campaign finance disaster

[Gary Ruskin <gary@essential.org>]

Congressional Reform Briefings			February 8, 1999

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-- Campaign finance disaster: a new IRS memorandum may allow candidates
for elective office to raise tax-deductible contributions for
campaign-related purposes.

The Internal Revenue Service (IRS) memorandum, issued in a case
regarding the Progress & Freedom Foundation (PFF, affiliated with
ex-House Speaker Newt Gingrich), looks like it may open a huge new
loophole in campaign finance law, which would permit candidates for
elective office to raise tax-deductible funds for campaign-related
purposes. The political implications of this memorandum may be
enormous.  The IRS memorandum and new campaign finance loophole will
likely provide greater influence to corporate and wealthy elites, who
could afford to make large tax-deductible contributions to candidates,
while further damaging the political influence of the vast majority of
Americans who are less wealthy.

Professor Fran Hill, a University of Miami tax expert, told Roll Call
that following the new IRS memorandum, "Every candidate for public
office ought to immediately incorporate a 501(c)3 charitable
organization into his or her campaign finance structure. And they should
do that sooner rather than later. And they should run all of their
research activities and all of their dissemination of the ideas through
the (c)3. I think they should now push the law. I mean I see no reason
now why the (c)3 couldn't distribute a videotape of their candidate just
giving a speech, full of ideas."

The IRS's peculiar investigative lassitude and subsequent ruling in the
PFF case raises questions about whether the IRS was intimidated in its
audit of a 501(c)(3) organization affiliated with then-Speaker Gingrich.

Following is an important article from the Monday, February 8 issue of
Roll Call <http://www.rollcall.com/newsscoops/3rdscoop.html>.  Reprinted
with permission.

IRS, Ethics Disagree On Access; Gingrich Ruling May Create New Campaign
Options 

By Damon Chappie 

The House ethics committee blocked the Internal Revenue Service from
obtaining crucial information during the tax agency's investigation of
the network of charitable groups tied to former House Speaker Newt
Gingrich (R-Ga.), the IRS says.

The allegation, disputed by the ethics committee, was made in the
long-awaited ruling by the IRS that, according to several prominent tax
attorneys, vindicated Gingrich on the political use of tax groups and
signaled a change in the relationship between politics and charities
that will fundamentally alter the way
candidates raise money.

One major change will be that tax attorneys may now advise candidates
that they can add a 501(c)3 charity to their campaign finance structure,
allowing their political efforts to make use of unrestricted,
tax-deductible donations -- an act that was nearly unthinkable just a
few years ago.

The dispute over access to the information collected by the ethics
committee during its yearlong probe of Gingrich's teaching of a
televised course on American culture erupted after the IRS, in unusually
strong terms, said that it was repeatedly denied access to sworn
testimony that may have changed the verdict on what it described as "a
close case."

The transfer of "all relevant documents" from the ethics committee to
the IRS was a key element of the 1997 plea agreement between Gingrich
and the House and was settled on as a compromise to head off a referral
to the Justice Department.

The IRS identified key testimony from a longtime associate of Gingrich
that it said was critical to a judgment on whether the tax-exempt group,
the Progress and Freedom Foundation, was set up for political purposes. 

The IRS said in its ruling: "It is precisely this information to which
we have been denied access by the Ethics Committee. It is possible that
if the Ethics Committee had rendered full cooperation with our
examination, the transcripts might have affected our conclusion."

Under the agreement approved by the House, the outside counsel hired by
the ethics committee to investigate Gingrich, James Cole, was designated
to act as a liaison between the committee and the IRS for the transfer
of documents.

Cole, a former top Justice Department prosecutor, said in an interview
that he was "never consulted" about the IRS requests for the
transcripts. Cole said his involvement with the case ended after an
initial period of identifying and labeling boxes of documents for the
IRS. 

