In the world of nonprofit “dark money” groups, nothing is as it seems: political committees, through the magic of the internal revenue code, become tax-exempt “social welfare” organizations; a partisan campaign ad becomes principled “issue advocacy”; and federal election law that requires public disclosure of donors is rendered toothless by regulatory loopholes.
The flow of cash through organizations asserting tax-exempt status under section 501(c)(4) of the federal tax code has been rising exponentially, from just $5.2 million in 2006 to $310.8 million in 2012.
There is one reason for this growth: 501(c)(4) groups do not have to reveal their donors.
Brendan Smialowski/Getty Images James Martin, chairman of the 60 Plus Association, and Selena Owens before a Tea Party Express press conference at the National Press Club in Washington on Aug. 4.Two pie charts — Figure 1 and Figure 2 — drawn up by the Center for Responsive Politics demonstrate the crucial role of conservative non-profits in driving this increase in spending.
Center for Responsive Politics Fig. 1
Center for Responsive Politics Fig. 2The Center, which has dug deeply into this submerged area of American politics, has gathered a lot of the relevant data about the influence of money on American politics at OpenSecrets.org. It makes for instructive reading.
The controversy over the revelation that organizations whose names include the words “Tea Party” were targeted by the I.R.S. for review has provided new cover for politically active conservative organizations, allowing them to charge that investigations of the legitimacy of their tax-exempt status are politically motivated. Many of these groups have, in fact, been explicitly involved in federal election campaigns, as reported upon by The New York Times and Politico.
Sheila Krumholz, the Center’s executive director, told me that despite the denials coming from conservative non-profits her organization has found increasing evidence of practices designed to evade I.R.S. rules governing tax-exempt status and donor disclosure.
The actual I.R.S. rule is worth examining closely:
The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f).
The phrase “not its primary activity” has been interpreted by campaign finance lawyers to mean that a 501(c)(4) organization can spend no more that 49.9% of its money on political activity, according to Krumholz.
In a process she refers to as “money churning,” a hypothetical tax-exempt organization, let’s call it the Good Government Coalition, has $10 million in revenues. The G.G.C. fulfills its obligation to spend just over half its money on non-political activity by giving $5 million plus $1 to another tax-exempt social welfare organization with an ambiguous name, the Liberty Bell Alliance. G.G.C. can now spend what it has left, $4,999,999 on political activity. The Liberty Bell Alliance, which now has $5 million plus $1, can spend just under half, $2,499,999, on political activity. The net result is that of the original $10 million, instead of only $4,999,999 going to political activity, $7,499,998, or 75 percent of the original $10 million, can be spent on politics.
Your eyes glaze over trying to follow money trail between organizations with names like TC4 Trust, the Center for the Protection of Patients’ Rights, Americans for Job Security, American Future Fund and American Commitment – not to mention the difficulty for a layperson, or even for a political professional, of keeping track of the differences between 501(c)(4)s, 501(c)(3)s, super PACs, Political Action Committees, independent expenditure groups, and political party committees — or God forbid 501(c)(6)s.
Let’s look at just one “social welfare” 501(c)(4) organization, the 60 Plus Association. The purpose of 60 Plus is to serve as a conservative counter to the A.A.R.P., which many Republicans believe to be a subsidiary of the Democratic Party.
60 Plus claims to be “a non-partisan seniors advocacy group.” Nonpartisanship is crucial for an organization seeking to get and maintain 501(c)(4) tax exempt status as a social welfare organization, which confers the magic right to conceal the identity of donors.
Generously interpreting the 49.9 percent guideline covering political activity, 60 Plus has pushed the non-partisanship rule beyond the limit. Its web site features items like these: “Shameful Democrats Rush to Defense of Their I.R.S. Political Partners”; “House Votes to Repeal Obamacare as Democrats Stand by Corrupt I.R.S.”; “Seniors Overwhelming Support for Romney Could Spell Trouble for Democrats Nationally”; “Democrat Deceptions on Full Display with Paul Ryan Joining GOP Ticket.”
James Martin, the chairman of 60 Plus, demonstrated his “nonpartisanship” just before the 2012 election thus:
Senior citizens better than any other group understand how devastating President Obama’s policies have been to every generation. They won’t sit idly by as he continues to squander our nation’s greatness, and liquidate our future under trillions more in debt.
Martin continued in the same vein:
Never forget, America’s seniors fought in wars and bled to defend freedom and make this country everything it is today. For four long years we’ve watched as this President has trampled on everything that defines us as a nation, and now tramples on his opponent, his predecessor and the truth itself in a desperate plea for four more years. Seniors know a great leader when they see one, regardless of party, and this President falls far short of deserving our consideration or our vote.
