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Campaign Finance: The Nonprofit World’s New Weapon

Exempt From Disclosure Rules, Now They Have New Money Leeway

On the surface, the public furor over the Supreme Court’s 2010 ruling to deregulate political money looks far removed from K Street’s lobbying and advocacy world.

After all, much of the controversy triggered by Citizens United v. Federal Election Commission has centered on unrestricted super PACs, which engage in campaigns and politics, not lobbying. And for the most part, lobbyists register and report their activities under the Lobbying Disclosure Act, not campaign finance laws.

But in fact, the Citizens United ruling is already having a profound effect on public policy advocates of all stripes, whether they represent corporations, trade associations or issue groups touting guns, women or clean air. Such players are finding themselves dragged into the emotional debate over money in politics and could face regulatory or legal fallout.

That’s because much of the big money flooding the 2012 elections is being spent not by super PACs but by nonprofit organizations that describe themselves as social welfare advocacy groups. They are both donating money to super PACs and spending money directly on political advertisements that, to the average voter, look just like any other campaign spot.

Because of their nonprofit status, these groups are not covered by the political money  disclosure rules — and that has created mounting anxiety about secret political spending that’s shared by voters, shareholder accountability groups, campaign finance watchdogs and even some corporate leaders. The controversy is creating public relations headaches for groups friendly to GOP conservatives, such as the U.S. Chamber of Commerce, and nonprofits with umbrella groups that favor Democrats and liberals, such as the Alliance for Justice. It’s also raising questions about where advocacy ends and politicking begins.

The secretive money explosion has drawn scrutiny from Capitol Hill and the IRS. The IRS has taken steps to enforce rules that bar nonprofit social welfare groups from making politics their primary purpose. Proposed changes, which range from a constitutional amendments that would reverse Citizens United to campaign finance disclosure legislation, have alarmed some lobbyists, who argue that new restrictions on the table could chill legitimate public policy advocacy.

“We want to make sure that in the effort to stop the excessive, undue influence, that we’re not trapping everyday Americans that often advocate through nonprofit organizations,” said Abby Levine, legal director of advocacy programs at the Alliance for Justice. “Because they’re the ones that are going to be hurt the most.”

Tough Road to Transparency

In theory, pulling back the curtain on secret political money should be simple. In the Citizens United ruling, the justices unanimously rejected a constitutional challenge to the campaign finance disclosure rules and justified their decision to throw out the longtime ban on direct corporate and union spending on the grounds that the money would be publicly reported.

In the real world of campaigns, however, total transparency is harder than it looks. The FEC’s disclosure regulations are loophole-ridden, argue the critics who have successfully challenged some of those rules in court. Moreover, both the FEC and the IRS have been slow to punish politically active nonprofits that run campaign-style ads.

That may soon change. A federal appeals court last month ordered the FEC to rewrite its disclosure rules governing “electioneering communications,” defined as ads that picture or name a candidate on the eve of an election. The court was responding to a lawsuit by Democratic Rep. Chris Van Hollen (Md.), who argued that the agency’s rules fly in the face of election law.

The IRS, too, is being prodded to respond to hyperpolitical social welfare groups that flood the airwaves with campaign-style ads. Both watchdogs and Democrats on Capitol Hill have asked the agency to investigate the activities of politically active nonprofits such as Crossroads Grassroots Policy Strategies, a GOP-friendly 501(c)(4) nonprofit associated with the Karl Rove-linked super PAC American Crossroads. “Crossroads GPS is serving as a vehicle to funnel tens of millions of dollars of secret funds into the 2012 federal elections,” organizers with the Campaign Legal Center and Democracy 21 wrote in a letter last month urging the IRS to deny the group tax-exempt status. “By the end of the year, this may be hundreds of millions of dollars of secret contributions.”

Crossroads GPS spokesman Jonathan Collegio suggested the IRS complaint is partisan in nature because it does not target Priorities USA, the nonprofit affiliate of a super PAC backing President Barack Obama.

