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How Nonprofits Spend Millions on Elections and Call It Public Welfare

It's spending by nonprofits, not super-PACs, that may sway this election.

| Tue Sep. 4, 2012 5:00 AM EDT

This story first appeared on the ProPublica website.

Matt Brooks describes the mission of the Republican Jewish Coalition as educating the Jewish community about critical domestic and foreign policy issues.

But the well-dressed crowd that gathered in May for a luncheon on the 24th floor of a New York law firm easily could have figured that the group had a different purpose: helping Mitt Romney win the presidency.

Brooks, the group's executive director, showed the 100 or so attendees two coalition-funded ads taking aim at President Barack Obama. Then Brooks made a pitch for a $6.5 million plan to help Romney in battleground states, reminding guests that their donations would not be publicly disclosed by the tax-exempt group.

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"Contributions to the RJC are not reported," Brooks told the people sitting around a horseshoe-shaped table. "We don't make our donors' names available. We can take corporate money, personal money, cash, shekels, whatever you got."

The Republican Jewish Coalition and similar organizations enjoy tax-exempt status in exchange for promoting social welfare. In this election, the most expensive in US history, they also have emerged as the primary conduit for anonymous big-money contributions.

Forget super-PACs, their much-hyped cousins, which can take unlimited contributions but must name their donors. More money is being spent on TV advertising in the presidential race by social welfare nonprofits, known as 501(c)(4)s for their section of the tax code, than by any other type of independent group.

As of August 8, they had spent more than $71 million on ads mentioning a candidate for president, according to estimates by Kantar Media's Campaign Media Analysis Group, or CMAG. Super-PACs have spent an estimated $56 million.

Congress created the legal framework for 501(c)(4) nonprofits nearly a century ago. To receive the tax exemption, groups were supposed to be "operated exclusively for the promotion of social welfare." The IRS later opened the door to some forms of political activity by interpreting the statute to mean groups had to be "primarily" engaged in enhancing social welfare. But neither the tax code nor regulators set out how this would be measured.

In recent years, Democrats and Republicans alike have seized on that seemingly innocuous wording to create the darkest corner of American political fundraising.

An investigation by ProPublica, drawing on documents filed with the Internal Revenue Service and the Federal Election Commission, offers the most detailed picture to date of how 501(c)(4) groups have used their tax status for purposes likely never intended.

Our examination shows that dozens of these groups do little or nothing to justify the subsidies they receive from taxpayers. Instead, they are pouring much of their resources, directly or indirectly, into political races at the local, state and federal level.

Democrats and Republicans alike have seized on that seemingly innocuous wording to create the darkest corner of American political fundraising.

The 2010 election functioned, effectively, as a dry run, providing a blueprint for what social welfare groups are doing on a larger scale today. Records on what is happening in the 2012 campaign will not be available until well after the election.

For this story, ProPublica reviewed thousands of pages of filings for 106 nonprofits active during the 2010 election cycle, tracking what portion of their funds went into politics. We watched TV ads bought by these groups, looked at documents from other nonprofits that gave them money, and interviewed dozens of campaign finance experts and political strategists.

We found that some groups said they would not engage in politics when they applied for IRS recognition of their tax-exempt status. But later filings showed they spent millions on just such activities.

On the very day in 2008 that the American Future Fund mailed its application to the IRS, checking the box for "no" on whether it planned to participate in politics, it uploaded an ad to YouTube praising a Republican senator. The group reported more than $8 million in political spending in 2010.

We also found that social welfare groups used a range of tactics to underreport their political activities to the IRS, a critical measure in determining whether they are entitled to remain tax-exempt.

Many groups told the IRS they spent far less on politics than they reported to federal election officials. Some classified expenditures that clearly praised or criticized candidates for office as "lobbying," "education" or "issue advocacy" on their tax returns.

One group, the Center for Individual Freedom, told election officials that it spent $2.5 million on ads in 2010, when it paid for commercials criticizing Democrats in 10 districts. But it reported to the IRS that it spent nothing to directly or indirectly influence elections, calling those same ads "education" or "legislative activities."

In several instances, nonprofits funneled much of their money to other 501(c)(4)s , which experts say is a way to meet, or appear to meet, IRS requirements for promoting social welfare. Yet records show the recipients of those grants spent much of their money on political activities, whether ads or voter registration drives.

For example, almost 70 percent of America's Families First's 2010 expenditures went to grants to five social welfare nonprofits. Four spent money on ads supporting Democrats or criticizing Republicans, including one group that put almost half of its expenditures into political ads.

No one from the Center for Individual Freedom or the American Future Fund responded to phone calls and emails from ProPublica asking for comment. In a written statement, America's Families First said its primary purpose was "issue advocacy" but did not answer specific questions about grants.

Campaign-finance watchdogs say the IRS has not clarified rules for social welfare groups or enforced them vigorously.

"The tax laws are being ripped off and the public is being denied information to which they are entitled—namely, who is financing ads that are being run to influence their votes," said Fred Wertheimer, the president of Democracy 21, a watchdog group that has filed repeated complaints about 501(c)(4)s to regulators.

The IRS declined to answer questions from ProPublica for this story. The agency said in its annual work plan that it would look at "serious allegations of impermissible political intervention" by social welfare groups.

"The tax laws are being ripped off and the public is being denied information to which they are entitled."

Marcus Owens, who was the director of the IRS' exempt organizations division for 10 years, pointed out that chasing political nonprofits isn't the agency's primary function, nor one for which it is staffed. One measure of this: Between 2001 and 2011, the IRS recognized more than 14,000 501(c)(4)s and turned down 56 applications.

One reason the IRS struggles is that it can't match the speed of politics. By the time some groups submitted tax returns spelling out the millions they put into the 2010 election, they had stopped operating, or disbanded and reformed under new names, ProPublica found.

The most politically active social welfare groups—former Minnesota Republican Sen. Norm Coleman's American Action Network and GOP strategist Karl Rove's Crossroads GPS—only filed tax returns covering fall 2010 in the spring of this year.

The Republican Jewish Coalition, though formed in 1985, in many ways epitomizes the new breed of political-minded social welfare nonprofits.

The group's initial IRS application said it would not engage in politics, yet its 2010 tax return says it gave almost $3.8 million to other groups for political activities.

Separately, the Republican Jewish Coalition told the FEC it spent more than $1.1 million on political ads, money that wasn't reported to the IRS. Together, the grants and the political advertising made up almost 40 percent of the total expenditures of the group, which is chaired by GOP super donor and casino magnate Sheldon Adelson.

"Our efforts and our expenditures are well within our primary purpose test requirements," Brooks said in an interview. "Everything we do is strictly within the legal guidelines."

Recent Rulings Embolden Nonprofits

Social welfare nonprofits have emerged as a prime vehicle for political money for several reasons.

Like super-PACs, they can rake in unlimited contributions, support and oppose candidates, and buy ads right up until Election Day. But unlike super-PACs, they don't have to disclose their donors.

Although individuals cannot deduct contributions to social welfare nonprofits on their taxes, companies may be able to write off donations as business expenses as long as they aren't earmarked for lobbying or political ads.

Many social welfare nonprofits became more active in politics after a series of recent court rulings, including the Supreme Court's Citizens United decision in January 2010, reshaped the rules of campaign finance.

Previously, laws had barred nonprofits from accepting donations from corporations or unions for political purposes and had mostly restricted 501(c)(4)s to generic "issue" ads that stopped short of calling on people to vote for or against candidates.

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