next question is, if that is true and maybe 
Mr. Mikrut, you disagree.
    Mr. Mikrut. I think the organizations may take a different 
position than the IRS, yes.
    Mr. Portman. Depending on the facts and circumstances, but 
this is not saying elect them or don't elect them. If the 
organization feels it is educational, do they have to disclose 
the expenditures of the ad to the FEC?
    Mr. Mikrut. To the FEC, this--.
    Ms. Paull. It wouldn't matter.
    Mr. Portman. They would not have to disclose?
    Ms. Paull. It is not express advocacy.
    Mr. Portman. So you wouldn't have to disclose.
    Let me put it this way. Do you believe that this type of ad 
would be reported on a political expenditure on the 
organization's form 990?
    Mr. Mikrut. Yes, I think it would be disclosed as a 
political expenditure.
    Mr. Portman. Why is it a political expenditure if it is not 
express advocacy, if it is an educational effort?
    Mr. Mikrut. Because it may include both issue advocacy.
    Mr. Portman. I think that is very murky. That is a gray 
area because if it is not political advocacy, not express 
advocacy, I don't think that it has to be reported. My point 
here is there is a lot of gray area here. There is a shaking of 
a head behind you. Would it have to be reported?
    Ms. Paull. It would be reported either as education or 
political expenditure. If, as I think generally are on-balance 
view is that it is a political expenditure, it would be 
reported on the line of political expenditures in an aggregate 
amount.
    Mr. Portman. Let us assume that it is reported as 
educational because I think that is where most organizations 
are going to put it. Where is it reported on the 990?
    Ms. Paull. Program expenses.
    Mr. Portman. Program service activities. In other words, it 
would be hidden?
    Mr. Mikrut. Yes.
    Ms. Paull. Political expenditures also are in the 
aggregate. They are not described in any detail.
    Mr. Portman. OK. I would just say would you have the same 
responses to my questions if the organization were a 501(c)(3)?
    Ms. Paull. Sure.
    Mr. Mikrut. Yes.
    Mr. Portman. And (c)(6)?
    Ms. Paull. Yes.
    Mr. Portman. My point is a 501(c)(4), a 501(c)(5), and (6) 
can do a lot of activities that a 527 can do. There is a lot of 
need for definition and there is potentially room for abuse. 
There is a lot of disagreement between where the IRS may come 
out and where most organizations seem to be coming out, and I 
think that is a very important point to be made. We need to 
look at the broad range. We push something down in one area of 
campaign finance laws, and they pop up somewhere else. Even 
though there is currently some disagreement and gray area, 
there is likely to be more. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you very much. I would just like 
to ask a quick question, and I guess it follows on the heels of 
this. You probably are aware of the bills by Senator Snowe and 
Jeffords and some of the things that Mr. Shays has advocated 
vis-a-vis broadcasting.
    Are those going to get at some of the abuses that we are 
talking about here?
    Ms. Paull. Mr. Houghton, I think they certainly would 
address a narrow category of communications. As you said, they 
are broadcast ads and they are timeframes before the election 
for which they would be hit.
    The problem is that these organizations have gotten very 
creative and what they do, they would first start--the 
information that we have gotten, for example, is they first 
start with an issue, and you advertise on that. Then you might 
follow it up with what Mr. Portman just said. You have raised 
this issue in the public's mind. Then the next ad might be this 
particular candidate is good on the issue. Call him and thank 
him.
    Then the next ad might be this particular candidate is good 
on a vote for them in the end, and it is a whole series of ads, 
some of which start out very innocuous, but there is a whole 
program going on from the beginning to end to achieve that kind 
of a purpose.
    The same thing could occur to attempt to defeat a 
candidate. All of those taken together are intended to 
influence the outcome of an election. And so if you just set 
some arbitrary time period before an election and say the only 
things we are going to count will require to be disclosed, you 
are going to miss a lot of activity, I think.
    Mr. Thomas. Mr. Chairman?
    Chairman Houghton. Mr. Thomas.
    Mr. Thomas. Could I briefly review with you what you could 
or couldn't do under Jeffords-Snowe if we are trying to get at 
certain activities?
    Chairman Houghton. Sure.
    Mr. Thomas. If the broadcast communication is to the public 
and it mentions a Federal candidate made within 60 days of the 
general election, or 30 days of the primary election, yes. Both 
in 527, 501(c)(4)s for lobbying organizations and (c)(5)s for 
unions and (c)(6)s for trade associations, they all get 
impacted by that. But listen to what Snowe-Jeffords doesn't 
cover: Broadcast communications to the public that mention 
Federal candidate made 31 days before a primary or 61 days 
before a general election; broadcast communications to the 
public that mention a political party but not a clearly 
identified Federal candidate; direct mail communications to the 
public that mention a Federal candidate; mass telephone bank 
communications to the public that mention a Federal candidate; 
paid precinct worker campaign distributing literature to the 
public that mentions a Federal candidate; billboards outside 
advertising that mentions a Federal candidate.
    I have got another 15 categories of direct political 
participation that Snowe-Jeffords wouldn't cover. The point 
being, it is a specific timeframe in a specific window when 
there is a world of activity out there, none of which would be 
covered. Thank you.
    Ms. Paull. Mr. Chairman, if you were going to pick a 
timeframe, you certainly would pick the election years because 
we have been going back and doing some spot-checking, and you 
can really see the expenditures pop up in an election year. You 
can see them being five times what they were the year before in 
a cycle. If you need to pick a timeframe, I certainly would 
pick those election years as the entire year.
    Chairman Houghton. Mr. Mikrut?
    Mr. Mikrut. An approach like Snowe-Jeffords will avoid some 
of the problems that Mr. Portman has raised, that if the 
standard, which is under current law 527, is to influence 
election, reasonable people could disagree as to what that 
standard is. However, if you have a more objective standard as 
to an ad run on a certain medium, or within a certain 
timeframe, whatever that timeframe may be, that is much more 
objective, and you would know whether you were subject to the 
rule or not subject to the rule. This would avoid some of the 
problems that Mr. Portman has pointed out.
    Chairman Houghton. Thank you very much, both of you. It is 
very, very helpful.
    We have another panel. Mr. Glen Moramarco is attorney for 
the Brennan Center for Justice in New York, the University 
School of Law, New York; Larry Makinson, executive director, 
Center for Responsive Politics; and Frances Hill, professor, 
School of Law, University of Miami; and Leo Troy, professor 
department of economics, Rutgers University; Cleta Mitchell, 
attorney, Sullivan & Mitchell; and Hon. Trevor Potter, senior 
fellow, Brookings Institution and partner, Wiley, Rein & 
Fielding, former commissioner, former chairman, Federal 
Election Commission.
    Mr. Moramarco, would you start your testimony.

   STATEMENT OF GLENN J. MORAMARCO, SENIOR ATTORNEY, BRENNAN 
     CENTER FOR JUSTICE, NEW YORK UNIVERSITY SCHOOL OF LAW

    Mr. Moramarco. Thank you, Mr. Chairman. I am Glenn 
Moramarco, I am a senior attorney at the Brennan Center for 
Justice, New York University School of Law. I am happy to be 
invited to testify before the Committee on this important 
issue. In my few minutes before the Committee, I would like to 
make three specific points: One, I think that 527s are unique 
and should be given special and different treatment.
    The second point is when you go beyond 527 organizations, I 
believe that you should not make your legislation turn on what 
section of the Tax Code is being affected, but look at the 
activities of the organization. And third, I would like to talk 
about a study that the Brennan Center conducted called ``Buying 
Time'' that I would ask to put in the record at the conclusion 
of my remarks that looked at all of the ads that are placed in 
the 1998 Federal Congressional Elections and the facts about 
disclosure that we learned from that study.
    Let me begin with the 527 organizations which seem to be 
the heart of the discussion.
    And I understand, Representative Coyne asked questions to 
Senator Lieberman earlier about what interplay is there between 
527s and political Committees, and it is interesting because 
whenever I read about 527 organizations, it always starts with 
the same sentence, that until recently, everyone always assumed 
that 527 organizations were political Committees subject to 
FECA, and I want to suggest to the Committee there was a good 
reason for that assumption.
    It is because they are subject to FECA and should be. The 
definitions are nearly identical, and it is a myth and a 
fiction that these organizations are not, in fact, political 
Committees. What seems to be the case is that we do not have 
four votes on the FEC now to enforce currently existing law, we 
have to deal with that as a practical matter, but it is 
important to recognize, because really, Congress's initial will 
in drafting these two provisions to have identical language is 
being frustrated.
    The reason that I mention that is any suggestion that 527 
organizations can't be held to the same--to full and fair 
disclosure requirements I think is a fundamental misreading of 
Buckley. When the Supreme Court in Buckley talked about having 
things limited to express advocacy, the court was very specific 
that it was not talking about political candidates, it was not 
talking about political parties, and it was not talking about 
political Committees. It adopted the narrowing interpretation 
of FECA, because there were actors outside of these core 
groups, groups like Right to Life, the pro- and antiabortion 
groups, and all sorts of issue advocacy speakers that needed 
special protection. But for the core groups, there is no 
question that what they are doing is subject to regulation.
    Now, what I would suggest is that when you move beyond 
section 527 organizations, you get into more potential 
constitutional problems. Chairman Houghton, you received a 
letter from 15 of your colleagues supporting the Snowe-Jeffords 
approach, I would urge you to give serious consideration to 
that. There was a lot of support for it on the initial panel as 
well. What the Snowe-Jeffords approach is trying to do is meet 
Buckley's concerns and provide some certainty. It may not cover 
everything, but it looks at the conduct so you won't be chasing 
these groups around different portions of the Tax Code, whether 
they are in (c)(4) or (c)(5) today or 527 tomorrow, you look at 
what they are doing; are they naming candidates in a specific 
timeframe on particular medium, and you can increase the 
medium.
    There is nothing magic about Snowe-Jeffords' choice about 
broadcast and radio. If you want to add direct mail, if you 
want to add phone banks you can do that, but you need 
certainty. That is what the Supreme Court was telling us in 
Buckley, and this gets away from all of the problems that I was 
hearing from some of the members suggesting that groups are not 
being treated the same. It should not matter where they are in 
the Tax Code. Look to their actions and that is what Snowe-
Jeffords does.
    On the third point, we had a blue ribbon panel that 
included a number of your former colleagues. They looked at all 
of the ads in the 1998 campaign, and we found that just 4 
percent of even the candidate ads used magic words of advocacy. 
So that is why Snowe-Jeffords tries to go beyond that to look 
at a more reasonable definition of electioneering.
    What we found was that the definition in Snowe-Jeffords, 
McCain-Feingold seems to be tracking with pretty good accuracy 
the distinction between true issue ads and electioneering ads. 
We call for three solutions, or the policy Committee called for 
three solutions there. They wanted the ads to have more 
prominent disclaimers. Right now, 25 percent of the ads didn't 
have disclaimers that were required. We think that there should 
be a standard form and repository for all of these kept at the 
FEC, the FCC or the IRS, and we believe that true identity of 
the sponsors needs to be disclosed. And I thank you for your 
time.
    Chairman Houghton. Thank you very much.
    [The prepared statement follows:]

Statement of Glenn J. Moramarco, Senior Attorney, Brennan Center for 
Justice, New York University School of Law

    Good afternoon, Mr. Chairman and Members of the 
Subcommittee. I am a senior attorney at the Brennan Center for 
Justice at NYU School of Law. Thank you for the opportunity to 
testify at today's hearing.
    The question before this Committee is whether and how, 
consistent with good public policy and the Constitution, to 
require enhanced disclosure for the political activities of tax 
exempt organizations. Though I will touch on a number of 
related issues, at the start of my testimony I want to 
emphasize one overarching point. I would suggest to the 
Committee that, apart from the Section 527 issue, which is 
unique and warrants separate consideration, the disclosure 
regime you want should not turn on whether a group is 
categorized as a 501(c)(4), (c)(5) or (c)(6) organization under 
the tax laws; rather it should turn on the specific activities 
in which the group is engaged. In a June 15, 2000 letter to 
you, Mr. Chairman, 15 of your colleagues advocated just such an 
approach, supporting a combination of the ``McCain-Feingold-
Lieberman'' amendment requiring disclosures by 527 
organizations with an approach to disclosure by other entities 
modeled on that authored by Senators Olympia Snowe (R-ME) and 
James Jeffords (R-VT).'' These Members are, I believe, on the 
right track, both as a matter of policy and law.
    Before turning to the remainder of my testimony, a word 
about my organization. The Brennan Center for Justice at NYU 
School of Law unites thinkers and advocates in pursuit of a 
vision of inclusive and effective democracy. Our mission is to 
develop and implement an innovative, nonpartisan agenda of 
scholarship, public education, and legal action that promotes 
equality and human dignity, while safeguarding fundamental 
freedoms.
    Last month, the Brennan Center published Buying Time: 
Television Advertising in the 1998 Congressional Elections, an 
unprecedented study which analyzed data from more than 300,000 
ads aired in 1998 and created the first-ever nationwide survey 
of both candidate advocacy and so-called ``issue advocacy.'' 
Building on the findings in Buying Time, a Brennan Center 
Policy Committee on Political Advertising, composed of leading 
scholars, business leaders, and a number of your former House 
colleagues (including Leon Panetta, Vic Fazio, Linda Smith, and 
Al Swift), developed a series of policy recommendations in 
response to the problem of sham ``issue advocacy'' in American 
elections. Three of the recommendations made by the Policy 
Committee concern disclosure and are directly relevant to the 
work of this Committee; I describe them below. These policy 
recommendations and an executive summary of Buying Time are 
attached to this testimony as exhibits.

                          Summary of Testimony

    Determining whether and how to enhance disclosure of the 
political activities of tax exempt organizations has taken on 
increased urgency. Certain groups have recently concluded that 
they can organize themselves under Section 527 of the Internal 
Revenue Code and engage in political activity without being 
subject to any of the Federal Election Campaign Act's 
restrictions on political committees. Thus, these Section 527 
organizations are raising money from otherwise prohibited 
sources (corporations and unions), in unlimited amounts, and 
without any public disclosure. One of the primary methods that 
these section 527 organizations and other tax-exempt groups are 
using to attempt to influence the outcome of federal elections 
is the expenditure of enormous sums of money on so-called 
``issue ads.''
    While before this Committee, I would like to make three 
general points. First, it is certainly constitutional to 
subject Section 527 organizations to the public disclosure 
rules that already govern ``political committees'' under FECA, 
and Congress should act to require full disclosure from these 
groups. Second, disclosing the political activity of tax-exempt 
groups beyond Section 527 organizations will require the 
Committee to make some difficult, but important judgment calls 
about how to appropriately define the ``political activity'' 
that will subject a group to public disclosure. In this regard, 
however, there are already some good working ideas already in 
Congress, such as the Snowe-Jeffords amendment to McCain-
Feingold. Third, regardless of how broadly or narrowly the 
Committee decides to cast the net concerning what organizations 
or types of organizations should be subject to public 
disclosure, the Committee should also give serious 
consideration to how to insure that the required disclosure is 
adequate to meet the public's real needs.
    On the first point, virtually every news report or article 
that attempts to explain Section 527 organizations begins with 
the statement that, until recently, it was generally assumed 
that Section 527 organizations were subject to regulation under 
FECA as ``political committees.'' Let me suggest to you that 
there was a good reason for that general assumption, and that 
is, because Section 527 organizations are, in fact, subject to 
regulation as political committees under FECA (unless they 
engage in activity solely related to non-federal elections). We 
should not make the mistake of assuming that the FEC's inaction 
in this area means anything other than the fact that the FEC 
lacks four votes to enforce currently existing law.
    In the face of the FEC's inability or unwillingness to 
enforce the law, it is appropriate for Congress to act and 
reaffirm that Section 527 organizations are ``political 
committees.'' I am aware that some have argued that it would be 
unconstitutional to apply FECA's disclosure and other 
requirements to Section 527 organizations. That legal 
contention, in my view, is utterly without any merit. As I 
describe in more detail below, the argument that Section 527 
organizations cannot be subject to federal disclosure laws 
stems from the mistaken impression that Buckley v. Valeo 
forbids any regulation of a group's political activities unless 
the group engages in ``express advocacy.'' In fact, however, 
Buckley was explicit in holding that its ``express advocacy'' 
limitation was not relevant for speakers who were political 
candidates, political parties, or political committees. Any 
group that, by definition, is engaged in political activity, 
may be subject to reasonable disclosure rules. Section 527 
organizations are, by definition, engaged in political 
advocacy. Just as no one would suggest that a candidate's ads 
can escape regulation under FECA for failing to use ``magic 
words'' of advocacy, it is likewise true that ads sponsored by 
political parties or Section 527 organizations are subject to 
FECA even if they eschew the use of ``magic words.'' Congress 
should reaffirm what, until recently, everyone assumed was the 
law.
    When you move beyond regulation of Section 527 
organizations, then you begin to encounter constitutional line-
drawing problems. I would suggest to the Committee that, apart 
from the Section 527 issue, which is unique, the disclosure 
regime you want should not turn on how the group is categorized 
for purposes of treatment under the tax laws. In my view, 
public disclosure should not turn on whether a group is 
registered as a 501(c)(4), (c)(5), or (c)(6) organization; 
rather it should turn on the specific activities in which the 
group is engaged. As noted above, section 527 organizations 
should be regulated because what they are engaged in is, by 
definition, political advocacy. For other groups, it should be 
their actions, rather than their tax-exempt status, which 
subject them to public disclosure laws.
    In this regard, you already have some useful models in 
other pieces of legislation. For example, the Snowe-Jeffords 
amendment to McCain-Feingold contains a definition of 
``electioneering'' which turns on meeting a certain dollar 
threshold on communications that are broadcast on certain 
specified media within a certain specified number of days 
before an election and that refer to a clearly identified 
candidate. People or groups that engage in ``electioneering'' 
whether for profit or not for profit, should be subject to 
reasonable public disclosure rules. Congress should act and 
require public disclosure of all of the non de minimus funding 
sources of those who sponsor electioneering communications.
    Finally, on the third point, once you decide what types of 
organizations and activities you want to subject to public 
disclosure, you need to insure that the disclosure regime you 
adopt is effective. A fully effective system of disclosure 
would ensure: a) that the name of the sponsor of an 
advertisement appears clearly within every political ad; and b) 
that basic information about the sponsors of such ads is 
publicly and readily available. There are at least three 
concrete steps that Congress can and should take to meet these 
goals, all of which were recommended by the Brennan Center's 
Policy Committee in Political Advertising. First, attribution 
lines (``;Paid for by . . .'') need to be required for every 
political ad. Second, we must require full disclosure of the 
true identity of the sponsors of media buys. Third, we need to 
promulgate a single form for disclosure of political ads and 
create a central repository for public access to the 
information.

I. Congress May Require Disclosure From Groups that, Like 
Section 527 Organizations, Are Organized For The Purpose Of 
Engaging In Political Advocacy.

    In Buckley v. Valeo, the Supreme Court considered the 
constitutional validity of, among other things, various 
disclosure provisions that Congress had enacted on federal 
political activity. In general, the Court found mandatory 
disclosure requirements to be the least restrictive means for 
achieving the government's compelling interests in the campaign 
finance arena. However, the Court believed that, while it was 
constitutionally permissible to require advocacy groups that 
``expressly advocate'' for or against particular federal 
candidates to comply with the Federal Election Campaign Act's 
disclosure provisions, advocacy groups that engage in a mere 
discussion of political issues (so-called ``issue advocacy'') 
could not be so required.
    The Supreme Court was concerned that the Federal Election 
Campaign Act could become a trap for unwary political speakers. 
Advocacy groups or individuals that participate in the national 
debate about important policy issues might discover that they 
had run afoul of federal campaign finance law restrictions 
simply by virtue of their having mentioned a federal candidate 
in connection with a pressing public issue. The Court found 
that FECA's disclosure provisions, as written, raised potential 
problems both of vagueness and overbreadth.
    Under First Amendment ``void for vagueness'' jurisprudence, 
the government cannot punish someone without providing a 
sufficiently precise description of what conduct is legal and 
what is illegal. A vague or imprecise definition of regulated 
political advocacy might serve to ``chill'' some political 
speakers who, although they desire to engage in pure ``issue 
advocacy,'' may be afraid that their speech will be construed 
as regulable ``express advocacy.'' Similarly, the overbreadth 
doctrine in First Amendment jurisprudence is concerned with a 
regulation that, however, precise, sweeps too broadly and 
reaches constitutionally protected speech. Thus, a regulation 
that is clearly drafted, but covers both ``issue advocacy'' and 
``express advocacy'' may be overbroad as applied to certain 
speakers.
    The Court's vagueness and overbreadth analysis centered on 
two provisions in FECA--section 608(e), which adopted limits on 
independent expenditures, and section 434(e), which adopted 
reporting requirements for individuals and groups. For these 
two provisions, the Supreme Court overcame the vagueness and 
overbreadth issues by adopting a narrow construction of the 
statute that limited its applicability to ``express advocacy.'' 
However, the Court made it absolutely clear that the ``express 
advocacy'' limiting construction that it was adopting for these 
sections did not apply to expenditures by either candidates or 
political committees. According to the Court, the activities of 
candidates and political committees are ``by definition, 
campaign related.'' Buckley, 424 U.S. at 79.
    The ``express advocacy'' limitation was intended by the 
Court to give protection to speakers that are not primarily 
engaged in influencing federal elections. However, because 
candidates and political committees have as their major purpose 
the influencing of elections, they are not entitled to the 
benefit of the ``express advocacy'' limiting construction. The 
Supreme Court never suggested, as no rational court would, that 
political candidates, political parties, or political 
committees can avoid all of FECA's requirements by simply 
eschewing the use of ``express advocacy'' in their 
communications. As discussed above, the Supreme Court wanted to 
avoid trapping the unwary political speaker in the web of FECA 
regulation. However, for political parties, political 
candidates, and political committees, which have influencing 
electoral outcomes as their central mission, there is no fear 
that they will be unwittingly or improperly subject to 
regulation.
    The Buckley Court's first invocation of the ``express 
advocacy'' standard appears in its discussion of the mandatory 
limitations imposed by FECA section 608(e) on independent 
expenditures. Section 608(e)(1) limited individual and group 
expenditures ``relative to a clearly identified candidate'' to 
$1,000 per year. The Court, in analyzing the constitutional 
validity of the $1,000 limit on independent expenditures by 
groups and individuals, focused first on the issue of 
unconstitutional vagueness. The Court noted that although the 
terms ``expenditure,'' ``clearly identified,'' and 
``candidate'' were all defined in the statute, the term 
``relative to'' a candidate was not defined. Buckley, 424 U.S. 
at 41. The Court found this undefined term to be impermissibly 
vague. Id. at 41. Due to the vagueness problem, the Court 
construed the phrase ``relative to'' a candidate to mean 
``advocating the election or defeat of'' a candidate. Id. at 
42.
    Significantly, the Court did not adopt a limiting 
construction of the term ``expenditure,'' which appears in a 
definitional section of the statute at section 591(f). Rather, 
the Court narrowly construed only section 608(e). Id. at 44 
(``;in order to preserve the provision against invalidation on 
vagueness grounds, Sec. 608(e)(1) must be construed to apply 
only to expenditures for communications that in express terms 
advocate the election or defeat of a clearly identified 
candidate for federal office.''). The limitations under section 
608(e) apply only to individuals and groups. Id. at 39-40. 
Political parties and federal candidates have separate 
expenditure limits that did not use the ``relative to a clearly 
identified candidate'' language, see Sec. Sec. 608(c) & (f), 
which was found to be problematic in section 608(e)(1).
    The Court, having solved the statute's vagueness problem, 
next turned to the question of whether section 608(e)(1), as 
narrowly construed by the Court, nevertheless continued to 
impermissibly burden the speaker's constitutional right of free 
expression. The Court found the government's interest in 
preventing corruption and the appearance of corruption, 
although adequate to justify contribution limits, was 
nevertheless inadequate to justify the independent expenditure 
limits. Therefore, the Court held section 608(e)(1)'s 
limitation on independent expenditures unconstitutional, even 
as narrowly construed.
    In sum, in this portion of its opinion, the Buckley Court 
did not adopt a new definition of the term ``expenditure'' for 
all of FECA. Rather, the Court held that the limits on 
independent expenditures imposed on individuals and groups 
should be narrowly construed to apply only to ``express 
advocacy,'' and that these limits were nevertheless 
unconstitutional even as so limited. Because the limits on 
independent expenditures in section 608(e) were ultimately 
struck down by the Court, the narrowing construction of that 
section became, in a practical sense, irrelevant.
    The only other portion of the Buckley decision that raises 
the ``express advocacy'' narrowing construction is the Court's 
discussion of reporting and disclosure requirements under FECA 
section 434(e). It is here that the Court makes it absolutely 
clear, in unambiguous language, that political committees and 
candidates are not entitled to the benefit of the narrowing 
``express advocacy'' construction earlier discussed in section 
608(e).
    The Court begins its discussion of reporting and disclosure 
requirements by noting that such requirements, ``as a general 
matter, directly serve substantial governmental interests.'' 
Buckley, 424 U.S. at 68. After concluding that minor parties 
and independents are not entitled to a blanket exemption from 
FECA's reporting and disclosure requirements, the Court moved 
on to a general discussion of section 434(e).
    As introduced by the Court, ``Section 434(e) requires 
'[e]very person (other than a political committee or candidate) 
who makes contributions or expenditures' aggregating over $100 
in a calendar year 'other than by contribution to a political 
committee or candidate' to file a statement with the 
Commission.'' Id. 74-75 (emphasis added). The Court noted that 
this provision does not require the disclosure of membership or 
contribution lists; rather, it requires disclosure only of what 
a person or group actually spends or contributes. Id. at 75.
    The Buckley Court noted that the Court of Appeals had 
upheld section 434(e) as necessary to enforce the independent 
expenditure ceiling discussed above--section 608(e). Id. at 75. 
The Supreme Court, having just struck down these independent 
expenditure limits, concluded that the appellate court's 
rationale would no longer suffice. Id. at 76. However, the 
Buckley Court concluded that section 434(e) was ``not so 
intimately tied'' to section 608(e) that it could not stand on 
its own. Id. at 76. Section 434(e), which predated the 
enactment of section 608(e) by several years, was an 
independent effort by Congress to obtain ``total disclosure'' 
of ``every kind of political activity.'' Id. at 76.
    The Court concluded that Congress, in its effort to be all-
inclusive, had drafted the disclosure statute in a manner that 
raised vagueness problems. Id. at 76. Section 434(e) required 
the reporting of ``contributions'' and ``expenditures.'' These 
terms were defined in parallel FECA provisions in sections 
431(e) and (f) as using money or other valuable assets ``for 
the purpose of influencing'' the nomination or election of 
candidates for federal office. Id. at 77. The Court found that 
the phrase ``for the purpose of . . . influencing'' created 
ambiguity that posed constitutional problems. Id. at 77.
    In order to eliminate this vagueness problem, the Court 
then went back to its earlier discussions of ``contributions'' 
and ``expenditures.'' The Court construed the term 
``contribution'' in section 434(e) in the same manner as it had 
done when it upheld FECA's contribution limits. Id. at 78. It 
next considered whether to adopt the same limiting construction 
of ``expenditure'' that it had adopted when construing section 
608(e)'s limits on independent expenditures by individuals and 
groups.

        When we attempt to define ``expenditure'' in a similarly narrow 
        way we encounter line-drawing problems of the sort we faced in 
        18 U.S.C. Sec. 608(e)(1) (1970 ed., Supp. IV). Although the 
        phrase, ``for the purpose of . . . influencing'' an election or 
        nomination, differs from the language used in Sec. 608(e)(1), 
        it shares the same potential for encompassing both issue 
        discussion and advocacy of a political result. The general 
        requirement that ``political committees'' and candidates 
        disclose their expenditures could raise similar vagueness 
        problems, for ``political committee'' is defined only in terms 
        of amount of annual ``contributions'' and ``expenditures,'' and 
        could be interpreted to reach groups engaged purely in issue 
        discussion. The lower courts have construed the words 
        ``political committee'' more narrowly. To fulfill the purposes 
        of the Act they need only encompass organizations that are 
        under the control of a candidate or the major purpose of which 
        is the nomination or election of a candidate. Expenditures of 
        candidates and of ``political committees'' so construed can be 
        assumed to fall within the core area sought to be addressed by 
        Congress. They are, by definition, campaign related.
        But when the maker of the expenditures is not within these 
        categories--when it is an individual other than a candidate or 
        a group other than a political committee''--the relation of the 
        information sought to the purposes of the Act may be too 
        remote. To insure that the reach of Sec. 434(e) is not 
        impermissibly broad, we construe ``expenditure'' for purposes 
        of that section in the same way we construed the terms of 
        Sec. 608(e)--to reach only funds used for communications that 
        expressly advocate the election or defeat of a clearly 
        identified candidate.

    Id. at 79-80 (footnotes omitted) (emphasis added).
    The Court in Buckley could not have been more clear. When 
applied to a speaker that is neither a political candidate nor 
a political committee, the term ``expenditure'' in section 
434(e) must be narrowly construed under the ``express 
advocacy'' standard. However, when applied to organizations 
that have as a major purpose the nomination or election of a 
candidate, the ``express advocacy'' limiting construction 
simply does not apply. The activities of these groups are, by 
definition, campaign related, and legitimately subject to 
regulation under FECA.
    This, of course, is the only sensible reading of FECA. To 
suggest that political candidates, political parties, or 
political committees can escape FECA's regulatory reach by 
merely eschewing the use of express words of advocacy, reduces 
the law to meaninglessness. It may be necessary, as the Court 
held, to give advocacy groups that are not primarily engaged in 
campaign-related activity a bright-line test that will enable 
them to avoid regulatory scrutiny. But organizations whose very 
purpose is to influence federal elections need no such safety 
net, and have not been given one.