“I’ve been referring all requests for comment on the letter and donor disclosure to Bill Burton, who runs President Obama’s nondisclosing group, Priorities USA,” Collegio responded in an email, which also noted that the complaint made no mention of the League of Conservation Voters, which spent $2 million on ads last year attacking GOP Sen. Scott Brown (Mass.).

But the IRS “is moving to enforce the rules,” said Marcus Owens, a tax lawyer at Caplin & Drysdale. He noted that the agency has signaled an interest in 501(c)(4) organizations and recently revoked the tax-exempt status of five groups. The IRS uses “facts and circumstances,” not trigger words such as “vote for” or “vote against,” in gauging whether a social welfare group has strayed too aggressively into politics, he said.

“What’s going to happen in the next two years is, there’s going to be this epic struggle, if you will, of how to define campaign activity,” said Owens, who previously directed the Exempt Organizations Division at the IRS.

Already, a string of detailed IRS questionnaires to largely conservative groups has stirred complaints among tea party activists and caught the attention of election lawyers. The agency’s “scrutiny is likely a prelude to future IRS investigations into the tax-exempt status of current 501(c)(4) organizations, potentially including major groups supporting President Obama and Republican candidates,” stated a recent memo circulated to clients by the law firm Clark Hill.

“I think there’s going to be pressure on [501(c)(4) groups] to disclose their donors if they are using that money for campaign ads,” said Trevor Potter, president and general counsel of the Campaign Legal Center and former chairman of the FEC.

Divided on Disclosures

Conservatives and GOP-friendly business allies have cast recent calls for disclosure as a partisan bid to intimidate and silence critics. They point to a successful campaign this spring by civil rights and other progressive groups to pressure several prominent corporations — including McDonald’s, Wendy’s and Coca-Cola — to leave the American Legislative Exchange Council. ALEC has fielded liberal attacks for taking funding from the conservative Koch brothers and for its role in drafting controversial state laws, including the Florida “Stand Your Ground” law connected to the killing of Trayvon Martin.

The disclosure movement “is all about intimidation,” U.S. Chamber of Commerce President Tom Donohue said at a recent breakfast with reporters. “It’s the only reason people are fighting; they want to be able to intimidate people not to put their money into the electoral process.”

Not all members of the chamber agree, however. Spooked by anti-corporate sentiment in the wake of Citizens United, as well as by a shareholder movement agitating for corporate transparency, a growing number of business leaders are taking a second look at whether the money they dole out for politics and advocacy is well-spent.

Some are sending money to the chamber and other trade groups with specific instructions not to use it for politically oriented ads. Others are adopting policies to vet and fully disclose their political expenditures. Many cite the recent defections from ALEC, as well as a 2010 controversy that forced Target Corp. to apologize to employees for backing an anti-gay-rights GOP candidate, as wake-up calls.

The Citizens United ruling “has not been, on balance, a plus for corporate America,” said Charles Kolb, president of the Committee for Economic Development, a business-led public policy organization. “It potentially ties corporate America to a system which is going to be embarrassing for the country and potentially problematic for those companies that go down this route.”

Corporate leaders are divided, however, on just what and how much they should disclose. At a Washington conference on corporate political spending hosted by the Conference Board, a business membership and research association, a show of hands indicated that virtually none of the participants were donating to super PACs.

But some at the conference argued that they face no obligation to disclose details about their public policy activities. Increasingly, Washington advocacy encompasses a host of activities, from grass-roots organizing to issue advertising, that fall outside the lobbying disclosure rules. Lobbyists on the right and left, as well as the interests they represent, are struggling to define how much advocacy and disclosure is too much.

“Companies and other political players are facing greater scrutiny, are being defined by what their executives do and what they organizations they belong to do,” said Douglas Pinkham, president of the Public Affairs Council. “And they have to weigh the pros and cons, and be strategic and thoughtful about their political involvement and affiliations, so as not to be caught by surprise.”

Correction: 4:15 p.m.

This article was corrected to clarify that nonprofits are exempt from campaign finance disclosure rules.

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