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Club for Growth, Other Big Groups Altering Tax Status

The Club for Growth, the conservative political organization known for targeting moderate Republican lawmakers, recently shelved its 527 tax status in favor of the designation used by AARP, the National Rifle Association and others, a legal retooling many expect to accelerate as the 2008 election cycle turns on the afterburners.

“There’s been a lot more scrutiny over the past several years on 527 organizations,” said Michael Toner, former chairman of the Federal Election Commission and now a Republican election law attorney in private practice. “There’s a growing recognition that 501(c)’s are the vehicles of choice in this legal and political environment.”

Former Rep. Pat Toomey (R-Pa.), the group’s president, first told club members in January of the plan to transfer operations from the much-maligned 527 tax status to 501(c)(4), a section of the tax code used by social welfare organizations. Charities, labor unions and business groups also are organized under section 501(c) of the tax code.

“I’ll spare you all the minute details here, but in a nutshell, when you first joined the old Club it was a ‘527’ organization,” Toomey wrote to the club’s members in a February e-mail. “Such groups proved so effective at highlighting the harmful policies of Members of Congress and presidential candidates like John Kerry that the political class made it practically impossible to continue in that type of structure.

“Because of the outrageously anti-First Amendment regulatory schemes of the Federal Election Commission,” Toomey continued. “And because the self-serving career politicians in Congress are now on the verge of banning the old Club’s structure. In response, the old Club for Growth’s board of directors unanimously decided to make a few changes.”

The club’s reorganized tax status will alter little of the group’s focus on “promoting economic freedom,” Toomey wrote, but also will allow unlimited anonymous donations from individuals and allow the group to take part in a variety of new lobbying activities. Club directors also reconfigured its political action committee, which it can use to channel hard-dollar donations to candidates.

“With the Democrats now in charge of Congress, we need that hard-hitting advocacy more than ever … we can now directly lobby Congress and run grassroots lobbying campaigns without paying huge tax penalties,” Toomey wrote. “Unlike in the past, your donations to the Club will not be disclosed to the public, except in very limited circumstances.”

A report out Tuesday by the Campaign Finance Institute also suggests that 527s will prove passé, once the chips for the 2008 election cycle are counted and cashed. Instead, big-dollar, soft-money donors increasingly may prefer redesigned groups such as the Club for Growth, which are precisely crafted to avoid hefty FEC fines and can keep their donor lists confidential. The requirement that 527s make public their donor lists proved politically troublesome recently for White House nominee and GOP donor Sam Fox.

“There was significant energy among the 501(c) advocacy groups and newer ‘taxable’ entities in ’06,” according to the Campaign Finance Institute’s report “Soft Money in the 2006 Election and the Outlook for 2008.”

“As regulatory pressure has increased on certain 527s, some leading organizations and donors have switched their funding emphasis from 527s to these alternative groups,” the report says.

The Campaign Finance Institute’s study, which first publicized the club’s plans Tuesday — later confirmed independently by Roll Call — reported that outside Democratic groups also already have started migrating to lesser-known environs of the tax code.

“On the Democratic-oriented side, the League of Conservation Voters, one of the groups that concluded a 527 settlement with the FEC, did not use its 527 in ’06 but is continuing to make independent expenditures through its own 501(c)(4) qualified non-profit corporation,” according to the study.

Democratic election lawyer Marc Elias agreed that a recent FEC crackdown on 527s is pushing many groups toward the hills. In recent months, the agency has fined a handful of 527s hundreds of thousands of dollars for unlawful campaign activity and is showing no signs of letting up. Democratic lawmakers also are promising to take up the issue of 527s in the coming months.

The club has “decided that it would rather tangle with the [Internal Revenue Service] over the appropriateness of activity going on within a 501(c)(4) then tangle with the FEC in the current environment,” Elias said.

Club President Toomey said his new group should be largely immune to meddling by Federal Election Commission lawyers. The group continues to wait for a federal judge’s decision in a nearly two-year-old legal battle with the FEC over whether the club, as a 527 organization, should be required to file with the agency as a political action committee for raising and spending “millions of dollars to affect Congressional elections in the 2000, 2002, and 2004 campaigns.”

Although its new status could shroud the group from some legal scrutiny, Elias said that simply switching to 501(c)(4) tax status does not eliminate altogether the possibility of an FEC lawsuit.

“If a 501(c)(4) ran an ad that ‘expressly advocated’ the election or defeat of a clearly identifiable candidate, the FEC would almost certainly take the position that that was impermissible … because it would be a corporation making expenditures in connection with a federal election,” Elias said.

Elias also speculated that the club’s ongoing legal battles and its recent decision to reorganize are hardly isolated, suggesting that the club — and perhaps many other 527s — may face a decision of survival: switch tax status, or be prepared for lengthy and expensive court battles with the federal government.

“Does that mean the [club’s] litigation is going well, or going badly?” Elias asked.

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