Fine line between politics and issues spending by secretive 501(c)(4) groups

Introduction

The conservative American Action Network, a leading independent player in last year’s election, poured $26 million — out of some $30 million in spending — from secret donors into political ads and activities to help Republican candidates.

Set up in 2009, the network enjoys a prized tax status from the Internal Revenue Service as a social welfare, tax-free 501(c)(4) organization, which permits it to accept secret donations and engage in some political advocacy. But to qualify for this special status, an organization cannot spend the majority of its money on politics, and its primary advocacy must be on issues.

As required by law, the network reported the $26 million it spent on political activities to the Federal Election Commission before Election Day.

But the network’s hefty spending on politics poses an important question: is its primary purpose social welfare, as the IRS intended, or political activity?

Former Sen. Norman Coleman, who chairs the network, told iWatch News his organization “followed the law” in spending its almost $30 million.

Justifying their spending, Coleman’s group further said that $20.4 million went to broadcast ads close to the elections — officially called “electioneering communications” — that mentioned candidates’ names but didn’t recommend a vote for or against the candidate. These ads mostly “urged center-right action on issues” before Congress, the group said. The remaining $5.7 million was spent on ads that directly called for the election or defeat of candidates.

“Not all electioneering communications are candidate advocacy under the campaign finance or tax laws,” network president Brian Walsh said.

However, some veteran tax experts say the group’s status with the IRS could be in jeopardy. “If over 80 percent of a group’s expenditures are for political purposes that require reporting to the FEC, then that organization will not qualify for tax-exempt status under section 501(c)(4),” Marc Owens, who was director of the IRS exempt organizations division for a decade, told iWatch News.

“They’re saying they can dress up electioneering communications that they’ve reported to the FEC as a lobbying message, and have the IRS view that with blinders.”

IRS rulings indicate that advocacy communications do not have to expressly support a candidate to qualify as political activity, say tax and election lawyers.

Dozens of other GOP-allied 501(c)(4) groups — and a smaller number of Democratic ones — are on spending sprees fueled by donor secrecy and the Supreme Court’s historic Citizens United vs. FEC decision last year. That ruling gave the green light to corporations, unions and individuals making unlimited contributions for ads and other political tools that back specific candidates, provided there is no coordination with campaigns or party committees.

As a result of this secrecy, voters will never know how much money is manipulating the 2012 elections.

Almost no reporting required

These 501(c)(4) groups — nicknamed after the provision in the IRS code that allows them — are taking in and spending tens of millions of dollars and reporting only a fraction of it to the FEC as political activity. Donors never have to be disclosed publicly by these groups — only to the IRS.

TV viewers are being bombarded with ads on issues such as taxes and regulations that often mention candidates and are only being reported in a general way, long after the fact, to the IRS. How do these organizations, run by veteran political operatives whose ideology is well-known, manage to largely escape scrutiny by regulators and public disclosure on the small fortune they spend on these ads?

Since the Watergate-era campaign finance scandal, following the money has been a Washington obsession, but the emergence of 501(c)(4)s has created a murky labyrinth.

“The fact that so far 501(c)(4)s are only reporting a fraction of what they’re spending — and nothing at all about their donors — underscores the wholesale inadequacy of our disclosure requirements,” Sheila Krumholz, executive director of the Center for Responsive Politics (CRP), told iWatch News.

“Our current system of campaign finance disclosure is on shaky ground.”

The limited evidence available shows that 501(c)(4)s have become magnets for big money: last year at least 65 groups reported spending over $89 million on political activities to the FEC, according to a CRP analysis.

Krumholz predicts a dramatic increase next year in 501(c)(4) spending on political activities. “I think it’s plausible that the number of c4s reporting political activity to the FEC will double this cycle,” she said. “Last year was viewed as a toe-in-the-water post Citizens United, and now more liberal groups have formed too.”

The total universe of organizations granted 501(c)(4) status is enormous, according to IRS data. In 2010, the number of c4s registered with the IRS jumped to over 139,000, up 2,000 from the prior year. These include such organizations as AARP and Disabled American Veterans.

Gaining c4 status is increasingly popular because it provides “quite a bit of flexibility in structuring activities with minimal reporting to the Internal Revenue Service and the Federal Election Commission,” Marc Owens said.

While c4s have become more popular post Citizens United, they include older conservative groups like the 60 Plus Association and liberal bastions like Moveon.org.

Owens, the former IRS official who’s now a tax lawyer, said the huge disparity between the 65 groups that reported to the FEC last year and the vastly larger number of these groups registered with the IRS, is partly attributable to the vagueness about how issue ads are defined. “Activities that have political impacts can also be dressed up or characterized as public education of some sort,” Owens said.

So how many c4 groups will be players in the 2012 elections? The answer isn’t clear, and never will be, but campaign finance watchdog Krumholz estimates, “There are likely a few hundred of these c4 groups that are largely focused on issue advocacy, if not electoral advocacy.”

