The darker side of nonprofits: when charities and social welfare groups become political slush funds.

• Author: Meier, Robert Paul

INTRODUCTION: CLINTON'S BILTMORE BONANZA

The 1996 general election was only two weeks away.(1) Many of Florida's Democratic faithful had gathered at the Biltmore Hotel in Coral Gables for a prominent fundraiser.(2) This was their mission: to provide Democratic candidate President Bill Clinton with a final surge of cash to send him coasting to a second term in the White House. The price of admission that night was $1,500.(3) And at least one person, Warren Meddoff, intended to help contribute much, much more.

After briefly speaking at the fundraiser, Clinton was making his way through the "crush" of attendees when Meddoff handed him a business card.(4) Clinton "took two [more] steps" and stopped in his tracks.(5) Glancing at the card, he had read a simple message handwritten by Meddoff: "`I have an associate that [sic] is interested in donating $5 million to your campaign.'"(6) The amount offered was equivalent to 3,300 additional guests rushing into the fundraiser. President Clinton immediately found Meddoff, a stranger until this point, and informed him that a staff member would be in contact.(7)

Four days later, with just ten days left until the general election, White House Deputy Chief of Staff Harold Ickes called Meddoff from Air Force One to discuss the proposed contribution.(8) By now, the offer became even more incredible and completely unprecedented in American politics.(9) Meddoff informed Ickes that a business associate,(10) Bill Morgan, was expecting a "very large sum of money" from a business deal and was willing to donate $5 million initially and another $50 million over the course of the next ten months.(11) The catch was that Meddoff's associate wanted the contributions to President Clinton to be tax deductible.(12) Ickes reportedly replied that there were "tax-favorable" ways of assisting Clinton's reelection campaign.(13)

Later in the week, Ickes called again from Air Force One and informed Meddoff that the Clinton campaign had an "`immediate need for $1.5 million within the next 24 hours.'"(14) Meddoff was unsure if Morgan could obtain the funds that quickly.(15) Still, Meddoff requested that Ickes forward a list of where the money should be sent.(16) Within hours, Ickes, from the President's plane, dictated to a White House staff member a list of four organizations to receive the $1.5 million.(17) The Ickes list was then faxed to Meddoff from the White House.(18)

The list that Meddoff received was a hodgepodge of organizations,(19) some offering the tax haven that Morgan sought, and others not. Contributions to the two nonprofit charities on the Ickes list, Vote Now `96 and the National Coalition of Black Voter Participation ("Black Voter Coalition"), would be tax deductible.(20) By law, these groups must operate exclusively for religious, educational, or similar purposes.(21) Such charities are also limited in the political activities they may undertake, and are barred from engaging in political campaigning.(22) Contributions to the other two organizations, the Democratic National Committee ("DNC") and the Defeat 209 campaign,(23) were not tax deductible, because both are classified under the Internal Revenue Code ("IRC") as groups that typically engage in significant political and political campaign activity, albeit to differing degrees.(24)

Meddoff claimed that later during the same day that he received the fax, Ickes, perhaps realizing the potential impropriety of listing tax-exempt charities as Clinton-friendly organizations, called and requested that the fax be shredded.(25) Ickes has refuted this allegation, stating that he "did not urge [Meddoff] to destroy the document ... [to the] best of[his] knowledge."(26)

In the end, neither the $1.5 million nor the other $53.5 million was ever used to the benefit of President Clinton's campaign.(27) In fact, the money may never have existed. The contributions were supposed to come from a suspect business transaction involving the sale of old railroad bonds.(28) Morgan, Clinton's supposed benefactor-to-be, was also thousands of dollars in debt to the Internal Revenue Service ("IRS").(29)

This bizarre tale, revealed in the Senate hearings on alleged campaign fundraising abuses in the 1996 elections, paints a dubious picture of the American political landscape. Here, mysterious figures who were virtual strangers to President Clinton gained access to him and his closest aides by offering unprecedented contributions, provided that the donations could be routed to tax-deductible sources. Among the many questions that this story raises is how did charities such as Vote Now '96 and the Black Voter Coalition--groups that face strict limits on the political activities in which they are permitted to engage--make it onto the Ickes list and become the topic of urgent phone calls made from Air Force One during the final days before the election?

