WASHINGTON -- Not long ago, a Republican political consultant from Southern California was seething at organized labor's success at running ads and mounting voter mobilization efforts for Democratic candidates.
Well-heeled associates told the consultant they would be willing to put up big money for a counterattack -- as long as their involvement could be kept secret.
A continent away in the nation's capital, the head of a major environmental group that tilts toward Democrats was wondering how to handle several prospective donors flush with cash who wanted to make contributions shielded from taxes and public attention.
Both the consultant and the environmental leader seemed to have a problem: The Internal Revenue Service was starting to clamp down on the political activities of not-for-profit groups that are allowed to keep the names of contributors private. Independently, they found new possibilities in Section 527 of the Internal Revenue Code. Lawyers told them that organizations such as theirs could use it to fly below regulatory radar.
Section 527 turned out to be a boon for those wishing to donate quietly. For others committed to public disclosure of how political campaigns are financed, the obscure IRS provision has become the loophole from hell.
"These stealth groups are throwbacks to the off-the-books slush funds of the Watergate era," said Scott Harshbarger, president of the citizens lobby Common Cause. "Just when you thought campaign finance couldn't get worse, it does." These new tax-exempt organizations can raise and spend unlimited sums on behalf of candidates without having to identify donors publicly or reveal how the groups are using those funds.
In addition, the groups can accept direct donations from corporations, labor unions and foreigners -- sources of funding forbidden to candidates or political action committees.
The organizations must file tax forms that identify officers, sources of income and expenditures, according to the IRS. But these documents, unlike those for other not-for-profit groups, are withheld from the public by law. The groups are not required to acknowledge their presence to the Federal Election Commission, which is charged with regulating elections for federal office. They do, however, have to put the name of their organization on any ads they run.
Faces in the shadows
In delegate-rich California, a group called Shape the Debate paid for television ads last month attacking Vice President Al Gore, the likely Democratic presidential nominee, spoofing the game show "Jeopardy" with its version, called "Hypocrisy."
Shape the Debate, which proclaims its devotion to the principles of free enterprise, was developed by longtime associates of former California Gov. Pete Wilson, a Republican. The group's Web site touts the anonymity given its individual and corporate contributors.
Like other Republicans involved in such groups, Wilson strategist George Gorton said he was inspired by advertising and voter mobilization drives conducted by organized labor, even though the unions did not employ the Section 527 loophole.
"I was amazed about what unions were doing in the 1998 political cycle," said Gorton, who helped set up Shape the Debate. "I told my friends it was outrageous, and they said it was a constitutionally protected form of speech. ... I thought there ought to be a business voice."
Gorton said his friends -- businessmen who became his patrons -- wanted to keep their involvement off the public record because they feared retribution from Democrats. So, Gorton gave them a voice, but to ease their skittishness kept their faces in shadow.
The League of Conservation Voters, which tends to support Democrats, has created its own 527 organization, which expects to spend $1.5 million this year.
Deb Callahan, president of the Washington-based league, attempted to distinguish the 527 account run by her well-established group from those such as Shape the Debate, which she called "headless horsemen" that sprout up without warning. But she acknowledged starting her group's 527 offshoot partly to ensure that a handful of wealthy donors could give money to the league anonymously.
A similar group, the Sierra Club, has roughly $7 million to spend on this year's elections from its 527 account, said Bruce Hamilton, the club's conservation director.
Attacking with ads
The handiwork of the so-called 527 groups has been seen in television ads savaging congressional candidates in California, New York, New Jersey, Kentucky and Missouri this campaign season, courtesy of groups with bland names, thick bankrolls and unidentified benefactors. Despite howls from public watchdogs such as Common Cause, it is likely that there will be more such attacks.