        Implications for Regulation of Section 527 Organizations

    FECA's definition of a ``political committee'' mirrors the 
Internal Revenue Service's definition of a Section 527 
``political organization.'' Under FECA, a ``political 
committee'' is, among other things, ``any committee, club, 
association, or other group of persons which . . . makes 
expenditures aggregating in excess of $1,000 during a calendar 
year.'' 2 U.S.C. Sec. 431(4)(A). The term ``expenditures'' 
includes, among other things, ``any purchase, payment, 
distribution, loan, advance, deposit, gift of money or anything 
of value, made by any person for the purpose of influencing any 
election for Federal office.'' 2 U.S.C. Sec. 431(9)(A)(i) 
(emphasis added).
    Under the Internal Revenue Code, a Section 527 political 
organization is defined as ``a party, committee, association, 
fund, or other organization (whether or not incorporated) 
organized and operated primarily for the purpose of directly or 
indirectly accepting contributions or making expenditures, or 
both, for an exempt function.'' 26 U.S.C. Sec. 527(e)(1) 
(emphasis added). An ``exempt function'' within the meaning of 
section 527 ``means 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 or office in a political organization, or the 
election of Presidential or Vice-Presidential electors, whether 
or not such individual or electors are selected, nominated, 
elected, or appointed.'' 26 U.S.C. Sec. 527(e)(2) (emphasis 
added).
    Thus, any organization that is a Section 527 organization 
is, by definition, organized and operated primarily for the 
purpose of ``influencing or attempting to influence the 
selection, nomination, election, or appointment of any 
individual'' to public office. See 26 U.S.C. Sec. 527(e)(2). 
Such an organization satisfies the ``major purpose'' standard 
established by the Supreme Court in Buckley, and may therefore 
be subject to reasonable public disclosure of its sources of 
funding for its political activities. Buckley offered 
protection to issue-oriented speakers and groups that are not 
organized for the explicit purpose of influencing election 
outcomes. Section 527 organizations, however, are subject to 
reasonable mandatory public disclosure requirements by virtue 
of their central mission.

II.When Moving Beyond Section 527 Organizations, Congress 
Should Require Disclosure Based on Activity, Not Tax Status. 
The Snowe-Jeffords Amendment Presents A Reasonable And 
Constitutional Model For Accomplishing This.

    The complete secrecy that surrounds contributions to and 
political expenditures by groups operating under Section 527 of 
the Internal Revenue Code is intolerable. Until recently, the 
one point that both supporters and opponents of campaign 
finance law agreed upon was the need for, at a minimum, full 
public disclosure of political contributions and spending. 
However, it would be wrong to conclude that the problem 
surrounding Section 527 organizations is one that stems from 
inadequacies in the Internal Revenue Code. There is a 
legitimate public policy reason why we have Section 527 
organizations--political parties, like the Democratic and 
Republican parties, are not profit-making enterprises and there 
is no sound public policy reason to tax them on their receipts 
or expenditures.
    Of course, public disclosure of the large donors to and 
expenditures of tax-exempt groups may be a worthy goal in its 
own right. Organizations that receive the public benefit of 
tax-exempt status should perhaps be subject to appropriate 
public scrutiny in exchange for that benefit. However, the 
major public policy problem that we are facing today is that 
there is an enormous potential for corruption from the massive 
secret fund-raising and political expenditures being made by 
Section 527 organizations. The fact that these organizations 
are also tax exempt is really incidental to the main problem of 
massive and secret fundraising and political expenditures.
    Congress should not focus on the tax status of 
organizations that are involved in political activity; rather 
it should focus on the activities themselves. Congress needs to 
develop a solid, constitutional definition of ``electioneering 
activity'' which is subject to full public disclosure, with the 
disclosure requirement applying regardless of the tax status of 
the sponsoring organization. Congress will have accomplished 
very little if it chases the current Section 527 groups to 
organize themselves under different provisions of the tax code.
    There are other models currently in Congress that attempt 
to achieve reasonable disclosure of the activity of groups 
engaged in political advocacy. These proposals are not geared 
to the tax status of the organizations that engage in the 
activity. For example, the Snowe-Jeffords amendment to McCain-
Feingold would require, subject to certain limited exceptions, 
public disclosure from a sponsor who spends more than $10,000 
on communications that: (i) refer to a clearly identified 
candidate for Federal office, (ii) are aired within 60 days 
before a general election or 30 days before a primary, and 
(iii) are broadcast on radio or television to the electorate 
for the identified candidate. This is a sensible approach for 
delineating electioneering speech that should be subject to 
public disclosure. A sponsor would be subject to disclosure 
requirements regardless of how it is organized for tax 
purposes.
    Using the Snowe-Jeffords criteria to delineate which 
communications should be subject to disclosure as 
electioneering communications is constitutional. The Supreme 
Court has made clear that, for constitutional purposes, 
electioneering is different from other speech. See FEC v. 
Massachusetts Citizens for Life, 479 U.S. 238, 249 (1986). 
Congress has the power to enact campaign finance laws that 
constrain the spending of money on electioneering in a variety 
of ways, even though spending on other forms of political 
speech is entitled to absolute First Amendment protection. See 
generally Buckley v. Valeo, 424 U.S. 1 (1976). Congress is 
permitted to demand that the sponsor of an electioneering 
message disclose the amount spent on the message and the 
sources of the funds. This is black letter constitutional law 
about which there can be no serious dispute.
    There are, of course, limits to Congress's power to 
regulate election-related spending. But Congress has broader 
latitude to require disclosure of election-related spending 
than it does to restrict such spending. See Buckley, 424 U.S. 
at 67-68. In Buckley, the Court declared that the governmental 
interests that justify disclosure of election-related spending 
are considerably broader and more powerful than those 
justifying prohibitions or restrictions on election-related 
spending. Disclosure rules, the Court opined, in contrast to 
spending restrictions or contribution limits, enhance the 
information available to the voting public. Plus, the burdens 
on free speech rights are far less significant when Congress 
requires disclosure of a particular type of spending than when 
it prohibits the spending outright or limits the funds that 
support the speech. Disclosure rules, according to the Court, 
are ``the least restrictive means of curbing the evils of 
campaign ignorance and corruption.'' Thus, even if certain 
political advertisements cannot be prohibited or otherwise 
regulated, the speaker might still be required to disclose the 
funding sources for those ads if the governmental justification 
is sufficiently strong.
    Those who oppose disclosure of the type that would be 
required under Snowe-Jeffords and other similar approaches 
frequently contend that it is unconstitutional for Congress to 
regulate any communication that does not contain ``magic 
words'' of advocacy for or against a particular candidate. 
However, the Supreme Court has never held that there is only a 
single constitutionally permissible route a legislature may 
take when it defines ``electioneering'' to be regulated or 
reported. The Court has not prescribed certain ``magic words'' 
that are regulable and placed all other electioneering beyond 
the reach of any campaign finance regulation.
    As noted in the previous section, in Buckley, when the 
Supreme Court reviewed the constitutionality of FECA, it was 
concerned about the clumsy way that the statute was written. 
However, rather than simply striking FECA and leaving it to 
Congress to develop a narrower and more precise definition of 
electioneering, the Court instead intervened and essentially 
rewrote Congress's handiwork itself. In order to avoid the 
vagueness and overbreadth problems, the Court interpreted FECA 
to reach only funds used for communications that ``expressly 
advocate'' the election or defeat of a clearly identified 
candidate. In an important footnote, the Court provided some 
guidance on how to decide whether a communication meets that 
description. The Court stated that its revision of FECA would 
limit the reach of the statute ``to communications containing 
express words of advocacy of election or defeat, such as 'vote 
for,' 'elect,' 'support,' 'cast your ballot for,' 'Smith for 
Congress,' 'vote against,' 'defeat,' 'reject.''' Buckley, 424 
U.S. at 44 n.52.
    But the Court emphatically did not declare that all 
legislatures were stuck with these magic words, or words like 
them, for all time. To the contrary, Congress has the power to 
enact a statute that defines electioneering in a more nuanced 
manner, as long as its definition adequately addresses the 
vagueness and overbreadth concerns expressed by the Court. Any 
more restrictive reading of the Supreme Court's opinion would 
be fundamentally at odds with the rest of the Supreme Court's 
First Amendment jurisprudence. Countless other contexts--
including libel, obscenity, fighting words, and labor 
elections--call for delicate line drawing between protected 
speech and speech that may be regulated. It is doubtful that 
the Supreme Court in Buckley intended to single out election 
regulations as requiring a mechanical, formulaic, and utterly 
unworkable test.
    The criteria contained in the Snowe-Jeffords amendment 
present a definition of electioneering carefully crafted to 
address the Supreme Court's dual concerns regarding vagueness 
and overbreadth. Because the test for prohibited electioneering 
is defined with great clarity, it satisfies the Supreme Court's 
vagueness concerns. Any sponsor of a broadcast will know, with 
absolute certainty, whether the ad depicts or names a 
candidate, how many days before an election it is being 
broadcast, and what audience is targeted. There is little 
danger that a sponsor would mistakenly censor its own protected 
speech out of fear of prosecution under such a clear standard.
    The prohibition is also so narrow that it satisfies the 
Supreme Court's overbreadth concerns. Any speech encompassed by 
the prohibition is plainly intended to convince voters to vote 
for or against a particular candidate. A sponsor who wishes 
simply to inform the public at large about an issue immediately 
before an election could readily do so without mentioning a 
specific candidate and without targeting the message to the 
specific voters who happen to be eligible to vote for that 
candidate. It is difficult to imagine an example of a broadcast 
that satisfies this definition even though it was not intended 
to influence the election in a direct and substantial way. 
Though a fertile imagination might conjure up a few counter-
examples, they would not make the law substantially overbroad.
    The careful crafting of the Snowe-Jeffords Amendment stands 
in stark contrast to the clumsy and sweeping prohibition that 
Congress originally drafted in FECA. Unlike the FECA definition 
of electioneering, the Snowe-Jeffords Amendment would withstand 
constitutional challenge without having to resort to the device 
of narrowing the statute with magic words. When moving beyond 
disclosure for Section 527 organizations, Congress should 
consider the Snowe-Jeffords approach as a model for requiring 
disclosure from all groups, regardless of how they are 
organized under the tax code.

III. Policy Recommendations for Better and Fuller Public 
Disclosure

    The decision concerning what types of organizations and 
activities to subject to public disclosure is, of course, only 
the first step. It is important to ensure that the disclosure 
regime is effective in supplying the vital information that the 
public needs. In Buying Time, the Brennan Center's study of 
political advertising in 1998, we discovered that the 
disclosure requirements under already existing Federal 
Communications Commission regulation are not being fully 
complied with. The Brennan Center's Policy Committee, which 
included academics, business leaders, and former Congressional 
Representatives (John Brademas, Vic Fazio, Leon Panetta, Linda 
Smith and Al Swift), made a number of recommendations for 
enhancing disclosure that Congress should consider.
    A fully effective system of disclosure would ensure that, 
a) the name of the sponsor of an advertisement appears clearly 
within the ad and that, b) basic information about the sponsors 
of election advertisements is publicly available. 
Unfortunately, the Brennan Center Study revealed that both of 
these basic pieces of information were often hard to come by in 
1998. Disclaimers, the portion of the ad that reads ``Paid for 
by . . .,'' are for most people the only means by which to 
learn who sponsored the ad they are seeing, but even this 
minimal piece of information was missing from a sizable number 
of ads in 1998. The sponsorship of slightly less than one 
quarter of ads in the study was either missing or illegible.
    One way to make the sponsorship of ads more transparent 
without establishing new standards for electioneering would be 
to use the existing statutory authority of the Federal 
Communications Commission (FCC). The FCC's rules apply to all 
noncommercial speech; their enforcement does not depend on 
whether an ad uses ``magic words.'' The Brennan Center's Policy 
Committee recommended three separate steps for enhancing 
disclosure through the FCC: 1) requiring disclaimers on ads to 
be more prominent, 2) increasing access to existing information 
about media buys, and 3) preventing sponsors of political ads 
from hiding their identities.
    In regard to the first recommendation, the FCC should 
enforce its existing rules on disclaimers and adopt stronger 
requirements for the display of sponsor information within all 
political advertisements. Current FCC rules maintain that 
sponsorship of ads with political content -whether or not they 
are sponsored by a candidate -must be ``identified with letters 
equal to or greater than four percent of the vertical picture 
height'' and must air ``for not less than four seconds.'' 47 
CFR 73.1212(a)(1)(ii). This applies to all political ads, 
including ones that are not explicitly campaign-related but 
simply ``political matter or matter involving the discussion of 
a controversial issue of public importance,'' a test that 
includes true issue advocacy. Both the size and duration of the 
disclaimer could be increased, along with controls insuring 
that the background does not render it illegible (i.e. no black 
text on black background, white text on white background). In 
addition, it may be worthwhile to require that the sponsors of 
the ad be identified aurally as well as visually.
    This should be an uncontroversial idea. There is ample 
precedent for requiring a greater proportion of a commercial to 
be devoted to disclaimer messages. If pharmaceutical companies 
are required to provide relatively extensive messages on the 
potential risks of their products, then certainly political 
advertisers should not object to taking a few minor steps to 
decrease the possibility of voter confusion.
    The second recommendation put forward by the Policy 
Committee is to increase access to existing information about 
media buys by requiring the FCC to promulgate forms for 
disclosure and create a central repository for public access. 
For all political ads, FCC regulations mandate that their 
sponsors file organizational paperwork with the broadcast 
station for public inspection. The required organizational 
information includes a list of the members of the group's 
executive committee, board of directors, or chief executive 
officers. All radio and television broadcast stations and cable 
operators are required to keep this information available for 
public inspection during regular business hours.
    Despite these requirements, records can be sloppy and 
access to the data less-than-willingly granted. The FCC could 
promulgate forms for disclosure and provide a central 
repository (perhaps at FCC headquarters or via the web) to 
allow easier access for citizens and journalists. Creating a 
clear process for disclosure of ad buys through a standardized 
form and through requiring stations to share this information 
does not represent a large change for political advertisers, 
who are already required to disclose their identity; it would 
only be part of an attempt to improve and make more transparent 
this already existing process.
    Creating a central repository for ad buy records would, 
however, be a welcome change. The Federal Election Commission 
(FEC), whose ability to provide financial information on 
candidates and parties to the public is widely praised, 
presents itself as a model for what is possible. The FEC has 
also made great strides in making information available via the 
Internet, something the FCC or a new data center could also do.
    The third recommendation put forward by the Policy 
Committee is to require full disclosure of the true identity of 
sponsors of media buys by having the FCC issue regulations or 
give clearer direction to television stations of what is 
required under existing law. Current FCC rules require that 
political ads must ``fully and fairly disclose the true 
identity'' of the organization paying for the ad. If the person 
placing the ad is known to be an agent for someone else, or if 
the station could determine that with ``reasonable diligence,'' 
then the ad must disclose the identity of the actual sponsor of 
the advertisement. The regulation's scope has been 
substantially unexplored by the courts, and its 
constitutionality has not been ruled on. However, in 1996, the 
FCC found that a number of stations in Oregon failed to 
properly identify ad sponsors during an anti-smoking campaign 
and had failed to exercise reasonable diligence to determine 
the true identity of the sponsors. In that action, the ads 
identified ``Fairness Matters to Oregonians Committee'' as the 
sponsor, although the Tobacco Institute funded, designed, and 
implemented the advertisements. Notably, the FCC did not impose 
sanctions because the stations lacked guidance from the 
Commission on how they were supposed to proceed in these 
situations. Given the proliferation of groups such as these, it 
is more clear than ever that new rules for what constitutes 
full and fair disclosure are necessary.
    The FCC's rules provide the lever to force advertisers who 
currently use innocuous sounding names like ``Citizens for Good 
Government'' to fully disclose their true identities--including 
contact information and the names of the group's principals--
and require stations to exercise reasonable diligence in 
assembling this information. This information could be 
incorporated into the disclaimer within the ad or may simply be 
available to those who review the station's records of media 
buys. Requiring groups running political ads to disclose basic 
information (for example, a physical address, not a post office 
box) does not approach what groups running independent 
expenditures disclose to the FEC, but it provides a minimum 
level of information to citizens and journalists, who can then 
make more informed evaluations of the claims made in the ads 
they see.
    These two disclosure requirements--the basic organizational 
information and the true identity disclosure--provide a hook 
for getting more information to the public about who is 
sponsoring the sham issue ads. For these steps to be effective, 
however, the FCC must provide stations with guidance on how 
they are supposed to determine the ``true identity'' of 
sponsors and what constitutes reasonable diligence when the 
station doubts that the identified sponsor is the true sponsor. 
In addition, the FCC must be willing to enforce these rules.

Conclusions

    Congress should close the loophole that allows Section 527 
organizations to evade FECA requirements, most notably the 
requirements for full public disclosure of political 
expenditures. When moving beyond Section 527 organizations, 
Congress should regulate groups based on their actions, not 
their tax status under the Internal Revenue Code. The Snowe-
Jeffords amendment offers a viable, constitutionally-sound 
model for further disclosure. Finally, the disclosure that is 
enacted should include requiring disclaimers on advertisements 
to be more prominent, increasing public access to existing 
information about media buys, and preventing sponsors of 
political ads from hiding their true identities.
    [An attachment is being retained in the Committee files.]
      

                                


    Chairman Houghton. Mr. Makinson.

  STATEMENT OF LARRY MAKINSON, EXECUTIVE DIRECTOR, CENTER FOR 
                      RESPONSIVE POLITICS

    Mr. Makinson. Thank you, Mr. Chairman, and Members of the 
Committee. My name is Larry Makinson. I am executive director 
of the Center for Responsive Politics, which is a nonprofit 
research organization that monitors and analyzes campaign 
contributions in Federal elections. I appreciate the 
opportunity to address the Committee today, and I would like to 
address specifically the 527s. A little background first. The 
center was founded in 1983 by two United States senators: Hugh 
Scott, a Republican of Pennsylvania, and Frank Church, a 
Democrat of Idaho. The idea in being founded was to look at 
ways to make Congress more responsive to the public. And as a 
logical part of fulfilling that mandate, very early on, we 
started tracking money in politics. Our first report was back 
in 1984 after the presidential elections.
    Beginning in 1989, we have systematically monitored all 
itemized contributions to Federal candidates and parties, both 
from PACs and individuals. We break them down by industry and 
interest group and we publish our findings so that anyone can 
see them. We used to do them in a 1,300-page book, which I have 
a copy here, called ``Open Secrets.'' we now do this on the 
Internet. Thank God, I don't have to drag that book around as 
much as I used to.
    Now, the--Mr. Chairman, Members of the Committee, your 
contributions, contributions to your reelection Committees are 
an open book. As you well know, all contributions over $200 
have to be itemized and reported to the Federal Election 
Commission. The FEC both gathers and reports that information, 
and any interested citizen can now look it up on the Internet. 
Using the information from the FEC, we at the Center compile 
full campaign finance profiles for every Member of Congress, 
all candidates for Congress and all the leading candidates for 
President.
    Here's what we have on each one of you and on all your 
opponents in the 2000 election as well. First of all, a summary 
of how much money you have taken in this election cycle, how 
much you spent, how much cash you have left in the bank, how 
much of your money has come from PACs, how much from 
individuals, how much from your own pocket.
    We also break down the contributions geographically. Anyone 
can look up your profile and find out how much of your money 
was collected in-State versus out-of-State. They can look up 
the five biggest metro areas to your campaign and your top ten 
ZIP codes.
    They can also get a breakdown of your contributions by 
industry and interest group. We do this both in a broad sense, 
through a chart that shows all contributions in one of 13 
sectors, such as health or transportation, and a more detailed 
level by looking at the top 20 industries giving to your 
campaign. This would show how much you got from, say, 
securities firms, insurance companies, public employee unions, 
or airlines. They can also see your leading contributors 
standardized and grouped by organization.
    We even monitor how good a job each candidate does in fully 
identifing the occupations and employers of their donors as 
required by Federal law. That is disclosure. With that 
information, any citizen who wants to find out who is paying 
for your election can do so quickly and easily.
    Now, contrast that level of disclosure with the information 
available today on so-called 527 organizations--groups such as 
Republicans for Clean Air, which spent an estimated $2.5 
million on negative ads in New York, Ohio, and California in 
the days leading to Super Tuesday and helped derail Senator 
McCain's presidential campaign.
    When those ads first came out, nobody knew who Republicans 
for Clean Air was. In fact, as later came out, there was no 
organization. There was only a Texas billionaire named Sam 
Wiley and his brother, and if Wiley hadn't stood up and said 
his were the dollars that were fueling those ads, we still 
would be scratching our heads wondering where they came from.
    Under the terms of section 527, Wiley didn't have to 
disclose a thing--nor does anyone else. Unlimited sums can also 
come from corporations, labor unions, ideological and single-
issue groups of all political stripes, even foreign companies, 
governments, despots or for that matter, the Sicilian Mafia if 
they had the inclination.
    The fact is, if Saddam Hussein wanted to plunk $100 million 
into a barrage of TV ads the final week before we pick our next 
President, he could do it. He could also fly under the radar 
with direct mail pieces or prerecorded phone messages to every 
mailbox and telephone in America. So could the Trial Lawyers, 
the Teamsters Union, Philip Morris, the National Rifle 
Association, the Sierra Club or Microsoft, all without anybody 
knowing where the money came from or how much was even spent.
    This has all come about through a combination of reasons. 
The Federal court ruling that opened up the phenomenon of so-
called ``issue ads,'' the move by the IRS to clamp down on 
political activities by tax-exempt organizations, and a growing 
desire in an age when disclosure of contributions is improving 
all the time for some donors to evade public detection. They 
have found the ultimate loophole in these 527 Committees, which 
are seen as 100 percent political by the IRS, and 100 percent 
nonpolitical by the FEC. That legal alchemy has rendered them 
essentially--has rendered their finances 100 percent invisible.
    I know there has been a lot of discussion about adding 
other groups beyond 527s to this. I would like to point out 
there is a crucial difference between 527s and all the other 
tax-exempt groups. 527s needn't be organizations at all. All 
they are is bank accounts, secret bank accounts, whose donors 
can come from absolutely anywhere in the world.
    Mr. Chairman, we spend hundreds of billions of dollars a 
year protecting our national security, yet with this loophole 
we have invited anyone to potentially disrupt our elections. 
For the cost of a few Scud missiles, any foreign government, 
corporation or cartel can pour millions of dollars into 
influencing our elections, and they can do it all legally and 
completely anonymously. That is as much a danger to the 
republic as any brushfire war halfway around the world. There 
should be no place in our American elections for secret bank 
accounts or phantom organizations with names that sound all-
American but identities that can be anything but.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thank you very much.
    [The prepared statement follows:]

Statement of Larry Makinson, Executive Director, Center for Responsive 
Politics

    Chairman, and members of the committee, my name is Larry 
Makinson. I am executive director of the Center for Responsive 
Politics, a non-partisan non-profit research organization that 
monitors and analyzes campaign contributions in federal 
elections. I appreciate the opportunity to address the 
committee today, and I'd like to address my remarks 
particularly to those organizations operating under section 527 
of the Internal Revenue code.
    A little background first. The Center for Responsive 
Politics was founded in 1983 by two U.S. Senators--Hugh Scott, 
Republican of Pennsylvania, and Frank Church, Democrat of 
Idaho. It was founded with the idea of looking at Congress and 
finding ways to make it more responsive to the public. As part 
of that mandate, the Center first examined the relationship 
between money and politics quite early in its history. Our 
first report on the subject reviewed contribution patterns in 
the 1984 presidential elections. Since 1989, and proceeding 
right up to the present, we have systematically monitored all 
itemized contributions to federal candidates and parties, both 
from PACs and from individuals. We break them down by industry 
and interest group, and we publish our findings so that anyone 
can see them. We used to do this in a 1,300 page book called 
``Open Secrets'' and published by Congressional Quarterly. 
Nowadays we publish it solely on the Web, on our 
opensecrets.org website.
    Mr. Chairman, members of the committee, your 
contributions--contributions to your reelection committees--are 
an open book. As you well know, all contributions over $200 
have to be itemized and reported to the Federal Election 
Commission. The FEC both gathers and reports that information, 
and any interested citizen can now look it up on the Internet. 
Using that information, we at the Center compile, and publish 
on the Web, full campaign finance profiles for every member of 
Congress, all candidates for Congress, and the leading 
contenders for President.
    Here's what we have on each one of you--and all your 
opponents in the 2000 elections, as well. A summary of how much 
money you've taken in this election cycle, how much you've 
spent, how much cash you have left in the bank, and how much of 
your money has come from PACs versus individuals, versus money 
from your own pocket. We also break down the contributions 
geographically. Anyone can look up your profile and find out 
how much of your money was collected in-state versus out-of-
state. They can look up the five biggest metro areas 
contributing to your campaign, as well as your top 10 zip 
codes.
    They can also get a breakdown of your contributions by 
industry and interest group. We do this both in a broad sense, 
through a chart that divides all your contributions into one of 
13 broad sectors--such as Health or Transportation--and on a 
more detailed level by looking at the top 20 industries and 
interest groups giving to your campaign. This would show how 
much you got from, say, securities firms, insurance companies, 
public employee unions, or airlines. They can also see your 
leading contributors, standardized and grouped by organization. 
We even monitor how good a job each candidate does in fully 
identifying the occupation and employers of their donors, as 
required by federal law.
    That's disclosure. With that information, any citizen who 
wants to find out who's paying for your election can do so, 
easily and quickly.
    Contrast that level of disclosure with the information 
available today on so-called ``527 organizations''--groups like 
Republicans for Clean Air, which spent an estimated $2.5 
million on negative ads in New York, Ohio and California in the 
days leading to Super Tuesday--ads that helped bring to an end 
the presidential campaign of John McCain.
    When those ads first came out, nobody knew who Republicans 
for Clean Air was. In fact as later came out, there was no 
organization. There was only a Texas billionaire named Sam 
Wyly, and his brother. And if Wyly hadn't stood up and said it 
was his dollars that were fueling those ads, we'd still be 
scratching our heads wondering where they came from. Under the 
terms of Section 527, Wyly didn't have to disclose a thing.
    Nor does anyone else. Unlimited sums can also come from 
corporations, labor unions, ideological and single-issue groups 
of all political stripes--even foreign companies, governments, 
despots, or for that matter the Sicilian Mafia, if they had the 
inclination. The fact is, if Saddam Hussein wanted to plunk 
$100 million into a barrage of TV ads the final week before we 
pick our next president, he could do it. He could also fly 
under the radar with direct mail pieces, or pre-recorded phone 
messages, to every mailbox and telephone in America.
    So could the American Trial Lawyers Association, the 
Teamsters Union, Philip Morris, the National Rifle Association, 
the Sierra Club, or Microsoft--all without anybody knowing 
where the money came from, or how much was even spent.
    This has all come about through a combination of reasons--
the federal court ruling that opened up the phenomenon of so-
called ``issue ads,'' the move by the IRS to clamp down on 
political activities by tax-exempt organizations, and a growing 
desire--in an age when disclosure of contributions is improving 
all the time--for some donors to evade public detection.
    They have found the ultimate loophole in these 527 
committees, which are seen as 100% political by the IRS, and 
100% non-political by the FEC. This legal alchemy has 
effectively rendered their finances 100% invisible.
    I know there's been much discussion lately about expanding 
this legislation to include not simply 527's, but to require 
disclosure of other tax-exempt organizations attempting to 
influence elections as well. The one thing I would point out, 
however, is that there's a difference--a crucial difference--
between 527s and all the other tax-exempt groups.
    As ``Republicans for Clean Air'' has all too clearly 
demonstrated, a 527 needn't be an organization at all. All it 
is is a bank account. A secret bank account, whose donors can 
come from absolutely anywhere in the world.
    Mr. Chairman, we spend hundreds of billions of dollars a 
year protecting our national security, yet with this loophole 
we have invited anyone in to potentially disrupt our elections. 
For the cost of a few Scud missiles, any foreign government, 
corporation, or cartel could pour millions of dollars into 
influencing our elections. They could do it legally and 
completely anonymously.
    That's as much a danger to this republic as any brushfire 
war halfway around the world. I'm glad it's getting attention 
here in Congress, and I hope you'll shut this loophole down as 
quickly as possible. There should be no place in our American 
elections for secret bank accounts or phantom organizations 
with names that sound all-American, but identities that could 
be anything but.
    Thank you, and I'd be happy to answer any questions you may 
have.
      

                                


    Chairman Houghton. Ms. Hill.

