Nonprofit spends big on politics despite IRS limitation

Introduction

Last fall, a cadre of wealthy business executives and conservative groups tried to sell California voters on new campaign finance reforms.

Couched in lofty rhetoric about the importance of cutting off money from special interests to politicians and other regulations favored by reformers, their proposal sought to ban the practice of using payroll deductions for political expenditures — a popular method of union fundraising.

Once alerted to the true nature of Proposition 32, the unions and political left rose up against it.

An innocuously named nonprofit, the Iowa-based American Future Fund, proved to be one of the biggest backers of the initiative, sinking more than $4 million into the ballot measure that voters ultimately rejected.

As a “social welfare” organization, the American Future Fund is not required to publicly disclose its donors. But to maintain its tax-exempt status under Sec. 501(c)(4) of the U.S. tax code, influencing elections cannot be its primary purpose.

The American Future Fund’s investment in California was part of a nationwide, political advertising spree in 2012 that exceeded $29 million, according to a Center for Public Integrity analysis of state and federal records.

That amount included more than $19 million on efforts designed to oust President Barack Obama, as well as millions more to oppose Democratic candidates for Congress and even two state attorneys general. Now the group is funding ads opposing Obama’s nomination of former Republican Sen. Chuck Hagel of Nebraska for defense secretary.

Since the U.S. Supreme Court’s controversial Citizens United decision in 2010, nonprofits such as the American Future Fund have played a more prominent role in electoral contests — all while giving their supporters the ability to keep their identities hidden. During the 2010 midterm elections, politically active nonprofits outspent super PACs, which exist to fund political advertisements, by a 3-to-2 margin.

The American Future Fund ranked third among “social welfare” nonprofits in spending in the 2012 federal election, according to the Center for Responsive Politics, trailing only the Karl Rove-affiliated Crossroads GPS and Americans for Prosperity, which is backed by conservative billionaire brothers Charles and David Koch.

There are also Democratic-aligned nonprofits, but their spending was well below that of their conservative counterparts. The top left-leaning nonprofit was the League of Conservation Voters, which reported spending about $11 million in the 2012 election opposing or supporting candidates.

The American Future Fund’s spending “raises some serious questions” and “evades any form of meaningful disclosure,” said Adam Rappaport, senior counsel with watchdog group Citizens for Responsibility and Ethics in Washington (CREW).

Numerous officials with the American Future Fund did not respond to requests for comment for this story.

Advocating for ‘free-market ideas’

The American Future Fund’s mission is to “educate and advocate for conservative and free-market ideas,” according to its annual filing with the Internal Revenue Service.

Despite asserting that it isn’t primarily focused on elections, the nonprofit’s DNA is decidedly political.

Conservative political operative Nick Ryan, a longtime adviser to former GOP Rep. Jim Nussle of Iowa, founded it in 2007. Over the years, the group has paid Ryan’s firm, Concordia Enterprises, hundreds of thousands of dollars annually for consulting services.

In 2010, the New York Times reported that Iowa businessman Bruce Rastetter provided an unspecified amount of “seed money” for the organization. Ryan once represented four of Rastetter’s companies as a lobbyist, including Hawkeye Energy Holdings, one of the country’s largest ethanol producers.

The nonprofit’s first president was Nicole Schlinger, the former finance director of Iowa’s Republican Party. Its current president is veteran Republican state Sen. Sandra Greiner, who served for 14 years as the Iowa chairwoman of the pro-business American Legislative Exchange Council.

Ryan and Greiner did not respond to requests for comment.

In 2008, when the American Future Fund was seeking — and ultimately garnered — tax-exempt status from the IRS, it pledged to abstain from electoral politics, saying it would spend 70 percent of its time doing work to “educate the public on policy issues” and 30 percent engaging in efforts to “influence legislation through grassroots advocacy.”

When asked on its application if the group had any plans to spend money to “influence the selection, nomination, election or appointment” of anyone seeking public office, it answered “no.” It also vowed to stay out of the presidential race.

When the IRS subsequently inquired why the group’s advertisements “appear to be more partisan than nonpartisan,” the group’s attorney, Karen Blackistone, wrote that the efforts were “strictly issued-based and nonpartisan.”

The group takes a position on issues and encourages the public to contact their representative, she wrote in a 2008 response to the IRS.

“AFF’s advertisements have never commented on a candidate’s character, qualifications or fitness for office,” she stated.

Big money tied to post office box

The American Future Fund has raised more than $60 million, with spikes in contributions coming in election years.

Much of that money has come from another conservative “social welfare” nonprofit that doesn’t disclose its donors by name — the Arizona-based Center to Protect Patient Rights.