In 2010, GOP-leaning 501(c)(4) groups accounted for almost $74 million of the $89 million reported to the FEC, according to CRP.

Seasoned Republican operatives like Karl Rove and Ed Gillespie seized on the opportunity to raise undisclosed, unregulated money. The frenetic money chase is exemplified by Crossroads GPS, a c4 launched by Rove and Gillespie, and its affiliated Super PAC, American Crossroads. A Super PAC can take unlimited checks but must disclose the names of donors in filings with the FEC. The Crossroads groups intend to raise $240 million for the 2012 elections, more than triple the $71 million they pulled in last year.

Last year, Democratic operatives were slow to respond to the GOP groups, relying heavily instead on the tens of millions that several big unions supplied for get out the vote and ads to boost candidates on Election Day. After losing the House last fall, Democrats vowed they would not get clobbered again and launched several new 501 (c)(4)s including Priorities USA, which was started by two former White House aides to help President Obama win in 2012. But at the end of the first half of 2011, fundraising totals were lackluster and paled beside their GOP counterparts.

Bill Burton, a cofounder of Priorities USA and an allied super PAC Priorities USA Action, sounds unfazed that the two groups raised just over $5 million in the first half of the year. “Donors understand the urgency and see the need to keep up with what Rove and the Koch brothers are doing,”said Burton, former deputy White House press secretary. “I’m confident we will have the resources that we need.”

The two groups are shooting to raise about $100 million.

Meanwhile, several of the largest GOP allied groups have already spent tens of millions on ad blitzes on policy issues involving taxes, spending and regulations in states and congressional districts where they would like to defeat Democratic incumbents.

Coleman of the American Action Network said his group intends to focus their funds and firepower heavily on keeping the House in Republican hands next year. “You can’t take the House for granted,” Coleman said.

In what looks like a synergistic move, Coleman spearheaded the creation of a Super PAC, the Congressional Leadership Fund, which will also be devoted to bolstering House members. Its president is the same as Coleman’s c4.

“I envision there will be many races in which the Network will be involved and the Super PAC will be involved too,” providing opportunities for the two outside groups to legally coordinate, Coleman said.

Last summer, Crossroads GPS said it spent $20 million on ads blasting the Obama administration’s economic policies — including ads that targeted five vulnerable Democratic senators who are running for re-election. The ads featured people fretting about high unemployment, rising gas prices and other economic worries. The ads charged that the Democratic senators back “billions in new taxes” and urged viewers to tell their senator: “No more blank checks.”

To counter Crossroads GPS and defend Senate Democrats, a little known c4 group called Patriot Majority USA has been very active. Last summer it ran $400,000 of issue ads in Nebraska, Missouri and Montana where Sens. Ben Nelson, Claire McCaskill, and Jon Tester were being pummeled by Crossroads GPS. The ads from the Democratic c4 attacked a GOP sponsored budget plan that would have substituted a kind of voucher system for Medicare. One ad ended with the line “Tell Congress the Republican plan is wrong for Missouri.”

Patriot Majority USA chief Craig Varoga says the group will raise significantly more than the $4 million it spent in 2010.

Some c4s have been around for years, but are also ratcheting up their spending plans for next year. One case in point is the Republican Jewish Coalition, a conservative pro-Israel group. The RJC plans to spend as much as $5 million next year on electoral and issue advocacy, or about double its previous high mark, RJC executive director Matt Brooks said. For RJC, the stakes are high: three Jewish candidates are running for Senate seats in Florida, Hawaii and Ohio. There are no Jewish GOP senators currently.

Another example is Americans for Prosperity, the grassroots goliath that was launched with funding from the billionaire Koch brothers. Tracy Henke, AFP’s chief operating officer, said the group spent about $25 million on issue advocacy last year that focused heavily on cutting regulations and federal spending. Of that sum, only $1.3 million was publicly reported to the FEC as political activity.

Who are the secret donors?

Though there is no mechanism to officially identify the people who make big contributions to the c4 groups, iWatch News has learned the names of a few recent big check writers.

• Sheldon Adelson, the Las Vegas casino titan whose net worth has been pegged at more than $20 billion by Forbes, has for a few years been the RJC’s leading financial angel, according to two board members.
• The Libre Initiative, a group that was set up early this year by Dan Garza who worked in the George W. Bush White House to help promote free enterprise in the Hispanic community, has received a multimillion-dollar commitment from Koch family interests, say three fundraisers with ties to the group. The group co-hosted a conference in Las Vegas with Americans for Prosperity this month.
• A secret donor to Crossroads GPS last year was Paul Singer, a billionaire who runs the hedge fund Elliott Management, say four fundraisers close to the group.