 STATEMENT OF FRANCES R. HILL, PROFESSOR, UNIVERSITY OF MIAMI, 
                         SCHOOL OF LAW

    Ms. Hill. Thank you, Mr. Chairman. I am Frances Hill. Iam a 
professor at the University of Miami School of Law. My 
testimony today does not represent the views, if any, of the 
University of Miami on these topics. I appreciate the 
opportunity to be here today.
    The intense focus on the right of contributors that 
dominates current debates, both academic and legislative, over 
campaign finance reform threatens to obscure the consideration 
of the rights of voters as participants in campaigns and 
elections. Elections are held so that citizens can exercise 
their sovereign authority to choose their elected 
representatives. governments chosen in elections are legitimate 
and effective to the extent that citizens have confidence that 
their choices matter. I am here today to urge you to remember 
the voters by ensuring that the voters have the information 
that they require.
    You have heard much today about the secrecy of the new 
section 527 organizations and about how that secrecy occurs. I 
would like to make four points about the potential consequences 
of allowing the section 527 stealth funds to go unchecked:
    One, they intend to obscure and confuse the voters by 
providing information under innocuous-sounding names. This is 
not anonymous political speech. This is pseudonymous political 
speech in the name of another, and it does not serve the 
interest of informing the voters.
    Two, the new section 527 stealth funds may well suck money, 
oxygen, and legitimacy, in fact, out of the old section 527 
organizations, the political parties and the candidate 
Committees. It is interesting to me that many national 
political leaders of both parties now do not seem to feel that 
working through their own campaign Committees and their own 
political parties is sufficient, and they need to affiliate 
themselves loosely or closely, as the case may be, with secret 
bank accounts that the voters know nothing of.
    Three, the secrecy of the stealth funds fuels public 
concern that powerful national political leaders are using them 
to levy a toll charge for access to the legislative process. 
This is what the economists have called ``rent seeking.'' 
Congress should have a strong incentive to blunt this 
perception by meaningful disclosure.
    Four, it appears technically possible, some of the money 
collected in these secret bank accounts to private individuals 
for their private uses although I doubt that this is in the 
mind of anyone involved with new section 527 organizations. It 
would appear that the ethics rules of the House and the Senate 
would prevent current Members engaging in this practice, but I 
urge Congress to determine whether such transfers are possible, 
to take steps to ensure that this practice is not possible, and 
to assure the American people that the new 527 organizations 
are not slush funds for the personal use of Members.
    Disclosure seems to me an adequate remedy for all of these 
problems, and I think that Mr. Doggett's bill, among others, 
provides a workable disclosure system, well adapted to the 
reality of the new section 527 organizations.
    Let us be clear. These organizations are already disclosing 
to the candidates or parties or caucuses whom they wish to 
support. Only the voters do not know where the money is coming 
from and why it is being contrituted. Since we already have 
selective disclosure, we should extend disclosure to include 
the voters.
    The current debate over whether we should deal with the 
section 527s alone, or with other organizations, is a worthy 
debate, but it should not be a debate that allows us to say, 
since we cannot be perfect, we are going to allow these truly 
unusual secret checking accounts to play a role in our 
elections. Section 501(c)(4), (5), and (6) organizations have 
other purposes and already disclose a great deal. In the 
future, you may certainly wish to consider fuller disclosure by 
them, as well; but now I would urge you to remember the voters 
in this election cycle and to enact legislation that discloses 
the existence and the contributors to the new 527 stealth 
funds.
    Thank you.
    Chairman Houghton. Thanks very much.
    [The prepared statement follows:]

Statement of Frances R. Hill, Professor, University of Miami School of 
Law

    I am a professor of law at the University of Miami School 
of Law. My academic research deals in substantial part with tax 
exempt organizations and with their political activities. The 
views expressed in this testimony are based on my research and 
do not reflect the views of the University of Miami or of any 
client. None of this research has been supported by federal 
government grants or contracts.
    I support enactment of disclosure requirements applicable 
to certain structures claiming exemption from taxation under 
section 527 of the Internal Revenue Code of 1986, as amended 
(the ``Code''). In my view, disclosure requirements are 
necessary to provide voters with information relevant to their 
voting decisions. My testimony will discuss the legal basis of 
the new section 527 organizations, the reasons for disclosure, 
and the distinctions between the appropriate disclosure rules 
for new section 527 organizations and certain organizations 
treated as exempt from taxation under section 501(c).

I. Structure of the New Section 527 Organizations

    Section 527 was enacted to resolve tax uncertainty relating 
to the taxation of political contributions. It protected 
candidates from inclusion of political contributions in their 
personal gross income and also provided that political 
contributions would be taxed if they were not used for exempt 
activities but had been used to earn investment income. For 
purposes of section 527, exempt function is defined as ``the 
function of influencing or attempting to influence the 
selection, nomination, election or appointment of an individual 
to any federal, state, or local public office of office in a 
political organization, or the election of presidential or 
vice-presidential electors, whether or not such individual or 
electors are selected, nominated, elected or appointed.'' 
Section 527(e)(2). The organizations that were covered by 
section 527 were political parties, candidate committees, and 
separate segregated funds, more commonly know as political 
action committees (``;PACs'').
    Section 527 political organizations are not required to 
apply for recognition of exempt status or to file annual 
information returns. They file a tax return on Form 1120-POL 
only if they have investment income and use their income for 
expenditures inconsistent with purposes set forth in section 
527(e)(2). Form 1120-POL is a corporate return that cannot be 
disclosed to the public.
    Recently, section 527 has been used as the statutory basis 
for ``new section 527 organizations,'' which might more 
descriptively be called ``stealth funds.\1\ These new 
structures exist at the intersection of the Code and the 
Federal Election Campaign Act (the ``FECA'') and exploit the 
ambiguities of each to create a structure that can collect and 
distribute unlimited amounts of money from any donor, foreign 
or domestic, in total secrecy.
---------------------------------------------------------------------------
    \1\ Frances R. Hill, Probing the Limits of Section 527 to Design a 
New Campaign Finance Vehicle, Tax Notes (January 19, 2000) and 26 
Exempt Organization Tax Review 205 (November 1999).
---------------------------------------------------------------------------
    These ``new section 527 organizations'' or ``stealth 
funds'' are exempt from taxation under section 527 because 
their sole purpose is to influence electoral outcomes within 
the meaning of section 527(e)(2). The Internal Revenue Service 
(the ``IRS'') has issued four private letter rulings showing 
how organizations qualify for exempt status under section 527. 
Priv. Ltr. Rul. 9652026 (December 27, 1996); Priv. Ltr. Rul. 
9725036 (June 20, 1997); Priv. Ltr. Rul. 9808037 (November 21, 
1997); and Priv. Ltr. Rul. 199925051 (March 29, 1999). These 
rulings were sought by the new section 527 organizations and 
their issuance does not suggest that the new section 527 
organizations are required to apply for recognition of 
exemption. These private letter rulings suggest that it is 
apparently sufficient to represent to the IRS that the 
organization intends its political communication influence 
electoral outcomes. Other factors such as the expert opinion of 
a political scientist that the organization's communications or 
other activities could affect electoral outcomes might also be 
sufficient. Certain of these organizations described their 
materials as ``politically biased'' and used such asserted bias 
as support for their claim that they were organized for the 
purpose of influencing electoral outcomes under section 527. In 
sum, it appears to be quite simple to choose to satisfy the 
requirements for exemption under section 527. Like all other 
section 527 organizations, the new section 527 organizations 
are not required to file annual information returns. If they do 
file a Form 1120-POL, which most will presumably be able to 
avoid, this form cannot be disclosed to the public and, in any 
case, contains little information. Unless a new section 527 
organization files a Form 1120-POL, the IRS has no way of 
learning of the existence of these organizations.
    At the same time, the new section 527 organizations claim 
that they are not required to disclose their existence or their 
sources or uses of funds to the Federal Election Commission 
(``;FEC'') because they do not engage in express advocacy, do 
not coordinate their activities with a candidate, and are not 
themselves political committees. Each of these issues is 
subject to substantial uncertainty under current law. The 
application of current election law to the new section 527 
organizations remains to be addressed by the FEC. In this state 
of indeterminacy, the new section 527 organizations are not 
subject to FEC limitations or disclosure requirements.
    If a stealth fund uses its money to influence an election 
without engaging in the type of express advocacy or 
coordination that causes its expenditures to be characterized 
as contributions or independent expenditures within the meaning 
of the FECA, these stealth funds are not subject to the FECA 
limitations on the identity of contributors or the amount of 
contributions. Foreign source funds in unlimited amounts could 
be received without becoming subject to taxation or to 
disclosure to the FEC or to the public. Corporate treasury 
funds, union treasury funds, and unlimited individual 
contributions could also be received without taxation and 
without disclosure to the FEC and the public.
    The new section 527 organizations need not be organizations 
in any conventional sense. There is no requirement that they 
incorporate under state law or that they have members. A 
stealth fund may be simply a checking account with a separate 
taxpayer identification number. That checking account need have 
only one source of funds.

II. Reasons for Using New Section 527 Organizations

    The primary reason for using a new section 527 organization 
is to avoid both taxation and the limitations and disclosure 
requirements of the FECA when collecting or making very large 
contributions to influence electoral outcomes. These structures 
seem to be chosen by wealthy individuals, powerful national 
political leaders, and by certain advocacy organizations exempt 
under section 501(c). It is unclear whether corporations or 
labor unions or foreign persons are establishing their own new 
section 527 organizations or simply funding stealth funds 
established by others. These persons have several other 
alternatives for making their views known to the public, but 
none of these alternatives provides the same degree of secrecy 
as do the new section 527 organizations. Considering the 
available alternatives underscores the importance of the 
stealth element of the new section 527 organizations. The 
Supreme Court held in Regan v. Taxation with Representation, 
461 U.S. 540 (1983) in upholding the limits on lobbying by 
section 501(c)(3) organizations that the rights of speech and 
association did not require that every type of organization be 
available for all purposes, only that some reasonable 
organizational form be available.
    A candidate for public office may organize a principal 
campaign committee and as many other political committees as he 
or she wishes. In addition, political parties may raise money 
for candidates. All of these organizations are political 
committees subject to the limitations and disclosure 
requirements of the FECA.
    An individual who has already reached his or her 
contribution limitation could contribute unlimited amounts of 
soft money to a political party, but this amount would be 
disclosed under the FECA because the recipient organization is 
a political committee.
    A corporation or a labor union or a trade association 
cannot use its treasury funds for hard money contributions or 
independent expenditures, but each can organize a separate 
segregated fund under section 527(f)(3). These section 
527(f)(3) PACs are subject to FEC disclosure. In addition, a 
corporation or a labor union or a trade association can use its 
treasury funds for soft money contributions to political 
parties, but these soft money contributions are also subject to 
disclosure to the FEC and to the public.
    There are many structures for political speech funded with 
disclosed funds. New section 527 organizations are distinctive 
and, to some, particularly desirable, because they provide a 
structure for political speech with undisclosed funds.

III. Consequences of the New Section 527 Organizations

    The new section 527 organizations serve the interests of 
those who want additional scope for influencing electoral 
outcomes without revealing their roles to the voters, including 
powerful political leaders who choose to work outside their own 
political parties.
    There are several consequences of the use of new section 
527 organizations that would not appear to be beneficial under 
standard concepts of democratic participation and 
representation. The primary problem is the lack of information 
to the voters. Voters have a legitimate interest in information 
about the source of the funds for organizations established for 
the sole purpose of influencing elections, and government has a 
duty to ensure that voters receive the information they need to 
evaluate political communications in making their voting 
decisions. New section 527 organizations engage not simply in 
anonymous speech but in pseudonymous speech. There has been no 
determination by the courts on anonymous speech in political 
campaigns. If a political communication is identified as having 
been paid for and reflecting the views of ``anonymous,'' the 
voters are told that the funder does not wish to be identified 
publicly with the views and may draw their own conclusions. If 
a political communication is identified as coming from a group 
with an innocuous or even patriotic and virtuous name, voters 
have no way of knowing that the communication is from the 
secret contributor now recast as an organization. The issue is 
not one of prohibiting the speech but one of giving voters 
information about the speaker when the organization is the 
alter ego of a funder or a conduit for the money and views of 
another.
    The second problem is the potential competition for 
contributions between the new section 527 organizations and 
political parties. While there is no reason to think that total 
contributions are fixed or that there is a zero-sum 
relationship between political parties and new section 527 
organizations, there is also no reason to assume that political 
money is unlimited. Political parties disclose their 
contributors. Even more importantly, political parties 
represent voters and express their preferences on a broad range 
of issues. New section 527 organizations may represent only a 
narrow concern of one contributor. The point is not to 
articulate positions that will build public support but to 
induce gratitude in candidates who benefit from the 
expenditures with a view to eventual legislative support. The 
new section 527 organizations might well weaken political 
parties in their public aspect relative to the new section 527 
organizations. The 2000 general election may well become a 
contest between the old section 527 structures, the political 
parties and the candidate committees, and the new section 527 
stealth funds.
    The third problem is the potential impact on the 
legislative process. Certain of the stealth funds appear to be 
linked with members of Congress. The danger is that the stealth 
funds can be used for what economists term ``rent seeking.'' 
\2\ Indeed, the total secrecy of the new section 527 
organizations makes them a potentially useful structure for 
collecting the proceeds of rent extraction. Any powerful 
national leader could organize several new section 527 
organizations for this purpose. The money so collected could be 
used to influence electoral outcomes or to threaten to 
influence electoral outcomes. This would include funding 
primary opponents for the purpose of defeating nettlesome 
Congressional colleagues within the member's own party. Whether 
any such transactions have yet occurred cannot be determined 
when even the existence of the new section 527 organizations is 
unknowable. Permitting certain political leaders to amass 
private warchests with no disclosure and no accountability in 
the use of the funds raises this possibility. In the worst 
case, such uses of new section 527 stealth funds would 
interfere with the relationship between other members of 
Congress and the people who support them with disclosed 
contributions and with their votes. Interposing those leaders 
controlling the most successful new section 527 organizations 
between other members of Congress and their constituents calls 
for a redefinition of representation in ways that appear 
inconsistent with citizen sovereignty.
---------------------------------------------------------------------------
    \2\ George J. Stigler, The Citizen and the State: Essays on 
Regulation (Chicago: University of Chicago Press, 1975); Fred 
McChesney, Money for Nothing: Politicians, Rent Extraction, and 
Political Extortion (Cambridge: Harvard University Press, 1997).
---------------------------------------------------------------------------
    The fourth potential problem is that the funds collected in 
new section 527 organizations appear to be transferable to 
candidates for private use, at least once they leave office, or 
to other private persons for their private use. Congress has 
determined that any money left in official campaign committees 
may no longer be converted to personal use upon the payment of 
appropriate taxes, which the law previously permitted. To the 
extent that the new section 527 organizations now provide a 
means of again taking money for eventual personal use, this 
would appear inconsistent with the prior reform. This 
possibility is an example of the unintended consequences of the 
new section 527 organizations. I urge Congress to determine 
whether this apparent technical possibility is indeed a 
possibility and, if it is, to take immediate action to 
eliminate it and to enact a disclosure system allowing the 
American people to have complete confidence that it has been 
eliminated.

IV. Disclosure Remedies for the Problems Posed by the New 
Section 527 Organizations

    Disclosure is an appropriate remedy for the problems posed 
by the new section 527 organizations. Disclosure remedies raise 
questions regarding what information should be disclosed to 
whom on what schedule and with what consequences in the event 
of noncompliance. In the case of the new section 527 
organizations, the minimum goal of disclosure should be to 
provide the public at least as much information as is provided 
with respect to the sources and uses of soft money.
    The first step is to require disclosure of the formation 
and continued existence of new section 527 organizations. In 
addition, disclosure of the persons who formed the organization 
and who are responsible for its continued operation should be 
disclosed. These disclosure requirements should be stated in 
terms that take account of the informal structures of at least 
some of the stealth funds. Statutory references to boards of 
directors or particular roles associated with organizations 
with more formal structures under state law would limit the 
scope of the provision.
    Disclosure of contributors and the amount of their 
contributions is vital to any meaningful disclosure provision. 
This is information that is already disclosed with respect to 
soft money. There is no distinction between soft money and the 
funds collected by the new section 527 organizations for the 
sole exempt purpose of influencing electoral outcomes as 
provided in section 527(e)(2) that would support the continued 
nondisclosure of the contributors to the new section 527 
organizations.
    Disclosure requires an effective anti-conduit provision to 
prevent the use of multiple intermediary organizations to 
defeat disclosure. The principle should be that all the 
intermediaries that do not report to the FEC should be 
disclosed and contributors to them should be disclosed.
    Disclosure of the contributors and the amount of their 
contributions is unlikely to be unduly burdensome. While little 
is known about the contributors to the new section 527 
organizations, those that have come to light have been campaign 
finance structures for collecting a limited number of very 
large contributions. Indeed, collecting very large amounts is 
seen as more efficient with lower transaction costs than 
collecting money from ordinary American voters in amounts they 
might be able to afford to contribute.
    Disclosure of the expenditures of the new section 527 
organizations is also a necessary part of any meaningful 
disclosure remedy. This information gives the voters additional 
information about the entity and the contributors. It also 
provides information about the funding of political 
communications by other organizations. The use of multiple 
intermediary organizations has become quite common in campaign 
finance and the public deserves to have information about the 
ultimate sources of the funding of political communications.
    Disclosure to the IRS is appropriate since the new section 
527 organizations base their structures on section 527 of the 
Code and because these structures enjoy the benefits of 
exemption from taxation. The IRS has a duty to the public to 
ensure that exemption from taxation is appropriate and that 
structures that claim exemption are operating in a manner 
consistent with the statutory requirements. The Joint Committee 
on Taxation has issued a report on disclosure with respect to 
various types of exempt organizations. See, Joint Committee of 
Taxation, Study of Present-Law Taxpayer Confidentiality and 
Disclosure Provisions as Required by Section 3802 of the 
Internal Revenue Service Restructuring and Reform Act of 1998: 
Volume II: Study of Disclosure Provisions Relating to Tax-
Exempt Organizations (JCS-1-00)(January 28, 2000) and has 
called for increased disclosure in certain areas and for 
consideration of increased disclosure in other areas, including 
the new section 527 organizations.
    The timing of disclosure is more difficult in the case of 
electoral disclosure than in the case of ordinary filing of a 
tax return or an information return. An election fixes the last 
date on which the information is of immediate use to the 
public, and the benefits to the public are the primary reason 
for any disclosure requirement. Disclosure to the public 
without delay is a foundation of a meaningful disclosure 
regime.
    Finally, appropriate sanctions must apply in the event of 
noncompliance. These sanctions should exceed a mere cost of 
doing business and serve as a disincentive to noncompliance.
    I believe that HR 4168 sets forth a workable disclosure 
regime adapted to the realities of the new section 527 
organizations.
V. Electoral Roles of Other Exempt Organizations

    Section 501(c)(4) social welfare organizations, section 
501(c)(5) labor unions, and section 501(c)(6) trade 
associations may also function as means of collecting and 
deploying undisclosed political money. In the 1996 campaign 
certain section 501(c)(4) organizations appear to have played 
this role.
    Each of these organizations can be distinguished from the 
new section 527 organizations. The most obvious difference is 
that these organizations are required to file for recognition 
of exemption and each files an annual information return that 
must be disclosed to members of the public upon request. 
Another important difference is that each of these organization 
is granted exemption for a purpose other than influencing 
electoral outcomes and this exempt purpose must be the 
organization's primary purpose. Yet another difference is that 
section 501(c)(5) labor organizations and section 501(c)(6) 
trade associations have members. These organizations are 
supported primarily by dues paid by their members and the 
identity of their members can be determined from their exempt 
purpose and from their publicly disclosed information. None of 
these organizations is a stealth organization in the same 
manner as are the new section 527 organizations.
    At the same time, these organizations are characterized by 
a certain degree of organizational opacity that makes them 
useful for collecting political money and serving as the alter 
egos of large contributors or a conduits for contributions 
earmarked for political use. Like the new section 527 
organizations, section 501(c)(4) organizations may collect 
unlimited amounts of money from any contributors, whether 
domestic or foreign, including money from political parties or, 
indeed, from new section 527 organizations. Information on 
categories of expenditures is included on the annual 
information returns of section 501(c)(4) organizations, but 
this information does not identify the recipients of 
transferred funds.
    Section 501(c)(4) organization may engage in a certain 
amount of activity that is characterized as ``participation or 
intervention'' in a political campaign, the kind of activity 
that would jeopardize the exempt status of section 501(c)(3) 
organizations, but this may not be the organization's primary 
activity. Section 527(f)(1) provides that a section 501(c)(4) 
organization or other section 501(c) organization that engages 
in section 527 (e)(2) activities is subject to the tax levied 
on the investment income of section 527 organizations. This tax 
is likely to be minimal in most cases.
    Even though section 501(c)(4) organizations that engage in 
section 527(e)(2) activities are subject to tax, section 
501(c)(4) organizations are not subject to any of the 
disclosure requirements that apply under the FECA. Because the 
section 501(c)(4) organization reports its section 527(e)(2) 
activities on Form 1120-POL, this information may not be 
disclosed to the public. In any event, it is likely that few 
section 501(c)(4) organizations file a Form 1120-POL. It is 
likely that most section 501(c)(4) organizations take the 
position that their activities are educational activities not 
undertaken to influence electoral outcomes within the meaning 
of section 527(e)(2). Because the IRS has based qualification 
for exemption under section 527 on the organization's 
statements regarding its intent to influence elections, 
structures engaging in identical activities in practice have 
the choice of claiming exemption under section 501(c)(4) or 
section 527. If they claim exemption under section 501(c)(4), 
they will claim that their activities are educational and if 
they claim exemption under section 527 they will claim that 
they intend that their activities influence electoral outcomes 
within the meaning of section 527(e)(2).
    One difference between section 527 organizations and 
section 501(c)(4) organizations is that contributions to 
section 501(c)(4) organizations appear to be subject to the 
gift tax under section 2501(a)(5). The possibility of the 
imposition of the gift tax has meant that section 501(c)(4) 
organizations are less attractive for large contributors who 
could become liable to substantial amounts of gift tax. The new 
section 527 organizations offer an alternative that is not 
subject to the gift tax and that at the same provides an even 
greater degree of organizational opacity than do section 
501(c)(4) organizations which are subject to the section 6033 
filing requirements and the section 6104 public disclosure 
requirements.
    Section 501(c) organizations already provide substantial 
amounts of information to the IRS and to the public. They are 
not required to disclose their members or their contributors to 
the public or to the government. However, there is no absolute 
prohibition on disclosure of contributors. Indeed, certain 
section 501(c)(4) organizations which are granted an exception 
from treatment as corporations prohibited from using their 
treasury funds for campaign activities are required to disclose 
certain information relating to contributors and expenditures 
to the FEC. These section 501(c)(4) organizations are permitted 
to use their treasury funds for direct campaign activities 
under FEC v. Massachusetts Citizens for Life, 479 U.S. 238 
(1986) . The Supreme Court made no exceptions to the disclosure 
requirements for these organizations. Regulations under the 
FECA require that they comply with disclosure requirements. 11 
CFR 114.10 and 11 CFR 109.
    It would, in my view, be appropriate to require that 
section 501(c)(4) social welfare organizations, section 
501(c)(5) labor unions, and section 501(c)(6) trade 
associations disclose their substantial contributors and the 
amount of their contributions to the IRS and to the public. 
Disclosure of substantial contributors would provide 
information on sources of funding other than membership dues or 
the ordinary contributions from ordinary Americans who 
associate together for such organizations' exempt purposes.
    Rules focused on substantial contributors find precedent in 
existing law applicable to exempt organizations. Section 4958 
already requires disclosure of substantial contributors in the 
case of section 501(c)(4) organizations in certain 
circumstances. Section 4941 imposes special rules on private 
foundations in dealings with substantial contributors.
    Disclosure of substantial contributors would provide 
information to the public on persons whose financial 
contributions might be sufficient to shape the political 
positions of the organization. Disclosure would also prevent 
abuse of exemption and of exempt organizations as alter egos or 
as conduits serving private interests and not the public 
interests for which exemption was granted.
    All section 501(c) organizations already provide 
information on their annual information returns on their 
expenditures. They should be required to disclose their 
expenditures of any amounts that would qualify as section 
527(e)(2) expenditures on the same terms and on the same 
schedule that section 527 organizations are required to report. 
Section 527(f)(1) makes section 527 applicable to such 
organizations under current law.
    Any distributions to other section 501(c) or section 527 
organizations should be disclosed to the public. Transfers of 
funds among entities is part of the challenge to voters in 
evaluating political communications. Such transfers make it 
unclear whether organizations are speaking in an organizational 
voice or in the voice of a substantial contributor. Transfers 
among organizations compound the difficulty for voters.

VI. Conclusions

    The intense focus on the rights of contributors that 
dominates current debate over campaign finance reform threatens 
to obscure consideration of the rights of voters as 
participants in campaigns and elections. Elections are held so 
that citizens can exercise their sovereign authority to choose 
their elected representatives. Governments chosen in elections 
are legitimate and effective to the extent that citizens have 
confidence that their choices matter. Disclosure is one element 
in ensuring that the rights and duties of voters are respected 
and that the political system reflects the well-informed and 
well-considered choices of a free and sovereign people. Voters, 
not just contributors, have rights and disclosure helps protect 
those rights.
    The new section 527 organizations represent a direct threat 
to the rights of voters. Pseudonymous speech makes it 
impossible for citizens to evaluate communications and thereby 
inhibits political discourse. Voters have a right to know who 
is speaking and to evaluate the communication as they see fit. 
They may ignore or discount the information, but they should 
not be denied such information. I urge Congress to remember the 
voters in its deliberations on disclosure and other campaign 
finance issues.
      

                                


    Chairman Houghton. Mr. Potter--by the way, let me say, we 
are going to try to keep this thing going. At the end of this 
vote, I will try to go over and vote--and vote for the next one 
and come back; and in the meantime, Mr. Portman is coming back. 
So we will have sort of a sliding show, but we are trying to 
keep it going to help you with your time.
    Thanks.

   STATEMENT OF HON. TREVOR POTTER, SENIOR FELLOW, BROOKINGS 
   INSTITUTION; AND PARTNER, WILEY, REIN & FIELDING (FORMER 
 COMMISSIONER, AND FORMER CHAIRMAN, FEDERAL ELECTION CAMPAIGN)

    Mr. Potter. Thank you, Mr. Chairman. Particularly in view 
of that, I will attempt to be brief. I have written testimony 
and would ask permission to submit that for the record. I am 
speaking today, representing myself as a lawyer in private 
practice, but not speaking on behalf of any of my clients, or 
my firm's clients.
    I want to commend the Committee for taking a look at this 
issue. Disclosure in Federal elections is an increasingly 
important issue and a problem. The problem comes about, as you 
have heard today, both because of the accidental treatment 
really of 527s and because there has been a movement of Federal 
election funds out of political Committees that reported to the 
FEC and into these other organizations, whether they are 527s 
or other types that exist on the edges of Federal election law, 
influence Federal elections, and do not report or disclose.
    The principal thrust of my testimony today as explained in 
some length in my written submission is that disclosure is 
constitutional. The Supreme Court in the Buckley case said that 
Congress did it wrong, that Congress used vague language--``for 
the purpose of influencing;''-- and the Court said nobody is 
going to know what that means, and it is not fair to have 
potential criminal liability when you cannot tell, looking at 
the statute, whether your activity is covered or not.
    As a result, the Supreme Court said since Congress wrote 
something that nobody can figure out, we are going to write a 
more precise definition. That is not the only definition that 
could be adopted. It is the one the court chose then in the 
absence of anything else from Congress.
    So my message to you today is that you can adopt, I 
believe, a broader definition of Federal political activity 
involving Federal candidates, and you can require disclosure of 
that activity. You have to be careful when you do it that that 
is not so vague or so overly broad that the Court says it goes 
too far, but I think you can go further than you have to date.
    There are three reasons that the Court said it is 
permissible to allow disclosure of Federal activity, and these 
are from the Buckley case, but they apply equally well to many 
of the issues you have before you now.
    First, the Court recognized that providing the electorate 
with information in order for the electorate to evaluate those 
seeking Federal office is important. The Court said the 
disclosure allows voters to place each candidate on the 
political spectrum more precisely than is often possible merely 
on the basis of party labels and campaign speeches. So you have 
the Court saying the information conveyed by who is 
communicating is actually important.
    Second, the Court said you deter actual corruption with 
disclosure and they said a public armed with information about 
``a candidate's most generous supporters is better able to 
detect any post-election special favors that may be given in 
return.'' This is true whether this is activity by a 527 or a 
direct contribution to a candidate.
    Finally, the Court said that disclosure is useful in 
deterring and detecting violations. Public access to 
recordkeeping and who is spending enables people to figure out 
whether the campaign finance laws are being followed.
    I would have a couple of specific suggestions for you. They 
are also outlined in my testimony as you look at a disclosure 
system.
    First, it is important that you be crystal clear what 
speech is covered and what is not. That is why I think a 
bright-line test, such as the name or likeness of a Federal 
candidate, is important.
    Second, it is important under the NAACP, the Alabama case, 
that you provide some out or exemption for people who would 
have a serious threat of reprisal. The Supreme Court has 
effectively done that in the Socialist Workers Party case for 
the Federal election laws, and you should do it here.
    Third, I think it is important that you limit disclosure to 
however you define major funders, using either a dollar minimum 
or a percentage of the organization's total budget. The tax 
laws, through the 1990s, already require disclosure of people 
who contribute $5,000 or more. Congressman Castle's bill talks 
about $1,000.
    I would urge you not to go down to either all contributors 
or even the Federal election campaign Act's $200 contributor, 
because I don't think you need that to get at what you are 
looking for, which is who is actually financing these 
communications. It is very useful to limit the reach of the 
disclosure provisions to a period close to an election, 
whatever number of days you set.
    I think it is also useful to limit disclosure to 
communications that are communicated broadly to the general 
public, either through radio and television or mass mailings. I 
would note in the McIntyre case, which is sometimes cited as a 
change in the Supreme Court jurisprudence, they were not 
dealing with communications that were televised or distributed 
through mass mailings.
    It is important that the disclosure provisions be easy to 
administer, and finally, I would suggest that you would want to 
incorporate an exemption for news media activity, as the 
Federal election law does.
    Thank you.
    Mr. Portman [presiding]. Thank you, Mr. Potter.
    [The prepared statement follows:]

Statement of Hon. Trevor Potter, Senior Fellow, Brookings Institution; 
and Partner, Wiley, Rein & Fielding (former Commissioner, and former 
Chairman, Federal Election Commission)

    Mr. Chairman, and Members of the Subcommittee:
    Thank you for your invitation to appear today. I am a 
lawyer in private practice, and regularly speak, write and 
teach on election law issues. I have served as a Commissioner 
of the Federal Election Commission. My testimony today is mine 
alone, and is not offered on behalf of anyone else, including 
any client of my law firm's.
    This testimony will first discuss the issue of candidate-
specific activity by Section 527 political organizations which 
are not registered and disclosing their activities and donors 
to the public through any federal, state or local campaign 
finance agency. Then, it will discuss the suggestion that 
certain Section 501(c) organizations be required to disclose 
their federal candidate-specific political activities and, to 
some extent, their donors. It then notes the existence of not 
for profit and for profit business entities without Section 
501(c) status, and the implications this has for disclosure 
policy. Finally, my testimony will review the constitutional 
and statutory construction issues that by necessity guide any 
legislation in this area. It is my hope in this final section 
of my testimony to offer guidance to the Committee that may be 
helpful as it considers potential legislation in this area.

