By Denise Ross, Journal Staff Writer

A fund-raising practice carried out by Gov. Bill Janklow and the state Republican Party for the past 22 years is riddled with legal and ethical problems, campaign-finance and tax experts have told the Rapid City Journal.

It's called the Governor's Club, an entity managed internally by the state party, and Janklow has received more than $400,000 in the past seven years from the unique fund-raising arrangement.

Since 1995, Janklow has received between $31,000 and $92,000 in any given year, according to campaign reports.

Despite his claims that he need not pay tax on Governor's Club money, Janklow most likely owes the federal government income tax on it, according to several campaign-finance and tax experts contacted by the Rapid City Journal.

Janklow said there are no problems with the Governor's Club, and he is confident he does not owe taxes.

The club works like this: The party office sends out solicitation letters, usually in the fall and spring of each year. Governor's Club donors write checks for $1,000 or more to the South Dakota Republican Party and are listed along with all other

Republican donors on the party's year-end campaign-finance report filed with the South Dakota secretary of state.

The party writes one or more checks to Janklow personally for about half of a given year's Governor's Club donations and sends the money to him at his office in the state Capitol, according to the party's year-end reports.

"We write it to Bill Janklow out of our fund-raising account," party Executive Director Laura Schoen said.

What Janklow does with his share of the money is entirely up to him, numerous party officials, including Janklow, said.

"I'm not sure what the governor does with that money," Schoen said. "It is for the governor to use at his own discretion."

Governor's Club donors, who are not noted as such on official campaign reports, are invited to a few weekend meetings with the governor and state employees from various departments to discuss policy, she said.

Donors are not explicitly told that Janklow will receive about half the money for any use he chooses, Schoen said.

"We don't specifically go into that stuff," Schoen said. "They know the governor uses it for his ongoing political expense."

The party has raised about $1 million through the Governor's Club, state party Chairman Joel Rosenthal said.

"It is our biggest donor program," Rosenthal said. "The governor has been very generous. He's the attraction. People give because they want to help him."

Janklow started the club in 1980 during his first of four terms as governor, Rosenthal said.

Janklow said he copied a practice of his predecessor, Democratic Gov. Dick Kneip.

The half-dozen campaign-finance experts, including one former Federal Election Commission attorney contacted by the Rapid City Journal for this story, said they had not heard of anything like the Governor's Club existing in other states.

"That's a new one," Federal Election Commission spokesman Bob Biersack said.

Tax law
The total discretion Janklow has over Governor's Club receipts makes the money taxable income, several sources interviewed for this story said.

Janklow said because he chooses to deposit the money into his governor's candidate fund, he can avoid paying taxes.

"I deposit it right into my political account. I don't have to do that. I could do anything with it. If I use the money personally, I'll have to pay income tax on it," he said. "I don't mind paying taxes on it. I'll just keep the money, then. But I don't think I ought to keep the money. That's the reason I put it in there."

Others doubt that Janklow can avoid tax liability without a specific exemption from the IRS.

One way or another, the tax code applies to the money sent to Janklow. Either it is taxable income or a tax-exempt fund, but it cannot exist in some kind of in-between netherworld to which tax law does not apply, said Paul Sanford,

director of the FEC Watch Project at the Center for Responsive Politics, a watchdog group based in Washington.

"Either it's a campaign contribution or it's income," Sanford said. "The more control a person has over the money, the more likely it would be treated as income."

The annual transfer from the party to Janklow is not a campaign contribution, party officials said.

"It's not a campaign contribution. It's not classified as that," Schoen said.

On its official reports, the party lists the transfer as an expense rather than as a contribution - no small distinction in the world of campaign finance.

If the annual transfer were a campaign contribution, the money would not be taxable, but it also would be subject to all the limits, restrictions and reporting requirements of state election law.

An expense is simply the party paying for goods or services. The party reports items such as telephone service, salaries and office supplies as expenses.

Janklow said he doesn't know why the party doesn't classify the transfers as campaign contributions.

"I don't know how the party keeps their books," he said.

The fact that Janklow deposits the money into his governor's candidate fund is unlikely to exempt him from a tax obligation, several sources, including University of Michigan tax-law professor Kyle Logue, said.

"Whenever you receive a payment over which you have complete discretion, it's income," Logue said. "It isn't clear what exemption would apply."

Sanford agrees.

"I don't think the IRS would be at all impressed that a third legal entity is involved," Sanford said, referring to Janklow's governor's candidate fund.

Depositing the money into his governor's candidate fund, which held more than $880,000 at the last reporting date in June, might be a distinction without a difference. State law imposes no restrictions on how candidates may spend from their campaign funds, according to election staffers in the secretary of state's office.

Since he won re-election in 1998, Janklow has spent $105,309 from his governor's candidate fund, including $31,631 on travel, $18,804 on motels, $8,940 on entertainment and $8,444 on meals and food.