In the past two elections, 60 Plus has invested heavily in overtly partisan independent expenditures. In 2012, the tax-exempt organization doled out $4.62 million, $3.19 million of which was spent in support of Republicans, with the remaining $1.43 million spent to defeat Democratic candidates for federal office, including $321,933 to defeat Obama.
In the 2010 elections, 60 Plus spent even more money, $6.72 million, almost all of which, $6.67 million, was allocated to defeat Democratic candidates.
60 Plus is one of the major beneficiaries of the recent surge in the investment of conservative money in 501(c)(4) organizations.
In the two years from July 1, 2007 to June 30, 2009, the organization’s annual budgets were a modest $1.89 million and $1.81 million, according to 990 forms filed with the I.R.S. and available through the Guidestar web site. In 2009-10, 60 Plus receipts abruptly rose to $16.01 million, and then to $18.58 million in 2010-11. In 2011-12, the total fell to $11.8 million, which was still 650 percent larger than in 2008-09.
This burst of cash was in part the result of multi-million dollar grants to 60 Plus from two of the other “social welfare” groups I mentioned above, TC4 Trust and the Center for the Protection of Patient Rights. The Center for the Protection of Patient Rights has been the subject of investigations by the Center for Responsive Politics, by the California Fair Political Practices Commission, the web-based Republic Report and the Los Angeles Times.
The L.A. Times reported that Charles and David Koch, the conservative billionaire brothers who own Koch Industries, “have several ties” to the Center for the Protection of Patient Rights:
It is run by Sean Noble, a Phoenix-based GOP consultant who is a key operative in the Kochs’ political activities, as noted by the investigative blog Republic Report. One of the center’s original directors, Heather Higgins, is chairwoman of the Independent Women’s Forum, which has received funding from a Koch-controlled foundation. And Cheryl Hillen, a Connecticut-based consultant who raised $2.6 million for the center, was director of fundraising for the Koch-backed Citizens for a Sound Economy.
The Center for Responsive Politics found that the Center to Protect Patient Rights gave 60 Plus a total of $11.39 million, TC4 Trust gave $4.06 million, and other groups gave smaller amounts, including Karl Rove’s Crossroads GPS ($50,000) and the American Petroleum Institute ($25,000).
This year, 60 Plus reported in lobbying disclosure forms that in addition to issues affecting seniors, it is supporting off-shore drilling legislation and a measure to permit online gambling. Past issues it has supported have included opposition to the federal telephone excise tax and to legislation allowing drug imports, as well as support for Arctic drilling and the storage of nuclear waste at Yucca Mountain in Nevada.
60 Plus has been the subject of a number of attempts to restrain its activities, but it remains undaunted. In July 2012, for example, the Democratic Senatorial Campaign Committee filed a complaint with the Federal Election Commission charging that 60 Plus, Crossroads GPS and Americans for Prosperity “are ‘political committees’ who have failed to register and disclose with the F.E.C.” The D.S.C.C. dismissed the organizations’ claims of 501(c)(4) status as “spurious” and “risible on their face.” The complaint is still pending before the F.E.C.
In July, 2012, well before the current I.R.S. controversy, Senator Carl Levin, Democrat of Michigan, called on the I.R.S. to investigate the political activities of a dozen 501(c)(4)s, including 60 Plus. Levin’s list included both Republican and Democratic-leaning 501(c)(4)s: Crossroads Grassroots Policy Strategies, Priorities U.S.A., Americans Elect, American Action Network, Americans for Prosperity, American Future Fund, Americans for Tax Reform, Patriot Majority USA, Club for Growth, Citizens for a Working America Inc. and the Susan B. Anthony List.
60 Plus was not cowed. It is pulling out the stops to capitalize on the controversy regarding the I.R.S. focus on Tea Party groups. In one of his many denunciations of Democrats and the I.R.S., James Martin declared:
The shades of Watergate continue to hover over this scandal. We recall Nixon’s defenders dismissed that as a “3rd rate burglary.” With new revelations coming out by the day and more I.R.S. employees tucking tail, this disgraceful escapade is making Watergate look like a bad hair day by comparison.
Martin appears to be acting on the premise that the best defense is a good offense. (He did not respond to email or phone requests for comment.) In fact, what the past and present activities of 60 Plus, and of a host of other independent expenditure groups, point to is the need for a thorough rewriting of section 501(c)(4) of the tax code to limit the benefits of tax-exempt status – and of the right to conceal the identity of donors — to legitimate “social welfare” organizations.
The current political activities of large numbers of 501(c) organizations in no way constitute the kind of charitable work for which the public would grant favorable tax status as a reward. One of the reasons the people involved with political nonprofits — operatives and donors alike — love secrecy is that they fear public repercussions if their activities have to be conducted in the open. It is by now abundantly clear that abuse of the 501(c)(4) loophole corrupts and corrodes a campaign-finance system that was hardly a model of rectitude to begin with.
