Congress May Push Donors to Unregulated U.S. Political Groups

July 11 (Bloomberg) -- The U.S. Senate investigation of lobbyist Jack Abramoff is raising the curtain on a multibillion- dollar world of tax-exempt groups poised to become the next refuge of fundraisers trying to stay a step ahead of regulators.

The groups, called 501c4s for the section of the tax code under which they fall, were among the vehicles that Abramoff used to move money around on behalf of clients, according to e-mails released by the Senate last month.

While 501c4s are prohibited from spending more than half their resources on political activity, their combined budgets of $52 billion dwarf the major parties. Election lawyers say a congressional attempt to rein in other groups, such as the Swift Boat Veterans for Truth, which were prominent in last year's presidential campaign, may end up driving more money into the 501c4s, whose ranks include such well-known groups as AARP, the nation's biggest senior-citizens' organization, and the National Rifle Association,.

``Money in politics is like air in a balloon: Any time you compress it one place it's going to pop out somewhere else,'' says Kenneth Gross, who was the Federal Election Commission's head of enforcement in the 1980s. The 501c4s are ``a logical place for it to come out.''

Senators John McCain, an Arizona Republican, and Russell Feingold, a Wisconsin Democrat, are trying to limit what they say are excesses by political organizations known as 527 groups, named for a different section of the tax code. These include the Swift Boat Veterans, which ran advertisements against Democratic presidential candidate John Kerry in 2004, and America Coming Together, a group that went after President George W. Bush.

$5,000 Limit

Unlike the 501c4 groups, the 527s must disclose their major contributions and how they spend the money, all of which they can use for political activity. Both groups can take in unlimited funds, although legislation sponsored by McCain and Feingold would change that for the 527s. The measure would limit donors to contributions of $5,000 a year. A House panel approved a companion measure on June 29.

Some 527s have already morphed into 501c4 organizations. They include Washington-based Progress for America, which raised $45 million last year to run ads supporting Bush and criticizing Kerry. This year, the group has an $18 million campaign ready to support Bush appointments to the Supreme Court, including the replacement for Justice Sandra Day O'Connor, who announced her retirement July 1.

Household Names

Many of the more than 107,000 501c4 organizations registered with the Internal Revenue Service are household names. The biggest is Washington-based AARP, with a budget of $626 million in 2003. Next is the Fairfax, Virginia-based National Rifle Association, with $233 million, followed by the Sierra Club, a San Francisco- based environmental group, with $95 million. Chartered to ``further the common good,'' the groups lobby on a range of issues and have millions of small donors.

``They're a potent force in American politics,'' says Gross, now a partner at the Washington office of Skadden Arps Slate Meagher & Flom LLP.

Lobbyist Abramoff -- whose partner, Michael Scanlon, was formerly a top aide to House Majority Leader Tom DeLay -- used one 501c4 group to funnel money from his Indian tribe clients to projects run by political operatives, according to e-mails released June 22 by the Senate Indian Affairs Committee. The tribe paid at least $1 million to Washington-based Americans for Tax Reform, founded by tax-cut advocate Grover Norquist, which passed out checks to a coalition trying to block casino gambling.

A smaller subset of the 501c4 groups is more focused on electoral politics. Without a requirement to detail their expenses, it's almost impossible to know how much political activity they engage in, experts in campaign finance say.

`Unaccountable'

The groups took in a total of $52.1 billion in the most recent year in which they filed, according to IRS records compiled by PoliticalMoneyLine, a Washington-based company that tracks campaign finance. Only part of that went toward politics, yet it potentially outstripped the $2.9 billion raised for federal elections last year.

``There's no accountability,'' says Kent Cooper, a co-founder of PoliticalMoneyLine. ``You wind up with an unregulated, unaccountable organization moving millions of dollars into the corners of the political arena.''

Colorado Springs, Colorado-based Focus on the Family, an evangelical Christian organization, used its 501c4 arm to support Republican Senate candidates such as John Thune of South Dakota in his successful bid last year to unseat Democratic Leader Tom Daschle. It formed a 501c4, Focus on the Family Action, before the election, spokesman John Wilson says. IRS records show the group has a budget of $13.4 million.

Lots of Leeway

Washington-based Citizens United last year ran ads in Florida and Ohio. The group also produced a movie, ``Celsius 41.11,'' in response to director Michael Moore's anti-Bush ``Fahrenheit 911.''

Next year, the group plans to work against New York Democratic Senator Hillary Clinton's re-election.

``A 501c4 can do lots of things related to an election,'' Citizens United President David Bossie says.

Whether a group crosses the 50 percent limit for political activity ``is difficult to determine at the margins,'' says Marcus Owens, a lawyer at Caplin & Drysdale in Washington who headed the IRS tax-exempt organizations unit from 1990 to 2000.

Searching for C4s

McCain's Indian Affairs committee began investigating Abramoff to explore his handling of millions of dollars in tribal money. Some of the e-mails the committee released showed Abramoff and Christian activist Ralph Reed discussing how to move funds for a project to kill an Alabama gambling initiative. Abramoff's client, the Mississippi Band of Choctaw Indians, owned a casino that might suffer from competition.

``Please give me the name of the c4 you want to use,'' Abramoff wrote in January 2000 to Reed, who's running for lieutenant governor of Georgia.

They settled on Americans for Tax Reform, the e-mails showed. The Choctaws sent money to Norquist's group, and it wrote checks to Reed's anti-gambling coalition.

Abramoff's use of tax-exempt groups has drawn the attention of senators such as Byron Dorgan, a North Dakota Democrat.

``If you dyed that money purple, there would be a lot of purple pants pockets around this town and in the country,'' Dorgan said at the Indian Affairs Committee hearing. ``This is probably not the only circumstance where that happens.''

Long History

Americans for Tax Reform spokesman Chris Butler defended the contributions from the Choctaws. ``Native Americans have just as much right as anyone else to participate in American politics and donate money to any group they want,'' he says.

The contribution to Norquist's group ``was entirely appropriate and was not an attempt to disguise the funds,'' says Lisa Baron, a spokeswoman for Reed. ``Using intermediaries is common.'' Abramoff spokesman Andrew Blum had no comment.

Opponents of the 2002 McCain-Feingold law that cut off unlimited donations to the political parties say the growth of groups such as 501c4s is the natural consequence of trying to put limits on campaign finance.

``To think that you're going to keep money away from politics is folly,'' says Representative John Boehner, an Ohio Republican. ``We lock down what you can give to the parties and we create this whole new industry on the outside.''



To contact the reporters on this story:
Mike Forsythe in Washington mforsythe@bloomberg.net
Kristin Jensen in Washington kjensen@Bloomberg.net

Last Updated: July 11, 2005 00:19 EDT