Yet Another Layer of Tax Laws Shields Donors

Listen: Peter Overby's Sept. 21, 2004, Morning Edition Report

Not for the first time, millions of dollars meant to affect election outcomes are moving where nobody's looking.

Public attention remains focused on what are now commonly called "527 organizations" (so named because they're organized as purely political non-profit groups under Section 527 of the tax code). They can raise unlimited sums from corporate, union and individual donors, and because they don't have the same accountability requirements as candidates and political parties, they can produce some of the meanest messages of the campaign season while the candidate they favor stands off to one side.

Odds are slim to none that the anti-Kerry Swift Boat Veterans for Truth, the liberal Media Fund or any other 527 will actually be brought under effective regulation before Election Day. Odds are they will not even be embarrassed enough by publicity to change tactics.

But the once-obscure 527 money is relatively famous now in comparison with some other forms of political finance. And some of Washington's less-noticed money movers are fretfully awaiting an upcoming analysis of an entirely different pot of money.

As early as Monday, the ardently liberal group Public Citizen plans to release a report on groups organized under Sections 501c4, c5 and c6, categories that include some of the country's most aggressive political players. The report is expected to shed light on previously undisclosed sources for the millions some of these organizations spend.

Section 501 of the tax code lays out the definitions for various non-profit groups. The best known are the 501c3 charities, classics such as the Red Cross or the Salvation Army. Contributions to c3's are tax-deductible, and that means they are essentially barred from political activity.

But there are all sorts of other 501c's as well: c7's are social and recreation clubs, for example.

But in Washington, the really important categories are these three: 501c4 — "civic leagues and social welfare organizations" in IRS nomenclature, which includes many lobby groups; 501c5, which includes labor unions; and 501c6, which covers business leagues and chambers of commerce.

All of these groups can engage in some political activity. None of them can make politics their primary purpose. But the distinction between primary and secondary purpose is among the grayest of gray areas in the landscape of campaign finance.

When the AFL-CIO or U.S. Chamber of Commerce runs ads about your local member of Congress, is that a political purpose? How about if a Washington trade association, or even a corporation, sends money to a grassroots-style group, and that outfit starts phone-banking or mailing messages that attack the lawmaker. How political is that?

And how would anyone know? Many 501c's routinely report zero spending for "direct and indirect political expenditures." And for years, political money watchdogs have suspected that some of the big political money is shielded from public view precisely because it flows through 501c4's.

Non-profit groups file Form 990 tax returns, and unlike your own 1040, these are public documents. By law, you can walk into the office of a 501c, ask for the 990 and expect to see it. Or at least, most of it. Donors of $5,000 or more are listed on the 990, along with the size of their contributions. But in the public version of the 990, the donors' names are whited out.

This is very close to the way 527s used to operate — in secret. The 527s lost their privacy in 2000, when a couple of Friends of George in Texas set up something called Republicans for Clean Air to slam Sen. John McCain in the Republican presidential primaries. McCain reacted by pushing a 527 disclosure bill through Congress.

Now, 527s have to report their donors quarterly to the IRS. And thanks to the McCain-Feingold campaign finance law, they have to disclose the donors who finance electioneering ads on TV, in reports to the Federal Election Commission. Thus we know, for example, that Jay Van Andel and Richard De Vos, of Amway fame, each gave $2 million to the Progress for America Voter Fund earlier this month.

But for 501c4's, the only similar disclosure occurs when a Form 990 slips out without the normal redactions (whiteouts). This happens just often enough — a million dollars given here, a million spent there — to make reporters and other inquisitive people wonder what else is going on.

Washington's organizations that are c4's like it this way. Their political work stays just outside of the territory regulated by the FEC, and their donors stay out of the spotlight.

Which is why they're so anxious to find out just how much information Public Citizen has dug up.

NPR's Peter Overby has been taking listeners behind the scenes of American politics, where the money is raised and deals are made, since 1994.

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