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More Headaches Ahead for Tax-Exempt Groups?

Thirteen months after Election Day, the politically active nonprofits that spent more than $300 million in the 2012 campaigns without disclosing their donors are back in the news.

Many of the biggest spenders submitted their 990 tax forms to the IRS on Nov. 15, offering a revealing glimpse into just how politically minded these supposed social welfare groups were. Filers included the election-focused social welfare groups Crossroads GPS, founded by GOP operative Karl Rove; Americans for Prosperity underwritten by the conservative Koch brothers; and Priorities USA, organized by backers of President Barack Obama.

The 990 forms do not list the names of big donors but have nonetheless triggered several eye-opening investigations that illuminate just how such “dark money” groups operate. ProPublica detailed how Crossroads GPS spent at least $85.7 million on politics, despite having reported a far smaller sum to the IRS — $74 million. The difference is largely explained by an $11.2 million Crossroads grant to Americans for Tax Reform, which spent the money on campaigns, the report found.

The Center for Responsive Politics continued its “Shadow Money Trail” series with several updates showing, among other findings, that one in four “dark money” dollars went to groups with links to billionaire conservatives Charles and David Koch. The CRP also examined the Crossroads GPS grant.

Citizens for Responsibility and Ethics in Washington recently complained to the IRS and the Department of Justice that ATR spent more than half its money on politics, not social welfare, and that the group provided false information to the tax agency. ATR organizers call the allegations baseless and say they have complied with the law.

Amid all this, the Treasury Department and the IRS have proposed new rules defining “candidate-related political activity” for 501(c)(4) social welfare groups, triggering a wave of alarm across the nonprofit sector. Advocates of tighter campaign finance restrictions have hailed the move, and Rep. Chris Van Hollen, D-Md., and his allies have dropped their lawsuit demanding that the IRS issue new regulations.

But advocacy groups on the left and right object to provisions that would define election eve ads that identify a candidate, along with voter mobilization, as political activity. Public comments have already started coming in, including from the Center for Competitive Politics. The agency has struggled for decades to explain what social welfare groups may or may not do on the political front. Tax law says they should be “exclusively” for the public welfare, while IRS regulations say their “primary” focus should be the public good.

Defining what’s permitted will draw still more controversy to an agency already under fire for its mishandling of applications for exemption from the tea party and other groups. And political money may soon be migrating elsewhere in any case, campaign finance and tax experts said last week at a panel hosted by the Center for Responsive Politics. Indeed, politically active nonprofits are under pressure on more fronts than just the IRS.

“Let’s face it, there are some warning signs for groups that are operating in this space,” said CRP Editorial and Communications Director Viveca Novak at last week’s forum, which took place at George Washington University Law School.

Such groups face not only the threat of tighter IRS rules, Novak noted, but growing pressure from state officials to disclose their political activities. She cited a record $1 million fine recently imposed on two Arizona tax-exempt groups by California’s Fair Political Practices Commission and new nonprofit disclosure laws in New York State.

Watchdog groups and investigative journalists also have gotten better at pulling back the curtain on “dark money,” Novak said. Nevertheless, she and CRP Political Nonprofits Investigator Robert Maguire detailed how leading tax-exempt groups on both sides of the aisle used multiple techniques in the 2012 elections to obscure their contributors. These included “shape shifting,” or morphing structure repeatedly over the years, operating at times as a 527 political organization, a 501(c)(4) social welfare group or an unrestricted super PAC.

Maguire detailed how a network of high-dollar tax-exempt groups associated with the Koch brothers used multiple pass-through organizations to muddy the money trail.  One leading Koch-funded group, the Center to Protect Patient Rights, received millions of dollars in grants only after the money had traveled through a network of wholly owned subsidiaries that the IRS terms “disregarded entities.”

Similarly, a Washington, D.C., social welfare group dubbed the Wellspring Committee funneled money to multiple groups and changed the course of a key environmental ruling in Michigan, said panelist Peter Overby, who covers political money and lobbying for National Public Radio. Overby disclosed the transactions through a joint investigation with the CRP. All told, non-disclosing tax-exempt groups spent some $336 million in the 2012 campaigns, according to the CRP, an exponential increase over previous elections.

Panelists voiced skepticism that the IRS regulations proposed last month will end secrecy in political spending. While money may move away from 501(c)(4) social welfare groups, it is likely to simply shift to other undisclosed avenues, they predicted. At this stage, the proposed IRS regulations apply only to social welfare groups, though the agency has invited comment on whether new restrictions should be extended across the tax-exempt sector.

Even if 501(c)(5) labor unions and 501(c)(6) trade groups face new rules, too, political players will prove adept at exploring alternatives, tax lawyers on the panel said.

GOP tax attorney Jan Witold Baran, a partner at Wiley Rein, noted that following 2002, when Congress banned the unrestricted “soft money” collected by the political parties, spending by the political organizations known as 527 groups spiked to about $440 million — just a little less than the $500 million or so that the national parties had collectively raised and spent before the ban.

“We see that money migrates,” Baran said. “And it migrates as a result of changes in the law,” whether because of congressional legislation or Supreme Court rulings. Indeed, the recent surge in tax-exempt politicking follows hard on the Supreme Court’s 2010 Citizens United v. Federal Election Commission ruling to deregulate independent political spending.

But if social welfare groups are now the vehicle of choice for political players intent on operating in the dark, such organizations may already be falling out of favor. The new “dark money” flavors of the month may soon include 501(c)(6) trade associations, trusts, limited liability corporations, for-profit corporations set up for the purpose of making independent campaign expenditures or even veterans groups, the panelists predicted.

“When are veterans organizations going to be used as the new vehicle,” mused Donald Tobin, a business law professor at Ohio State University’s Moritz College of Law. Such groups may raise tax-deductible contributions, he said, and are free to engage in electioneering communications.

Tobin commended the IRS for opening “a dialogue that needs to be had.” But he added: “In the end, I have to say I’m not sure it’s going to make any difference.”

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