527 GROUPS: Political nonprofits flouting the law?
Reports find disclosure rules are being ignored, and regulators doing little about it.

By Andrew Benore
Public Citizen

In March of 2000, during the New York Republican presidential primary, Sen. John McCain (R-Ariz.) was attacked out of the blue by an organization called Republicans for Clean Air, which began spending millions of dollars on campaign ads.

At the time, the law didn’t require the organization to file disclosure forms of any kind. It did not limit the amount of money the group could raise and spend. It did not require the group to reveal its backers, or even its founder.

These were anonymous attack ads funded by anonymous donors. As it turned out, the New York ads were funded by Sam Wyly, a longtime supporter of McCain’s chief rival in the primary, George W. Bush – a fact that did not come to light until well after the election. This was what brought national attention to the rise of political nonprofits -- sometimes called section 527 organizations or stealth PACs.

Republicans for Clean Air was just one of many similar groups in the 2000 election that were spending massive amounts of money – lavish parties for members of Congress, federal politicians doling out contributions to state candidates and million-dollar ad campaigns. But it was nearly impossible to learn who was behind these attempts to influence politicians and elections because they were not required to even reveal their existence.

As a result, McCain and his reform allies, including Public Citizen, spurred Congress two years ago to pass a disclosure law covering nonprofit groups “primarily engaged in electioneering.” The law required these shadowy groups for the first time to reveal organizational information, contributors and how money is spent to the Internal Revenue Service.

Public Citizen decided to use this new flow of information to learn more about who was behind the money. We wanted to better understand who contributes to 527 groups and why, how the organizations influence elections, limitations of the IRS disclosure system and effectiveness of IRS enforcement and compliance programs. Disclosure by 527 groups was required, but Public Citizen wanted to know what the public, media and government watchdogs could learn.

Public Citizen has issued four reports documenting the first two years of disclosure. We have determined that organizations identified as being active in federal elections raised $156.7 million and spent $181.1 million during the past two years (expenditures are higher because some groups raised money prior to enactment of the 527 law). So far during the 2002 election cycle, 150 of the top 527 groups have raised $79.3 million. By comparison, the national parties raised $495 million in soft money during the 1999-2000 election cycle.

That was the big picture, but to bring it into focus, we had to build and analyze a database of contributors, tally expenditure reports and test the IRS disclosure system.

Getting Started: A Search For 527 Groups

The 2000 law requires 527 groups to file a statement of organization (Form 8871) and periodic reports detailing contributions and expenditures (Form 8872). In election years, the contribution and expenditure reports are due quarterly as well as 12 to 15 days before the November election and 30 days after the general election. In odd-numbered years, only mid-year and year-end reports are required. These disclosure reports are posted in PDF format on the IRS website at http://eforms.irs.gov.

To research these reports, Public Citizen looked at several hundred 527 groups, mostly by opening electronic files and attempting to learn if the organization was active in federal elections. Other groups were outed by media or government watchdogs like the Center for Public Integrity or PoliticalMoneyLine.com. But 527 groups are being formed every day and, undoubtedly, some groups active in federal elections remain uncovered.

We have focused on 527 groups active on the federal level, but the vast majority of the more than 17,000 groups are created by politicians and organizations interested in influencing state and local elections.

Fortunately, there are tricks and alternatives to clicking through a morass of more than 17,000 groups listed on the IRS online disclosure site. We looked at existing groups’ expenditures to see where money was going; checked to see if organizations running issue ads were 527 groups or had 527 accounts; took a closer look at new groups created by political operatives who run other 527 groups; searched the IRS site using the name of the Congress members’ hard money leadership PAC; and used the advanced search engine to identify groups created in Washington, D.C.

Creating the Databases

After finding the 527 soft money vehicles, it was time to learn what drives them. Contributors were listed on 8872 forms and the employer and occupation must be revealed for all donors that give more than $200. Using this information, Public Citizen built a donor database by entering the name, employer, reporting period and amount of every contribution more than $5,000 given to groups active in federal elections.

Organizations and donations were then coded. The 527 groups were categorized by party affiliation, purpose and defined as a “politician 527” if they were linked with a member of Congress or “non-politician 527” if they were an interest group promoting a cause. Contributors were coded by type of donor (individual, corporation, union) and by industry and sector. The basis for the industry coding was the Center for Responsive Politics’ contributor classification system, which uses 13 sectors (such as agribusiness or transportation) and about 100 industries (such as dairy or trucking).

The 4,000 coded contributions in Public Citizen’s database show that public sector unions are the biggest industry/interest group donor ($21.6 million), the largest type of contributor to groups run by federal politicians is lawyers/law firms ($3.4 million), AT&T is the largest corporate giver to politician 527s ($421,000), and actress Jane Fonda is the biggest donor overall ($12.7 million). Public Citizen hopes to have this database available online by Oct. 1.

That took care of what was coming in, but equally important was how the money was being used to influence elections. This task of identifying expenditures was made difficult because 527 groups are not required to list the general purpose of expenditures, unlike political groups that report to the Federal Election Commission. So without an official explanation of how the money was spent or exact dates, a system of cross checking was used to create a database describing expenditures in categories like media buys, staff, direct mail, national parties, entertainment, polling and consultants.

