Another Loophole?
527 disclosure provision could allow big donors to remain anonymous
By Steven Weiss

May 26, 2004 | A little-noticed provision of the Internal Revenue Code permits so-called 527 groups spending millions of dollars on this year's elections to withhold information about their donors.
The provision could become a major loophole that allows 527s to keep secret the identities of wealthy individuals and organizations contributing six- and seven-figure sums for ad campaigns and other communications designed to influence people's votes this election season.

So-called 527 groups, which are named for the section of the tax code that governs them, have become major players in this year's elections, the first to be held under new campaign finance rules that ban the national political parties from raising or spending unlimited soft money contributions.

The Federal Election Commission this month chose not to regulate 527s involved in federal elections as political committees, a decision that is expected to encourage these groups to multiply. Republicans have announced plans to quickly form 527s that will compete with the slate of Democratic-leaning groups that already exists.

The tax code provision at issue was included in legislation signed into law in 2000 that requires groups organized under code section 527 to file regular reports with the IRS that detail their contributions and expenditures.

These groups must identify the name and address of contributors of $200 or more and recipients of $500 or more. If the donor or recipient is a person, the group is supposed to list the employer and occupation of that individual.

However, section 527(j) of the tax code, as amended in 2000, allows groups to omit disclosure information as long as they pay a tax on the amount not disclosed. 527 groups do not pay taxes on income that is properly disclosed.

The Center, which has been collecting financial information on 527s since the beginning of the current election cycle, has discovered a total of 13 records in the reports of nine committees that list contributors as "withheld" or "N/A." Another 38 records in the reports of 12 committees list the recipients of expenditures as "withheld" or "N/A." No identifying information about these individuals or organizations is provided.

In at least one case, the missing disclosure apparently was the result of confusion over reporting requirements, not of an attempt to take advantage of the loophole.

GOPAC, a Republican-leaning group whose chairman is former Rep. J.C. Watts of Oklahoma, filed a report for the second half of 2003 that listed "withheld" for contributions that exceeded $125,000. The group also listed more than $200,000 in expenditures as "withheld." GOPAC has raised a total of more than $584,000 in the current election cycle.

The Bureau of National Affairs reported today that according to one GOPAC official, the group entered "withheld" for contributions under $200, which do not have to be itemized. The official told BNA he "misread" IRS reporting instructions.

The law compelling disclosure by 527 groups was signed just months after the 2000 presidential nominating season, during which mysterious groups whose donors were unknown spent millions of dollars on televised ads that touted or criticized federal candidates.

One such group, called Republicans for Clean Air, spent a reported $2.5 million on ads that were highly critical of Republican presidential hopeful John McCain. Sam Wyly, a wealthy Dallas entrepreneur and longtime backer of then-Texas Gov. George Bush, later claimed credit for the spots, which contributed to the McCain campaign's demise.

More Information
The Major 527 Groups (Opensecrets.org)
"Withheld" 527 Receipts and Expenditures

New Jersey Governor James McGreevey wnats to change the 'pay-to-play' system in New Jersey
An Order to Reclaim 'the Integrity of the Government'
NY TIMES, September 23, 2004

Following are excerpts from Gov. James E. McGreevey's statement yesterday announcing his order banning campaign contributions by vendors that do business with government agencies in New Jersey:

For better or worse, recent events have been a catalyst, providing me with a personal and political freedom that has enabled me to confront challenges I have avoided in the past. Time will afford plenty of opportunity for me as an individual citizen to process my own personal issues. However, my few remaining days as your governor require me, in fairness to you, the people I serve, to take quick action on governmental challenges. One of the issues which has caused me discomfort but with which I had avoided is the pay-to-play system in New Jersey.

Today, the relationship between political fund-raising and government operations has become corrosive and cancerous. Legitimate lines of behavior are blurred, ethical ambiguities are the norm and the need to sustain an all-consuming fund-raising effort has become almost as important as the function of government itself.

In county and state government, elected officials have become all too mindful as to who supports our political success through fund-raising efforts. The wall, the separation, between politics and government, between campaign finance and government operations, between state interest and personal interests, has disintegrated.

To be clear, most contractors and vendors who happen to be donors provide outstanding service and do not expect a quid pro quo. I have also seen, and believe, that most elected officials are honest, act with integrity and distinguish clearly between their elected office and their political roles. However, the existence of the pay-to-play system raises the possibility of line crossing.

Perhaps even more importantly, the existence of the system has eroded the public confidence in the integrity of the government.

The fault lies, not merely in the person, but in the system which now exists. The system, by definition, appeals to human weakness. It offers a temptation to elected officials and contractors to place their respective personal interests ahead of the interest of the state.

I am issuing an executive order today which will forbid a contractor doing business with the State of New Jersey from contributing to a gubernatorial candidate or any state or county political organization. The order also restricts contributions by certain 527 organizations and contains disclosure requirements.

To my colleagues in government, I know that this may cause consternation and anger. Change can be uncomfortable. The goal is to liberate those who seek to serve to do so unfettered by these possible conflicts, and it will reassure the people we serve that we do so honestly and decently. I take this action recognizing that cynics may say that I am doing this to create a legacy for myself - a Hail Mary pass of sorts to seek redemption. Critics will say what they will, but I tell you, I do not hold onto some hopeful notion that I will be known for much more than as the governor who resigned - and I am at peace with that. Others may say that I am hypocritical, in biting the hand that fed me. Believe me, I am more aware than ever of my own frailties, but that does not justify inaction.

Apart from judging or determining the moral framework of this action, this executive order itself will hopefully transcend all political carping and speculation about motives and will instead provide for a better New Jersey.

And finally, to the citizens of New Jersey, I have felt your goodness. I have felt your kindness. I now know that we are capable of doing great things. One may not be able to change the past, but we can learn from it and we certainly can change the future.

Today, finally, I am seeking to put an end to politics as usual in Trenton. God knows I wish that the circumstances were different, but they aren't. In a few minutes I will be signing executive order No. 1,000, which will provide the most sweeping campaign finance reform this state has ever seen.

And I know in my heart of hearts that this is the right thing to do. Thank you.