Transfers allow nonprofits to spend more money on campaigns, experts say

Introduction

Political nonprofits, also known as “dark money” groups, often transfer funds to other political nonprofits, which then transfer funds to other nonprofits, and so on — largely to further obscure where the funds are coming from.

A lesser-known reason for the money shuffle: It may enable nonprofits collectively to spend more money on politics than would otherwise be permissible.

This new breed of political nonprofits came about as a result of the 2010 U.S. Supreme Court Citizens United v. Federal Election Commission decision. The groups may accept unlimited sums of money from corporations, unions, nonprofits and billionaires and spend the cash on ads backing or opposing candidates. And they don’t have to reveal their donors.

But there’s a downside.

Internal Revenue Service rules are generally interpreted to mean 501(c)(4) social welfare groups must spend less than half of their money on such political campaigning. (The rest goes for overhead and the broadly defined area of “social welfare.” That can include “issue advertising,” which does not overtly support or oppose a candidate.)

Transfers are a way to get around that limitation, say tax lawyers.

Say “Nonprofit A” has $1 million and “Nonprofit B” has $1 million in unrestricted funds. Working separately, the two can only spend a bit less than $500,000 apiece on ads advocating for or against political candidates.

But let’s say Nonprofit A transfers $500,001 to Nonprofit B for exclusively “social welfare” purposes.

Nonprofit A spends the rest — $499,999 — on overt political campaigning. Meanwhile, Nonprofit B now has $1.5 million. It spends half of that, a little under $750,000, on politics.

The end result: Separately, the two social welfare nonprofits spend less than $1 million on political campaigning. Working in concert, they can spend almost $1.25 million.

That’s what Greg Colvin, a legal expert in nonprofits, calls the “multiplier effect.”

Another advantage from the transfers is leverage, say tax lawyers that specialize in nonprofits.

A big nonprofit could give $20 million exclusively for social welfare purposes to a small nonprofit that has just a few thousand dollars in the bank. The smaller nonprofit could then go to donors and make the case that every dollar raised will be used to elect or defeat a specific candidate — up to $20 million, minus a penny.

“When one 501(c)(4) gives a grant for social welfare, it boosts the ability of the other to raise money for political campaigning,” Colvin, a principal at San Francisco-based law firm Adler & Colvin, told the Center for Public Integrity.

In addition, social welfare grants can also help nonprofits pay for overhead, salaries and other expenses, freeing up other revenue for politics.

A single social welfare grant can also help the grantor. Rather than going to all the trouble of spending its social welfare money on actual activities, it can simply write a check and spend a near equal amount on campaigning.

The irony is that by law, both grantors and grantees exist primarily to serve the common good — not engage in “political campaign activity,” pushing for or against a candidate.

But nonprofits may have a short window to bolster political spending by leveraging social welfare grants and using the multiplier effect.

The IRS is considering proposed rules limiting political spending by social welfare nonprofits, available here. Comments on the proposed rules, which are due today, can be submitted online.