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PACs remain stealthy despite disclosure law

By Sarah Wright
Campaign Finance Information Center

The so-called stealth PACs cannot seem to shake their unflattering moniker, despite a disclosure law that went into effect in 2000. But critics say that even with the reform measure, these groups are as stealthy as ever.

"The name still applies," says Shelia Krumholz, research director at The Center for Responsive Politics, a Washington-based watchdog organization. "They are still a stealthy way to get political money in elections."

Stealth PAC was a term coined in the late 1990s to describe political action committees that took advantage of a loophole in the tax law to avoid oversight by the Federal Election Commission. These groups incorporated themselves under Section 527 of the federal tax code, which governs taxation of most types of political organizations. But they avoided FEC oversight because they refrained from spending money on specific candidates and kept their messages and efforts broad.

"It's a group that is, on one hand, telling the IRS that it shouldn't be taxed, but doesn't report to the FEC because it doesn't influence specific elections. It's like being a little bit pregnant," says Celia Wexler, senior policy analyst at Common Cause, the watchdog group that coined the term stealth PAC in its report "Under the Radar."

As long as these groups keep words like "vote for" or "vote against" out of their message, stealth PACs were within the limits of the law and out of FEC reach. They can accept unlimited amounts of money from any source (even groups barred from contributing to other kinds of committees). Before the disclosure law, there was no requirement that they disclose who their supporters were or where they spent their money.

They jumped into campaigns with an 11th-hour media barrage like a cleanup hitter in a baseball lineup. The trouble is, people didn't know who was on what team because stealth PACs have ambiguous names (Mainstream America, Restore America and Saving American's Families Everyday, for example). The blandness gave these groups a forgettable presence and allowed them to engage in electioneering without revealing who they really were.

In 2000, a stealth PAC called Republicans for Clean Air launched a multimillion-dollar attack on Arizona Sen. John McCain's environmental record when McCain was challenging Texas Gov. George W. Bush for the Republican presidential nomination. At the time, no one knew who was behind the ads. Later, it was revealed that funding for the group came from Texas millionaire Sam Wyly, a Bush supporter.

Sometimes stealth PACs were affiliated with nonprofit organizations such as the Sierra Club. Nonprofits are permitted only limited political activity. In other cases, they were affiliated with politicians looking for a way to funnel otherwise illegal campaign contributions into an election.

Many weren't even active corporations or associations, but were little more than a bank account for campaign donations and expenditures. For obvious reasons, stealth PACs became a popular tool for both parties during the past several election cycles.

"The Sierra Club was one of the first groups to form a 527," says Krumholz "It is certainly not a tool of the left or the right."

The law has been successful in opening up the records, but critics say it fails to curb the flow of this money into elections.

The law -- Public Law 106-230 - makes the workings of these groups more transparent. The law does three major things: It requires the 527 political organizations to register (using Form 8871) with the IRS, file periodic financial reports (Form 8872) and make these filings public.

Another disclosure development as of June 2000 is that the IRS Form 1120-POL is open to public inspection. The 1120-POL is a form for reporting revenue that is unrelated to exempt function, such as investment income, rental income or something of that nature. This signals a big change, because the form, entitled "U.S. Income Tax Return for Certain Political Organizations," is essentially a document detailing what a particular group paid in taxes. Generally, tax-reporting forms are off limits to the public. Note that groups that file the 1120-POL will also file the Form 990 unless they have less than $25,000 in gross receipts. The rules of disclosure and public inspection for 1120-POL, and Forms 990, 8871 and 8872 are the same; the group must allow the public access to these forms during normal business hours.

These disclosure requirements are still less stringent than those generally required by the FEC. A political committee must register with the commission once it surpasses $5,000 in contributions toward a federal election. Section 527 organizations generally do not have to register until they surpass $25,000 in annual receipts. The IRS requires these 527 groups to register within 24 hours if they "reasonably expect" to have more than $25,000 in annual receipts. But the PAC can get around the 24-hour filing deadline by claiming that it did not "reasonably expect" its annual gross receipts to be more than $25,000. Once the said PAC hits the $25,000 threshold, it has 30 days to file paperwork. By comparison, traditional political action committees must file with the FEC within10 days of reaching the $5,000 threshold.

Even with disclosure, it is still hard to track the money. The forms are filed over the Internet. But unlike federal filings, they are not being compiled into a complete, central database. The lag time of disclosure is a particular problem because "you can't do real-time research," Krumholz says.

Further, these documents are self-reported. The IRS is still feeling its way through compliance, and it is not yet known what would trigger an audit or investigation of these groups.

Since the law went into effect July 1, 2000, some 12,035 groups have registered with the IRS. The IRS is trying to list these groups and post their forms online, but that is an ongoing effort. Fewer than 600 organizations turned up on a search of all 527 groups, which is fewer than 5 percent of the total on record and there is not yet a database of 527 organizations.The IRS has posted some of the forms from the stealth PACs that are listed here: eforms.irs.gov/search_result.asp. They are available in a format that is easier to search at Political Money Line, www.politicalmoneyline.com.

Getting the goods is easier with the new disclosure laws, but it still takes a committed hunt. Here are a few tips that might help:
  1. If PACs are running radio or television ads, the buys they make and how much they spend are public record. Sometimes stations will tell reporters a bit more than that, such as the name of the person who bought the ad.
  2. If PACs are sending print materials, get them. Compare them to materials sent by the candidate they are tacitly supporting. Remember that sharing a mail house or consultant can constitute a contribution "in-kind" and may be reportable to the FEC, as well as a violation of the law. If there are similarities in the photos used, or the same permit number on the mailing account, those are tipoffs that there may be some coordination.
  3. Always check to see if the organization is incorporated and, if so, get those documents. Usually, these organizations are little more than bank accounts, but it's worth checking.
  4. There may be state laws that apply in some cases. Know your state's election laws.
  5. To find out more about what kind of disclosure laws apply to tax-exempt groups, see the IRS paper on Election Year Issues at www.irs.gov/bus_info/eo/topicI02.pdf.
  6. If there are active nonprofit organizations in your state, check to see if they are affiliated with any PACs or have established a separate segregated fund. Such an affiliation would be declared on the group's Form 990, the informational return of a tax-exempt organization.
Sarah Wright is the assistant director at the Campaign Finance Information Center.