When Democrats complained during the 1998 election that Janklow used the Governor's Club as a slush fund, Janklow said there was no need to pay taxes on the money because he did not use it for personal use, according to news reports at the time.

At the same time, Janklow appeared to contradict himself by saying he used Governor's Club money to repay the state for non-official use of state equipment, such as telephones, and produced checks written on a Governor's Club account.

For this story, Janklow said he does not maintain a separate Governor's Club account but took the money from his governor's candidate fund.

Janklow does not list the money as income on the personal financial-disclosure form that he is required to file as a candidate for the U.S. House of Representatives. That form lists Janklow's $94,000 salary as governor as earned income plus other rental and investment income.

In 1998, Janklow refused to release his income-tax returns, and South Dakota law does not require such disclosure of its public officials or candidates for public office.

Janklow called the claims that he owes tax "nonsense" and compared the Governor's Club checks to individual campaign contributions that are made out to candidates personally.

"You've got a thousand different ways it's written. You take all the money and put it in a political account, and you report it. That's exactly what everybody does," he said.

An IRS spokesman said agency officials are prohibited from commenting on the Governor's Club "because of disclosure restrictions in terms of private, personal tax information."

Republican Govs. George S. Mickelson and Walter Dale Miller had their own versions of the Governor's Club when they served in the late 1980s and early 1990s, between Janklow's two eight-year runs in office.

Frank Brost, who was chief of staff to both Mickelson and Miller, said that he doesn't remember specific details but that he knows the two men paid taxes on any money they converted to personal use.

Janklow said that he has been audited multiple times by the IRS but that those audits did not include the Governor's Club money.

"They looked into all my accounts," he said. "I won't tell you they looked into a Governor's Club account because they didn't, because there is no such account. It's not a separate entity."

Campaign law
Janklow said he owes no tax on the Governor's Club because he deposits the money into a political fund.

In the realm of campaign-finance law, further problems with the Governor's Club arise.

The Governor's Club set-up allows individual political donors to exceed South Dakota's $1,000 cap on donations to a candidate in a calendar year. A person could give $1,000 directly to Janklow's governor's candidate fund, then give more to him by the state party under the Governor's Club.

Because Governor's Club donors are not designated as such on any public forms, it is nearly impossible to track who might be exceeding the limit.

Furthermore, Janklow could be in violation of federal election laws because he has continued to take Governor's Club money while talking publicly about and declaring a bid for federal office. However, several campaign-finance experts said that issue likely hinges on whether Governor's Club money was used to pay for any of Janklow's House campaign expenses - something he says is not happening.

If the governor's share of Governor's Club donations constitute a political fund exempt from taxes, the fund should be registered with the IRS, according to section 527 of federal tax law.

Janklow said he does not register his Governor's Club receipts as a 527 political account.

According to the IRS Web site, a 527 organization is "a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for ... influencing or attempting to influence the selection, nomination, election or appointment of an individual to a federal, state or local public office or office in a political organization."

Because Janklow has total discretion about how to spend his share of the money, it is unlikely the Governor's Club fits this definition. Nonetheless, Janklow has deposited the money into his governor's candidate fund, which is registered with the secretary of state and files reports on spending.

And, Rep. John Thune, R-S.D., said he understood that Janklow kept raising money, despite being term-limited after the 1998 election with the intention of running for another office.

"My understanding was he was raising money, and they were contributing based on the thought he was going to run for something else. Of course, there was a Senate seat that was going to be open or the House seat," Thune, who is now seeking election to the U.S. Senate, said. "And, I think, too, some people assumed that money in some way was going to find its way back into supporting the party in some fashion. I don't know what he does with it."

Raising money for a federal office under anything other than an official campaign fund registered with the Federal Election Commission is improper, but Thune's statement would lend support to the argument that the Governor's Club is a political fund.

If the Governor's Club is a political fund, the lack of disclosure of donors is "beyond outrageous," John Dunbar of the Center for Public Integrity, a nonprofit group based in Washington, D.C., said.

"If you've got a fund where you can't tell who's giving and what it's being spent on, you have a tremendous problem," Dunbar said. "Defining this as a slush fund makes sense."

Janklow's Democratic opponent in the House race, Stephanie Herseth, declined to comment on the Governor's Club.

State Democratic Party Chairwoman Judy Olson said she has been aware of the club for a number of years as a "private, do-with-as-you-want personal fund" but that she hadn't looked into it further.

"I don't think I would like the idea of giving play money to a governor, even if it were my governor," Olson said.

Democratic Party Executive Director Bret Healy said the Governor's Club allows campaign contributors to build the wealth of a public official, and he assailed Janklow for the practice.

"He has no problem tapping his public position for private gain. He makes us have to think of him as our version of Louisiana's Huey Long and Edwin Edwards," Healy said, referring to two governors known for bending the rules. "He needs to come clean about how he operated this, release his tax returns and tell us whether he paid taxes on it. His predecessor did pay taxes on it."

Call reporter Denise Ross at 394-8438 or send e-mail to denise.ross@rapidcityjournal.com.