This Comment examines an alarming trend in which charities and social welfare groups have become powerful political players, yet have been able to circumvent IRC limits on nonprofit political activity and to avoid nearly all election regulations. Part I analyzes the activities of two supposedly nonpartisan, nonprofit groups, Vote Now '96 (an I.R.C. [sections] 501(c)(3) charity) and the Citizens for the Republic Education Fund ("Republic Education Fund") (an I.R.C. [sections] 501(c)(4) social welfare organization during the 1996 elections).(30) Part II outlines the current regulation of such groups under the IRC and the Federal Election Campaign Act ("FECA"), while Part III explains how both Vote Now '96 and the Republic Education Fund used gaps in the law to engage in otherwise prohibited partisan endeavors.

Part IV of this Comment proposes to close the legal loopholes allowing charities and social welfare groups to engage in unregulated political activities by requiring that any activity likely to influence an election be conducted through nonprofit political action committees ("PACs"). This plan will allow nonprofit organizations to engage in political activity and ensure that such endeavors are regulated, while imposing few burdens on the existing rights of charities and social welfare groups.

1. THE POLITICAL UNDERWORLD OF NONPROFITS

   1. Vote Now '96: The Democrats' Political Charity

      Vote Now '96, one of the nonprofit organizations on the Ickes list, offers a telling example of the extent to which the line between political campaigning and charitable endeavors has blurred.(31) Vote Now '96, to which Ickes directed Meddoff to contribute $250,000,(32) is touted as a "nonpartisan voter registration or ... get-out-the-vote group."(33) Upon closer inspection, however, Vote Now '96 seems more like a taxpayer-subsidized(34) slush fund for the Democratic Party.

      Vote Now '96 operated exclusively to increase voter turnout in "heavily Democratic" areas.(35) The group's "executive director was deputy finance director of the [DNC] throughout Clinton's 1992 campaign. Its chairman was chairman of the Democratic Senatorial Campaign Committee in 1993-94."(36) On July 12, 1996, President Clinton and the First Lady held a fundraiser for Vote Now '96 at the White House.(37)

      Some of the [sixty] guests were wealthy donors who wanted to give money to the Democratic Party but preferred to do so quietly, either because they had business before the Government or simply wanted to avoid having their names appear on public donor lists. The solution was simple, they were told. They could make their donations to an organization called Vote Now '96, which was ostensibly created to encourage voter turnout and, unlike the [DNC] or the Clinton-Gore campaign organization, would not be required to identify the donors or the amount of their gifts. Vote Now '96 ultimately received $3 million in donations in the 1996 campaign.(38) The Democrats probably made other attempts to steer contributors to Vote Now '96. The charity received $3,000 from Clinton supporter and Arkansas restaurateur, Yah Lin "Charlie" Trie,(39) who was later implicated in a Chinese plot to bias the outcomes of the 1996 federal election.(40) A "foreign businessman," Gilbert Chagoury, who was living in Paris and "closely tied to Nigerian dictator Sani Abacha," contributed $460,000 to Vote Now '96.(41) Despite the fact that Chagoury was "not a party contributor and[, as a foreign citizen,] could not legally give to the Democrats," he was invited to a special dinner on December 21, 1996 for the 250 top donors to the DNC.(42)

      Vote Now '96 was also scrutinized during the criminal investigation of charges that the DNC "swapped" contributions with Ron Carey's 1996 reelection campaign to head the Teamsters labor union.

      At their heart, the swap schemes envisioned the Teamsters contributing not only to the DNC, but also to various tax-exempt organizations.... In exchange, the DNC and various tax-exempt organizations would [illegally] contribute directly or indirectly to the election campaign of Teamsters president, Ron Carey, through an entity called the Teamsters for a Corruption-Free Union....(43) When all of these circumstances are considered, Vote Now '96 begins to look a lot less like a nonpartisan charity engaged in voter registration and much more like an offshoot of the Democratic Party, performing the politically valuable service of getting Democrats to the polls. However, despite the arguably partisan activities of Vote Now '96, the anonymous contributors, the foreign donors, and the limitless size of allowable contributions (complete with a tax deduction), there is still one more incredible aspect to this story. And that is the fact that possibly everything Vote Now '96 did is perfectly legal.(44)

   2. More Nonprofits Join the Fray: The Republic Education Fund

      As a nonprofit group created to advance political interests, Vote Now '96 had plenty of company in 1996.(45) Consider, for example, the following television advertisement:

      Senate candidate Winston Bryant's budget...