IRS sets its sights on political ‘dark money’

Introduction

Nearly four years after the U.S. Supreme Court’s Citizens United v. Federal Election Commission decision helped usher in a surge of political spending by “social welfare” nonprofits, the Internal Revenue Service is proposing new rules that could curtail the groups’ ability to influence elections while concealing their donors.

The agency’s action will have massive implications for politically engaged nonprofits from the Republican-aligned Crossroads GPS, which was co-founded by former Bush strategist Karl Rove, to the pro-Democratic Patriot Majority USA — as well as for ideological groups such as the League of Conservation Voters and Americans for Prosperity.

Such nonprofits organized under Sec. 501(c)(4) of the U.S. tax code must be “operated exclusively to promote social welfare” and function “primarily to further the common good and general welfare of the people of the community,” according to the IRS.

Citizens United opened the door for such groups to expand their political activities, including allowing them to advocate for the election or defeat of candidates. But the IRS definition of what exactly constitutes political spending is murky, and the agency has never defined how much money social welfare groups can spend on express political advocacy. Until now most nonprofits have been working under the rule of thumb that express political advocacy cannot constitute more than 50 percent of their spending.

The new proposed rules seek to clarify both.

The IRS is calling for the creation of a new legal term known as “candidate-related political activity,” which would not overlap with activities for the “promotion of social welfare.” And the agency is seeking input from the public on whether the level of political spending should be restricted to a certain percentage.

According to the Center for Responsive Politics, social welfare nonprofits spent more than $240 million on advertising calling for the election or defeat of federal political candidates during the 2012 election cycle.

As the Center for Public Integrity previously reported, the League of Conservation Voters alone spent more than 40 percent of its budget on express advocacy in 2012, while such expenditures amounted to nearly 46 percent of the Republican Jewish Coalition’s spending last year.

Social welfare groups also spent hundreds of millions more on “issue ads” — so called because they name a candidate but stop short of explicitly calling for their election or defeat.

When these advertisements were broadcast within 30 days of a primary election or 60 days of a general election, they were required to be reported to the FEC as “electioneering communications.”

Even so, most social welfare nonprofit groups did not define such advertising as political activity for the purposes of their IRS reporting.

For instance, one pro-business social welfare group with ties to the conservative billionaires Charles and David Koch — the American Energy Alliance — told the FEC it spent $1.36 million on ads urging viewers in Virginia and Ohio to “stand with coal” and “vote no on Obama’s failing energy policy.”

Yet the American Energy Alliance later told the IRS it did not spend a dime on “direct or indirect political campaign activities on behalf of or in opposition to candidates for public office.”

The major difference between politically active social welfare group and traditional political committees that are organized under Sec. 527 of the tax code is that the latter must regularly disclose their funders. This includes candidates’ campaigns, parties, political action committees and super PACs.

The FEC has interpreted the law to require politically active nonprofits to disclose only the names of donors who give for the specific purpose of “furthering” particular ads — something that rarely happens.

Critics have dubbed the influx of ads bankrolled by unnamed sources “dark money,” and they have argued the true donors of the money should be disclosed.

Supporters, meanwhile, assert they are spending within their constitutional rights and are complying with existing disclosure rules.

The new IRS proposal comes down closer to the side of the dark money opponents.

The new category of “candidate-related political activity” would encompass all spending reported to the FEC — including express advocacy and electioneering communications — as well as some additional activities, such as get-out-the-vote drives and events featuring candidates.

In a press release Tuesday, Treasury Assistant Secretary for Tax Policy Mark J. Mazur called the proposal “a critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations.”

Meanwhile, pro-campaign finance reform advocacy group Democracy 21 released a statement to “applaud” the action taken by the IRS as “an important step further.”

Democracy 21 President Fred Wertheimer further encouraged the agency to “seize this opportunity to end the scandalous practice of groups abusing the tax laws to hide from the American people campaign finance information to which they are entitled.”

But the proposal also immediately drew criticism from campaign finance reform opponents.

David Keating, the president of the Center for Competitive Politics, said the proposal went “seriously off track” by including “electioneering communications” as “candidate-related political activity.”

He argued that groups may be compelled to run issue ads on controversial legislation in the two months before Election Day because of the timetable under which Congress decides to act.

For instance, he cited votes on an alternative to sequestration, an omnibus appropriations bill and the reauthorization of the Foreign Intelligence Surveillance Act among high-profile votes occurring within 60 days of the November election last Congress.

“It is absurd to categorize ads on such legislation as per se political activity simply because an incumbent is mentioned in the communication,” Keating said. “Many social welfare groups are active on a single issue and are at the mercy of the congressional schedule.”

Representatives of the Republican Jewish Coalition, Crossroads GPS and Patriot Majority USA did not immediately respond to requests for comment. Spokesmen for both the League of Conservation Voters and Americans for Prosperity declined to comment.

Benjamin Cole, the communications director of the pro-coal American Energy Alliance, said his group was “looking closely at the administration’s proposal.”

“Behold, the tax man cometh,” Cole continued, adding that the president’s “political agenda” and “his personal contempt for the Citizens United decision” were both “nakedly obvious in this latest move.”