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Is the American Issues Project Breaking Campaign Finance Law?

A Texas billionaire, Harold Simmons, donated nearly $2.9 million to the American Issues Project,Inc., to run ads tying Sen. Obama to a former member of the Weather Underground, William Ayers.
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This post follows up on an earlier post linking to AP and Politico stories on the campaign finance controversy surrounding anti-Obama ads being run by a new group, American Issues Project. (There's a separate question whether the ads are accurate, and Sen. Obama's campaign has released a response ad on the merits, but that's not my concern here.)

Here's the relevant background. A Texas billionaire, Harold Simmons, donated nearly $2.9 million to the American Issues Project,Inc., to run ads tying Sen. Obama to a former member of the Weather Underground, William Ayers.

Simmons was one of the funders of the Swift Boat veterans ads in 2004. A search of the FEC contributor database shows he has a long history giving to Republican candidates and conservative causes. The McCain campaign also lists him as a bundler who has raised between $50,000 and $100,000 for the campaign.

Obama attorney Bob Bauer sent this letter to the Department of Justice claiming that AIP is engaged in illegal activities. Bob's letter makes two main claims:

1. The group is engaged in political activities that a 501(c)(4) organization may not engage in.

2. The group, by engaging in express advocacy against Sen. Obama and engaging in no other activities, is a political committee. But it has not registered as a political committee and has not followed the rules applicable to political committees.

I won't address the first issue, leaving that to the tax/non-profit lawyers. So the rest of this post addresses the second issue. Is AIP really a political committee in disguise? One of the most important limits on political committee activity is that the groups cannot accept contributions over $5,000 from any individual, making Simmons' $2.9 million contribution illegal. (There's an argument that individual contributions to political committees that make only independent expenditures are constitutionally protected and cannot be limited. Bob has expressed sympathy with this argument in the past in his own (not campaign) capacity, the the Supreme Court has not considered the question yet.)

Cleta Mitchell, AIP's lawyer, has sent this response to the Justice Department. Mitchell does not disagree that AIP's anti-Obama ad is express advocacy, and that disclosure of spending on such ads is required. However, she argues that AIP does not have to register as a political committee, because the group qualifies as a special kind of non-profit ideological corporation that can make unlimited independent expenditures supporting or opposing candidates for office and take unlimited contributions to fund them. These types of groups are known as either "MCFL" corporations, because the Supreme Court created this exemption in a case called FEC v. Massachusetts Citizens for Life. The FEC calls such groups "qualified non-profit corporations" (or QNCs), and it has issued a regulation defining who gets QNC status.

Mitchell argues that its group qualifies for QNC status because it is a non-profit corporation engaged in political activities that does not take corporate or union money and is organized as a 501(c)(4). It says its activities are no different from those of NARAL Pro-Choice America (which I believe is also a client of Bob Bauer's).

Assuming the facts are as Mitchell represents they are, it looks like AIP meets the requirements to be a QNC. However, Mitchell leaves out a significant part of the MCFL analysis. As the FEC's own discussion of MCFL (linked by Mitchell) notes, "Furthermore, the Court pointed out that 'should MCFL's independent spending become so extensive that the organization's major purpose may be regarded as campaign activity, the corporation would be classified as a political committee,' subject to the restrictions and extensive reporting requirements the law applies to such entities."

So the answer to the question depends upon whether AIP, like the actual MCFL organization and the NARAL Pro-Choice America, actually engages in other activities besides independent spending in federal elections. Bob's letter claims that the group does not appear to have engaged in any other activities. The Mitchell letter claims in contrast that "the majority of AIP's annual expenditures are not political expenditures but are devoted to grassroots lobbying and education on issues, public policies and other communications, activities and programs appropriate to a 501(c)(4) social welfare organization in accordance with all applicable provisions of the Internal Revenue Code."

Whether the group really is going to spend more on such activities than the significant anti-Obama ad buy remains to be seen. It is interesting that AP quotes the group's spokesman as saying "the group has set aside money to carry out non-election related work to meet the legal requirement." In other words, the other activities are being set up to avoid being classified as a political committee.

It would not surprise me that, following the election and an investigation (if we are lucky by late 2009), we will learn that AIP really should have been called a political committee and the contributions found to be illegal. The group, and perhaps Simmons, could face fines, but by then the election would be over.

One lesson to learn: a few years ago, the FEC resisted crafting regulations for determining when 527s should be considered political committees, preferring instead to rely on case-by-case adjudications. This situation explains why clear-cut written rules are preferable in dealing with this knotty problem (at least until the Supreme Court moots it if and when it declares limits on contributions to independent expenditure committees to be constitutional; at that point we can expect lots of billionaires to pony up money as Mr. Simmons has).