Other secret donors to Koch-connected c4s came to light in September when Mother Jones obtained a tape of Charles Koch thanking over two dozen GOP donors for making contributions of $1 million or more in the last year to conservative groups aligned with the Kochs. Among the prominent conservatives on that list were Art Pope, a North Carolina businessman who is a director of Americans for Prosperity; long time GOP donors from the DeVos family that founded Amway; and Ken Griffin, a Chicago hedge fund mogul who heads Citadel Investments.

Veteran fundraisers plus Democratic and Republican operatives running these groups say the main reason donors want anonymity is to avoid political retribution.

“Business people don’t want to create problems for their own companies,” said Mel Sembler, the former finance chairman of the Republican National Committee, who acknowledged he has written checks to several 501(c)(4)s.

By way of example, Sembler cited a Minnesota ad campaign last year for a GOP gubernatorial candidate who opposed gay rights that was partly financed by Target. The retailer, which helped finance the ad effort by a fledgling c4 called MN Forward, was hit with a shareholder resolution calling for disclosure of its political contributions and review of them by independent board members.

Regulation is almost nonexistent

To keep their coveted tax status as social welfare organizations, these groups must spend the majority of their funds on educational efforts — which can include issue advocacy with political overtones and grassroots lobbying. Generally, the IRS has allowed these groups considerable leeway to spend substantial amounts — but under 50 percent — on strictly political ads. This has expanded to include ads that call for the election or defeat of a particular candidate since Citizens United made them legal.

Owens, the former IRS official, says that under the rubric of issue advocacy, “activities that are styled as educational can nevertheless have a very significant political campaign effect in terms of driving certain groups of voters to the polls and causing other voter groups to stay away.”

Such efforts, Owens added, are permitted under the tax code and reflect “the increasing sophistication of political campaigning. Some groups are undoubtedly pushing the envelope but others are not.”Of the 65 non-profit c4s that reported spending to the FEC in the last election cycle, the lion’s share of money went for ads that helped GOP candidates. Conservative groups spent $74 million while liberal groups spent just $15.1 million in the midterm elections.

Overall, CRP says that c4s along with unions, trade associations and Super PACs reported to the FEC spending $305 million on election activities in 2010 — or four times what they spent in 2006.

More millions went into issue ads and get out the vote activities by 501(c)(4)s. These activities don’t have to be reported to the FEC, only to the IRS and typically as part of the group’s general expenditures.

For instance, Crossroads GPS and its affiliated American Crossroads reported to the FEC that it spent a total of $38.6 million on ads in 2010. Of that sum, GPS spent about $16 million on advocacy ads that specifically endorsed or opposed candidates, which is now permissible with unlimited donations post Citizens United.

GPS spent another $10 million on ads last year that fell under issue advocacy guidelines and therefore were not disclosed to the FEC, American Crossroads president Steven Law said.

Last summer’s $20 million ad blitz by GPS was on similar issues related to the economy including taxes, while bashing policies of the Obama administration and several Democratic senators. The ad spending wasn’t reported to the FEC since it was part of their educational mission, Law said. The ads were “aimed at promoting issues that we’ve continued to promote this year wholly apart from any election context.”

Law also said Crossroads GPS plowed a few million into other areas such as sophisticated micro-targeting that is used increasingly to help turn out voters sympathetic to candidates. This too was not reported to the FEC.

Because of concerns that this kind of spending by c4s should be made public, outside analysts and election watchdogs are calling for more oversight and reporting.

“There’s a lack of regulation and enforcement involving outside groups such as c4s and Super PACs including ones started by people who had ties to the candidates,” said Larry Noble, the former general counsel at the FEC.

Some watchdogs assert that several of these groups are not entitled to c4 status because they’re too involved in politics. Crossroads GPS, the American Action Network and Priorities USA were singled out in September by Democracy 21 and the Campaign Legal Center, which wrote the IRS challenging their status as social welfare organizations.

“The overriding purpose of these organizations is to influence elections and this makes them ineligible for tax exempt status,” Fred Wertheimer, the president of Democracy 21 told iWatch News. “The idea that these groups are social welfare organizations is nonsense.”

The heads of those groups all dispute Wertheimer and defend their tax status with the IRS as legitimate.

Still another issue that’s looming with c4s: foreign donations to 501(c)(4)s can be legally made as long as the money is not spent on any political activities but only for education. Owens, the former IRS official, frets that the agency is ill equipped to monitor potential abuses arising from foreign donations seeping into the American political system.

“IRS reporting rules are not really designed to capture those foreign financial flows,” Owens said. “The whole reporting and oversight mechanism is not designed to generate information for regulators or law enforcement regarding financial support from the outside the United States.”

Watchdogs are also nervous about possible abuses of foreign donations. “The Citizens United decision opened the door for foreign countries and foreign entities to launder undisclosed and unlimited money in our elections through 501 (c)(4) groups making campaign expenditures,” Wertheimer said.

When asked if they had received any foreign funds, Law, Coleman and Burton said they weren’t aware that was an option or had not pursued it.