Those documents were provided to the tax auditors. But in the fall of
1997, the IRS sent a letter asking for the transcripts of testimony of
witnesses, including that of Albert "Steve" Hanser, Gingrich's longtime
friend and advisor who had been a director of the Progress and Freedom
Foundation. 

Cole said he was never informed of that request or of a separate IRS
request for the same testimony that came several months later. "I was
never consulted. This was handled by the House ethics committee."

Two sources familiar with the communications between the IRS and the
ethics committee identified Ted Van Der Meid, the committee's former
chief counsel, as the point man who handled the communications with the
IRS. "It was Van Der Meid, not Cole," said one of the sources, who added
that "there seemed to be friction between Van Der Meid and the IRS
agents handling the case."

Van Der Meid, who has since taken a new job as counsel to Speaker Dennis
Hastert (R-Ill.), refused to discuss the matter. "I don't think that's
quite accurate but I don't think I can comment on it because I am no
longer there. You have to  careful in figuring out what they were asking
for because they are two separate things. I don't want to talk to you
about it."

Rep. Howard Berman (D-Calif.), the ranking member of the ethics panel in
1997, said he agreed with the decision not to provide the requested
transcripts because of a long-standing ethics committee policy against
turning over transcripts of witness statements to federal agencies. He
said that he would have been willing to assist the IRS if it had told
the ethics committee exactly why it wanted the transcripts.

But despite two requests for additional information, Berman said the
committee heard nothing from the agency until its ruling was made public
last week.

"It was the intent of the committee to turn over all relevant documents
to the IRS. Transcripts were a distinction. ... They would have access
to the transcripts if they made a case that they needed to have them.
... All the IRS did was, it sounds like to me, is decide not to pursue
an investigation and then try to use the committee as a scapegoat."

In interviews, the two Democrats who served on the ethics investigative
panel said they considered transcripts to be part of the material that
should have been turned over to the IRS.

However, one of the lawmakers, Rep. Ben Cardin (D-Md.), modified his
recollection after a conversation with Berman late Thursday. In an
interview earlier in the day, Cardin told Roll Call, "I know that the
committee felt very strongly that the IRS should be given access to all
documents, all testimony that they needed."

In a later interview, Cardin said he agreed with Berman that there was a
distinction between documents versus transcripts. "And it is absolutely
clear in my own interpretation that if there was a carte blanche request
for all transcripts that it is not what the committee envisioned. The
IRS would say what they needed and why they needed it. And the committee
would go to Mr. Cole and he would make the transcripts available to the
IRS."

But Cole maintained that he was never consulted again after the initial
round of document transfers and Berman said he could not address why
Cole was not involved in the requests for transcripts.

Rep. Nancy Pelosi (Calif.), the other Democrat with Cardin on the
original panel, demanded an explanation for the noncooperation with the
IRS and Cole

"I find it very alarming. I think that the issue of the ethics committee
not making the transcript available to the IRS, when that was the
intention of Congress, deserves some real attention."

She added that given the significance of the ruling and the repeated
assertions by the IRS that it was a close call, the committee should
immediately release the transcripts. "I think the ethics committee owes
us some answers about that lack of cooperation."

In addition, sources told Roll Call that other individuals, including a
tax attorney hired by Gingrich in the last stages of the case, were
given access to confidential testimony of ethics committee witnesses.
William Lehrfeld, who was asked to write an opinion letter that was
submitted to the committee during its deliberations, confirmed that he
was given access to transcripts of testimony and that he signed a
confidentiality pledge about the contents of the transcripts.

But tax experts agreed that nothing prevented the IRS from using its
powers to find the same information and they noted the extraordinary
nature of an IRS ruling based on admitted missing information.

Fran Hill, the University of Miami tax law professor who has written
extensively on politics and charities, said, "The striking thing about
this ruling is the curious lack of curiosity by the IRS. They say that
the House ethics committee didn't give them the documents. The response
to that is you're the IRS. You don't need their finding of fact. 