The nonprofit has no website and lists its address as a post office box in Phoenix. It was launched in 2009 by Republican operative Sean Noble, who has extensive ties to the vast political network underwritten by the Koch brothers.

Noble, a former chief of staff for former Rep. John Shadegg, R-Ariz., did not respond to requests for comment for this story.

For three years running, Noble’s organization has reported making substantial grants to the American Future Fund for “general support,” according to IRS filings. The nonprofit contributed more than $14 million to the American Future Fund between 2009 and 2011, or 51 percent of funds the group raised over the three-year period.

The Center to Protect Patient Rights has also given millions of dollars to a network of conservative groups, including the Koch-backed nonprofit Americans for Prosperity, as was first reported by the Center for Responsive Politics.

In addition to Noble, there is another Koch connection.

In 2008, Trent Sebits, the former manager of public and government affairs for the Kochs’ Wichita-based refining giant, Koch Industries, registered with the state of Kansas to lobby on behalf of the American Future Fund and Americans for Prosperity. Sebits did not respond to a request for comment.

The American Justice Partnership, another “social welfare” nonprofit, gave $50,000 to the American Future Fund in 2011 and $2.4 million in 2010, according to IRS filings. The group supports free enterprise and is often at odds with trial lawyers.

Dan Pero, its president, said in an emailed statement that the organization supported the American Future Fund to help “promote free enterprise and improve the fairness and predictability of the legal environment.”

Like super PACs, “social welfare” nonprofits are allowed to accept unlimited donations from individuals, corporations, unions and other organizations. The only funders whose names they are required to publicly disclose are those that make contributions earmarked for political purposes.

That’s as it should be, according to attorney Dan Backer, who is not affiliated the American Future Fund but does work with other conservative groups.

“A nonprofit makes its decisions by a board or other management structure, which is distinct from its donors,” Backer said.

Increasingly political

In 2010, the American Future Fund became far more politically active, reporting $8.6 million in political expenditures as well as millions more for “media services,” “telecommunications” and “mail service/production.” It told the Federal Election Commission that it spent $9.1 million on political advertisements.

Marcus Owens, former chief of the IRS’s nonprofits division, said it is “difficult to conjure up a situation where a particular expenditure would be reportable to the FEC but would not constitute political campaign intervention under tax law.”

Nevertheless, Owens said the organization could make a “straight-faced argument” that its orientation had simply changed over time to become more overtly political.

Of the $25 million that the American Future Fund reported spending to the FEC last year, more than 90 percent fueled ads that urged voters to support or reject candidates.

The group also sought the FEC’s advice on whether mentioning the White House or “the administration” in negative ads ahead of Election Day would be seen as referring to a “clearly identified candidate for federal office.”

Such a designation would have required the group to disclose information about its donors. (The commission deadlocked, 3-3, in a vote along party lines.)

In addition to the presidential race, the American Future Fund spent money in 20 congressional elections in 2012, including California’s 26th Congressional District, where it spent $500,000 attacking Democrat Julia Brownley, who, as a state legislator, had authored legislation to bolster disclosure for political advertisements.

She won anyway, but told the Center for Public Integrity that she is “deeply concerned” about the activities of non-disclosing groups in the wake of Citizens United and hopes to “take immediate action” to strengthen federal disclosure laws.

The American Future Fund also spent more than $542,000 to aid West Virginia Republican Patrick Morrisey in his successful quest to win the race for attorney general, records indicate, and more than $620,000 in a failed effort to sink Missouri Attorney General Chris Koster, a Democrat.

Complaints about the American Future Fund’s political activities have followed it since its creation.

In 2008, the Democratic Party in Minnesota contended that the group needed to register as a political committee after paying for ads that praised then-U.S. Sen. Norm Coleman, R-Minn. The FEC disagreed.

Two years later, in October 2010, consumer group Public Citizen and two other organizations alleged that the American Future Fund’s “huge expenditures” to aid candidates in the midterm election should have triggered requirements that the group register as a political committee and disclose its donors. That complaint is still being considered by the FEC, which often takes years to fully resolve such matters.

CREW, the watchdog organization, filed a complaint against the American Future Fund with the IRS in February 2011 that challenged whether its primary purpose was something other than influencing elections. The group has dismissed the complaint as “baseless” and contends that CREW “only targets government officials and organizations who have a differing or conservative point of view.”

Proposition 32

California’s campaign finance rules require major donors to groups that pay for political advertisements to be named in actual ads.

Thus, when a political committee called the California Future Fund for Free Markets aired ads praising Proposition 32, each advertisement included the disclaimer “with major funding by the American Future Fund.”

One ad criticized lawmakers for making “deals cut in shadows and back rooms” as dramatic music played in the background. Yet the donors to the American Future Fund itself largely remain in the shadows.