The fight over the future of so-called 527 groups is headed for a potential showdown in the Senate Rules and Administration Committee on Wednesday, when opponents of the groups are slated to square off with lawmakers favoring a hands-off approach to the controversial entities.

Sens. John McCain (R-Ariz.) and Russ Feingold (D-Wis.) — the chief Senate sponsors of the Bipartisan Campaign Reform Act of 2002 — will weigh in on the thorny issue at the 9:30 a.m. hearing in Russell Building Room 301, which was organized at the behest of Rules Chairman Trent Lott (R-Miss.). House hearings on the topic last fall erupted into chaos, when Democrats characterized House Administration Chairman Bob Ney’s (R-Ohio) inquiry as a “witch hunt,” and a number of groups declined to testify.

Lott has joined with other Republicans in questioning the legality of 527 groups, which have proliferated in the aftermath of the McCain-Feingold bill. Named after the section of the Internal Revenue Code that grants their tax-exempt status, ambitious 527 groups such as America Coming Together and The Media Fund have proliferated with intensity in Democratic circles.

McCain has raised questions about the groups recently, warning that efforts to circumvent campaign finance laws will not be tolerated.

“These new groups, however, which have made clear that their purpose is to influence federal elections — they have not made any bones about it — have purportedly set up nonfederal accounts to accept corporate and labor union funds and large contributions from individuals,” McCain said in a recent floor speech. “They plan to use these moneys, we are told, to finance partisan voter drives and run sham issue ads aimed at influencing the 2004 federal elections. This blatant end run around the campaign finance laws should not be tolerated.”

But other leaders in the Senate — including Sen. Chris Dodd (D-Conn.), the ranking member on Rules and a supporter of BCRA — have stopped short of calling for a crackdown on the outside groups and have even cautioned the Federal Election Commission, which is pondering new regulations to govern 527s and other outside groups, not to read too much into what Congress wrote in BCRA.

“We are writing to say that, whatever decisions the Commission chooses to make, BCRA reflects in very clear and specific terms the choices that Congress made in reforming our federal campaign laws,” Dodd and other Senate Democrats stated in a recent letter to the FEC.

“Our principal concern was the soft money solicited, received, directed and spent by parties and federal elected officials — money that presents the clearest danger of conflict of interest, in fact or appearance,” explained the letter, which was also signed by Democratic Sens. Tom Daschle (S.D.), Harry Reid (Nev.), Dianne Feinstein (Calif.), Tom Carper (Del.), Dick Durbin (Ill.) Daniel Inouye (Hawaii) and Frank Lautenberg (N.J.).

“With the exception of ‘electioneering communications,’ the law did not aim similar restrictions at political organizations or tax-exempt groups that are neither controlled by, nor coordinated with, parties or candidates.”

Also slated to testify before the panel are Center for Responsive Politics Executive Director Larry Noble and Ohio State University law school professor Edward Foley. The Internal Revenue Service officials will not testify, nor will any representatives of the 527 groups at the forefront of the debate.

In January, Foley published a lengthy article with the Bureau of National Affairs — “The New Loophole?: 527s, Political Committees, and McCain-Feingold” — which concluded that “forming a 527 or (c)(4) tax-exempt organization as a vehicle for receiving large-dollar donations to spend on influencing federal elections is not an easy end run around McCain-Feingold.”

Spending less of its funds on federal election activities than on both state-level political activities and nonelectoral functions would allow a group to escape being designated a political committee and having to register with the FEC, Foley wrote, but it might end up deterring those wealthy donors seeking to have a substantial impact on elections.

Moreover, Foley reasoned that if a 527 group decided to challenge the constitutionality of a cap on the money it spends on federal election activities, the recent Supreme Court decision in McConnell v. FEC, which upheld BCRA, “points to the conclusion that ‘political committees,’ like ‘political parties,’ may be subject to contribution limits that would not be permissible if imposed on other organizations.”

Noble’s group, the Campaign Legal Center and Democracy 21 filed a complaint with the FEC in January alleging that three 527s were exploiting federal campaign finance laws by registering as political organizations with the IRS to serve as conduits for soft money into campaigns. The groups have denied their activities are breaking any laws.