I. Section 527 Organizations

    Section 527 of the tax code grants an exemption from income 
tax to organizations formed for the explicit purpose of 
influencing elections (whether federal, state or local) and 
nominations for federal office. Their is no application 
procedure for qualification or recognition (unlike other tax 
exempt entities). This is because entities qualifying were 
assumed to be almost exclusively federal or state candidate 
committees, party committees, and PACs, all of which are 
already registered and reporting with a campaign finance 
disclosure agency. Section 527 was enacted specifically because 
these organizations wanted a clear statutory statement that 
political contributions to political committees, used for 
political purposes, were not taxable as income to those 
entities.
    Since the 1970s, however, regulatory interpretation and 
constitutional law, beginning with the Buckley v. Valeo case, 
(424 U.S. 1, 1976) have combined to create a new category of 
political speech and activity--communications intended to 
influence federal elections, using every device known to modern 
advertising to exert such influence--but which do not 
``expressly advocate the election or defeat of a federal 
candidate.'' It has become a widely held view, supported by 
many legal practitioners, that groups organized for the sole 
purpose of influencing federal elections, and engaging solely 
in speech attacking or praising specific federal candidates--
sometimes without even the pretense of an ``issue'' except the 
qualifications of a candidate to hold office--are not engaged 
in federal political activity requiring registration and 
reporting of these expenditures, and adherence to the ban on 
corporate, labor, and foreign money in federal elections.
    This interpretation presents an increasingly apparent gap 
between the coverage of the federal election laws and the terms 
of Section 527 of the tax code. Thus, organizations attempt to 
avoid the disclosure provisions and limits of the federal 
election laws by carefully refraining from ``expressly 
advocating the election or defeat'' of a candidate, while still 
claiming to qualify as a ``political organization'' that exists 
to ``influence federal elections'' and is therefore exempt from 
federal income tax under Section 527 of the tax code. This is 
the origination of the suddenly famous ``stealth PACs.''
    The appeal of 527's to donors and political activists is 
easy to understand, though also the result of some coincidental 
events. Contributions to ``stealth 527s'' are not disclosed to 
the IRS or otherwise made public (because Congress didn't 
require them to be, assuming that they were already reporting 
elsewhere) and are not disclosed to the FEC because the 
organizations are not registered political committees. 
Contributions to 527 organizations are specifically exempt from 
the federal gift tax, whereas tax lawyers do not agree whether 
their is a similar exemption for gifts to 501(c)(4)s. Section 
527 organizations can exist for the sole purpose of influencing 
federal elections, whereas 501(c) organizations must show some 
other non-political principal purpose. There is not an IRS 
approval process for creation of a 527, while 501(c)(3) and 
(c)(4) organizations can take months--or years--seeking 
approval. If the IRS thinks a 501(c) applicant is ``too 
political'' it will deny the application. All of these 
constitute good reasons for persons or groups seeking to engage 
in undisclosed political speech to choose the Section 527 form.
    The problem, of course, is that all of these perceived 
advantages are the consequences of an unintended misconnection 
of federal tax and election laws. These laws were written by 
different Congressional committees, for different purposes, and 
are administered by different federal agencies with different 
administrative priorities. As a result, the existence of 527s 
engaged in candidate-related political activity but not 
registered and reporting anywhere as political committees is 
accidental, rather than the result of Congressional policy. Now 
that the results of this accidental chain of consequences is 
obvious to all, Congress has an opportunity to decide on an 
appropriate disclosure policy for these entities.

II. Section 501(c) Organizations

    Mr. Chairman, you have made it clear that you would like 
testimony on the inclusion of Section 501(c) organizations in 
any political disclosure system. While I am not a tax lawyer, I 
have had experience with a variety of 501(c) organizations from 
an election law perspective. Therefore, I will respond to your 
request to discuss in general terms these organization's 
possible inclusion in a political communication disclosure 
system.
    Since Section 501(c)(3) organizations are statutorily 
prohibited from intervening in federal elections, there would 
appear to be no reason to include their communications to the 
general public in such a disclosure system. Section 501(c)(4), 
(5), and (6) organizations (social welfare, labor unions, and 
trade associations) however, are all permitted by their tax 
status to engage in candidate-specific political 
communications, and many do so during the course of elections. 
It seems reasonable to require them to identify their larger 
expenditures for public communications, and to require that 
their names appear on the communications so that voters know 
the organizational source of the public communications.
    The more difficult question is whether such organizations 
should be required to identify the names of some or all of 
their donors who have financed such public communications. The 
difficulty arises because by definition these organizations' 
principle purpose is not to conduct election activities (or 
they would qualify under Section 527, not 501(c)), and 
therefore they may have many donors who are not intending to 
engage in political speech. Further, since the organizations 
principle purpose may be focused on issues of a controversial 
and perhaps unpopular nature, there is a real risk to chilling 
these organizations and the contributions they receive from 
supporters if any disclosure system is not carefully thought 
out and hedged with safeguards. Such chilling would, of course, 
have serious constitutional implications.
    For these reasons, I would urge the Committee to narrowly 
tailor any disclosure by 501(c)s. One such approach is to allow 
effected 501(c) groups to establish separate accounts which 
would pay for political advertising, and the contributors to 
which would be disclosed (as opposed to the contributors to the 
parent organization). This approach, commonly called Snowe 
Jeffords after legislation which passed the Senate in the last 
Congress, may be useful to this committee.
    Another approach would be to except entirely or largely 
from donor disclosure those organizations so large and publicly 
supported that their names alone convey sufficient information 
about the message and interests of their funders. The Sierra 
Club and the National Rifle Association in the issue sphere, 
along with the Chamber of Commerce and the AFL-CIO in the 
business and labor sphere, come to mind in this regard: the 
general public understands the perspective they bring to the 
election contest, and their names alone should provide voters 
with sufficient disclosure of the interests they represent. The 
same cannot be said for new and/or unknown organizations, 
sometimes used only as vehicles for candidate specific 
political advertising paid for by a handful of anonymous 
donors. In these instances, major donor identification may be 
the only way for voters to know whose interests are represented 
by the generically named entity paying for the advertising.
    Finally, it would certainly be appropriate for this 
Committee to adopt a higher threshold for donor disclosure for 
501(c) organizations than for 527 entities. The FEC standard of 
$200 and up, applicable to contributors to political 
organizations, may be far easier to transfer to 527 political 
entities than to 501(c) predominantly non-political groups. For 
the latter, a threshold based on substantial contributions (as 
measured either in absolute dollar terms or as a percentage of 
an organizations funding) would be appropriate, and 
constitutionally helpful as discussed below.

III. For-Profit and Not-for-Profit Entities without Tax Exempt 
Status

    Another type of legal entity the Committee needs to address 
is organizations that are incorporated as for profit or not for 
profit entities under state law, but which have not sought 
favored tax status under Section 527 or 501(c). Under state law 
such entities may engage in political communications to the 
general public. Under current FEC law such entities may not 
need to register or report if they do not engage in ``express 
advocacy,'' so they will have no disclosure requirements. If 
they have no profits at the end of the tax year, because they 
have spent all of their funds for political advertising, then 
they will incur no federal income tax liability. Thus, in all 
material respects, they are as a matter of practice materially 
indistinguishable from Section 527 organizations in terms of 
their attractiveness as a vehicle for non-disclosed candidate 
specific election speech.
    Recognizing that this Committee has jurisdiction over tax, 
not FEC, legislation, I urge you to consider whether it would 
be possible, and advisable, to condition such entities' tax 
treatment on their disclosure--or nondisclosure--of the sources 
of funding for their political advertising. For instance, 
Congress has already provided that expenditures for political 
activities by a corporation are not deductible as business 
expenses. Section 162e. Would it be possible for the tax code 
to encourage disclosure of political activities by non-527 and 
non-501(c) corporate entities by providing that if they engage 
in the same sort of narrowly defined political advertising as 
these tax exempt entities, and fail to disclose their major 
funders, then the funds used would be tax disadvantaged?
    One possible approach might be to subject the funds 
transferred to the corporation to pay for the non-disclosed 
advertising to the federal gift tax? Alternatively, the funds 
used for such non-disclosed advertising could be denied 
treatment as a capital contribution to the corporation, and 
instead considered income subject to tax (and without any 
offsetting business deductions because it is political 
activity). Such a provision could be narrowly drawn to apply 
only to corporations whose principle activity is political 
advertising, so as not to include entities which have true 
commercial reasons for existence. I do not recommend any 
particular solution to this issue, but merely seek to draw it 
to the Committee's attention. In my view, some treatment of 
this issue under the tax code will be necessary in order to 
accomplish the Committee's disclosure objectives.
    Whatever approach to any of these entities is eventually 
adopted by the Committee, it is essential that the disclosure 
requirements be carefully drafted to take into account the 
Supreme Court's previously stated views on the permissibility 
of disclosure. It is to these holdings that my testimony will 
now turn.

IV. The Supreme Court's Disclosure Jurisprudence: Buckley v. 
Valeo and Other Cases

    As a basic matter of constitutional law, the Supreme Court 
has allowed disclosure of candidate-related communications--and 
their funders--so long as the disclosure requirement is 
narrowly tailored (precisely drafted) to meet a compelling 
public interest. In the case of candidate-specific public 
political communications, the Court has on several occasions 
forcefully stated that a public interest in such disclosure 
exists. Therefore, what remains for Congress is to ensure that 
the disclosure requirement is narrowly-tailored. It must be (1) 
clear, not vague; (2) as minimally burdensome as necessary to 
accomplish the needed disclosure; and (3) provide exceptions 
where compelled by Supreme Court jurisprudence. If these three 
goals are met, the Court's cases indicate the disclosure will 
be upheld as constitutional. When the Congress last attempted 
to provide for full disclosure of money spent in federal 
elections in 1974, it failed to meet these tests. Now, this 
Committee, and Congress, has another opportunity to get it 
right.

A. The Buckley Case

    In Buckley v. Valeo, the Supreme Court held the 
government's interests in disclosure sufficiently important to 
outweigh the possibility of infringement of First Amendment 
rights to anonymity of political speech, particularly where the 
``free functioning of our national institutions'' is involved. 
Id. at 424 US 1, 66.
    In reviewing the Federal Election Campaign Act 1971's post-
Watergate amendments, the Court held that Congress had 
identified three compelling governmental interests for 
disclosure. The Buckley opinion stated that these were:
    (1) Providing the electorate with information in order for 
the electorate to evaluate those seeking federal office. 
Disclosure allows voters to place each candidate on the 
political spectrum more precisely than is often possible solely 
on the basis of party labels and campaign speeches.
    (2) Deterring actual corruption. ``A public armed with 
information about a candidate's most generous supporters is 
better able to detect any post-election special favors that may 
be given in return.'' Id.
    (3) Deterring and detecting violations. Public access to 
recordkeeping and disclosure helps to detect violations of 
contribution limits. Such violations would include in-kind 
contributions to candidates through candidate control and 
coordination of the group's activities.
    Buckley at 67-68.
    The Supreme Court observed in Buckley that Congress in the 
1974 amendments sought ``total disclosure'' of federal campaign 
spending ``reaching every kind of activity.'' The purpose of 
this broad disclosure was to ensure that political spending did 
not occur undisclosed merely because it was by groups that did 
not qualify as political committees. The Court stated that ``in 
an effort to be all-inclusive, however, the provision raises 
serious problems of vagueness'' because the disclosure 
requirement applies to ``every person who makes contributions 
or expenditures,'' and those terms are defined as money spent 
``for the purpose of influencing a federal election.'' Id. at 
77.
    The Court noted that violations of the disclosure 
provisions carried a potential criminal penalty, and that it 
was a constitutional requirement that persons subject to 
criminal penalties must have adequate notice of the legal 
standard to which they are being held. How could someone know 
whether their contemplated conduct was illegal, the Court 
asked, when it was described by such a subjective terms as 
``for the purpose of influencing.'' Therefore, the Court held 
that standard to be overly vague, and in order to save the 
provision the Court rewrote it to apply only to speech that 
``expressly advocates the election or defeat of a federal 
candidate.'' Id. at 77-82.
    In doing so, the Court made an assumption that has not been 
borne out by the last 25 years of practice. The Court stated 
that if the speech was by an entity under the control of a 
candidate, or whose major purpose was the nomination or 
election of a candidate, then the expenditures ``can be assumed 
to fall within the core area sought to be addressed by 
Congress. They are, by definition, campaign related.'' Id. at 
79. In fact, the FEC has not enforced the statute to cover 
activities by all entities ``under the control'' of federal 
candidates, and has not urged the courts (e.g. in the GOPAC 
case) to do so. Further, the Supreme Court in Buckley assumed 
that any spending coordinated with a candidate would be 
considered an in-kind contribution to the candidate, and 
therefore reportable. In practice, that has proved a far easier 
proposition to announce than to enforce. It is very difficult 
for the FEC to identify and investigate incidents of 
coordination because of their very surreptitious nature, and 
the courts have overturned FEC attempts to enforce this concept 
through prophylactic regulation. As a result, much spending 
that the Court in Buckley assumed would be covered by the 
federal disclosure laws, because of the involvement of federal 
candidates, is in fact beyond the current disclosure 
provisions.
    Thus, the current state of disclosure law, brought about by 
Congress's use of an overly vague term--``for the purpose of 
influencing''--and by the Supreme Court's resulting rewriting 
of the statute, is contrary to what both Congress and the 
Supreme Court intended. Congress sought full disclosure of 
candidate-related election spending, and the Court thought its 
rewriting of the statute ensured disclosure of ``spending that 
is unambiguously related to the campaign of a political 
candidate.''
    The Buckley Court explicitly validated the informational 
interests that disclosure provisions serve, beyond the 
prevention of corruption rationale. Disclosure of the sources 
of funding of political speech, the Court said, sheds ``the 
light of publicity on spending that is unambiguously campaign 
related but would not otherwise be reported because it takes 
the form of independent expenditures or of contributions to an 
individual or group not itself required to report the names of 
its contributors a disclosure helps voters to define more of 
the candidates constituencies.'' Id. at 81.
    Opponents of disclosure frequently cite the Supreme Court's 
decision in McIntyre v. Ohio Elections Comm'n, 514 U.S. 334 
(1995) for the proposition that disclosure is less favored by 
today's Court than it was in 1976 when the Buckley decision was 
issued. What such persons fail to note is that McIntyre did not 
involve communications that either mentioned candidates or were 
disseminated as mass communications such as through the 
broadcast medium. Instead, the leaflets in McIntyre were handed 
out by one individual, at minimal cost, and involved only a 
local tax initiative. The Court in McIntyre explicitly noted 
the lack of candidate-related content and the fact that the 
communication was not distributed through the broadcast media.
    Similarly, a number of lower courts have (correctly) 
interpreted Buckley as establishing an express advocacy test 
for disclosure. See Vermont Right to life Committee, Inc. v. 
Sorrell, Second Circuit, June 15, 2000, Virginia Soc'y for 
Human Life, 83 F. Supp. 2d 668 (2000). However, these cases do 
not stand for the proposition that Congress is prohibited from 
requiring better but narrowly tailored disclosure. Rather, 
those cases adhere to the statutory standard the Supreme Court 
created in lieu of Congress's vague ``for the purpose of 
influencing'' language. If Congress creates new disclosure 
language, and that new standard is upheld by the Supreme Court, 
then the new statutory test would be applied by the lower 
courts, instead of the Buckley test. It is exactly for this 
reason that the precise language of a new disclosure standard 
for candidate specific election advertising is so important.

B. ``Narrowly Tailored''

    It is precisely this disclosure interest which your 
Committee is addressing today. Congress's task is therefore to 
narrowly tailor any new legislation so that it meets this 
governmental interest in disclosure, recognized by the Supreme 
Court, in a form that is neither vague (as in Buckley) nor 
overly broad. In several cases, both before and after Buckley, 
the Court has provided a road map of the sorts of disclosure 
provisions Congress should write. These may be summarized, 
briefly, as follows:
    (1) Clearly delineating the speech covered, rather than 
using vague and confusing terms (Buckley);
    (2) Providing an exemption from disclosure for those 
persons who would face a ``serious threat of reprisal'' if 
their participation were public (NAACP v. Alabama, Socialist 
Workers Party);

    (3) Limiting disclosure to major funders, either using a 
dollar minimum, or a percentage of the organizations total 
budget. This is clearly preferable to disclosure of all members 
or contributors (NAACP) and is the standard already used for 
filing Form 990s;
    (4) Limiting the disclosure in time, to speech in those 
periods close to the elections (see, by contrast, McIntyre);
    (5) Limit disclosure to communications broadly communicated 
to the general public, perhaps only through mass media and 
mailings, or with a significant expenditure threshold (see, by 
contrast, McIntyre);
    (6) Make the disclosure process administratively easy, so 
it is not unduly burdensome on the reporting entity (see, by 
contrast, Massachusetts Citizens for Life);
    (7) Provide an exemption for reporting by the news media, 
as the Federal Election Campaign Act does.

V. CONCLUSION

    It is possible for Congress to require additional 
disclosure of candidate-specific election advertisements. 
Congress has legitimate purposes in doing so that have been 
explicitly approved by the Supreme Court in Buckley. However, 
in reaching such speech for disclosure purposes, Congress must 
be careful to design the disclosure system so that it is clear, 
not vague, and precisely drafted to achieve its purposes. The 
criteria I have just outlined should provide a road map for 
such drafting.
      

                                


    Mr. Portman. Ms. Mitchell.

 STATEMENT OF CLETA DEATHERAGE MITCHELL, ATTORNEY, SULLIVAN & 
                       MITCHELL, P.L.L.C.

    Ms. Mitchell. Thank you, Mr. Chairman. My name is Cleta 
Mitchell. I am a practicing attorney here in Washington, D.C., 
a partner in the law firm of Sullivan and Mitchell. We 
specialize in the area of campaign finance and election law at 
the State and Federal levels, and represent candidates, 
candidate Committees, individuals and corporations, both for-
profit and not-for-profit, who are involved in various aspects 
of the political and public policy arenas.
    I would like to submit to you, Mr. Chairman, that this is a 
classic example of legislation by headline, that for the past 
year what we have seen are articles with pejorative terms about 
shadowy, secretive, stealth organizations; and it is important 
I think that we take a moment--I appreciate the fact that 
somebody at least in this Congress is willing to have a hearing 
on this matter before enacting legislation which implicates 
basic First amendment rights of the citizenry.
    And I know it is not very politically popular or 
politically correct to say this, but the fact is, journalists 
are not the only ones with First amendment rights, and it is 
very important to think about the First amendment implications 
of all of these proposals. The freedom of speech, the freedom 
of association, and the right to petition the government. These 
are all very significant rights that are implicated in every 
proposal that is currently pending on this subject.
    Now, First amendment law requires that Congress, before 
enacting legislation that implicates First amendment rights, 
must first identify the problem it seeks to correct and then 
narrowly tailor a solution to remedy that problem. So I would 
suggest that the very first order of business is for Congress 
to identify what is the problem and what is the origin of the 
problem.
    The IRS really created this situation by broadening the 
list of exempt purpose expenditures to include for section 527 
Committees, such things as voter registration, issue advocacy, 
voter registration, and so forth. If Congress wants to identify 
that as the problem, that 527 Committees are not being utilized 
for the purpose for which they were originally intended, it 
would be my suggestion that Congress can do one of two things 
or both.
    Congress could say all 527 Committees shall file a 990 tax 
return just like other tax-exempt groups. Rather than creating 
a whole new regime of disclosure and filing and regulation, 
Congress would say we are going to treat all tax-exempt groups 
alike, you all will file a 990.
    Congress could also well decide that a 527 Committee should 
only be for the purposes originally intended related to 
candidates or political parties. But if Congress should do 
that, then the Internal Revenue Service should also be required 
to reconsider its decisions to deny tax-exempt status as 
501(c)(4)s to the National Policy Forum and to the Christian 
Coalition.
    It seems to me that what the IRS has done through its 
decisionmaking process the last several years is to move groups 
away from 501(c)(4) status into the 527 arena, and it seems to 
me that that is something that Congress ought to address.
    Second, it seems that really, this is not what is at issue 
here. If you look at the statement, the opening statement, of 
the Treasury Tax Legislative Counsel, Mr. Mikrut, he just said 
what I think is really going on here. ``The administration 
strongly supports efforts to require greater disclosure of 
political campaign contributions and expenditures as part of 
its ongoing efforts to achieve comprehensive campaign finance 
reform.''
    What we are doing here, what we are seeing here is an 
effort to do an end run around existing campaign finance laws 
and the rule of law established by the Supreme Court in Buckley 
v. Valeo. That is it pure and simple.
    I have to tell you that sitting here a moment ago, 
listening to the tax counsel and the Joint Committee's counsel 
try to answer your questions, Mr. Portman, about whether this 
ad would be considered political or whether that one would be--
and let me just point out what the answers were that, well, we 
use the facts-and-issues test or the on-balance view.
    The fact of the matter is, the Supreme Court specifically 
said that citizens have a right to know in advance what speech 
is going to be subject to regulation by the government and what 
is not and that, in fact, the defining line between issue 
speech and candidate speech may be difficult to tell; but the 
citizens have to have a bright line, and they have to know.
    This Committee must abide by the First amendment 
requirements of Buckley v. Valeo and not seek to create in the 
Internal Revenue Service, for God's sake, the opportunity to 
regulate the political speech of Americans. That is a 
frightening prospect. I would recommend that if we do anything, 
that this Committee enforce existing law in two respects.
    Number one, if the 990 political expenditure categories are 
not being addressed or properly reported, deal with those. Make 
everybody file one and make that process work.
    And number two, I have listed in my testimony five pages of 
evidence where the 501(c)(5) labor unions are not complying 
with existing reporting requirements regarding their political 
activities--$13 billion unaccounted for in the 1996 cycle, 
$20.5 million unaccounted for in the 1998 cycle, and $35 
million unaccounted for in this cycle.
    Now, it seems to me that before Congress enacts some 
comprehensive new regulatory regime, vesting in the Internal 
Revenue Service to regulate our First amendment rights, that 
the first thing Congress ought to do is enforce the existing 
laws. Thank you.
    Mr. Portman. Thank you, Ms. Mitchell.
    [The prepared statement follows:]

Statement of Cleta Deatherage Mitchell, Attorney, Sullivan & Mitchell, 
P.L.L.C.

    Mr. Chairman, Members of the Committee:
    My name is Cleta Mitchell. I am a practicing attorney in 
Washington, D.C., a partner in the law firm of Sullivan & 
Mitchell P.L.L.C. Our firm specializes in the area of campaign 
finance and election law at the state and federal levels. We 
represent candidates, candidate committees, individuals and 
corporations, both for profit and not-for-profit, who are 
involved in the political and public policy arenas.
    The issue of `disclosure' of income to and expenditures by 
IRC Sec. 527 committees has become, with all due respect, a 
classic example of legislation by headline.
    I have spent countless hours over the past year discussing 
this issue with members of the press and it is clear that there 
is a basic lack of knowledge on this subject by those who are 
most adamant about it. So, let me begin this testimony with a 
primer, mainly for the reporters in the room, but for the 
members of Congress as well.
    The media having determined that legislation is needed and 
having demanded action, it seems only reasonable that we ought 
to try and interject some knowledge of the subject in hopes 
that the reporters who are driving this legislation can become 
informed about this matter upon which they have weighed in with 
such vehemence.
    For that reason, I have attached a chart which we use in 
our office to describe for clients the differences between and 
among various types of tax-exempt entities through which 
citizens may wish to become involved in the legislative, public 
policy or political arena(s).
    I would note that there are 25 sections of IRC Sec. 501c 
which describe and define various types of non-profit, tax-
exempt entities. Those reflected on the chart are the ones 
pertinent to today's discussions.

   Chart #1: Table of Tax Exempt Entities and Permissible Activities

    I submit that the reason Sec. 527 committees have become 
more significant over the past five years is NOT because some 
group of donors have sought to hide anything -but rather 
because the Internal Revenue Service has seemed intent upon 
denying to certain groups c4 status.

        Remember the National Policy Forum?
        Remember the Christian Coalition?

    In both instances, the IRS denied the groups' c4 status 
applications on the basis that the groups were `partisan' and 
thus, were more appropriately Sec. 527 committees, even though 
the groups were involved in issues and voter education, and 
were never candidate campaign committees.
    These recent IRS decisions are not consistent with its 
earlier decisions. For example, the Democratic Leadership 
Council is a 501c4 social welfare organization, which is 
clearly partisan, so why did the IRS deny the National Policy 
Forum and the Christian Coalition similar status?
    My point here is that contrary to news reports over the 
past year, there is nothing `sinister' or `evil' or `corrupt' 
or `shady' about issue organizations operating as Sec. 527 
committees. In my opinion having reviewed various private 
letter rulings from the IRS, it is entirely appropriate for 
organizations and citizens groups who are interested in voter 
registration, voter education and issue advocacy to be 
constituted as Sec. 527 committees based on recent decisions of 
the IRS.
    My recommendation to the Committee as you consider this 
subject and the various proposals before you is that you be 
guided by four basic principles and recommendations:
    First, treat all tax exempt entities alike. Do not pick 
winners and losers, don't create separate types of reporting 
and filing and disclosures for different types of entities 
depending on the media's mood this year. Treat all alike.
    Second, the most pressing need for disclosure of political 
expenditures is to those who are members of tax-exempt 
organizations and whose dues and/or assessments are paying for 
the political expenditures. Before you embark on a massive 
public disclosure regimen, begin with requiring tax-exempt 
organizations to disclose to their members the amount of their 
dues and assessments devoted to political activities.
    Third, demand and ensure enforcement of and compliance with 
existing disclosure laws before you create new ones.

    Fourth, remember the Constitution. You have all sworn to 
uphold the Constitution. There are significant First Amendment 
considerations and concerns which simply cannot and must not be 
ignored, notwithstanding the fact that adherence to such 
principles is politically incorrect these days.
    Let me amplify each of these.

I. Treat all tax exempt entities alike by requiring common tax filings: 
                          the 990 tax return.

    There is only difference between a Sec. 527 committee and 
every other tax exempt entity on the chart, and that is that 
Sec. 527 committees file a different type of tax return than 
other tax-exempt organizations.
    If Congress wants to treat Sec. 527 issue committees like 
the others, then Congress should pass a bill requiring Sec. 527 
committees to file a 990 tax return and make them subject to 
the same disclosures as the other types of tax exempt entities.
    And rather than starting from the presumption that YOUR 
Sec. 527 committees, your principal authorized campaign 
committees and national party committees, should be exempt from 
these new filing requirements you are considering, you should 
instead START with the presumption that your Sec. 527 
committees and all other Sec. 527 committees should file the 
same tax returns that other non-profits do and those should be 
available to the public on the same basis as other 990s. You 
should exempt NO Sec. 527 committee from these requirements and 
all non-profits will instantly be on the same level of 
disclosure for all purposes related to their legal structure.
    Does it matter? Yes. I'll give you one example.
    The Democratic Congressional Campaign Committee (DCCC) is a 
Sec. 527 committee, which reports its contributions and 
expenditures to the FEC. The DCCC's reports are, in my opinion, 
difficult and complicated. But one of the more curious items on 
the DCCC's reports of contributions to its non-federal account 
is a notation at the top of each page, which reads: ``Receipts 
include Direct Contributions AND Harriman Communications Center 
Revenue.'' What does that mean? In reviewing the various 
entries, odd numbers appear, most of which are from 
communications or media entities, such as Joe Slade White 
Communications, Doak, Shrum, and Devine and other Democratic 
media consultants.
    What is that notation ``Harriman Communications Center 
Revenue'' ? Why is that revenue lumped together with ``Direct 
Contributions'' ? Is that revenue accounted for in its tax 
returns or isn't it?
    We don't know because the DCCC's 1120 POLs, its tax 
returns, are not publicly disclosed.
    Why shouldn't the tax returns for the DCCC be a matter of 
public record so we could see what that income from the 
Harriman Communications Center actually is and what offsetting 
expenses exist?
    That information is not available from existing FEC 
reports. If the DCCC were required to file a 990 and make it 
available as other non-profit entities do, we could follow that 
money and perhaps, and know what the revenue sources are and 
what the expenses are and for what.
    Why are Democratic media consultants using the DCCC's 
communications center? Are they being charged a reasonable 
market rate for its use? Are the consultants using the Harriman 
Center for federal candidates at less than full market costs?
    This reporting method raises a great many questions -and 
the media AND Congress should be as determined in getting THAT 
information as reporters have been on the subject of other 
Sec. 527 committees.
    By requiring the DCCC and every other Sec. 527 committee to 
file a 990, all tax exempt entities will operate on the same 
basis.

 II. Require disclosure to members of tax exempt organizations of the 
 amount of dues and assessments used by the organization for political 
                             expenditures.

    The other glaring difference in and among the tax-exempt entities 
on the chart is very simple: all but one of the entities on the chart 
receive funds from sources, whether individuals or other entities, 
which voluntarily make the decision to either join or contribute.
    However, the 501c5s which are labor organizations, the unions, are 
not comprised of members all of whom voluntarily decide to join. In the 
case of the labor unions, not only do we not know who the donors are to 
their political activities, but the donors themselves do not know who 
they are. Those who are paying for the labor unions' political 
activities are not even aware because that information is not disclosed 
by the unions to its members.
    This is morally wrong and it is imperative that Congress remedy 
this situation.
    Congress should require that tax exempt entities notify their 
members annually with the following disclosures:
    a) the amount received by the organization from that individual for 
dues and assessments
    b) the amount of each member's dues and/or assessments spent by the 
organization for political expenditures, and the breakdown by political 
party of the organization's political expenditures
    c) notice of the right of the member to receive a refund from the 
entity for the amount of the political expenditures from dues and/or 
assessments
    If it's disclosure you want, then you should start by requiring 
that tax-exempt organizations, including the labor unions, disclose to 
their own members exactly how much of their individual dues and 
assessments have been utilized for political purposes and for which 
political parties and a notice that the member has a right to receive a 
refund.
    Before you institute a new, burdensome and intrusive reporting and 
public disclosure regimen for political expenditures by tax exempt 
groups, start with a simple requirement that people paying for 
political activities have a right to know they're doing so.