"Ordinary taxpayers caught in an IRS audit would be forced to provide
all types of information and would be subject to subpoena," she said.
"But here, all of a sudden, the IRS cannot find facts when it is the
Speaker of the House of Representatives."

The IRS, citing tax confidentiality rules, declined to comment on the
ruling.

Jeffrey Eisenach, director of the Progress and Freedom Foundation, which
was the subject of the audit, said the IRS came back "many, many" times
for additional documents. "In order to believe that the information the
IRS says it doesn't have is important is to believe that Jim Cole left
the smoking gun in the filing cabinet. And forgot to put it in the
report. And if you think that, you think less of him than I do."

Eisenach praised the IRS ruling as a vindication. "I am pretty much
resigned to the fact that I am going to be one of these poor souls
wandering down the streets of Washington begging for my reputation
back." 

But a number of tax attorneys who reviewed the IRS' 74-page ruling said
they were "amazed" at the IRS reversal on the prohibition of political
activities with charities.

"It's inexplicable, but then again, it's the IRS," said Hill, who said
the ruling overturns decades of previous rulings. "Every candidate for
public office ought to immediately incorporate a 501(c)3 charitable
organization into his or her campaign finance structure. And they should
do that sooner rather than later.
                      
And they should run all of their research activities and all of their
dissemination of the ideas through the (c)3. I think they should now
push the law. I mean I see no reason now why the (c)3 couldn't
distribute a videotape of their candidate just giving a speech, full of
ideas."

Greg Colvin, a San Francisco attorney who specializes in advising
nonprofits, said he agreed that charitable groups with tax deductible
donations could now be incorporated into political activities. "It is a
truly amazing decision."

Pelosi shared that assessment. "The ruling means that my colleagues and
I can set up a (c)3 charitable organization, the easiest way out there
to raise money. That's why the Republicans were setting them up. It's an
easy way to raise money. Now you would be a fool not to do it." 

--------------------------------------------------
Following is a letter from the Congressional Accountability Project to
House Committee on Standards of Official Conduct Chairman Lamar Smith
and Ranking Member Howard Berman:

									February 4, 1999

Honorable Lamar Smith, Chairman
Honorable Howard Berman, Ranking Member
House Committee on Standards of Official Conduct
HT-2, The Capitol
U. S. House of Representatives
Washington, DC 20515

	RE: 	The Ethics Committee's Failure to Comply with IRS Requests for
Documents Produced in the Matter of Representative Newt Gingrich

Dear Representatives Smith and Berman:

	As a part of the committee report In The Matter of Representative Newt
Gingrich, the House Committee on Standards of Official Conduct ("Ethics
Committee") agreed to cooperate with Internal Revenue Service (IRS)
requests for documents relating to certain 501(c)(3) organizations
affiliated with then-Speaker Gingrich.  According to the committee
report, 

		In light of the possibility that documents which were produced to the
Subcommittee during the Preliminary Inquiry might be useful to the IRS
as part of its reported ongoing investigations of various 501(c)(3)
organizations, the Subcommittee decided to recommend that the full
Committee make available to the IRS all relevant documents produced
during the Preliminary Inquiry. It is the Committee's recommendation
that the House Committee on Standards of Official Conduct in the 105th
Congress establish a liaison with the IRS to fulfill its recommendation
and that this liaison be established in consultation with Mr. [Special
Counsel James] Cole.

	The full House of Representatives adopted this Ethics Committee report
on January 21, 1997, in House Resolution 31. 

	However, according to the IRS, in a Technical Advice Memorandum on the
Progress & Freedom Foundation (PFF), the Ethics Committee failed to
cooperate with IRS requests for documents produced during the
Preliminary Inquiry.  The IRS Memorandum states:

		Despite requests to the Ethics Committee, the Service has not been
allowed access to the transcripts by the Ethics Committee. Therefore, we
are unable to evaluate the context in which these statements were made.

