[House Hearing, 106 Congress]
[From the U.S. Government Publishing 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.
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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)).
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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.
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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.
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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).
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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).
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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.''
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\74\ See 2 USC 431(8)(A) and 431(9)(A).
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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.
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\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).
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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\
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\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).
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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.
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\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.
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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.
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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.
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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).
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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.
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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\
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\8\ Common Cause, Under the Radar: The Attack of the ``Stealth
PACs'' on Our Nation's Elections, A Report From Common Cause.
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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.
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\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.
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\5\ 459 U.S. 87, 96-98 (1982)
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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.
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\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.
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\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.
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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.
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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.
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\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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