Campaign Groups Challenge Tax-Free Status of Political Nonprofits

Posted September 28, 2011 at 11:13am

Updated: 4:23 p.m.

Two campaign finance reform groups on Tuesday called on the Internal Revenue Service to investigate whether nonprofit organizations that have become popular vehicles for injecting millions of dollars into political campaigns are eligible for the tax-exempt status they currently claim.

The Campaign Legal Center and Democracy 21, in a 23-page letter to the IRS, said the primary purpose of 501(c)(4) organizations such as Crossroads GPS, Priorities USA, American Action Network and Americans Elect is not social welfare so they are therefore ineligible to file as nonprofit advocacy groups.

“The idea that these organizations are social welfare groups is nonsense,” Democracy 21 President Fred Wertheimer said in a statement. “The overriding purpose of these groups is to participate in and influence elections, which makes them ineligible for tax exempt status.”

Nonprofit 501(c)(4) organizations emerged as powerful players during the last election cycle after a January 2010 Supreme Court decision rolled back limits on corporate and union spending in election campaigns. In addition to working with super PACs, which can raise unlimited money but must track donors, 501(c)(4) organizations are attractive fundraising vehicles because, unlike their charitable 501(c)(3) counterparts — which are barred from political activity — and 527 political organizations — which have enhanced disclosure requirements — 501(c)(4) groups can shield donor identities and still participate in campaign activity, so long as it’s not the organization’s primary purpose.

“By claiming tax-exempt status under section 501(c)4, these groups allow their donors to evade the public disclosure requirements that would apply if the organizations were registered under section 527 as ‘political organizations.’ In fact, it appears that avoiding disclosure of their donors is the basic reason that these groups organized under 501(c)(4),” the letter said.

The two groups also say that while court decisions and IRS regulations have established that 501(c)(4) groups “cannot engage in more than an insubstantial amount of any non-social welfare activity,” in practice, political operatives and lawyers have interpreted that wording to mean 501(c)(4) clients can “spend up to 49 percent of their total expenditures on campaign activity.” Wertheimer and Campaign Legal Center Executive Director J. Gerald Hebert point to a 2008 IRS ruling that stated that if a group’s “first and primary emphasis” is to promote the election of candidates, it cannot be organized as a 501(c)(4) organization.

The bulk of the letter focuses on media reports and other accounts of the political activities of the four groups they have asked the IRS to investigate. Karl Rove, one of the founders of Crossroads GPS and its affiliated political organization American Crossroads, said at an Ohio election event that the group’s objective was to be a “strong presence” in the state during the last presidential race, the letter said. The founders of Priorities USA, launched this spring by former members of the Obama White House, have said the group’s purpose is to “answer the hundreds of millions of dollars Karl Rove and [Charles and David Koch] have dedicated to spending in the 2012 election,” according to a memo quoted in the letter. Reports about American Action Network and Americans Elect that show similar missions are also cited.

“The IRS should conduct an investigation of whether each such organization has engaged in more than an insubstantial amount of nonexempt activity by participating or intervening in political campaigns and accordingly is not primarily engaged in the promotion of social welfare,” the groups said. If they have, “the organizations should be denied or should lose tax-exempt status. In addition, appropriate penalties should be imposed by the IRS.”

“Consistent with the requirements for a tax-exempt status under the law, Americans Elect does not and will not support or oppose any candidate or candidate committee — it simply provides the nominating process where the American people can participate directly,” said Daniel B. Winslow, Americans Elect’s attorney.

Bill Burton, senior strategist for Priorities USA, said, “Our organization operates in compliance with all federal rules and regulations enforced by the IRS.”

The other groups were not immediately available for comment on the complaint.