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Rules of the Game: Campaign Finance Rules Too Lax, Some Say

In his ongoing spoof of the nation’s campaign finance laws, comedian Stephen Colbert has a new gimmick: a secretive nonprofit that can launder donations to his satirical super political action committee.

“So I can take secret donations of my (c)(4) and give it to my supposedly transparent super PAC?” Colbert asked his lawyer, Trevor Potter, in an on-air exchange last month.

Potter gave the nod, prompting Colbert to quip: “What is the difference between that and money laundering?” Potter’s retort: “It’s hard to say.”

In fact, the group Colbert had cited as the inspiration for this new “Colbert Super Pac Shh” nonprofit — the $240 million American Crossroads operation masterminded in part by GOP operative Karl Rove — makes no such transfers. In response to an email from the group’s lawyer, Colbert clarified on a later show that “there is no evidence of money laundering” at the Crossroads group.

But other groups do make such transfers, and the amount of money funneled through politically active tax-exempt organizations is escalating. Surging political activity by nonprofits has prompted watchdog groups to call on the Internal Revenue Service and the Federal Election Commission to better enforce the law. It has also prompted some state election officials and judges to crack down.

The latest campaign-oriented tax-exempt group to make headlines is Prosperity USA, a Wisconsin-based nonprofit that reportedly spent some $40,000 on travel and other costs early in GOP White House candidate Herman Cain’s presidential bid.

Run by Mark Block, now Cain’s chief of staff, the group may have run afoul of both tax and campaign finance laws, election lawyers say. As a 501(c)(3) charity, Prosperity USA is barred under tax laws from partisan political activity. Under federal election laws, even candidates who are in the early “testing-the-waters” phase of their campaigns must follow disclosure and other rules.

The scandal could drag in Americans for Prosperity, a much larger, unrelated tax-exempt group underwritten in part by conservative billionaire David H. Koch. Americans for Prosperity, whose 2010 budget exceeded $20 million, is now investigating its own financial dealings with Prosperity USA, iWatch News has reported. Block previously ran Americans for Prosperity’s Wisconsin affiliate.

Cain campaign officials have also said they have asked an outside counsel to investigate. It’s one more headache for a campaign struggling to tamp down a furor over allegations that Cain behaved improperly toward three female employees when he was president of the National Restaurant Association.

The boom in political nonprofits has followed the Supreme Court’s landmark 2010 ruling in Citizens United v. FEC to permit unrestricted independent spending by corporations and unions. That ruling ushered in super PACs that may take unlimited donations from corporations of any kind, including nonprofits, as long as they keep candidates and parties at arm’s length.

But nonprofits face virtually no reporting requirements, meaning that an awful lot of campaign money is now flying under the radar. In 2010, five super PACs attributed virtually all their receipts to undisclosed nonprofits, according to the Center for Responsive Politics.

Most of the biggest super PACs, moreover, operate affiliated nonprofits that raise and spend millions of dollars, but disclose nothing. A pair of watchdog groups has challenged five politically active nonprofits and asked the IRS to investigate.

“The law says a 501(c)(4) has to be an organization that is exclusively devoted to the social welfare,” said Tara Malloy, associate legal counsel at the Campaign Legal Center, which filed the challenge along with Democracy 21.

The two groups have asked the IRS to investigate Crossroads GPS; Priorities USA, a Democrat-friendly group set up by two former aides to President Barack Obama; the conservative American Action Network; and Americans Elect, a bipartisan group trying to get an alternative presidential candidate on the ballot.

The watchdog groups have also called on the IRS to clarify its own rules for tax-exempt groups, which have never been clearly spelled out. Court rulings show that social welfare groups may engage in no more than “an insubstantial” amount of political activity, the reformers argue.

By contrast, many Washington players point to the unofficial rule of thumb that social welfare must be the primary purpose, or at least 51 percent, of a 501(c)4 group’s activities. That rule of thumb is “just incorrect,” Malloy said. She added: “The IRS should be far more true to the original statute.”

“They appear to be taking a different view of the nonprofit law than any other group that is practicing under those rules right now,” countered Crossroads GPS Communications Director Jonathan Collegio.

Some state officials, however, appear to be taking a harder line than federal regulators. In Kentucky, a circuit court judge recently issued a restraining order barring ads by a group dubbed Restoring America, arguing that it had violated state laws by using undisclosed money from a tax-exempt organization.

In Arizona, Secretary of State Ken Bennett has asked the state attorney general to investigate several tax-exempt groups that he argues are violating the state’s disclosure rules. Bennett has also launched an audit of a trio of randomly selected political groups in the state.

“The voters in Arizona clearly feel that these political committees need to be reporting their expenditures and contributors, so they know who’s influencing their elections,” said Matthew Roberts, Bennett’s communications director.

The Supreme Court’s Citizens United ruling echoes that sentiment: “The First Amendment protects political speech; and disclosure permits citizens and shareholders to reach to the speech of corporate entities in a proper way.”

But as political nonprofits proliferate, secrecy — not disclosure — is increasingly the norm.

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