 III. Demand enforcement of and compliance with existing reporting and 
                            disclosure laws.

    The media and Congress seem bent upon enacting new laws for 
disclosure of political expenditures. Before doing that, it might make 
some sense to be similarly dedicated to enforcement of existing laws on 
this subject.
    Since this legislation and, indeed this hearing surrounding 
Sec. 527 committees is a byproduct of news stories, you won't mind if I 
rely on various news reports.
    In 1995, the labor unions announced their intent to spend $35 
million in the 1996 cycle. Gerald McEntee, President of AFSCME and 
Chairman of the AFL-CIO Political Action Committee, appeared on McNeil/
Lehr on April 6, 1996, to discuss labor's plans. This excerpt from the 
transcript:
        ``The AFL-CIO has, among other things, targeted for defeat many 
        of the 73 freshman Republican House members elected two years 
        ago and will spend $35 million to get it done.
        JIM LEHRER: What's this money going to be spent doing?
        MR. McENTEE: Well, not--you know, I think it's important to 
        note that not one dime will go to a particular candidate, nor 
        to a particular party. We're going to try and get people out to 
        vote, and then we're going to run some television ads and some 
        radio ads, and we'll get pamphlets and information out to 
        working America about the records of the members of Congress.''

    Now, it is true that there are no current reporting 
requirements for issue advertising under the campaign finance 
laws or for grassroots lobbying on legislation which is exempt 
from the reporting and disclosure requirements of the Lobbying 
Disclosure Act of 1995.
    However, that is NOT true for the other types of 
expenditures Mr. McEntee referenced in that interview with Jim 
Lehrer.
    Current federal campaign finance laws allow expenditures by 
corporations and labor unions in support of or opposition to 
federal candidates, so long as those expenditures are directed 
ONLY to members of the union or the restricted class of the 
corporation as defined by the FEC. All such expenditures over 
$2,000 are required by law to be reported quarterly to the FEC, 
noting which candidates are being supported or opposed.
    Further, the FEC has very specific regulations governing 
the use of labor union funds for activities associated with 
member mobilization in elections, and for communications beyond 
union members for voter registration, development and 
production of voter guides and voting records and for other 
communications beyond its members.
    So, are unions complying with existing law? You tell me.
    In the September 4, 1999 issue of National Journal, in an 
article entitled ``Labor's Political Muscle'' by Kirk Victor 
and Eliza Newlin Carney, the following paragraph appeared:

        ``Although the AFL-CIO was dismissed as irrelevant in 1994, 
        when Republicans seized control of Congress. . .it rebounded in 
        1996 with a $35 million political mobilization campaign. The 
        largest share of that money -some $15 million, according to 
        AFL-CIO officials--went to high profile television 
        advertisements that promoted policy issues, not candidates, and 
        thus escaped federal regulation.''

    What the story doesn't say because NOBODY apparently 
bothered to ask is `what about the other $20 million?
    According to the FEC reports, organized labor only reported 
spending $2 million during the 1996 cycle. If, as Mr. McEntee 
promised on national television, it was spent on such things as 
voter registration, education and member mobilization, those 
expenditures ARE subject to federal regulation. Why is no one 
asking the labor unions where is the other $20 million? Who is 
asking the unions those questions? No one, as near as I can 
tell.
    Now look at the 1998 cycle:
    The same National Journal article, September, 1999, 
reported:

        ``In 1998, Sweeney surprised his opponents by again switching 
        strategies. He spent far less on issue advocacy and 
        concentrated on a back-to-basics ground war that turned out 
        union voters through phone banks, door-knocking, and direct 
        mail. Less than $5 million of the AFL-CIO's $28 million 
        political budget in 1998 went for issue ads.''

    From USA Today, October 14, 1999, it was reported:

        ``.  . .in the 1998 elections, tens of thousands of union 
        members and their families participated in sophisticated 
        campaign operations that put a heavy emphasis on personal 
        contact with voters. About 5.5 million telephone calls were 
        made on behalf of political candidates to union families, 
        urging them to vote.''

    Two days after the 1998 election, November 5,1998, Donald 
Lambro wrote an article which appeared in the Washington Times, 
quoting a number of labor union operatives and associates who 
were ecstatic about the results of the November election. The 
headline:

        ``AFL-CIO's Election Day Effort Paid Off Big for Democrats''
        ``. . .labor quietly conducted a campaign that focused on voter 
        registration, get-out-the-vote phone banks and knocking on 
        doors on Election Day to turn out up to 13 million union 
        members. ``In city after city, they put hundreds and hundreds 
        of people into the field,'' said Democratic campaign strategist 
        Vic Kamber. The effort, costing almost $20 million, was 
        directed by hundreds of AFL-CIO field coordinators, who worked 
        full time to mobilize tens of thousands of union workers on 
        behalf of Democratic candidates.''

    Really?
    So what did the AFL-CIO report spending in 1998 for those 
member mobilization efforts described in the National Journal, 
USA Today and the Washington Times? That twenty million dollar 
effort was reported by the AFL-CIO to the Federal Election 
Commission as a $2.5 million expenditure.
    Where is the other $17.5 million?
    How about this quote from Vic Kamber in the Washington 
Times story?
        ``In Las Vegas they had 120 paid shop stewards working the 
        polling places. And that kind of effort paid off for them.''

    The AFL-CIO reported to the FEC that it spent only $17,792 
in `on the ground' activities supporting Shelley Barkley and 
$28,000 on behalf of Sen. Harry Reid in Nevada. Assuming that 
all of the AFL-CIO's expenditures for Harry Reid were in Las 
Vegas, that still brings the grand total spent by the AFL-CIO 
in Las Vegas to only $46,000.00.
    Those news reports raise very serious questions about the 
use of the AFL-CIO's funds and the failure of the AFL-CIO to 
account for all its political expenditures, as required by 
existing law.

    Were those `120 paid shop stewards' paid by the unions? 
Were they communicating with the general public at the polling 
places?
    If so, not only was it not reported, it was illegal.
    Another possible irregularity reported in that same 
Washington Times story:

        ``Labor union allies said the AFL-CIO also poured large amounts 
        of money into efforts to boost black and Hispanic turnout, 
        including sending the Rev. Jesse Jackson around the country to 
        encourage higher turnout among minorities.''
    Were any of Jesse Jackson's appearances coordinated with any 
candidates? Who attended those events? Who paid for the events? Did any 
congressional candidates appear with Rev. Jackson at events paid for by 
the AFL-CIO?
    If so, such expenditures of labor union funds by the AFL-CIO was 
illegal and is specifically prohibited by existing campaign finance 
laws.
    Now, what about the current cycle?
    According to that same National Journal article, the AFL-CIO has 
pledged to spend $46 million on political activity and will `keep the 
focus on the ground war'.
    A Washington Post story by Frank Swoboda appearing on Thursday, 
February 18, 1999, quoted Gerald McEntee, Chairman of the AFL-CIO 
political committee as saying labor would ``keep (its) people mobilized 
and engaged for the year 2000.''

        ``McEntee said approximately three-fourths of the money will be 
        spent on field operations, such as issue education and get-out-
        the-vote efforts, and the balance on media campaigns. He said 
        this was about the same ratio as the 1998 election spending and 
        a reversal of the spending ratio in 1996, when the federation 
        raised $35 million for a one-year effort.''

    By my calculations, the member mobilization program will 
cost approximately $36 million during this cycle.
    And what has the AFL-CIO reported to the FEC spending on 
this program through the first year of its two year effort?
    As of March 31, the AFL-CIO has reported to the FEC 
expenditures of only approximately $900,000.

My question is:

    Why are the unions ignoring the existing regulations and 
reporting laws? Why is no one insisting that the unions comply 
with the laws? And why is Congress considering enacting NEW 
filing and disclosure laws when the current laws are not being 
enforced?
    Finally, one other VERY interesting item in that same 
Washington Post story:
        ``Although AFL-CIO officials would not give an official 
        estimate of the size of the new two-year budget for its 
        political operations, officials familiar with the spending plan 
        said it would be roughly double the $21.5 the federation spent 
        in the 1998 elections. Approximately $14 million a year would 
        come from an extension of the voluntary ``Buck a Member 
        campaign that federation leaders approved last year for the 
        1998 midterm congressional elections and another $7.5 million 
        would come from the annual increase in political spending 
        approved at the federation's last convention. The balance would 
        come from ``other sources within the federation,'' officials 
        said.''

    We are back to an earlier point. The sources of funding for 
the AFL-CIO's political activities are NOT known, and not 
disclosed, not to the public and not even to the dues paying 
members of the unions who are footing part of the bill. But 
that is, apparently, only part of the costs of the unions' 
political program. The numbers just don't add up.
    Evidently, there are sources -secret sources--beyond the 
dues paying members of the unions who are financing the unions' 
political activities. Who are they? How much are they paying?
    Those `other sources within the federation' will come up 
with more than twenty million dollars for the unions activities 
this cycle.
    The Washington Post headline on the story by Ruth Marcus on 
Monday, May 15, 2000, about Sec. 527 committees read: ``Flood 
of Secret Money Erodes Election Limits".
    There was no mention of the `other sources' of the unions' 
$20 million for this election cycle.
    Doesn't that $20 million count as a `flood of money'?
    Doesn't anyone in the media want to know where THAT money 
is coming from?
    Doesn't anyone want to know how it is being spent and 
whether it is being spent for legal or illegal purposes?
    Until there is enforcement of the existing laws, don't just 
scurry around creating new ones.
    I've attached a chart with a recap of the amounts I've just 
outlined.

         Chart #2:--AFL-CIO Political Expenditures 1995-Present

IV. Remember the Constitution.

    Finally, while it is not politically correct these days to 
remind Congress that citizens have First Amendment rights to 
engage in political speech and activities without government 
interference, regulation, control or disclosure, it is 
imperative that you take at least a moment to consider the 
First Amendment principles which impact this subject.
    There are three important decisions of the United States 
Supreme Court which are, I believe, essential for Congress to 
be study and apply to the consideration and enactment of any 
legislation on this subject.
    Those cases involve guaranteed First Amendment rights of 
citizens to do the following:
     voluntarily associate with other like-minded 
persons in private organizations without having to disclose 
that association to the government
     anonymously disseminate their views on political 
issues, including issues at election time
     know in advance what speech is going to be subject 
to government regulation and which speech is not subject to 
government regulation

 The right to voluntarily associate with other like-minded persons in 
 private organizations without having to disclose that association to 
                            the government.

    In NAACP v Alabama, 78 S.Ct. 1163 (1958), the Supreme Court 
invalidated an effort by the State of Alabama to requiring a 
non-profit organizations to turn over documents, records, bank 
account and other organizational information, including its 
membership lists to the government, saying:

        ``Effective advocacy of both public and private points of view, 
        particularly controversial ones, is undeniably enhanced by 
        group association, as this Court has more than once recognized 
        by remarking upon the close nexus between the freedoms of 
        speech and assembly''. . .it is immaterial whether the beliefs 
        sought to be advanced by association pertain to political, 
        economic, religious or cultural matters, and state action which 
        may have the effect of curtailing the freedom to associate is 
        subject to the closest scrutiny.
        ``It is hardly a novel perception that compelled disclosure of 
        affiliation with groups engaged in advocacy may constitute a(n) 
        effective restraint on freedom of association . . . the Court 
        has recognized the vital relationship between freedom to 
        associate and privacy in one's associations. . .Compelled 
        disclosure of membership in an organization engaged in advocacy 
        of particular beliefs is of the same order. Inviolability of 
        privacy in group association may in many circumstances be 
        indispensable to preservation of freedom of association, 
        particularly where a group espouses dissident beliefs. 
        (citations omitted)'' 78 S. Ct. @ 1171-1172

    The right to anonymously disseminate views on political issues, 
                   including issues at election time

    In McIntyre v. Ohio Elections Commission, 514 U.S. 334 
(1995), the Supreme Court invalidated an Ohio election 
regulation which banned anonymous campaign literature, saying:

        ``Under our Constitution, anonymous pamphleteering is not a 
        pernicious, fraudulent practice, but an honorable tradition of 
        advocacy and of dissent. Anonymity is a shield from the tyranny 
        of the majority. It thus exemplifies the purpose behind the 
        Bill of Rights, and of the First Amendment in particular: to 
        protect unpopular individuals from retaliation--and their ideas 
        from suppression--at the hand of an intolerant society. The 
        right to remain anonymous may be abused when it shields 
        fraudulent conduct. But political speech by its nature will 
        sometimes have unpalatable consequences, and, in general, our 
        society accords greater weight to the value of free speech than 
        to the dangers of its misuse.'' 514 U.S. @ ________.

  The right to know in advance what speech is going to be subject to 
  government regulation and which speech is not subject to government 
                              regulation.

    There is an ongoing, simmering outrage among many in this 
city that the Supreme Court in Buckley v. Valeo, 424 U.S. 1 
(1976), decided twenty-five years ago that Congress cannot 
regulate all forms of political speech. But it did. The Supreme 
Court specifically upheld the right of citizens to engage in 
issue speech that is NOT subject to government disclosure, 
interference or limitation. Further, the Supreme Court defined 
exactly what speech is subject to government regulation: that 
is, speech which expressly advocates the election or defeat of 
a clearly identified federal candidate. Period. And that is at 
the root of today's hearing--the fact that many, many in this 
town want to overturn or circumvent the Court's decision in 
Buckley. Was it an unintended consequence that issue advocacy 
and express advocacy speech are nearly indistinguishable? No. 
It was acknowledged specifically by the Supreme Court:

        ``(T)he distinction between discussion of issues and candidates 
        and advocacy of election or defeat of candidates may often 
        dissolve in practical application. Candidates, especially 
        incumbents, are intimately tied to public issues involving 
        legislative proposals and governmental actions. Not only do 
        candidates campaign on the basis of their positions on various 
        public issues, but campaigns themselves generate issues of 
        public interest. Citing Thomas v. Collins, 323 U.S. 516 (1945), 
        this Court observed:
        ``[W]hether words intended and designed to fall short of 
        invitation would miss that mark is a question both of intent 
        and of effect. No speaker, in such circumstances, safely could 
        assume that anything he might say upon the general subject 
        would not be understood by some as an invitation. In short, the 
        supposedly clear-cut distinction between discussion, laudation, 
        general advocacy, and solicitation puts the speaker in these 
        circumstances wholly at the mercy of the varied understanding 
        of his hearers and consequently of whatever inference may be 
        drawn as to his intent and meaning.
        ``Such a distinction offers no security for free discussion. In 
        these conditions it blankets with uncertainty whatever may be 
        said. It compels the speaker to hedge and trim.'' (citations 
        omitted) Buckley, 424 at 43.

    Please. Remember the Constitution.
    Don't be stampeded into enacting something that is ill-
advised and which violates the citizens' rights to associate 
and to engage in political speech without disclosure and 
regulation by the government.
    Thank you for the opportunity to appear before this 
Committee. I will be happy to answer any questions the 
Committee may have.

                       Chart #1:--Table of Tax Exempt Entities and Permissible Activities
----------------------------------------------------------------------------------------------------------------
                                                                                              FEC regulation of
     IRS code section        Types of entities      IRS permissible       IRS prohibited          political
                                                      activities            activities            activities
----------------------------------------------------------------------------------------------------------------
Sec.  501c3..............  Charities,            Charity, public       Lobbying as a         IRS regulations
                            educational           education, limited    substantial portion   govern c3's
                            institutions and      grassroots lobbying.  of activities is      political
                            foundations.                                prohibited;           activities
                                                                        Campaign activities
                                                                        prohibited: loss of
                                                                        tax status & tax
                                                                        penalties.
Sec.  501c4..............  Social welfare;       Public education on   Direct partisan       Must establish PAC
                            grassroots and        policy issues;        political             for direct
                            other lobbying and/   direct lobbying;      campaigning is        candidate
                            or issue membership   member mobilization   prohibited, except    contributions or
                            organizations.        for grassroots        to members only;.     express advocacy
                                                  lobbying & campaign                         to public;
                                                  purposes.                                  Member mobilization
                                                                                              permitted under
                                                                                              FECA
Sec.  501c5..............  Labor unions,         Collective            Must establish PAC
                            horticultural &       bargaining; public    for direct
                            agricultural          policy organizing;    candidate
                            organizations.        direct and            contributions or
                                                  grassroots            express advocacy to
                                                  lobbying; member      public;.
                                                  mobilization for     Member mobilization
                                                  grassroots lobbying   permitted under
                                                  & campaign purposes   FECA.
                                                  Lobbying expenses
                                                  not tax deductible.
Sec.  501c6..............  Business leagues,     Benefits to members   Must establish PAC
                            trade associations,   engaged in similar    for direct
                            chambers of           business              candidate
                            commerce, etc..       enterprises; public   contributions or
                                                  policy organizing;    express advocacy to
                                                  direct and            public;.
                                                  grassroots           Member mobilization
                                                  lobbying; member      permitted under
                                                  mobilization for      FECA.
                                                  grassroots lobbying
                                                  & campaign purposes
                                                  Lobbying expenses
                                                  not tax deductible.
Sec.  527................  Political Committees  Political candidate   IRS defines `exempt   If committee
                                                  committees; party     purpose               expressly
                                                  committees; issue,    activities': may      advocates election
                                                  voter education and   only engage in        or defeat of
                                                  advocacy committees.  exempt purpose        clearly identified
                                                                        activities; must      federal candidate,
                                                                        pay taxes if spent    & party committees
                                                                        for non-exempt        subject to FECA;
                                                                        purposes.             state laws apply
                                                                                              to state political
                                                                                              committees
----------------------------------------------------------------------------------------------------------------
Source: Sullivan & Mitchell P.L.L.C.


                             Chart #2:--AFL-CIO Political Expenditures 1995-Present
----------------------------------------------------------------------------------------------------------------
                                                                                                   Amount not
                                                   Amount spent for    Amount reported to FEC   reported to FEC;
     Election cycle          Amount claimed 1         issue ads 2                3                not spent on
                                                                                                   issue ads
----------------------------------------------------------------------------------------------------------------
1995-96................  $ 38 million...........  $15 million.......  $ 2 million............  $13 million
1997-98................  $ 28 million...........  $ 5 million.......  $ 2.5 million..........  $ 20.5 million
1999-2000..............  $ 46 million...........  $10 million (4)...  $ 900,000 (thru 3/31/    $35.1 million
                                                                       00).
----------------------------------------------------------------------------------------------------------------
1 National Journal, September 4, 1999, ``Labor's Political Muscle,'' by Kirk Victor and Eliza Newlin Carney,
  quoting AFL-CIO officials
2 ibid
3 Federal Election Commission, Communication Cost Index Reports for 1995-96, 1997-98, and 1999-2000 through
  March 31,2000.
4 Estimates based on `ratio' noted in Washington Post, February 18, 1999 ``AFL-CIO Plots a Push for Democratic
  House; Union Allots $46 Million for 2-Year Effort,'' by Frank Swboda.

      

                                


    Mr. Portman. Professor Troy.

    STATEMENT OF LEO TROY, PROFESSOR OF ECONOMICS, RUTGERS 
                 UNIVERSITY, NEWARK, NEW JERSEY

    Mr. Troy. Thank you. I appreciate the invitation. The 
remarks I will make are my own.
    I begin with the premise that unions are unions, and 
unions' campaign contributions. Unions are not only tax exempt, 
but they are the beneficiaries of very important public 
policies both in the private sector and in the public sector. I 
ask four questions.
    To begin with, do unions fulfill their obligation of full 
disclosure not only to the public of whom they owe these 
benefits, but also their members? So I ask, to follow up on 
that, what is the extent of unions' political contributions? 
From the Federal Election Commission, we know they gave in the 
1995-96 presidential cycle $100 million, but that is only the 
tip of the iceberg. I have estimated, using what I call a 
political multiplier--it is a derivative of what Lord Keynes 
came up with in 1935 in trying to explain the movement of the 
economy that a new investment of, say, $1 will multiply the 
amount--will multiply the amount of the increase in the gross 
domestic product.
    Well, I use that analogy here. If the unions have spent 
$100 million through their political action Committees in 1995-
96, I estimated, through use of this political multiplier, that 
the value of their in-kind contributions, which are not 
addressed by anything I have heard here today--nor can they be, 
frankly.
    I think it is self-defeating to think--apropos of some of 
the questions that Mr. Portman asked before about ``gray 
areas,'' there is just no solution to these gray areas, that 
this $300 million might sound like an outlandish figure until 
we consider what are the unions' resources.
    Their income is about 14 billion. I want to make that 
number clear, 14 billion. In a 1995 estimate of their assets--
that 14 billion is roughly a current value; in 1995 they had 
about 10 billion in assets.
    What do I mean by these in-kind contributions? There are 
three basic categories:
    One, services provided either by union members free of 
charge to anyone, employees of unions--and we don't know how 
many employees unions we have in this country. It would be 
fruitless to call the Labor Department; they don't know either. 
But there are 47,000 unions in this country, most of them local 
unions, about 45,000 local unions, a couple thousand 
intermediate bodies and under a hundred international 
organizations. They have 16 million members.
    The in-kind contribution that comes from labor services, 
there is no way of evaluating. In fact, none of these in-kind 
contributions can be evaluated. We have to think of them from 
the standpoint of economics, which is, what is the alternative 
cost? What would it cost the beneficiary of all these 
activities? And I don't see any of the Democrats here, but it 
is the Democratic Party. The media which the unions have--that 
is, periodicals, newspapers which are sent out every month to 
over 16 million members is a one-party press.
    Now, we have to ask the question, does the union 
leadership, what I call ``the management,'' actually represent 
the will of the members. They say they do surveys and they are 
acting on those surveys. I have waited a long time to see the 
results; I want to call again for it today.
    We have media still left in the room I believe. Why don't 
they ask the leading unions of this country, not just the AFL-
CIO, who don't conduct those surveys, but affiliated unions, 
international unions like the Teamsters, how they conduct their 
surveys? Show us how you do it. What are your methods? When do 
you do it? What are the results? I have never seen any 
disclosure of that either.
    The question then becomes, can unions sustain that level of 
in-kind contribution, which I have been arguing they do; and I 
return to the point that the financial assets, the financial 
income that they have enables them to do so.
    I want to turn finally to another question and follow up 
with a conclusion. Does the Labor Department's reporting firms, 
which superseded the 990, I believe, for unions, are they 
worth--are they valuable to learn what we are talking about; 
and the answer is clearly, in a word or less, no.
    And I want to indicate how fruitless they can be. For 
example, the Household International Corp. signed an agreement 
with the AFL-CIO in 1995 in exchange for the right to print an 
AFL-CIO emblazoned credit card to be distributeed to their 
members or made available to their members. They gave the AFL-
CIO 375 million over the last 5 years. That is reported on the 
LM-two form, the reporting form at the Labor Department. It 
does not tell us where those funds were expended.
    In conclusion, let me say this. I have no confidence, with 
all due respect to this Committee, with all due respect to the 
eminent Senators we heard here today, that any new legislation 
can deal with this in-kind contribution. I am advocating free 
markets in our political life. Free markets have served us well 
in the economy. We are the envy of the world for it, and we are 
now living in a new age of Adam Smith in terms of economics; 
and I think it is time to turn to that viewpoint in the 
political market. Thank you.
    Mr. Portman. Thank you, Mr. Troy.
    [The statement of Mr. Troy follows:]

Statement of Leo Troy, Professor of Economics, Rutgers University, 
Newark, New Jersey

1. Personal Information.

    I appear here on my own behalf; my views are not those of 
my University nor of any other organization, nor have received 
any fees or grants from any organization in connection with 
this appearance.\1\
---------------------------------------------------------------------------
    \1\ For nearly one-half century I have focused my research on 
unions, collective bargaining and labor markets. The results of my work 
have been published in all the major journals of industrial relations 
and by the National Bureau of Economic Research. These have dealt with 
major aspects of unionism including union finance, union philosophies 
and the differences between public and private sector labor in the U.S. 
and Canada. I pioneered the study of union finance, union philosophies, 
the distinction between public and private labor organization, and the 
development of union statistics by state and region. My statistical 
data have been republished by the U.S. Bureau of the Census. I have 
also written several books on these matters, the most recent (in 1999) 
is Beyond Unions and Collective Bargaining, published by M.E. Sharpe. 
My next book is titled, Twilight for Unions. Newspapers including the 
Wall Street Journal, have published my op ed articles, and in November 
1999, Forbes Magazine did a feature article on me and my work. A Lexis-
Nexis search reports more than 500 'hits' reflecting the number of 
times I have been contacted and interviewed by the news media across 
the country. In addition, I have appeared on television and have done 
numerous radio interviews. I have also testified before Congressman 
Thomas' House Committee on Oversight in 1996. A year later I also 
testified before Senator Thompson's Senate Committee on Campaign 
Finance Reform. In April 2000, I testified before the Senate Committee 
on Rules and Administration.

2. Unions' Political Contributions and Endorsement in 
Presidential Election Cycle Years.
    Unions' cash political contributions, which are reported to 
the Federal Elections Commission, will be dealt with here as 
they help determine the larger and almost universally ignored 
unions' in kind political contributions. By in kind 
contributions, I mean any services and publications paid for by 
unions or provided by volunteer labor services on behalf of 
political candidates and a political party. Virtually all of 
these are expended on behalf of candidates of the Democratic 
Party. The most valuable of these contributions are the union 
press, labor services, and the structure of the union movement 
itself.\2\ For the presidential cycle year 1995-96, I estimated 
the value of unions' in kind contributions at $300 million. 
(Refer to Sec.  3 on my method of calculating the value of in 
kind contributions). Their cash contributions reported to the 
FEC in that cycle were about $100 million, bringing the total 
to $400 million.
---------------------------------------------------------------------------
    \2\ Examples of in kind contributions are labor services to promote 
the election of candidates; the services of union members who volunteer 
their time for campaign activities; union officials and staff who spend 
time on campaign activities and organize volunteers, whether or not 
they receive their regular pay; provision of data and telephone banks 
on voters; registering voters, voter tracking and polling; getting out 
the vote, including services to transport voters to the polls; 
subsidizing delegates or alternates to national political conventions; 
exchanging research and strategy decisions with the Democratic Party; 
direct mail to members in comparing candidates' voting profiles, which 
almost universally caricature Republican candidates, and providing 
platforms for public personalities sympathetic to the Democratic Party 
to make speeches endorsing Democrats. Valuable services which unions 
provide the Democratic Party are political operatives whose salaries 
are paid by the unions. The two teachers' unions, the National 
Education Association and the American Federation of Teachers are 
reported to field more political operatives than the combined number of 
the Republican and Democrat parties. (Myron Lieberman in a 
communication to me, April 2000). This is particularly significant 
because these are professional operatives and activists, not volunteers 
who may be amateurs.
---------------------------------------------------------------------------
    The in kind contributions are made possible by unions' 
financial power. They receive a total income of about $14 
billion and hold assets in excess of $10 billion. (Masters and 
Atkin, Table 1, Industrial Relations, Oct. 1997, p. 494, and 
data unreported to the Labor Department).\3\
---------------------------------------------------------------------------
    \3\ Masters and Atkins' figures understate the totals because most 
public unions are not required to file financial reports with the Labor 
Department and, therefore, their figures, which are calculated from the 
Labor Department's data, necessarily understate the total. Thus, the 
state units of the National Education Association and the American 
Federation of Teachers (AFT), which do not report to the Labor 
Department, receive a combined income in excess of $700 million, and 
their locals account for more than $300 million in this time period. 
(Lieberman and Haar in a fax to the author). Taking these into account, 
the total income of the union movement is close to $14 billion. Figures 
of unreported assets are not available, but obviously unions as a whole 
have more than the $10 billion in assets calculated for 1995 by Masters 
and Atkin.
---------------------------------------------------------------------------
    The financial ability of unions to implement their in kind 
contributions is enhanced by the structure of the union 
movement. Contrary to popular and media notions, the union 
movement is not the AFL-CIO on 16th Street in Washington, D.C.; 
the Federation is the tip of the iceberg. The union movement 
consists of about 45 thousand local unions, some 2 thousand or 
so intermediate bodies distributed across the country, and 
under 100 large national and international headquarter bodies, 
many of which are located in the District. Unions' total income 
is nearly evenly divided among the 45 thousand local unions and 
their parent bodies. Locals control about 47 percent of unions' 
total revenue and assets, while the parent unions' share 
account for 40 percent of revenue and 42 percent of assets; 
intermediate organizations account for the balance. (All 
financial figures are for 1995. Masters and Atkin, Table 1, 
Industrial Relations, Oct. 1997, p. 494.). Hence, it is clear 
that unions' power to generate in kind contributions, which are 
beyond any financial accounting, is widely spread across the 
country and therefore in a position to benefit the Democratic 
Party at all political levels.
    One of the most valuable in kind services provided by 
unions to the Democrats are the unions' publications. These are 
mailed out to over 16 million members of unions implying a 
minimum household audience exceeding 30 million potential 
consumers of the unions' political point of view. These 
publications go out monthly. Thereby, they become a constant 
and repetitive advocate of the leadership's political views and 
these are uniformly in favor of the Democratic party. Most of 
the publications are issued by the national and international 
unions (parent organizations), but by many local and 
intermediate unions also publish and distribute their own 
publications In addition, many unions maintain websites to 
transmit the official union line.
    The union media is so biased in favor of the Democratic 
Party that it is no exaggeration to characterize the union 
media as a one-party press. The membership funds the union 
media from its dues and agency shop fees, but these are not the 
measure of their in-kind value. All in kind contributions must 
be construed in terms of what it would cost the Democratic 
Party to pay for this media.
    Parenthetically, because the monies actually paying for the 
union media are collected almost entirely under compelled 
arrangements, the union or agency shop and the check-off, 
members and those represented by the unions are compelled to 
pay for political programs and candidates which they may not 
support, and in very many instances do not endorse. The 
managers, that is, the leadership, of unions contend that the 
political views expressed in the organizations media reflect 
the attitudes of a majority of its members, based on membership 
surveys. If this is so, why aren't the surveys' results, 
timing, methods including sampling techniques and margins of 
error and costs publicly disclosed? To date, I am unaware of 
any such disclosure. Most important, if these surveys are do 
represent the members' political views, why do individual 
members contribute so little to political campaigns? In fact, 
while organizationally the union movement contributed spent 
about $100 million in the last presidential cycle, appeals to 
individual members--of whom there are over 16 million--brought 
in a mere 2 cents per member, a grand total of $243 thousand. 
(Masters and Jones, Journal of Labor Research, 1998, Table 4). 
The minuscule voluntary cash political contribution of union 
members suggests that the claim of union management that they 
have the endorsement of members for their political 
endorsements is more rhetoric than reality.\4\ Most important, 
this fact provides the strongest argument for the enactment of 
paycheck protection and full disclosure of what unions do with 
members' monies. Union managements' disregard, if not contempt 
for the views of substantial proportions of their membership, 
is especially egregious given that Ronald Reagan probably 
received a majority of private sector union members' votes in 
1984, and close to that in 1980. To a very great extent, the 
term `blue collar' Democrat of that era really meant and means 
to this day, blue collar unionists in the private economy. In 
1996, Bob Dole won about one-third of all union households 
(meaning private and public combined), implying that perhaps 40 
percent or more of the private sector workers probably voted 
for him. Although public sector unionists vote more for 
Democrats than private sector unionists, a poll of the 
membership of the National Education Association (NEA), the 
largest union in America, with a membership of 2.4 million, 
reported about 30 per cent of its members regarded themselves 
as Republicans and another 30 per cent considered themselves to 
be independents. If so, this means that a minority is committed 
Democrats, but the NEA's leadership devotes nearly all its 
resources from compelled dues and fees to supporting Democrats.
---------------------------------------------------------------------------
    \4\ The counter argument that individuals with business related 
jobs contribute amounts far greater than union members, as FEC figures 
show, is a red herring: It compares different and higher paying 
professional and managerial occupations with occupational categories 
much lower in the wage structure. Even so, given the high wages of many 
union members, and the fact that they are paid more than comparable 
nonunion workers, and that there are over 16 million members, would one 
dollar per member be too much for political causes their leaders claim 
the members endorse?
---------------------------------------------------------------------------
    The counter argument to the compelled union members' 
payments to support causes and candidates they oppose is that 
corporations also make political contributions which some 
shareholders may oppose. However, this comparison is invalid: 
Any shareholder, who objects to company policies of any kind, 
can sell his (her) shares at any time. And they have done so 
frequently as demonstrated by actions taken to show disapproval 
of apartheid, environmental practices and health (tobacco) and 
safety practices of the corporation. In contrast, a worker 
covered by a union shop agreement is compelled to resign his 
(her) membership to seek reimbursement of that share of dues 
which the union spent for political purposes. This is a high 
price to pay for a union member. It is a high price because it 
must take into account those union benefits financed out of 
dues (many of the old line AFL skilled unions continue to have 
these benefits) which would then be forfeited or denied. The 
price must also take into account that the same union and its 
officers will continue to represent the objector in grievance 
bargaining and bargaining in general, and though nominally 
required to do so fairly, one must reckon with the world as is, 
not as thought to be. Moreover, the objector runs the risk of 
the disapproval of fellow workers for opting out and being 
``sent to Coventry.'' To be sent to Coventry can be more than 
ostracism; it is often also means threats, intimidation and 
harassment. In contrast, the shareholder may even make a wise 
investment change, so it is evident that equating the union 
member working under a union shop and a shareholder who object 
to what their respective institutions are doing politically is 
not comparable.