Issue ads ($33.3 million), contributions to national parties ($7.4 million), staff ($3.5 million) and direct mail and telemarketing ($3.2 million) were among the biggest expenditure types included in Public Citizen’s report that covered July 2000 to December 2001.

Problems We Encountered – Groups Can Flaunt the Law

A key part of Public Citizen’s analysis of 527s has focused on groups’ compliance with the disclosure law and IRS enforcement efforts. Research for our reports involved compiling examples of missing reports, late filings and incomplete submissions, but it was difficult to assess blame because the IRS could not say for certain if groups were in compliance since it had no enforcement and inspection program. So with no cop on the beat two years after disclosure began, 527 groups can skirt the laws with impunity.

The most egregious disclosure violation is total failure to file reports. We have found several examples of this, including a pre-election report that should have been filed by House Speaker Dennis Hastert’s (R-Ill.) KOMPAC in October 2000. After inquiries by Public Citizen, KOMPAC filed the report on March 19, 2002 – 14 months late – and reported $259,959 in contributions and $867,708 in expenditures. In fact, late filings by many groups plague the system.

Scores of groups also failed to fully reveal the employer and occupation of individual donors who gave more than $200, as is required by law. A glaring example of failure to provide this critical information is the Republican Leadership Coalition. The group listed more than 1,600 individual contributors without disclosing the employer or occupation.

The stated purpose of 527 groups, when they file with the IRS, has been woefully incomplete in some cases. Information describing a group’s activities is required to be filed on their statement of purpose -- IRS Form 8871. But some groups, thumbing their noses at the disclosure law, have listed “any legal purpose” or “political group” instead of truly detailing their missions.

In an effort to kick off an enforcement project and spur some out-of-compliance groups to come clean, the IRS created an amnesty program in May 2002 that let any group file missing or incomplete reports by July 15, 2002 without running the risk of penalties. Several groups took advantage of this, notably, the Bush-Cheney Recount Fund, which reported $10.2 million in contributions and $13.8 million in expenditures more than 18 months late. But even though the amnesty program has ended, a compliance program still does not appear to be in place.

Another Challenge: Disclosure System Hampers Disclosure

Disclosure is meaningless unless it opens 527 groups to scrutiny. So a test of the IRS online disclosure Web site was needed to judge accessibility and see if groups’ information could be found and whether reports were posted correctly. This disclosure site, which should be a pathway to information, is more accurately described as an electronic filing cabinet with more than 17,000 files and no index.

First, accessing 527 groups’ filings requires users to know the exact, sometimes quirky, way that organizations’ names are entered into the online disclosure Web site. As an example, to find the environmental group Sierra Club, you must type in “The Sierra Club.” Entering “Sierra Club,” “Sierra” or “Club” will produce no results.

The disclosure system itself can even stymie disclosure. The IRS Web site indicates that second quarterly disclosure reports covering April 1-June 30, 2002 are available for many groups active in federal elections, but electronic links to the reports do not work. From at least August 5–22, links to the second quarterly reports took users only to an error page for several groups, including Gay and Lesbian Victory Fund, Rep. Martin Frost’s (D-Texas) Lone Star Fund, Rep. Charles Rangel’s (D-N.Y.) National Leadership PAC, National Tax Limitation Committee, Sen. Harry Reid’s (D-Nev.) Searchlight Leadership Fund and Rep. Roy Blunt’s (R-Mo.) Rely on Your Beliefs Fund.

Don’t expect the advanced search engine to provide much help: It can query only electronically filed reports, which represent about five percent of all filings. Worse, the IRS does not warn of its limited nature. The danger comes when a user looks up Enron employees who have donated and, finding none in the advanced search, thinks no one from the bankrupt energy giant contributed. (In fact, former CEO Kenneth Lay has contributed at least $55,000 to 527 groups and former vice chairman Joseph Sutton gave at least $25,000.)

We got around some of these pitfalls by going straight to the source: The disclosure law says that the public can inspect groups’ reports at their offices during normal business hours and this allowed us to track down some missing filings.

Soft Money All Over Again

With soft money prohibitions contained in the McCain-Feingold/Shays-Meehan campaign reform law, the future of 527 groups could look like expansion and contraction. Nonpolitician 527s, like EMILY’s List or the Republican Leadership Council, could serve as conduits for larger amounts of soft money that would have been given to the national parties. But 527 groups created for members of Congress could be forced out of business. It remains to be seen how the FEC and IRS will interpret the law, which prohibits soft money from being raised or spent by groups “created by directly or indirectly established, financed, maintained or controlled by or acting on behalf of” a federal politician.

These looming changes mean media and government watchdog groups must be on the lookout for new soft money groups impacting elections, disclosure failures and fund-raising trends. Are politicians encouraging former staff and loyalists to form 527 groups that will be unaffected by the upcoming ban (groups like Daschle Democrats Inc. and the Priorities Project may be a peek at the future)? Will donors maxing out hard money limits turn more to 527 groups? Will donors who can no longer give six-figure checks to the national parties steer contributions to 527 groups? Will technical problems and delays in posting reports mean that the public will have to wait until after the election before learning about these groups?

Given the history of exploiting loopholes in campaign finance laws, it is likely that the answer to all of these questions will be a resounding yes and that a flood of soft money will shift to 527 vehicles to influence future elections and further undermine our democracy.

Andrew Benore is a researcher for Public Citizen's Congress Watch program. He can be reached by email at ABENORE@citizen.org.

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