		We base our conclusions in this memorandum upon the facts available to
us....our factual record does not include transcripts of witness
statements before the Ethics Committee....part of our analysis of
whether PFF had a substantial nonexempt purpose to serve private
interests is the determination of the purposes for forming and operating
PFF. In determining the purposes of PFF, evidence of the purposes and
roles of PFF's officers and directors acting in their official
capacities and of Mr. Gingrich acting in his capacity as teacher of the
RAC course is relevant. Information was obtained from these persons
under oath by the Ethics Committee's Special Counsel. It is precisely
this information to which we have been denied access by the Ethics
Committee. It is possible that if the Ethics Committee had rendered full
cooperation with our examination, the transcripts might have affected
our conclusion. 

* * * * * 
		We do not have unofficial statements by PFF's officers and directors
(internal memos, unofficial statements of officers and directors)
evidencing a purpose to benefit private interests. We have considered a
number of quotes from depositions of key figures reported in the Ethics
Committee Report but have not been allowed access to the complete
deposition. Only one quote raises a question of improper purpose, and we
were unable to examine the quote in context without the complete
deposition. 

	These statements are troubling, given the IRS's judgment that the PFF
matter was a "close case" whose outcome may have been affected by the
Ethics Committee's failure to cooperate with document requests.  The
appearance is that the Ethics Committee has failed to cooperate with the
IRS in order to benefit then-Speaker Gingrich and the Progress & Freedom
Foundation. We have four questions for the Ethics Committee:

1.	Why did the Ethics Committee fail to fulfill its responsibility,
ratified by the full House of Representatives, to provide relevant
documents to the IRS?
2.	By what authority did the Ethics Committee or its staff refuse the
IRS document requests?
3.	Will the Ethics Committee release all correspondence with the IRS
regarding the IRS document requests relating to the Gingrich case?
4.	Will the Ethics Committee release Special Counsel James Cole to
provide a full and detailed description of why the Ethics Committee has
not met its responsibilities to provide relevant documents to the IRS?

	The Ethics Committee's failure to cooperate with IRS requests for
documents seems to fit a familiar pattern.  During its investigation of
then-Speaker Gingrich, the Ethics Committee built a remarkable record of
generosity and leniency toward Gingrich including, among other things,
investigative failures and torpor, violating Ethics Committee
precedents, failure to authorize outside counsel to investigate ethics
complaints, the narrow mandate for Special Counsel James Cole's
investigation, failure to initiate investigations based on credible and
well-documented news reports, the unwillingness of the Ethics Committee
to receive and evaluate documents related to the Gingrich case, failure
to thoroughly investigate the activities of Joe Gaylord within the
Speaker's office, failure to interview key witnesses and subpoena
documents related to telecommunications entrepreneur Donald Jones's
activities within the Speaker's offices, and failure to punish Gingrich
for repeated violations of House Rule 45 and other standards of
Congressional conduct.  This record is a direct affront to citizens who
want honest government.

	The Ethics Committee owes an explanation to the full House of
Representatives and to the public as to why it did not comply with IRS
requests for documents produced in the Matter of Representative Newt
Gingrich.

									Sincerely,

									Gary Ruskin								Director
----------------------------
	The IRS memorandum regarding the Progress & Freedom Foundation is
available at <http://www.pff.org/IRSmemo.htm>.

	The Congressional Accountability Project is a Congressional watchdog
group affiliated with Ralph Nader.  For more information about the
Congressional Accountability Project, see
http://www.essential.org/orgs/CAP/CAP.html or send e-mail to
gary@essential.org.

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Gary Ruskin | Congressional Accountability Project
1611 Connecticut Ave. NW, Suite #3A | Washington, DC 20009
Phone: (202) 296-2787 | Fax (202) 833-2406
http://www.essential.org/orgs/CAP/CAP.html |
mailto:gary@essential.org |
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