3. How I Determine the Value of In Kind Political 
Contributions.

    Calculating the value of each in kind contribution in an 
accounting sense is not possible because we do not know the 
universe and because each must be valued in terms of what it 
would cost the beneficiary, the Democratic party, in cash. 
Where labor services are involved, the detailed figures on the 
number of personnel and their earnings are not available. 
Moreover, expenditures are so classified by the Labor 
Department's reporting forms that they often conceal the true 
purposes of unions' expenditures. The Labor Department's 
financial forms which unions must file are useless for 
measuring political spending because of the nature of the 
financial categories. If corporations used comparable forms in 
their financial reports, stock exchanges would not list them 
and the IRS would reject their tax reports. Even if the Labor 
Department forms were amended in an effort to elicit the 
relevant political information, unions would obfuscate the true 
purpose of these expenditures in a labyrinth of categories. 
Moreover, there are no comprehensive figures available as to 
how many employees unions have, how many are detailed for 
political work, how many union members volunteer to do provide 
political activity and what should be the earnings they forego 
in volunteering. One insight into the extent of potential union 
member involvement in political activity are the contracts of 
the Auto Workers with the Big Three auto makers and Delphi, the 
parts maker, which give the members a paid day off on election 
day. The number of workers covered by these agreements is about 
400 thousand. While not all will spend the day working on 
behalf of the Democrats, the union leadership will expect a 
large number to do so. What is the value of this in kind labor 
service to the Democrats? Indeed, there really is a double 
value here: Because the members are being paid by their 
employers, it really constitutes their wage payments are a soft 
money contribution to the Democratic party. Finally, it should 
be noted that unions regularly assert that 'thousands' of 
members and union officials are active politically.
    The unions' in kind contributions demonstrate how public 
policy went off course. Public policy--the National Labor 
Relations Act--intended to encourage unions and collective 
bargaining. Building on that policy, unions' have increasingly 
shifted from their historic trade union function to a political 
function. Meantime, as it makes the switch, the union 
bureaucracy discloses little to the public which underwrote 
labor law or to the members whom it is supposed to serve on the 
extent of their political activity.
    Given that a direct accounting method of calculating the 
value of unions' in kind contributions is not possible, I rely 
upon an economic principle to arrive at an estimate. The key to 
valuing the unions' in kind contributions is my concept of the 
political multiplier. It is the analogue of the Keynesian 
investment multiplier in economic theory, a concept which has 
been established for more than six decades. Conceptually, the 
political multiplier postulates that a cash political 
contribution will generate a multiple dollar value of in kind 
political contributions. The cash expenditures used in this 
analysis are the Federal Elections Commission's reports that in 
1995-96, unions' PAC disbursements totaled $100 million. (The 
actual figure was $99,769,350). The political multiplier, 
estimated to be 3, therefore probably produced in kind 
additional contributions worth $300 million. Hence, in the 
1995-96 presidential cycle, the total value of unions' 
political contributions--nearly all of which went to 
Democrats--was worth $400 million!

        The multiplier, a number without units, is derived as follows:
        1/1--mpc

    Here, the acronym, mpc, means the unions' marginal 
propensity to consume (demand) additional political services of 
the Democratic Party which is associated with the unions' cash 
expenditures for political purposes. Put another way, the 
unions' mpc for Democrat political services asks, what 
proportion of each additional dollar of the unions' additional 
income will the unions spend on in kind political services? 
Assuming, the midpoint between 1 (all additional income) or 
zero, no additional income will be spent on in kind services, 
one-half (.5) of each additional dollar of income would be 
spent on in kind political purposes. The multiplier would then 
be 2. [ 1/(1-.5) = 2], and therefore that unions' in kind 
political contributions would equal $200 million in the 
presidential cycle of 1995-96. Together with their cash 
contributions of $100 million, this would bring the total to 
$300 million.
    However, based on experience in the Beck (private sector; 
(CWA v. Beck 487 US 935, 1988) and the Abood (public sector; 
Abood v. The Detroit Board of Education 431 U.S. 209, 1977) 
cases, a political multiplier of one-half is clearly too small. 
Judicial decisions concluded in the Beck case that unions spent 
less than 20% of their income on collective bargaining and 
related purposes, and even less in the Abood case. The 
remainder, the bulk of unions' income was allocated to other 
purposes, including political expenditures. The exact share 
going to political purposes is not known. However, given the 
often stated and forceful intention of the unions' management 
to implement their political objectives, and the range of 
possibilities opened up by the Beck and Abood cases, it is 
reasonable to estimate that the unions' political multiplier 
would be larger than 2. I estimate it to be 3. This means that 
the unions' marginal propensity to demand (spend) about two-
thirds of each dollar of additional income, or .67, for 
political purposes. [1/(1-.67) = 3]. Therefore, the unions' in 
kind political contribution had an estimated value of $300 
million in 1995-96. Since total unions cash expenditures are 
likely to be no less than in the previous presidential cycle 
year, the political multiplier should be about the same, or 
perhaps slightly larger during the current cycle.
    To critics who challenge my estimate of the unions' 
political multiplier, I call attention to additional millions 
of dollars in unions' cash contributions which I could 
justifiably have included in the base (the multiplicand) which 
is multiplied to derive the in kind total. Thus, in the 1995-96 
election cycle year, unions spent $50 million on categories of 
political expenditures other than PAC spending. (Masters and 
Jones, Table 4, Journal of Labor Research, 1999, vol. XX, No. 
3, p. 311). Beyond these funds is the remarkable 1995 financial 
arrangement between the AFL-CIO and Household International: In 
exchange for the right to issue an AFL-CIO emblazoned credit 
card, Household agreed to pay the Federation $75 million a year 
for 5 years for a total of $375 million. Should annual $50 
million be added to the unions' political spending and thereby 
enlarge the value of their in kind contributions? To date, I am 
unaware of any public accounting of those funds--to what 
purposes they were put, and most importantly the apparent 
absence of any accounting to the public and to the members 
using the credit cards responsible for generating these 
payments to the AFL-CIO. The fact that a listing of the receipt 
from Household is reported by the AFL-CIO to the Labor 
Department hardly meets the goal of full disclosure: where did 
the money go?

                              Conclusions

    In my judgment, there are numerous ethical and political 
problems with existing campaign finance legislation and policy. 
My recommendation, which I have consistently held, and 
presented in the past to the aforementioned Congressional 
Committees, is that contributions should be unrestricted for 
any domestic institution providing there is full and timely 
disclosure of the identity of the donor, the amounts 
contributed, and for which campaigns the contributions are 
made. This applies to both cash and in kind contributions. The 
most important reason for abandoning regulation of campaign 
finance is that the new regulation will surely fail just as it 
has in the past. Shrewd attorneys and clever judges will make 
Swiss cheese of any new legislation to regulate campaign 
finance. Finally, one may ask, are campaign finance matters the 
root of the perceived ills of the American political system? 
Free markets, albeit imperfect, have served this country's 
economy and society well. Why shouldn't they in the political 
market? To paraphrase Winston Churchill's comment on democracy, 
that democracy is the worst form of government--except for all 
the rest! Likewise, a free political market would be the worst 
form of raising contributions--except for all the rest, current 
and proposed.
    Finally, irrespective of a whether there will be a free 
market in political giving, public policy should require full 
and timely disclosure to the public and to union members, in 
this particular instance, of the identity of the donor, the 
amounts contributed, for which campaigns, and must be 
applicable to both cash and in kind contributions.

                                Appendix

    Major Democratic party services sought by the unions and referred 
to in the text are as follows: Restrictions on trade agreements, 
including extending most favored nation status with China; new labor 
law; minimum wage legislation, defeat of paycheck protection 
legislation; defeat of vouchers in education.
    On these issues, just as on political expenditures the unions' 
managements often impose their own views despite the clash of interests 
between them and the membership and within the membership itself. The 
most notable is paycheck protection. Enactment of legislation which 
would require unions to obtain the signature of members before spending 
monies for political purposes would severely reduce the unions' 
management political power. Given the minuscule amount individual 
members voluntarily contribute is the strongest argument in favor of 
the legislation.
    Another important union demand for Democratic Party services are 
restrictions on trade. The union leadership's demand that environmental 
and labor standards be included in trade agreements is actually 
intended to slow if not halt the importation of certain goods. These 
demands pretend that there are no such standards, when actually the 
International Labor Office has addressed them for years and the U.S. 
government is a signatory to these agreements. Moreover, as official 
members of the American delegation to the ILO, union representatives 
regularly participated in determining these standards.
    The leadership's demand for separate American standards makes them 
the 21st century version of the Luddites. Adoption of these rules might 
benefit some private sector organized workers, but a far larger group 
of private sector workers organized and nonunion (who are 90 per cent 
of the labor market) would lose jobs, especially in the export 
industries. Needless to say, it will cost all consumers, reduce their 
standards of living, and reduce the output of the economy.
    The position of the leaders of public sector unions on trade 
restrictions is even less defensible: The output of their members does 
not enter into the trade accounts, so they have no stake in 
protectionism. On the contrary, they have a stake in free trade. Trade 
restrictions will reduce their members living standards because they 
are also consumers. Similarly, this applies to the public sector 
members of private unions, a class of unions I have identified as the 
joint union. A particular case in point is the Service Employees 
International Union, the union once headed by John J. Sweeney, 
president of the AFL-CIO. About 75 per cent of its members are in the 
public sector, so their standards of living would be damaged by 
Sweeney's championing trade restrictions. If the U.S. has learned 
anything in the last two decades is the value of competition in 
furnishing goods and services, in this, the New Age of Adam Smith.
    Another important example of the Democratic Party services which 
the teachers' unions in particularly wish to obtain is the rejection of 
educational vouchers. The power of the teachers' unions is rooted in 
their monopoly control of public education; vouchers are a competitive 
challenge to that monopoly. By acquiring the Democrat Party's 
opposition to vouchers, the teachers' unions can maintain the status 
quo. So, like their confreres in the private sector, they, too, 
practice a 21st century version of Luddism.
    Organized labor's partnership with the Democrat Party will lurch 
further to the Left as the new century unfolds. Because of the future 
demographics of unionism, the dominant force within the union movement 
will become the public sector unions. Atop this group are the teachers' 
unions, the NEA and the AFT, and they are much further to the Left than 
most other unions. I expect the two to merge in the near term creating 
the largest union in the world. As part of that merger, the NEA will 
affiliate with the AFL-CIO, and in due course, will supply the 
leadership of the Federation. That development will further cement the 
close political relationship between organized labor and the Democrat 
Party and their interdependence will inevitably shift the political 
orientation of both further to the Left.
      

                                


    Mr. Portman. I want to thank all the panelists. I want to 
apologize that more members aren't here. The reason is we have 
had votes; and because this hearing was originally scheduled 
from 2 to 4 and the press and public were notified of that, 
there was some concern that we keep it moving so that we were 
able to hear not only all your testimony but have an 
opportunity for questions. After this vote, which is occurring 
now, I would expect members will begin to come back and have an 
opportunity to ask you questions.
    I would like to get started with the questions so, if I 
might--and let me make the further point, Mr. Troy, that not 
only is the media here, you have got C-SPAN here. So your words 
are going out to hundreds of thousands if not a million or so 
Americans, and this is also very important information that we 
are having read into the record to create a record of this 
hearing which will be distributed to all the Members. So we are 
here in a very important undertaking, and your words are being 
taken seriously and will be a major part of the deliberations 
as we decide what to do with 527s and other political activity.
    If I could start, Mr. Makinson, with you and thank you for 
your good testimony and talk a little bit about what the Center 
for Responsive Politics does, you made the point at the end of 
your testimony that needs to be clarified, at least for my own 
purposes, about how, because 527s are unique, we need to deal 
with the 527 issue. After all, a foreign entity could actually 
be influencing U.S. elections through 527. And that certainly 
is a concern of mine and I think it is a concern of many of our 
colleagues.
    My question for you is really pretty simple. Is it possible 
for a foreign government or a foreign person to contribute to a 
section 501(c)(4)organization?
    Mr. Makinson. Frankly, I don't know the answer to that.
    Mr. Portman. The answer is yes.
    Mr. Makinson. It is possible certainly for them--.
    Mr. Portman. It is a rhetorical question, since I knew the 
answer. Any other panelists would like to--maybe Mr. Potter 
remembers this back in his days as chairman or member of the 
commission, but the answer is yes. I would just make the point, 
can a (c)(4) engage in political activity?
    Mr. Makinson. Sure.
    Mr. Portman. Yes. Can a (c)(4) lobby me?
    Mr. Makinson. Sure.
    Mr. Portman. Can a (c)(4) lobby Congress?
    Mr. Makinson. That is what they are for.
    Mr. Portman. As long as it is not a substantial--51 percent 
of its activities; is that correct? Would a (c)(4) have to 
identify such a foreign contributor to the general public?
    Mr. Makinson. Only to the IRS if it was more than the 
amount. The answer is, no, they would not.
    Mr. Portman. The answer is, no, they would not.
    What if that person donated a million dollars?
    Mr. Makinson. The IRS would know. The public would not.
    Mr. Portman. The public would not know.
    I only make the point that there are other types of tax-
exempt organizations that can include elections today legally 
and keep their contributors anonymous. To say that somehow it 
is a unique problem with 527s I think misses the larger 
question. Maybe we cannot grapple with all these issues in this 
Congress, but I certainly hope we take our best shot at it.
    I will have to leave now and vote. If you all can remain 
for a moment. Again, other members will be coming back and are 
eager to ask you questions. We will only recess briefly and 
again apologize for this interruption and appreciate your 
patience. Thank you.
    [Recess.]
    Chairman Houghton. [Presiding.] Sorry about this. OK. Well, 
let's go ahead.
    Did everybody testify? OK. Let's have some questions here.
    Bill, have you got some questions? I have got some myself 
here.
    I guess the thing that I am most concerned with is the 
shifting, if we close off the 527s, that so much of the 
activity then can move over to the--on 501(c)4s, 5s, and 6s. So 
what we are trying to do is to make sure that we shine enough 
light on some of these activities and yet not be so invasive it 
really gets into the privacy issue. Maybe you have got some 
comments to make on that, any one of you.
    Ms. Mitchell. Mr. Chairman, I am Cleta Mitchell.
    In my testimony, one of the recommendations I would make to 
the Committee is that you do a couple of things that would 
require more disclosure but would not be too invasive and that 
is essentially requiring 527s to file 9nineties and work on--I 
have read in the reports from the staff and from the Treasury 
Department and others that the 990 provisions with regard to 
political expenditure reporting are aggregate, not--they are 
not very comprehensive. There is no reason that Congress 
couldn't work on that.
    They already are required to disclose their political 
expenditures. If Congress is not satisfied that those 
disclosures are sufficient, then that is an area to work on.
    The other thing I think is important is that another 
recommendation is that perhaps 527 Committees should not be for 
purposes other than related to candidates or political parties. 
That is what they started out to be. But part of this problem 
is the IRS decision several years ago to expand the definition 
of exempt purpose expenditures. That coupled with the decision 
of the IRS to deny tax-exempt status to a couple of Republican/
conservative groups--the Christian Coalition being the best 
example, as well as the National Policy Forum. I think the IRS 
has to take a little more expansive view for allowing for issue 
groups to be 501(c)4s and make the 527s candidate Committees as 
they originally were intended to be or political parties and 
make everybody file a 990 and work on the 990 disclosure 
provisions for political expenditures instead of creating a 
whole new raft of regulations in the IRS.
    Chairman Houghton. That is very helpful. Go ahead, but I 
have got a question I would like to ask you, Mr. Moramarco.
    Mr. Moramarco. The thing that the public is interested in, 
who are the major donors? The Supreme Court's concern was with 
corruption and the appearance of corruption; and if you get one 
piece of information from these organizations, it has to be who 
is contributing in amounts of 1,000, 5,000 amounts that people 
could consider corrupting so that when legislation comes up 
people will know, oh, that person may have been influenced here 
or not.
    Chairman Houghton. Let me talk about something that you 
mentioned, and that was the Snowe-Jeffords bill. You thought it 
was going in the right direction. I think it is going in the 
right direction. All of these things are going in the right 
direction. The question is, what is the extent?
    One of the things that I worried about is, if you are just 
talking about broadcasting, television or radio, in this modern 
day of campaigning, with all the ins and outs, I mean not only 
the newspapers and direct mail but the Internet and the web and 
everything like that, I would just--I feel it is just too 
narrow. How do you feel about that?
    Mr. Moramarco. I think you raise a good point. I think 
Snowe-Jeffords was crafted narrowly in order to try to get 
majority support in the Senate. I think it makes sense to look 
beyond to add things like direct mailing phone banks.
    If you do that, I would caution you to add a significant 
dollar threshold. You don't want to get to the point where you 
are capturing Mrs. McIntyre who is delivering pamphlets on a 
street corner. That the Supreme Court told us you can't do.
    If you want to start including things like phone banks and 
direct mail but you have a $25,000 threshold, $50,000 
threshold, something that allows the Court to sit back and say, 
OK, we are going after people who are major players in this, I 
think that makes sense. There is nothing magic about the three 
that Snowe-Jeffords picked.
    Chairman Houghton. Right. Yes?
    Mr. Potter. Mr. Chairman, I think in that regard there is 
another aspect of Snowe-Jeffords that is worth noting and that 
is to deal with some of the constitutional issues of compelled 
disclosure. Snowe-Jeffords sets up a mechanism whereby an 
organization can establish a separate account and fund its 
political advertising through that account and then only need 
disclose the donors to the account. I think particularly for 
non-527s that has some real validity because that way you are 
not requiring that every donor to the organization or every 
large donor has to be disclosed when they may have given to the 
(c)(4) for nonpolitical, non-advertising purposes. And so that 
is an area of Snowe-Jeffords that I would commend to the 
Committee's attention.
    Chairman Houghton. Mr. Coyne. Thank you.
    Mr. Coyne. Thank you, Mr. Chairman.
    It has been suggested by some people that we expand this 
beyond the Snowe-Jeffords and go to the 501(c)4, 5, and 6 and 
be included in the legislation as it relates to section 527. 
Does any of the panelists have any concerns about the 
constitutionality of doing that?
    Mr. Potter. It depends, I think, Mr. Coyne, on how you do 
that. There are clearly constitutional issues here that are 
more severe for (c)(4)s than they would be for a 527 because a 
527 exists for the purpose of election activity and the (c)(4) 
does not. Its principal purpose is otherwise. Thus, in my 
testimony when I talk about limiting the disclosure, I think 
the wider you are going to cast your net into (c)(4)s, 5s, and 
6s, the narrower you are going to want that disclosure to be.
    I would in particular urge the Committee that if you were 
going to require disclosure of any (c)(4) activity that you are 
going to have to use a definition that quite specifically and 
narrowly defines what that activity is. The 527 definition, 
which is political activity very much like the definition that 
the Court threw out in Buckley designed for the purpose of 
influencing a Federal election, that may work for 527s which, 
after all, are self-proclaimed political groups. That is what 
they have told the IRS they are there for, but I don't think it 
will work for (c)(4)s which have other purposes. So you are 
going to have to have a rather narrow definition as far as what 
has to be disclosed if you move toward disclosure in these 
groups.
    Mr. Coyne. Can I take that that no other panelists has any 
constitutional concerns about expanding it into those other 
areas?
    Ms. Mitchell. Do not let my silence on the subject in any 
way infer consent. Because I absolutely think there are serious 
constitutional implications which is why what I said in my oral 
testimony, what I have said in my written testimony--I think it 
is very important, two things: number one, that you have to 
identify what the problem is that you are trying to solve. I 
think that is the underlying problem here. And then whatever 
solution is designed is narrowly tailored to address that 
problem.
    What I think is going on here is that there is one stated 
problem but what really many are trying to accomplish is to 
create a whole new campaign finance regulatory apparatus within 
the IRS, and I find that very disturbing.
    The second thing I would say is there is not one person on 
any of these panels here today other than, I suppose, Mr. 
Potter and me--I don't know if you represent any, but I do--who 
represents 501(c)4s, 5s, and 6s. I don't represent any 5s, 
excuse me, because we represent--no unions have hired us let me 
say that.
    But I think that it is important to, first of all, know 
what it is you are proposing. I realize that everybody is 
trying to do this by Independence Day, which I think is utterly 
ironic, but it seems to me appropriate that Congress ought not 
to be stampeded into trampling on the first amendment rights of 
thousands and millions of Americans and that the first thing 
you ought to do is write a proposal and then circulate it, have 
time for people who are going to be affected by this, these 
hundreds of thousands of organizations.
    I counted 280,000 4s, 5s, and 6s listed in your staff's 
information. Couldn't you find one of them to come today? It 
seems to me that the people who are going to be impacted by 
whatever it is you are going to do are more important than to 
sit and listen to your colleagues telling you why this needs to 
be done so it can be on the evening news.
    I am very disturbed by this process, that you are not 
taking the time. This Committee thankfully is at least having a 
hearing, but this is not sufficient on this very important 
subject, and I would urge the Committee to slow down, give us a 
proposal, circulate it within the community that will be 
regulated which, ultimately, is all the citizens because they 
are the ones who join and pay dues to these organizations and 
let us have an opportunity for input.
    Chairman Houghton. Could I just interrupt? Lots of 
invitations were thrown out. Lots of information was out there. 
Very few people responded.
    Ms. Mitchell. Mr. Chairman, I will tell you--Mr. Chairman, 
I would like to--.
    Chairman Houghton. Would you like to--.
    Mr. Makinson. Thank you, Mr. Chairman.
    If there ever was a compelling argument why the Committee 
might want to narrow its scope on 527s, we just heard it. The 
last time that this issue came up that there was anything in 
Congress about regulating 501(c)4s, there was a rare agreement 
between the Christian Coalition, the Sierra Club and a whole 
other series of groups raising exactly those points. That is 
why I would take this opportunity, if I could, to once again 
draw the difference--it is 527s which are completely invisible, 
absolutely invisible, which don't have to be organizations at 
all and all the other organizations out there.
    If you look at ads produced by them, if the Teamsters or 
the Christian Coalition or the Sierra Club, which right now has 
issue ads on the air, puts their name on it, people know who 
they are. People don't know who Republicans for Clean Air or 
any of these other groups are, and there is--that is in a 
nutshell the difference between these groups and the others.
    I do think, Mr. Chairman, that it probably requires a bit 
more concentration by Congress on applying this disclosure 
required requirement to the other groups. I do think it is a 
good idea, frankly, but I do think those other groups are going 
to rise up if you expand it that way. If that happened, it 
could block passage of something before the 2000 elections, 
which I think would be a disaster, given the potential for 
527s.
    Chairman Houghton. Mr. Portman.
    Mr. Portman. Thank you.
    Chairman Houghton. I am sorry. Please go ahead.
    Mr. Moramarco. On the question of constitutional concerns, 
just speaking for myself, I think the 527s are absolutely 
clear. There really shouldn't be any constitutional problem 
with regulating 527s because of the way they self-define 
themselves. When you move beyond that, there are constitutional 
issues. I don't think anybody can give a guarantee about what 
the courts will or will not accept. It just hasn't been done 
yet.
    On the other hand, the reason I spoke in favor of Snowe-
Jeffords approach is because I think a lot of thought went into 
that approach, was recommended by a lot of thoughtful people in 
the Senate; and in my view that passes constitutional muster.
    Mr. Coyne. Thank you.
    Chairman Houghton. Thanks very much.
    Mr. Portman.
    Mr. Portman. Mr. Chairman, I won't take much time because I 
had the pleasure of hearing all the testimony and asking a 
couple of questions or one question of Mr. Makinson in your 
absence. Let me just make an observation.
    Mr. Makinson's point is basically that even though we ought 
to have disclosure that is consistent among nonprofits that do 
political activity, which would include the 501(c)4s which we 
talked about earlier that would permit foreign nationals, as we 
said, to contribute and not be disclosed, it is just too hard 
to do this year; and that is fine. Maybe that is the answer. 
But let's not create this sense that the only problem out there 
is this unique 527 group that only recently has become a matter 
of concern and make arguments as we did earlier that, gee, it 
is because foreign nationals can contribute to a 527 and 
therefore corrupt the political process, and that is why we 
need to get at 527s. I would just hope that we would keep this 
on an honest level, that there are a lot of problems out there.
    I appreciate your comment a moment ago that you would like 
to see disclosure in these other categories but you think this 
year, perhaps an election year, although you didn't say that--
I'll say that--it might be difficult to get our hands around 
the bigger issue, and Mr. Moramarco says a lot of work has gone 
into the other one, maybe not as much work into this--maybe. 
There is a lot of thought that has gone into this as well, and 
I know Mr. Houghton has put a lot of thought into it.
    I would hope before we throw in the towel and say, gee, we 
can't get at the bigger problem because it is not politically 
doable, let's talk about the right thing to do. I think the 
Center for Responsive Politics focuses on the right thing to do 
in their other work. I hope they will focus on it here.
    Ms. Mitchell has her views on what the right thing is to 
do. I know you all don't agree often not just on this issue but 
other issues with regard to political activity, disclosure, not 
just in the disclosure area but generally with regard to 
campaign finance. I would hope that we could at least keep this 
at a level that there are other problems.
    That is really the point I was trying to make earlier that 
has come out with regard to our other questions and our other 
witnesses that if, we really need to get beyond this problem, 
we need to get beyond the immediate sort of political hit of 
the day and whatever is the seemingly easy target right now and 
look at the broader issue and what is going to happen when we 
push down on one side, it is going to pop up somewhere else. 
And I think our lesson from the seventies has to be that it is 
never going to be perfect but that we need to look at the 
bigger picture as well.
    With that, I would yield back my time.
    Chairman Houghton. Thank you.
    Would you like to go, Lloyd? Please, you go ahead.
    Mr. Doggett. Ms. Mitchell, I believe that you are principal 
advisor for J.C. Watts' Citizens for a Republican Congress.
    Ms. Mitchell. J.C. Watts has nothing to do with that 
organization.
    Mr. Doggett. Are you principal advisor for--.
    Ms. Mitchell. I am legal counsel to Citizens for a 
Republican Congress.
    Mr. Doggett. And it is a 527?
    Ms. Mitchell. It is a 527 Committee, and let me say the 
reason why. Because after talking with the people who wanted to 
put that together, I advised them, based on the IRS rulings, 
that I did not think that they could qualify for a 501(c)4 
status even though they had no interest in being involved in 
any campaigns but because they wanted the name Republican in 
their name.
    Mr. Doggett. It still has as its goal raising $30 million 
for this election cycle?
    Ms. Mitchell. No. That was never true. That is what I am 
saying. This is legislation by headline.
    Mr. Doggett. What is its objective in terms of funds?
    Ms. Mitchell. Well, it had an objective to raise a lot of 
money. They just haven't been able to do that.
    Mr. Doggett. They couldn't get the $30 million?
    Ms. Mitchell. They really didn't--no, that is basically 
correct.
    Mr. Doggett. What other 527 organizations are you 
affiliated with?
    Ms. Mitchell. Affiliated with or represent as an attorney?
    Mr. Doggett. Either one.
    Ms. Mitchell. Our firm represents a number of candidate 
Committees. I am sure all of you are aware that your candidate 
Committees are section 527 Committees.
    Mr. Doggett. I am talking about the undisclosed non-
candidate Committees.
    Ms. Mitchell. Well, do you consider GOPAC an undisclosed 
non-candidate Committee?
    Mr. Doggett. Is that one of your--.
    Ms. Mitchell. That is one of our clients.
    Mr. Doggett. Are there any others?
    Ms. Mitchell. That is plenty.
    Mr. Doggett. Pardon?
    Ms. Mitchell. That is plenty.
    Mr. Doggett. Are there any others?
    Ms. Mitchell. There may be. I didn't bring my entire client 
list, but we represent a number of candidates, candidate 
Committees.
    Mr. Doggett. Can you name any of your other 527 clients 
that you represent that are involved in attempting to influence 
this election cycle?
    Ms. Mitchell. I represent some 527--we represent some 527 
Committees that are not involved in any way in the election 
cycle.
    Mr. Doggett. Do you represent any that are involved in the 
election cycle?
    Ms. Mitchell. No.
    Mr. Doggett. I gather that you disagree with Representative 
J.C. Watts' comment that he had no problem with full disclosure 
for 527s?
    Ms. Mitchell. I am not aware of what he said. I have a lot 
of problems with the fact that a number of Members of Congress 
have made statements on this subject that seem to me to be ill-
advised and uninformed, but that is not the first time that is 
going to happen.
    Mr. Doggett. I am sure it won't be the last.
    Ms. Mitchell. And, frankly, the fact of the matter is that 
is why citizens groups ought to be able to exist, to call you 
on it when you make those kind of dumb statements.
    Mr. Doggett. Thank you very much.
    Mr. Potter, I want to thank you for the leadership you have 
shown not only with reference to the issues we are discussing 
today but on campaign finance issues generally. I know that you 
mentioned that one of the areas that Buckley refers to and that 
has been an issue is the potential for campaign contributions 
to cause corruption; is that correct?
    Mr. Potter. That is right.
    Mr. Doggett. Isn't that potential for corruption greatly 
increased when the money can be taken without any disclosure as 
to when or how much or from whom it has been taken?
    Mr. Potter. The Court found that was the case when it 
upheld the requirement for disclosure of independent 
expenditures in the Buckley case.
    Mr. Doggett. From your experience on the FEC and as a 
lawyer and as someone involved in the political system, don't 
you find that to be true, that the potential for corruption of 
our political system without regard to any particular 
individual or political philosophy is significantly increased 
when the contributions in the old sense, I guess, of the bagman 
where the bag of money can come in without anyone knowing who 
it came from in the public, how much it is, and for whom it 
came?
    Mr. Potter. I think the Court was right that disclosure is 
important for those reasons.
    Mr. Doggett. Professor Hill, you heard my comments earlier 
on the panel with Senator McCain concerning the importance of 
effective date. If we do not in the effective date include 
those contributions that have been raised from secret sources 
throughout the year 2000, what do you think the effect of the 
legislation will be?
    Ms. Hill. I think the effect of the legislation would be to 
create what legal academics are fond of calling a moral hazard, 
which is to say an invitation to bad behavior given the last 
legally available moment. And, frankly, most private lawyers 
would feel compelled to advise their client if they still had a 
window to get it done fast. So retroactivity is not unknown by 
any means in tax measures and would not be I think particularly 
controversial, especially in view of the moral hazard of a 
prospective effective date for something like this.
    Mr. Doggett. Thank you and for your leadership on this 527 
issue.
    Mr. Makinson, I have been concerned that on the Senate 
side, unlike the bipartisan character of this hearing, those 
who advance the McConnell--I will get it right in a minute--the 
Senator from Kentucky and his colleagues who have advanced a 
proposal there seem to be the same group of people that took 
such pride in killing the McCain-Feingold broader campaign 
finance system. Is it your belief that if our choices are to 
load down this bill in a form that they will eventually be able 
to kill it over there or simply pass a 527 proposal along the 
lines that I have advanced and add on perhaps Snowe-Jeffords, 
that we would be better off doing the latter?
    Mr. Makinson. Mr. Doggett, that is a political question. 
And since we are a (c)(3), not a (c)(4), I haven't practiced in 
those sort of arguments.
    Mr. Doggett. I will take that as a fair answer, but maybe 
you can, within your tax-exempt status, maybe comment.
    Mr. Makinson. I will try. By far the most dangerous 
loophole we have this year are 527s, witness the rush to them 
because they give such unlimited flexibility.
    I might point out this is true of both the right and the 
left. The Sierra Club is doing this as well as groups on the 
right. And, frankly, the hallmark of people in the past on the 
Hill not wanting to change the laws has always been what we 
need is disclosure, so we are now beginning to hear for the 
first time what we have to be concerned about is privacy and 
that that somehow ranks higher than disclosure.
    I think that there is some legitimate questions about 
privacy that need to be addressed. But the real question here, 
and the question I think that Congress is justly dealing with, 
is, frankly, the question that the public is going to be asking 
this year more than ever, is who is paying for this election. 
If that answer can't be given, if there is one class of 
Committee that can put political ads on the air that doesn't 
have to answer that question, then the prospect that this whole 
Congress may face is that we can have an election on the 7th of 
November in which a lot of the public doesn't have faith in the 
results of the election because it may have been influenced at 
the last minute of the reality that we face with this loophole, 
particularly the loophole of the 527s, is negative ads the last 
week before the election coming in like a neutron bomb. They 
are coming out of nowhere, doing their damage and disappearing.
    We don't have any other means for affecting Federal 
elections that is quite as potent as these 527s. Therefore, I 
would say if you can narrowly address that most important 
problem and that biggest danger and then if you can get more 
beyond that, terrific, but don't fail to do something about 
527s before the elections or it may haunt us all.
    Mr. Doggett. Mr. Moramarco, you have mentioned in answer to 
earlier questions your support for the concept of the Snowe-
Jeffords proposal. It focuses, of course, on broadcast ads. Is 
there anything in the Court decisions or in terms of good 
policy that would limit our expanding that to cover print ads, 
direct mail, things of that type for the same time period?
    Mr. Moramarco. No, I would only add that a dollar threshold 
would be important to not cover de minimis spending. Leaving 
that issue aside, it is appropriate.
    I want to add I hope my earlier comments weren't taken by 
anyone to imply that I didn't think the bill currently before 
the House is a very thoughtful one. I think it is.
    Mr. Doggett. Thank you.
    Chairman Houghton. Dr. Troy.
    Mr. Troy. I just want to repeat my recommendation and maybe 
elaborate just a little that we should go to a political free 
market in determining what people will give as long as there 
are individuals, organizations, in kind or in cash, that all 
this should be only subject to complete disclosure.
    And I want to add this comment. Churchill said of 
democracy, it is the worst form of government except for all of 
the rest. A politically free market may be the worst way of 
handling campaign finance reform except for all of the rest. 
With all due respect to this Committee and those in the Senate, 
legislation will surely find its way into a Swiss cheese 
factory and it really is--all of these proposals wind up being, 
with all due respect to lawyers--and my son is a graduate of 
the Harvard Law School--this is ``make work'' for lawyers.
    I think the free market, which has served us so well in the 
economy--this new age of Adam Smith, I think it is time for the 
political world to move into the new age of Adam Smith. Thank 
you.
    Chairman Houghton. Thank you, Dr. Troy.
    Mr. Thomas.
    Mr. Thomas. Thank you very much, Mr. Chairman.
    Mr. Makinson, I wouldn't worry about the voters' reaction 
to this election on the 527 question, since you strongly 
advocated in your testimony, and others', to focus on the 527s. 
There are plenty of 501(c)(4)s that, through an educational 
process, have told us that Members of Congress are bought and 
sold.
    If you are really worried about the pivoting of this 
election on somebody spending some money, I wouldn't be so 
concerned about focusing totaling on the 527s.
    We also hold these hearings to try to shed some light on an 
area that probably needs to be addressed; and we bring panels 
in to try to shed light rather than obfuscate. And I apologize 
for not being here the whole time, but when I hear a phrase 
like ``527s are invisible,'' I don't think that you meant to 
say that as a blanket statement.
    Is that correct, Mr. Makinson?
    Mr. Makinson. I am not sure that I said ``invisible.'' I 
believe I said ``phantom Committees.'' .
    Mr. Thomas. Do you believe that all 527s are phantom 
Committees?
    Mr. Makinson. Not at all.
    Mr. Thomas. When you say 527s are the problem, as a 
legitimate candidate that files for office, I am a 527.
    Mr. Makinson. Exactly. And I think the traditional use of 
527s is part of our political--.
    Mr. Thomas. OK. But Mr. Moramarco earlier said it was 
because of the failure to get four votes on the FEC.
    I don't think that is the problem. I think if you go back 
and look at the letters issued by the IRS, that says that 
somebody can create a personal dilemma for themselves by 
becoming a 527, which prior to the IRS letters were all 
political and they had to file and disclose. Now the IRS says 
you can in your charter or by vote say, we don't advocate the 
election or defeat of someone; therefore, we are not 
constitutionally engaged in political activity, but are a 527.
    So IRS was the one that allowed people to produce this 
double screen, but not everybody in the 527 category gets the 
double screen--only those who fall in the political category 
who announce themselves as nonpolitical.
    Why in the world wouldn't you be in support of going after, 
in a reasonable and appropriate way, the point that you say 
that you have always wanted, which is disclosure; but why in 
the world would you create a structure which produces only a 
527 disclosure when the exact, same activity carried on by a 
(c)(4), (c)(5) or (c)(6) would not be disclosed if you take 
only the Doggett legislation and add Jeffords v. Snowe.
    Are you telling me that there is none of a similar activity 
going on in (c)(4)s, (c)(5)s and (c)(6)s? Of course, you can't 
say that.
    I would hope that if you are coming here as experts on the 
subject matter, you don't just shill for a 527 disclosure and 
say, gee, let's not do a reasonable and appropriate effort. You 
are doing a disservice to a period in time which might be able 
to deliver something that I didn't think we were going to 
deliver this soon; and that is a relatively broad disclosure 
provision and expenditure provision from groups who have chosen 
to be in a tax-benefited category. Nobody put them there but 
themselves. They chose the tax-preferred position.
    Mr. Potter, I would like a reaction to this statement. I 
believe that the Supreme Court's discussion in Buckley v. Valeo 
about the criteria for disclosure on political activity isn't a 
constitutional criterion that this Committee, the Ways and 
Means Committee in dealing with the Tax Code has to adhere to 
in terms of saying what the ground rules are to play in the 
tax-preferred area. I believe we can define a reasonable and 
appropriate political activity which isn't just the narrow 
advocacy of the election and defeat, but a broader definition 
of disclosure; and if those organizations don't like that 
definition, they don't have to be a tax-preferred Committee.
    Mr. Potter. Yes, I think one of the points that came out of 
Mr. Portman's earlier discussion with the witness is that the 
IRS has very broad and very murky rules at the moment for what 
constitutes political activity, that I think would never stand 
up if you were not dealing with an organization that had a tax 
preference there.
    Mr. Thomas. As I said at the beginning, if someone wants to 
avoid any impact by any of these bills that we have looked at, 
all they have to do is be a for-profit and carry on their 
activity, and they may or may not make a profit.
    So anybody who thinks that they are stamping out, or any 
member who stands up and says, or any organization that labels 
responsive in its title that we are going to stop these kinds 
of activities, really either is doing it for some other reason 
than I can understand or doesn't understand what we are doing.
    All we are saying is, if you want this tax-preferred 
position, from now on you are going to have to disclose both in 
terms of where the money comes from, above-appropriate 
expenditures, the expenditures above an appropriate threshold.
    My only concern, I hope someone took a look at the 
501(c)(3) political criteria, and if we are going to be dealing 
with (4)s, (5)s and 6s and 527s under a reasonable and 
appropriation definition of involvement in an election, you 
have now created a loophole in the 501(c)(3) which goes back to 
the court test of actively engaged in an election. We probably 
should carefully examine 501(c)(3)s as well.
    You people should have uniformly encouraged us to take the 
current opportunity and not just go after one section of the 
Code, but create a reasonable and appropriate disclosure in 
501(c)(4)s, (c)(5)s and (c)(6)s and look at the definition in 
501(c)(3)s to see if we need to change it.
    I frankly am disappointed that some of you who profess to 
be professors came on and shilled in a very narrow way for a 
specific proposal. I would have expected a broader 
understanding of the opportunity we have available; but after 
all, you also not only have to be knowledgeable, but understand 
politics. This is a window; this is an opportunity.
    The gentleman from New York, the chairman of this 
Subcommittee, is in the lead and his name is absolute triple A 
gold bond. When he says he wants to move an appropriate and 
reasonable bill, he has a better chance than anyone I have 
known in the 22 years I have been here to do that. Support him.
    Thank you, Mr. Chairman.
    Mr. Portman [presiding]. Do we have any more questions from 
the panelists?
    Mr. Coyne.
    Mr. Coyne. No.
    Mr. Portman. I think it would be appropriate to give the 
members of the panel an opportunity to respond appropriately, 
and then we will adjourn the hearing.
    Ms. Mitchell.
    Ms. Mitchell. Mr. Thomas, I think Mr. Portman can attest, I 
did not necessarily agree with the other comments that were 
made. My proposal is that I think it is important to have--to 
treat tax-exempt groups alike. And my suggestion to the 
Committee is to look seriously at three types: Number one, 
requiring 527 Committees to file 9nineties like (4)s, (5)s and 
(6)s; number two, to look at the political expenditure 
provisions that are already contained on the 9nineties, and if 
they are insufficient to address that and make them more 
comprehensive or more satisfactory; and number three, to 
consider addressing to the IRS the issue of returning 527s to 
their original intended purpose, but at the same time allowing 
organizations that come to the IRS that really are issue-based 
organizations not to be unfairly denied their applications to 
be 501(c)(4)s, as has happened to the Christian Coalition and 
to the National Policy Forum. I think there are some narrowly 
tailored solutions which could pass constitutional muster.
    Let us not forget that the canard here is disclosure. 
Senator Lieberman made reference to the canard, every dime of 
soft money which is given to the national party Committee and 
every dime expended; and that was the evil of the day until 
527s came along to be the new evil of the day. Disclosure is 
not what campaign finance reformers are after; they want to 
eradicate even that. So disclosure is only the first step to 
eliminating and regulation.
    Mr. Thomas. May I respond just briefly?
    Mr. Portman. Mr. Thomas and Mr. Hill and others.
    Mr. Thomas. I didn't mention you specifically, so by 
omission, you should have considered that I didn't.
    The concern that I have is that you can never put the genie 
back in the bottle. What we have to do is say, if there are 
organizations out there that function for good and worthy 
purposes that ought to have a tax-preferred position, this is 
not going to be a backwater for people involved in politics to 
use a subterfuge to cover up their activities.
    What the IRS has allowed is a fish to call itself a fowl, 
and we need to go in and make sure that the entire category is 
taken care of, not just one particular area that has been 
latched on as a political device to create additional images of 
people bought and sold, or activities carried on under the 
guise of education to subvert American politics.
    I want to make sure that doesn't occur whether it is a 
labor organization, an associational organization, or someone 
engaged in educational activities. I would hope others would 
have the same concern.
    Mr. Portman. Mr. Potter.
    Mr. Potter. I agree with Mr. Thomas that this is a historic 
opportunity. I think it is important, as you move through this 
to work very carefully, to make certain that you don't 
overreach. I think the opportunity includes all of those 
categories.
    I have read the comments for instance of the independent 
sector, which talks about some of the specific constitutional 
issues for the (c)(4)s and I think they are there. Your 
comments about for-profits, I am trying to address that in my 
written testimony.
    I would make two points. One is, as you know, you are never 
going to solve this in one instant blow. You will make a good 
start, but you will find next year that something else has come 
up, and you will find that there is some other way around this; 
and at some point you will have another panel, because you will 
have a disclosure problem. That is fine. That should not 
prevent you from doing something today, knowing that you cannot 
be all-inclusive and that something will turn up that you will 
have to address in the future.
    I also don't think that you can go back though, in all due 
deference to Cleta, you can't turn around and say to the IRS, 
redefine 527s again, because you had a real problem out there. 
On the Democratic side, the Democratic Leadership Council, on 
the Republican side, the Christian Coalition, were 
organizations that a couple of years ago did not have a home at 
all. They were not (c)(4)s under the Tax Code, and in the IRS 
view, they were not 527s because they did not engage in express 
advocacy. It seems to me that the point is, are you going to 
get to disclosure of their candidate-specific advertising which 
is how you all started this today?
    Mr. Potter. Ms. Hill.
    Ms. Hill. I really agree with Trevor Potter's comments, and 
I am very cheered by the spirit of bipartisanship that we saw 
on the panel of Senators and Congressmen who came forth today 
to talk about trying to achieve the achievable and not letting 
the perfect destroy the achievable at a particular time.
    Had Representative Thomas' staff had a chance to brief him 
on my testimony, he would perhaps feel more assured about the 
scope of the comments; and I will leave his staff to do that at 
their leisure.
    Mr. Portman. We will stipulate for the record that Ms. Hill 
testified in her written statement about problems both with 
527s and the 501(c)(3), (4), (5) and (6)s, although your oral 
testimony was slightly more focused on the 527s.
    Ms. Hill. Five minutes is 5 minutes.
    Mr. Thomas. Since my name was mentioned, I will tell you I 
don't have my staff brief me; I read the testimony.
    Ms. Hill. I am sure you do.
    Mr. Thomas. In your written testimony, it says one thing, 
and in your verbal, it says another in terms of not being as 
stressful of certain points. The point I wanted to make was who 
determines what is achievable. It probably ought not to be 
labor unions and groups on the right; and it probably ought not 
to be college professors or ex-college professors, because we 
tend to underestimate the achievability of something.
    Ms. Hill. To the extent that broader disclosure is 
achievable with the kinds of safeguards that Trevor Potter 
mentioned and we don't need to repeat, that is a useful idea, 
as my written testimony indicates, and I would call the 
Committee's attention to the taxation with representation case 
where the Supreme Court provides some useful guidance that you 
might wish to consider, that not every exempt organization has 
a full range of participatory rights. But the court emphasized 
that citizens must have the right to associate together in some 
other type of entity, and I would urge you not, in whatever 
logroll you engage in, to lose sight of that part of taxation 
with representation as well.
    The idea of moving forward on broader disclosure of 
contributors is certainly, I think, a worthy idea, and I hope 
that it is done with the kind of care for which Mr. Potter has 
provided useful guidance.
    Mr. Portman. We are in a freewheeling discussion which is 
hopefully going to help us move forward, and I think this is a 
good dialog, and it has been a bipartisan effort.
    Are there any other members of the panel who feel the need 
to express a view? We will turn the light on one more time 
because members have to go, as do others.
    Mr. Makinson.
    Mr. Makinson. I want to say I agree with Mr. Thomas that we 
need as much disclosure as we can possibly get, and I would 
like to commend the Commission, I have never been before 
Congress before, I have never had occasion to; and that is 
because Congress hasn't passed any campaign finance law in 20 
years that we have groups rushing to the IRS to find the 
equivalent of a tax loophole, and I really applaud your efforts 
to have Congress decide what the rules are and not the IRS and 
not the courts.
    Mr. Thomas. There have been a number of excellent 
bipartisan modest modifications to campaign laws over the 
years, and organizations out there have said, if you don't 
fundamentally change everything, we are not going to support 
it. It has been extremely difficult. Had we done this in a--
solved the problem as we moved along, we would be a long way 
down the road.
    But we also not only have to deal with the question of 
participation in elections, but frankly, Mr. Moramarco, we have 
a constitutional right to privacy which we have to balance 
while we balance all of these other rights as well.
    Mr. Portman. Other panelists. Mr. Moramarco.
    Mr. Moramarco. I agree with Mr. Thomas, that everything I 
have heard about this Committee is, it is struggling very hard 
to come up with a workable solution to this, and this really is 
a window of opportunity, so I am not exactly sure who I am 
supposed to be shilling for or not shilling for. That comment 
kind of surprises me.
    All I want to share with the Committee is my view that when 
there are problems of the type that Representative Thomas has 
addressed, which are, these groups could reorganize as for-
profits the very next day, it makes sense not to attack this 
just through the Tax Code, but to look at an approach like 
Snowe-Jeffords which looks at actions that would apply to 
anyone regardless of how they are organized by tax status.
    And I agree we should go as broad as achievable, but there 
seems to be legitimate disagreement among people how you 
proceed beyond 527s, but I think it would be a good thing.
    Mr. Portman. Professor Troy?
    Mr. Troy. I have nothing to add.
    Mr. Portman. Thank you all very much for great testimony. 
With that, the Subcommittee is adjourned.
    [Whereupon, at 5:16 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
                                       Alliance for Justice
                                       Washington, DC 20036
                                                       July 5, 2000

A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth Office Building
Washington, D.C. 20515

RE: Disclosure of Political Activities of Tax-Exempt Organizations

    Dear Mr. Singleton,
    The Alliance for Justice welcomes this opportunity to submit 
comments for the record regarding the various recent proposals for 
enhanced disclosure relating to the political activities of tax-exempt 
organizations. In particular, we are concerned about proposals that 
would have reached beyond organizations described in Internal Revenue 
Code Section 527 and would have required 501(c)(4), 501(c)(5), 
501(c)(6) and perhaps even 501(c)(3) organizations to disclose 
extensive information about contributors and expenditures the 
organizations made in their efforts to inform the public about 
important public policy issues. It is important that the committee 
recognize the clear constitutional concerns that arise whenever the 
government seeks to regulate speech by organizations created to 
advocate for a particular public policy issue and the difficulty of 
separating that speech from partisan candidate activities. The Alliance 
opposes the recently passed H.R. 4762, although we recognize that other 
recent proposals designed to regulate speech by tax-exempt groups were 
even more seriously flawed. These proposals trample the First Amendment 
and injure other policy interests in pursuit of goals that the 
proposals either fail to achieve or that may be achieved with less harm 
to the public.
    The Alliance for Justice is a national association of 
environmental, civil rights, mental health, women's, children's, and 
consumer organizations that works to promote public participation in 
the decisionmaking process. Our members and the other groups with which 
we work are tax-exempt organizations that are committed to working on 
public policy issues. Although few, if any, of our member organizations 
operate the type of 527 organizations regulated by H.R. 4762, the 
Alliance is concerned about the impact that this bill and the other 
proposals that have been discussed might have on the ability of 
organizations to advocate for the public interest.

I. Proposals that would require sweeping disclosures of 
contributors by tax-exempt organizations are unconstitutional.

    Proposals requiring extensive disclosure of contributors by 
advocacy organizations violate the First Amendment of the Constitution. 
The government's interest in requiring such sweeping disclosure does 
not rise to the level necessary to restrict these freedoms.
    The First Amendment protects the rights of people to come together 
to advocate for or against a particular cause, and the Supreme Court 
has held that this right includes the right to speak anonymously in 
some circumstances. In NAACP v. Alabama (357 U.S. 449 (1958)), the 
Court struck down an Alabama law that would have required the NAACP to 
make public the names of its supporters in Alabama, citing the risk 
that if the names of these civil rights activists were known they could 
become victims of the Ku Klux Klan and other violent supporters of 
segregation.
    To be sure, the Court is willing to require disclosure where there 
is a compelling government interest. Citing interests in support of 
disclosure, such as the need to avoid the appearance of corruption 
created by large campaign contributions to candidates, the Supreme 
Court in Buckley v. Valeo (424 U.S. 1 (1976)) upheld the Federal 
Election Campaign Act's requirement that independent contributions and 
expenditures be disclosed. However, the Court found it necessary to 
limit that disclosure to contributions and expenditures for activities 
coordinated with a candidate or communications that included ``express 
advocacy''--communications that included explicit calls to support or 
oppose a particular candidate. With regard to attempts to require 
broader disclosure, the Court found that ``the relation of the 
information sought to the purposed of the Act may be too remote.'' (Id. 
at 80.)
    The Court in Buckley also noted that the broad scope of the law 
left members of the public uncertain as to when the law applied to 
them. This vagueness also undermined the constitutionality of the FECA 
because the law failed to ``provide adequate notice to a person of 
ordinary intelligence that his contemplated conduct is illegal.'' (Id. 
at 77.)
    H.R. 4762 and, to an even greater degree, the other recent 
proposals in this area reach substantially beyond the narrow ruling in 
Buckley. In particular, the more extreme proposals, such as H.R. 4717 
(the bill passed by the full committee), are overbroad, requiring many 
different types organizations to disclose contributions and 
expenditures not merely for ``express advocacy,'' but also legislative 
advocacy and public education. For example, H.R. 4717 would require 
disclosure of contributors to and expenditures by a 501(c)(4) 
organization that spent more than $10,000 in a year on television 
advertisements featuring a candidate. This requirement would reach not 
merely political ads but also lobbying activities, such as an 
advertisement that seeks to influence a legislator's vote on pending 
legislation. The requirement would even reach a public service 
announcement that featured an elected official who happened to also be 
running for reelection.
    To the degree that proponents of this legislation argue that these 
proposals are not intended to reach such communications, it merely 
demonstrates the failure of these proposals to guide the public without 
overstepping constitutional lines. This vagueness in the language makes 
these proposals constitutionally defective.
    These are not mere technical concerns--they directly undermine the 
vital public policy interests that underlie the First Amendment. The 
type of speech that these proposals would regulate--discussions of 
policy matters and the qualifications of candidates for office--are the 
heart of the speech that the First Amendment protects. Yet the loss of 
the ability to speak anonymously can chill that speech. In some cases, 
people who face forced disclosure of their identities will not speak 
out of fear of physical or economic retribution, as in NAACP v. 
Alabama. In other cases, a speaker may want listeners to focus more on 
the message than on the messenger. The key architects of the 
Constitution published The Federalist Papers under the pseudonym 
``Publius,'' allowing the public to debate issues rather than 
personalities. In some cases the desire for anonymity may derive from 
cultural traditions favoring anonymous giving or even a mundane 
interest in avoiding the solicitations of other would-be recipients of 
contributions. Regardless of the motivation, the fact is that fewer 
people will participate in core public policy debates if they are not 
able to do so anonymously.
    In short, because the proposals would extend to cover speech far 
beyond the political arena where avoiding the appearance of corruption 
constitutes a compelling rationale, the government's interest in 
requiring disclosure of contributions and expenditures by these 
organizations for these activities does not rise to the level necessary 
to allow interference with vital First Amendment rights of speech and 
association.

II. Less harmful alternatives exist for achieving the goals of 
H.R. 4762 and the other proposals.

    There are other ways to protect the public from fraud that do not 
create the constitutional concerns raised by H.R. 4762 and the more 
sweeping disclosure proposals that have been debated.
    The impetus for this flood of legislation is also the evidence that 
demonstrates how unnecessary it is. When the ``Republicans for Clean 
Air Committee''--a 527 organization--began running ads suggesting that 
Texas Governor (and candidate) George W. Bush had stronger 
environmental credentials than Senator (and candidate) John McCain, a 
vigorous press corps, supported by the McCain campaign, tracked the 
source of the ads to Sam and Charles Wyly, longtime supporters of 
George W. Bush. Indeed the vigor of the press corps is directly 
proportional to the impact that these organizations are having on the 
campaign, and the victims of such an attack are likely to help uncover 
the truth. Thus, the greater potential harm to the electoral process, 
the more likely that those responsible will be unmasked by the media.
    Furthermore, the public is capable of evaluating the anonymity of 
the speaker in weighing the message. To at least some degree, people 
discount information from sources they do not know. As the Supreme 
Court said in upholding the right to anonymous leafleting in McIntyre 
v. Ohio Elections Commission:

        Don't underestimate the common man. People are intelligent 
        enough to evaluate the source of anonymous writing. They can 
        see it is anonymous. They know it is anonymous. They can 
        evaluate its anonymity along with its message, as long as they 
        are permitted, as they must be, to read that message. And then, 
        once they have done so, it is for them to decide what is 
        'responsible,' what is valuable, and what is truth.

    (514 U.S. 334, 349 n. 11, quoting New York v. Duryea (citation 
omitted).)
    The ability of the press to uncover those who seek to abuse the 
right of anonymity and the public's ability to evaluate that anonymity 
can be strengthened with more limited disclosures than those proposed 
by H.R. 4717. The Alliance for Justice supports a requirement that all 
organizations seeking tax-exempt status under Section 527 register with 
the Internal Revenue Service and file an annual Form 990 information 
return subject to the same disclosure requirements that cover other 
tax-exempt organizations. This would make public key information, 
including the names of the organization's officers and highly paid 
consultants. This information will frequently provide enough 
information for reporters and the public to determine what interests 
lie behind the organization.
    In general, contributors to a 527 would not be disclosed on the 
publicly available version of its Form 990. Although this information 
is generally reported to the IRS on Form 990, most tax-exempt 
organizations are permitted to exclude this information from the copies 
of the Form that they make available to the public. The one exception 
to this general rule is that private foundations--which receive funds 
from only a limited number of sources, rather than through support from 
the general public--must disclose the source of their funds on publicly 
available 990s. The Alliance would support such a requirement for 527 
organizations that fail to meet a similar public support test. This 
would directly address the most troubling use of this type of 
organization, diminishing the ability of a few individuals to 
masquerade as a group with broad public support.

III. Legislation limited to 527 organizations would be 
ineffective and dangerous.

    It is possible that legislation, such as H.R. 4762, requiring broad 
disclosure only by organizations created under Section 527 would pass 
constitutional muster. However, such legislation would fail to stop 
determined individuals from supporting anonymous issue advocacy through 
other types of organizations. Such legislation will inevitably lead to 
renewed calls for more sweeping, unconstitutional disclosure 
requirements on non-527 organizations.
    Although the Supreme Court has been reluctant to impose burdensome 
restrictions on the speech and associational rights of individuals, it 
has been more willing to impose such restrictions as a condition of 
receiving certain tax advantages. For example, the Supreme Court in 
Regan v. Taxation With Representation of Washington (461 U.S. 540 
(1983)) found that the Internal Revenue Code's restrictions on lobbying 
by 501(c)(3) organizations withstood First Amendment challenge because 
the organization had the option of conducting lobbying activities 
outside the 501(c)(3) structure, either by forming as another type of 
tax-exempt organization or creating such a group as an affiliated 
organization.
    In H.R. 4762, Congress has chosen to make granting of 527 status 
contingent upon compliance with extensive disclosure of contributors 
and expenditures. The bill has a certain intuitive appeal given that 
all 527 organizations, by definition, have the intent to influence 
elections as their primary purpose. (Although it is worth noting that 
527s may also engage in non-electoral activities, such as efforts to 
support or oppose nominations for certain appointed offices.)
    One problem with this ``solution'' is that it will merely create a 
flight to other types of organizations. Faced with greater barriers to 
the use of 527 organizations, those determined to espouse their 
ideology anonymously will likely create other types of tax-exempt 
organizations--or even ``for-profit'' corporations--that remain tax 
free because they never show a profit. (Indeed, it was just this type 
of unintended consequence that led the growth of the ``new'' 527 
organizations as would-be donors sought to avoid the gift tax burdens 
associated with giving to 501(c)(4) organizations.)
    A more insidious problem with a disclosure provision limited to 
527s, however, is the inevitable desire it will create to impose 
similar requirements on 501(c)(4)s, 501(c)(5)s, and 501(c)(6)s. 
Congress wisely decided to avoid this pitfall in passing H.R. 4762, but 
because issue advertisements created by 527s are indistinguishable in 
content from those produced by these other types of tax-exempt 
organizations, it will be all too easy to slide down the slippery slope 
and seek to regulate these other types of organizations. As described 
above, such an effort would be a clear violation of bedrock 
constitutional principles.
    Simply because it may be possible to regulate 527s does not mean 
that it should be done. Indeed, some of the same concerns about 
associational rights and the value of anonymous speech discussed above 
apply to individuals that come together in 527 organizations as well. 
Regardless of the potential merits of these policy arguments, however, 
it seems clear that efforts to regulate only 527 organizations will 
fail to achieve the sponsors' desire results and may open the door to 
more troubling attempts at regulation.
    Thank you for this opportunity to express our concerns about this 
dangerous legislation. The Alliance for Justice respectfully urges the 
Committee to take into account the risk this type of proposal creates 
for fundamental constitutional freedoms in the event it faces similar 
legislation in the future.

            Sincerely,

                                              John Pomeranz
                                         Nonprofit Advocacy Counsel
      

                                


Statement of OMB Watch

               Disclosure of Nonprofit Political Activity

    OMB Watch is a 501(c)(3) tax-exempt organization that 
promotes greater citizen participation in pursuing a more 
accountable, responsive, and just government. To a large 
extent, we work with and through the nonprofit sector because 
of its vital place in our communities and our faith that the 
sector can play a powerful role to invigorate our democratic 
principles. OMB Watch works with nearly 10,000 nonprofits 
around the country--mostly 501(c)(3) organizations, but also 
501(c)(4) organizations and unions--on various issues, 
including the protection of the nonprofit advocacy voice.
    OMB Watch understands the potentially corrupting influence 
of money in politics, and recognizes the urgent need to 
revitalize public confidence in our democracy. Despite serious 
concerns about some of the recent suggestions for legislative 
action, we recognize the benefits of public disclosure of the 
sources of communications that are closely tied to candidates 
and elections, even if they fall short of the ``express 
advocacy'' standard permitting certain speech to be regulated 
and limited under the Federal Elections Campaign Act 
(``FECA''). A reporting scheme similar to that imposed on other 
nonprofit organizations would meet much of the legitimate 
public need for information about these entities.
    As for more extensive regulation, we believe that ``soft 
money'' issues, including the problems raised by unlimited 
contributions to political parties, need to be addressed as 
part of a comprehensive approach to campaign finance reform. 
Focusing only on the advocacy activities of nonprofit 
organizations fails to address substantial problems throughout 
the existing campaign finance system.
    As an initial matter, we note that nonprofit ``political 
activities,'' the subject of much discussion in Congress, may 
refer to a broad range of communications. Depending on context, 
``political'' may describe spending that expressly supports the 
election or defeat of a candidate; discussions of candidates 
that fall short of such express advocacy; discussion of public 
policy issues conducted in the course of an election campaign 
that may have some effect on the outcome of the election; 
direct or grass roots lobbying with no electoral link; advocacy 
for or against a ballot measure; attempts to influence the 
nomination or confirmation of executive branch appointees; or 
even non-legislative policy advocacy. The distinctions between 
these categories of political speech are often far from clear, 
and it will help focus our discussion to acknowledge that they 
may be qualitatively different, and susceptible to differing 
constitutional analyses.

Disclosure of Nonprofit Political Activities Should be Limited 
in Scope to Narrowly-Defined Activities

    OMB Watch recognizes the legitimate interest in public 
disclosure of spending intended to influence the outcome of 
elections, even when the communications fall short of expressly 
advocating the election or defeat of candidates. Public 
disclosure of candidate contributions as well as other 
electoral expenditures allows the electorate to make more 
informed voting decisions; public scrutiny of the sources of 
influence on policy makers are important to the government 
accountability OMB Watch is committed to. As described in 
greater detail below, we fully support extending to tax code 
section 527 groups the same level of disclosure that is applied 
under current law to other nonprofit organizations. More 
detailed disclosure of expenditures for electoral purposes may 
even be merited.
    The interests of a free and vibrant democracy demand public 
accountability. But such accountability should not be advanced 
at the expense of freedom of association. Any disclosure 
requirements imposed on an organization that engages in 
political advocacy burden, to some extent, the exercise of 
First Amendment rights. In some circumstances the government's 
legitimate interest in disclosure even of express advocacy is 
not sufficient to outweigh the administrative burden required 
to establish a separate segregated fund for political campaign 
advocacy.\1\ When the regulated speech falls short of express 
advocacy, the burden of detailed reporting is even more likely 
to be found to outweigh the public interest in disclosure.
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    \1\ FEC v. Massachusetts Citizens for Life, 479 U.S. 238, 252-255 
(1986) (hereinafter MCFL).
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    Any attempt to regulate political speech, whether that of 
individuals or citizens' groups, must tread very carefully. 
Unless the boundaries of regulated speech are drawn both 
narrowly and precisely, forced disclosure and additional 
administrative burdens threaten to undermine well-recognized 
rights of citizens to associate freely and to engage in 
political advocacy without fear of reprisal. The existing 
definition of political activities under tax code section 
527(e), for instance, is both unclear and overbroad. It 
includes not only communications that are primarily intended to 
promote a candidate, but also speech that may have an electoral 
effect without being clearly electoral on its face.
    Still, let us assume for the moment that it is possible to 
define clearly a category of ``electioneering'' speech that 
falls just short of express advocacy. If the activity 
triggering the requirements is closely tied to speech that is 
clearly and unambiguously campaign-related, there is a strong 
governmental interest in requiring disclosure. Similarly, the 
more carefully the disclosure requirements are linked to the 
activity of concern, the less likely they are to infringe on 
other constitutionally protected speech. Unless a disclosure 
scheme is based on a carefully and narrowly crafted definition 
of electioneering speech, its reach is likely to be 
unconstitutionally vague or over broad.
    There are indeed many organizations that take advantage of 
existing legal rules to engage in advocacy falling just short 
of ``express,'' yet is clearly intended and is understood to 
serve as an electioneering message. In principle, there may be 
no constitutional impediment to disclosure requirements limited 
to these candidate-related electoral communications falling 
just short of express advocacy. In practice, however, the goal 
of forcing disclosure of advocacy closely tied to 
electioneering without impermissibly burdening citizens' rights 
to engage in advocacy on issues may prove elusive.

Donor Disclosure Has the Potential to Substantially Burden 
First Amendment Rights

    Many proposals have been put forward that would require 
disclosure of identifying information about contributors to 
organizations that engage in political advocacy (variously 
defined). Yet, mandating disclosure of the identity of donors 
to nonprofit organizations raises troubling implications for 
free association and speech.
    By banding together to speak collectively, members and 
supporters of nonprofit organizations enhance the exercise of 
their free speech rights. Particularly when addressing 
controversial issues, such organizations play a critical role 
in permitting effective advocacy. Viewpoints that might 
otherwise go unvoiced can compete in the ``marketplace of 
ideas,'' and be evaluated on their merits. It is a fundamental 
tenet of this country's commitment to free speech that allowing 
many ideas to be heard and considered is inherently beneficial. 
Any action that would inhibit the expression of ideas should 
only be taken if it advances a truly compelling countervailing 
interest, and should be narrowly focused to limit as little 
speech as possible.
    Privacy is an essential element of free association, a 
right closely linked to free speech. Forced disclosure of 
membership in (or financial support of) nonprofit organizations 
substantially burdens the members' right to speak out on issues 
of public importance. It is an obstacle to the freedom of 
association which becomes the mechanism for the exercise of 
free speech.
    Congress has historically recognized the importance of 
shielding most nonprofit donor information from public 
disclosure. Section 501(c) organizations must report certain 
donor information to the IRS as part of their exemption 
applications and annual tax filings. Those documents must be 
made publicly available, but the names and addresses of donors 
are excluded from public disclosure.\2\ The constitutional 
dimension of donor disclosure was most notably set out in NAACP 
v. Alabama,\3\ which recognized the right of organizational 
members to join together to advocate on issues without 
revealing their individual identities. Subsequently, the Court 
in Buckley v. Valeo recognized the potential that donor 
disclosure has for infringing on First Amendment rights. (4 The 
record keeping, reporting, and donor disclosure requirements 
imposed by FECA on candidates and political committees were 
upheld only after a finding that they furthered government 
interests that were both significant and substantially related 
to the information required to be disclosed.
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    \2\ E.g., 26 U.S.C. Sec. Sec. 6104(b), 6104(d)(3)(A).
    \3\ 357 U.S. 449 (1958).
    \4\ 424 U.S. 1, 64 (1976).
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    Any attempt to mandate the disclosure of donors to 
nonprofit organizations must be evaluated in light of this 
standard. Requiring disclosure of contributions earmarked for 
narrowly-defined electioneering communications would probably 
be tailored to achieve the goal of making public information 
about what is perceived as ``surreptitious'' campaign spending. 
On the other hand, a requirement of the disclosure of all 
donors if an organization engages, as any part of its activity, 
in certain types of advocacy, sweeps far broader, imposes a 
greater burden on associational rights, and effectively 
penalizes groups for engaging in political speech at the core 
of the First Amendment's protections.

Itemized Expenditure Disclosure Does Little to Further the 
Public Interest in Accountability

    Disclosure of itemized expenditures, either of an entire 
organization or for particular activities, raises similar First 
Amendment concerns. Mandating disclosure of the identity of 
those who receive payments from an organization could include 
potentially private information, such as employee 
reimbursements. As was recognized in Brown v. Socialist Workers 
'74 Campaign Committee,\5\ it is not only those who contribute 
to or join organizations representing unpopular causes who may 
be subject to harassment or intimidation; those who choose to 
do business with such groups may be targeted because of that 
connection as well. While disclosing which office supply store 
an entity patronizes is unlikely to have negative 
ramifications, the clients of individual consultants or small 
firms may very well reflect the consultant's political 
convictions. Working with a controversial organization is 
sometimes not just an economic statement.
---------------------------------------------------------------------------
    \5\ 459 U.S. 87, 96-98 (1982)
---------------------------------------------------------------------------
    Further, is it unclear what interest highly detailed, 
itemized reporting of expenditures would serve. Even if the 
only burden on the exercise of free speech rights is the 
additional administrative hassle of tracking and reporting 
expenditures in detail, the burden on the organization must 
correlate to an important public interest. It is highly 
questionable that the public's ability to evaluate political 
speech would be meaningfully advanced by knowing the identity 
of the media consultant who helped an organization buy air time 
for an advertisement.
    In upholding FECA's disclosure requirements for independent 
expenditures, the Buckley Court suggested such requirements, if 
applied to an organization not operated primarily for political 
purposes, would be unconstitutionally over broad if extended to 
communications short of express advocacy. Thus, an expenditure 
disclosure scheme that applies to more broadly defined 
political speech must be carefully tailored to advance a 
compelling interest in disclosure. In addition to 
constitutional concerns, prudent policy suggests that 
potentially burdensome reporting requirements should not be 
imposed unless they are reasonably expected to provide a level 
of information that is useful to the public. Itemized 
expenditure reporting does not lead to significantly more 
useful information than can be obtained from reporting of 
general categories of expenses.
    In any case, it does not make sense to require detailed 
disclosure of expenditures for ``political'' activities unless 
the same requirement applies to all such expenditures by any 
entity. The public interest in obtaining information about 
political expenditures by nonprofit organizations is no greater 
than the interest in similar information about such activities 
by for-profit companies. If there is indeed a legitimate public 
need to know who paid whom how much to undertake specific 
political advocacy, it applies equally to all entities.

Disclosure Limited to 527 Organizations Raises Problems of 
Public Confusion and Inconsistency

    Some proposals would limit their scope to entities exempt 
from taxation under section 527 that are not required to 
register and report under FECA. These organizations are by 
definition ``operated primarily for the purpose of directly or 
indirectly . . . influencing or attempting to influence'' 
elections to public office.\6\ By limiting its reach to these 
political organizations, this approach minimizes its 
infringement of donors' rights; a contributor to a 527 
organization is at least on notice that she is supporting an 
organization involved in election-related advocacy.
---------------------------------------------------------------------------
    \6\ 26 U.S.C. Sec. 527(e)
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    In addition, this approach has the merit of addressing an 
unintended gap in existing reporting and disclosure laws. As 
discussed below, OMB Watch supports imposing registration and 
reporting requirements on 527 organizations similar to those 
for other nonprofit organizations. However, a more 
comprehensive disclosure regime limited to 527 organizations 
raises difficult issues.
    In recent years, IRS rulings have progressively extended 
the reach of activities covered by section 527(e).\7\ This 
definition covers not only those communications that barely 
escape regulation by the Federal Election Commission (FEC), but 
also a wide array of issue advocacy that may only indirectly 
affect a candidate election. There must be a nexus to 
elections, but the link may be slight, and may not be evident 
on the face of a communication. The electoral connection may 
only be revealed upon close inspection of internal documents 
demonstrating the organization's intent in decisions regarding 
geographic targeting or message development.
---------------------------------------------------------------------------
    \7\ In fact, section 527 sweeps more broadly than expenditures 
directly and indirectly related to candidate elections, and may include 
some activities which even 501(c)(3) organizations may undertake, such 
as seeking to influence nomination and Senate confirmation of Executive 
branch appointees. We assume for purposes of this discussion that non-
electoral 527 organizations and activities could somehow be carved out 
from the scope of any legislation, although this could be difficult.
---------------------------------------------------------------------------
    Rulings have found that 527 activities may encompass 
grassroots lobbying communications; mass media advertisements 
that do not identify specific legislators; ballot measure 
activities; and litigation. In many cases, the determination 
that these activities are ``political'' rests on evidence of 
subjective intent found only in internal records.\8\ The 
contents of a communication may not overtly be linked to an 
election, but decisions made about targeting and distribution 
bring it into 527's ambit. The breadth of the IRS 
interpretation of 527(e) demonstrates a fact that courts in 
election law cases have repeatedly recognized: advocacy of 
issues and advocacy for or against candidates are often 
inextricably intertwined. Some 527 activity may be 
indistinguishable to the outside observer from pure issue 
advocacy activities conducted by 501(c)(4), or even 501(c)(3), 
nonprofit organizations.\9\ We therefore believe that imposing 
detailed donor disclosure requirements on only one type of 
organization would lead to both inconsistency and public 
confusion.
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    \8\ E.g., Priv. Ltr. Rul. 1999-25-051 (Mar. 29, 1999).
    \9\ For example, 501(c)(3) organizations may support or oppose 
referenda, which would be counted under its permissible lobbying 
activities. Unlike the 527 group, the 501(c)(3) is engaged to influence 
the policy, not an election. In this case, the difference between the 
two groups is one of intent, not action--and therefore 
indistinguishable to the public.
---------------------------------------------------------------------------
    Furthermore, to the extent section 527 organizations engage 
in advocacy that reaches much further than a narrowly drawn 
category of almost-express advocacy, forced donor disclosure 
implicates the same constitutional concerns raised in NAACP v. 
Alabama. Citizens choose to maintain individual anonymity and 
engage in political advocacy through support of organizations 
for a variety of legitimate reasons. Their right to do so 
should not be abridged absent compelling countervailing 
concerns. Including all 527 organizations with their entire 
range of advocacy activities is not sufficiently narrowly 
tailored to the interest in providing the public with 
information about campaign expenditures to offset the 
infringement on their supporters' right to privacy in their 
political associations.

Extending Disclosure to Other Organizations is Even More 
Problematic

    Other proposals would impose disclosure obligations on 
organizations that engage in covered ``political'' activity 
regardless of the type of organization. While this approach 
avoids the logical inconsistency of different disclosure 
requirements for organizations whose activities may appear 
indistinguishable, it does so at the expense of the First 
Amendment rights of supporters of organizations not organized 
primarily for electoral purposes. Requiring disclosure of 
donors who support the general activities of a nonprofit 
organization because that organization chooses to engage in 
legally permissible political advocacy effectively penalizes 
the exercise of free speech. Extending any disclosure 
requirement beyond donations earmarked for communications 
closely linked to candidates and elections invades donors' 
associational rights without furthering a compelling public 
interest substantially related to the required disclosure.
    There may be many reasons that individual donors would not 
want their support of an organization to become public 
knowledge. Contemporary issues, like public opinion and public 
tolerance for dissent, change swiftly. Even issues that are not 
unpopular today may one day become highly controversial. A 
disclosure system that makes public lists of individuals 
supporting various causes creates a potentially chilling 
legacy. We need only recall to the McCarthy era to realize the 
potential for misuse of such information.
    Some have suggested the harsh effects of donor disclosure 
requirements could be ameliorated by permitting an organization 
to establish a separate fund for covered ``political'' 
activities, and limit disclosure to contributors to that fund. 
This modification slightly reduces the infringement on free 
association, but it nonetheless establishes a significant 
burden on organizations wishing to engage in issue advocacy in 
the context of a political campaign. However, the 
administrative burden of maintaining a segregated account and 
separately raising funds for certain advocacy activities should 
not be underestimated.
    Requiring such specific earmarking in raising funds for 
different advocacy activities creates many difficulties. Donors 
typically give to support an organization's mission, trusting 
the nonprofit to use the funds as best it can to achieve those 
ends. Dividing the organization's activities into two (or more) 
pools requires that contributions be earmarked for one or the 
other. Rather than deciding on a day-to-day basis which 
activities best further the group's mission, funded by donors 
who support that mission, a nonprofit must solicit in advance 
specific contributions for specific activities. Donors are 
deprived of the ability to effectively provide general support 
for the organization. Any sort of earmarking scheme requires 
complex administration that reduces flexibility and impedes the 
ability to conduct program activities. Especially for an 
organization with a broad donor base, asking each contributor 
to designate the activities to be supported with her 
contribution creates a tremendous barrier to operating a 
unified organization.
    The tax code already provides for creation of separate 
segregated funds for nonprofits to engage in political 
activity.\10\ Creating such a fund allows an organization to 
avoid taxation of its investment income. The administrative 
burden of operating through such a fund does not offset the tax 
penalty of conducting political activities directly. A 
legislative proposal that would set donor privacy as the 
additional price of not administering a segregated fund for 
political activities seriously impedes the exercise of First 
Amendment rights. The administrative burden of establishing a 
PAC under the election law played a role in the determination 
that a ban on independent express advocacy by corporations 
violated MCFL's First Amendment rights.\11\ Requiring a 
separate fund for political advocacy defined more broadly than 
express advocacy as the price of protecting donor privacy 
raises serious constitutional issues.
---------------------------------------------------------------------------
    \10\ 26 U.S.C. Sec. 527(f)(3).
    \11\ 479 U.S. at 252-255.
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    It is important to recognize that existing FCC regulations 
already require that an organization making a communication via 
paid broadcast advertising identify itself. The print media, as 
a matter of policy, generally require identification of the 
sponsor of paid ads. Mandating disclosure of that 
organization's supporters may add incrementally to the 
information available to the public in evaluating its message, 
but only at the expense of a significant infringement on 
associational rights. Established nonprofit organizations are 
generally known to the public; their agenda is understood, and 
their position can be weighed accordingly. The public can also 
weigh the credibility of organizations that do not have an 
established reputation, or that represent only a small group of 
donors. The incremental benefit of public disclosure of donors 
to organizations that may only incidentally engage in political 
campaign advocacy does not support invading their supporters' 
privacy, associational, and speech rights.
    We also note the difficulty of defining appropriately 
covered activity. Several legislative proposals that have made 
an activity the trigger for disclosure rather than the type of 
organization have sought to capture communications that fall 
short of express advocacy, yet are sufficiently closely tied to 
candidates and elections to merit regulation. Yet in attempting 
to draw a bright line to give regulated entities adequate 
notice of covered activities, these definitions have inevitably 
swept too broadly.
    For instance, grassroots lobbying communications with no 
electoral intent (or effect) whatsoever must necessarily 
identify legislators whom the public is urged to contact 
regarding legislation. Yet legislators are frequently 
candidates. Distinguishing genuine lobbying messages from those 
that use legislation as an excuse to tarnish a candidate's 
character is no simple task. Indeed, some bills proposed would 
require disclosure of individual donors for organizations that 
make communications that do not even constitute political 
advocacy. Some of these proposals cover communications that 
``mention an individual holding Federal office or a clearly 
identified candidate for election for Federal office.'' Yet 
this definition includes not only lobbying messages, but even a 
public service announcement that features a well-known public 
figure and office holder encouraging screening for a particular 
health risk. Even if it is constitutionally possible to impose 
disclosure requirements on organizations based on participation 
in certain activities, the net should not be cast so wide as to 
capture non-electoral, or even wholly non-political, 
communications.
    We are also concerned that disclosure requirements imposed 
on activities that are entirely non-electoral would inevitably 
be extended to 501(c)(3) organizations. While 501(c)(3) 
charities may be exempted from disclosure initially, the 
inconsistency of a disclosure regimen triggered by advocacy of 
501(c)(4), 501(c)(5), or 501(c)(6) organizations but not by 
similar advocacy by 501(c)(3)s will inevitably generate 
pressure to eliminate this inequity. If an election campaign 
disclosure measure is to avoid the risk of being extended to 
entities that are prohibited from engaging in campaigns, it 
must regulate only unambiguously electoral activity.

Appropriate Disclosure for 527 Organizations

    Despite serious concerns about the potential scope of some 
of the proposals for donor disclosure related to political 
activities, OMB Watch does believe there is a need to address 
the legal anomaly that imposes no registration or reporting 
requirements on 527 organizations that fall outside the 
authority of the FEC. The form 1120-POL currently filed by 
these organizations does not provide sufficient information to 
evaluate them. However, the existing tax code framework for 
disclosure of other nonprofit organizations should, with a few 
modifications, serve to provide sufficient information to allow 
greater public understanding of these currently unregulated 
entities.
    Most 501(c) tax-exempt entities must file Form 990 with the 
IRS on an annual basis. They provide information about their 
financial condition, program activities, revenues, 
expenditures, names of officers and directors, and compliance 
with various legal restrictions. It certainly makes sense to 
extend this type of reporting scheme to 527 organizations, so 
that the different types of tax exempt organizations are 
subject to similar tax reporting requirements.
    Additionally, 527 organizations should file a registration 
statement with the FEC upon their formation to provide the news 
media and members of the public with notice of its existence. 
The press has uncovered the existence of a number of 527 
organizations even under current law, allowing the public to 
judge their communications accordingly. Mandating publicly 
available registration of all 527 groups would go far to 
shedding the light of public scrutiny on their activities.
    The information contained on a 990-style filing would 
provide a reasonable basis for the public to evaluate an entity 
sponsoring political advocacy activities, as it does for other 
nonprofit organizations. While individual donor identities are 
not subject to public disclosure, the form provides an overall 
picture of the organization's sources of support, financial 
situation, and activities. Similarly, the 990 requires 
reporting expenditures by category, rather than itemized 
detail. Surely the public interest in disclosure would be 
served by knowing the breakdown of funds spent on media buys, 
message development, staff, overhead, and fundraising costs; 
permitting an examination of each entry in a check register 
does not add a meaningful degree of public accountability.
    It might be appropriate to consider for 527s some 
modifications from the information required on the basic Form 
990. Just as 501(c)(3)s must file Schedule A containing more 
detailed information considered particularly significant in 
evaluating their legal compliance, 990-style disclosure by 527s 
need not be strictly limited to the exact items required of 
501(c)(4)s, 501(c)(5)s, or 501(c)(6)s. A supplemental schedule 
could provide additional information helpful to the public in 
evaluating 527 entities.
    One significant concern that has been raised about 527s is 
that they may represent the interests of only a small group of 
individuals, yet operate under a name that deceptively suggests 
they are organized to promote the public interest. It is not 
necessary to reveal the identities of individual donors to 
notify the public that these entities do not in fact represent 
a broader community. A measure similar to that used by 
501(c)(3)s to demonstrate ``public support'' can indicate 
whether an organization receives broad public support or is 
likely to represent the interests of a small group of donors. 
Armed with this information, the public can evaluate the 
credibility of an organization's statements and the likelihood 
that it is seeking to advance a private agenda.
    In some cases, it may be appropriate to require individual 
disclosure of large expenditures. For instance, consultants may 
play a significant role in developing an organization's program 
activities. Just as the identity and compensation of officers, 
directors or key employees is disclosed on the 990, the 
identity of consultants (perhaps those compensated over a 
certain amount) can be important in determining the entity's 
agenda. Thus, just as 501(c)(3)s must disclose on Schedule A 
payments to consultants over $50,000, similar disclosure for 
527 organizations, or for expenditures by other organizations 
undertaking 527 activities, may increase public accountability.
    The annual 990 submission may present two special problems 
when extended to 527 groups. First, an annual submission is not 
timely, particularly in the context of disclosure about actions 
to influence the outcomes of an election. To solve this 
problem, we think 527 groups making expenditures above a 
specific threshold should be required to report on a quarterly 
basis. This reporting should be done electronically to insure 
immediate and accurate disclosure.
    Second, the IRS is not structured to provide immediate 
release of information and is chronically underfunded in its 
tax-exempt enforcement area. Accordingly, we suggest that 527 
groups should not only submit the 990 filing to the IRS, but 
also to the FEC. The FEC is more adequately prepared to provide 
prompt public access to information.
    We believe this type of disclosure--absent donor 
disclosure--can greatly enhance public accountability. 
Admittedly, it is not perfect. It may still be difficult to 
determine the extent to which a 527 organization is candidate 
controlled, even with disclosure of directors. It will not 
provide detailed FEC-type disclosure for communications falling 
just short of express advocacy but having nearly the same 
impact. But, as described earlier, we do not believe it is 
possible to create a bright line test of such activity without 
trampling on constitutional rights.
    Despite these limitations, our suggestions would allow the 
public to take notice of a newly registered 527 group. If the 
public contacts the newly registered group and they choose not 
to disclose certain information, that refusal may have some 
impact on the credibility and legitimacy given to the group's 
message. Combined with information from the 990, the public 
will be armed with information to hold the 527 group 
accountable, yet core constitutional principles will not be 
violated.
      

                                


Statement of Hon. Greg Walden, a Representatives in Congress from the 
State of Oregon

    Mr. Chairman, I appreciate this opportunity to add my voice 
to the debate surrounding the reform of American campaign 
financing laws, particularly as it relates to the disclosure 
requirements of tax-exempt organization. While few campaign 
finance proposals are raised without controversy, I believe the 
full disclosure of campaign funds is a reform that will enhance 
the accountability of those who seek to influence our elections 
without subtracting from the freedom of the American people. 
Unlike most campaign finance reforms, which consist principally 
of allowing politicians to ration the amount of money that can 
be spent on their campaigns for reelection, this proposal 
simply requires these organizations to reveal the sources of 
their donations.
    Mr. Chairman, a number of reforms have been proposed to 
mitigate the influence of special interest money in politics, 
foremost among these the ban on unregulated, or ``soft'' money, 
which is sent to political parties and not individual 
candidates. These donations, while ostensibly intended for 
``party building'' activities, often are used to fund issue 
advocacy advertisements that are no less effective than those 
purchased by ``hard'' money, which are strictly regulated. 
Chief among the complaints by campaign finance proponents is 
that the absence of donor limitations gives the wealthy 
disproportionate influence in the political process over those 
with lower incomes. And while banning soft money completely is 
attractive to many, others argue that limitations on political 
contributions represent unconstitutional assaults on the free 
speech rights of the American people.
    Like most lawmakers, I favor campaign finance reform that 
diminishes the ability to influence the American electoral 
process in unseemly ways without compromising the First 
Amendment. The most obvious and effective campaign finance 
reform, of course, would be to scale back the intrusiveness of 
the federal government. If the various laws and regulations 
emanating from Congress and the federal agencies were not so 
inextricably tied to Americans' livelihood, their desire to 
influence the government with campaign contributions would be 
significantly reduced. Under the current system, however, 
citizens and businesses simply have no choice but to involve 
themselves in the political process because of the degree to 
which the government attempts to mold the landscape of American 
life.
    And while scaling back the size of government is a goal to 
which Republicans in Congress have committed themselves, no 
fundamental changes in government can take place with the 
swiftness that is needed to address the flaws in our campaign 
finance system. Among the immediate proposals I support to 
cleanse our campaign finance system, there is no need more 
obvious that that of full disclosure laws. Organizations that 
are afforded special tax-exempt status by our laws should not 
enjoy the ability to influence elections while remaining 
shielded from the scrutiny of the American people.
    I believe that like political candidates and political 
action committees (PACs), tax-exempt organizations that make 
financial contributions should be required to disclose fully 
the sources of their funds. Furthermore, the officers of such 
organizations should be made known to the public, in addition 
to other reasonable requirements deemed necessary to ensure the 
American people know who is influencing the political process.
    The explosion of technology--particularly the Internet--has 
afforded us the remarkable opportunity of having near-instant 
disclosure of campaign donations. While I believe donating to 
political candidates or grass-roots organizations is a 
fundamental American right, and one that should not be 
discouraged, I am equally convinced that disclosing the sources 
of these contributions will provide for an electoral system 
that is cleaner and less susceptible to corruption.
    Thank you, Mr. Chairman.

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