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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

Yet many social welfare groups have interpreted the IRS guidelines to mean they can report what the FEC considers to be electioneering communications as "education," "lobbying" or "issue advocacy" on tax filings.

Consider the American Action Network, which reported spending $25.7 million on its 2010 tax return.

The group told the IRS the bulk of that money, $17 million, went for lobbying and only $5 million went to political activity. But that same year, it told the FEC it spent more than $19 million on ads.

Conston, the American Action Network's spokesman, declined to explain the discrepancy, saying that the group had complied with all applicable laws.

Details in FEC filings offer some additional clues. The American Action Network reported $4 million in independent expenditures for 2010. Those ads clearly should be reported to the IRS as political spending, experts say. The group also reported $15.4 million in electioneering communications to the FEC—the only category on its 2010 tax form large enough to cover this amount is lobbying.

Many of the electioneering communication ads are no longer accessible online. ProPublica found nine that remain public. These cost more than $4.4 million, FEC records show.

Most criticized Democrats in vulnerable districts for supporting then-House Majority Leader Nancy Pelosi or health care reform. One focused on Nevada Rep. Dina Titus, showing a woman talking to a friend on Skype about the Democratic congresswoman.

"Apparently, convicted rapists can get Viagra paid for by the new health bill," the woman said. Later, she added, "I mean, Viagra for rapists? With my tax dollars? And Congresswoman Titus voted for it."

At ProPublica's request, Ellen Aprill, a law professor and the John E. Anderson chair in tax law at Loyola Law School in Los Angeles, reviewed the ads to assess whether they fit the IRS definition of political spending.

Criticizing particular lawmakers or candidates makes it likely that the IRS would see such ads as attempts to influence elections, rather than as issue advocacy or lobbying, Aprill said.

"Not simply saying this is bad legislation, but these people hurt you—with the implication, 'Don't send them back to Congress,'" she said.

Even in cases in which it seems clear that nonprofits have not met reporting requirements for political spending, groups sometimes stop operating before regulators can take action.

The Commission on Hope, Growth and Opportunity paid for a series of ads in 2010 that cost an estimated $2.3 million, according to CMAG.

One portrayed a cartoon dance line featuring Obama, Pelosi and an interchangeable Democrat, depending on where the ad ran. "Folks in Washington are living it up," it said. The ad urged viewers to "join" the Republican challenger.

Still, the group reported no spending to the FEC. In its 2010 tax return, it said it put at least $4.6 million—96 percent of its total expenditures—into advertising, yet insisted it spent nothing to influence elections.

The Commission on Hope, Growth and Opportunity now appears dormant. Calls and emails to the group went unanswered.

"You can go into business and violate the law and then go out of business."

"They are, of course, the best example of one of the problems with this: You can go into business and violate the law and then go out of business," said Melanie Sloan, the executive director of the Citizens for Responsibility and Ethics in Washington, which filed complaints against the group with the IRS and FEC. "And what's ever going to happen about that? There's no consequence."

Grants to Other Nonprofits Flow Into Politics

One way 501(c)(4) groups appear to fulfill their social welfare obligation is by making grants to other groups that share their tax status. Yet since the recipients also funnel money into politics, it's possible the grant money is ultimately spent on ads or other election-related activities.

According to its tax return, the nonprofit CitizenLink gave a grant of $120,000 to the Susan B. Anthony List to "assist with purchase of TV promotional spots & election help." CitizenLink did not count this money as political spending, the return said. The Susan B. Anthony List then used the money to help buy ads criticizing two Democrats for betraying voters by supporting health care reform, according to FEC reports. (The ads credited CitizenLink for helping pay for them.)

Another group, CSS Action Fund, gave a grant of $175,865 to Economy Forward for "promoting health care reform." Economy Forward spent almost all of this on ads promoting Sen. Harry Reid's help for the economy; health care reform wasn't mentioned.

Sometimes, ProPublica found, money passed back and forth between pairs or clusters of nonprofits with similar political agendas. It's not clear if the IRS compares tax filings and observes these patterns.

According to tax returns for 2010, the WMC Issues Mobilization Council gave $865,000 to the American Justice Partnership, which in turn gave $205,000 to the WMC Issues Mobilization Council. Both groups backed conservative causes and candidates.

Money passed back and forth between pairs or clusters of nonprofits with similar political agendas. It's not clear if the IRS compares tax filings and observes these patterns.

The Republican Jewish Coalition reported making grants to Crossroads GPS and the American Action Network in 2010, giving each group $4 million. Both groups returned the favor, reporting grants to the Republican Jewish Coalition in their 2010 tax years. Crossroads GPS gave the coalition $250,000, while the American Action Network chipped in $200,000.

Some nonprofits claim to stay out of politics but funnel money to other nonprofits that spend heavily on elections.

The Center to Protect Patient Rights, a group led by GOP strategist Sean Noble, reported on its 2010 tax return that it spent no money on politics.

As the Center for Responsive Politics first reported, however, almost three-quarters of the group's income—a total of more than $44 million—went to other social welfare groups that were politically active, such as the American Future Fund and the 60 Plus Association.

Brooks, the Republican Jewish Coalition's executive director, said grants to other groups should "absolutely count" toward meeting a group's primary social welfare purpose. "It's not obscuring the source of the money because it's fully reported and disclosed," he said. "We happily support other organizations that share our goals and our work."

Jonathan Collegio, a spokesman for Crossroads GPS, said forming a network of like-minded groups was the only way to change policy. He said Crossroads GPS sent the Republican Jewish Coalition a contribution because it "had a great program of work."

Some experts, however, compared the transactions to Russian nesting dolls, with each layer opening to reveal another, equally inscrutable one underneath. Even if a social welfare nonprofit had to reveal the donors behind an ad, it would be another nonprofit. There would be no way to trace the money to the original source.

For instance, the Independent Women's Voice and Citizens for the Republic, two nonprofits that made disclosures to the FEC about political ads purchased in 2010, identified a new social welfare group, The Annual Fund, as a major contributor.

And where did The Annual Fund get its money? Mostly from yet another social welfare nonprofit, the Wellspring Committee, run by the wife of The Annual Fund's founder.

Efforts for More Transparency Fall Short

The new breed of political nonprofits may operate differently from traditional social welfare organizations, but some say they serve a vital purpose in an era of increasingly bitter political partisanship.

Dan Backer, a lawyer who represents several conservative nonprofits, pointed to the Obama team's decision to single out donors like the Koch brothers.

"You have the president of the United States attacking donors," Backer said. "A lot of them have been named in person by the president as bad people. That's horrifying."

Openly taking controversial political positions can be bad for business. Some Democrats and gay-rights groups called for a boycott of Target in 2010 after the company donated $150,000 to a fund supporting a Republican candidate for governor in Minnesota who opposed gay marriage. Company officials swiftly apologized.

So far, efforts to impose limits on social welfare groups or demand more transparency from them have mostly failed.

Last summer, after coming under criticism, the IRS abandoned efforts to force five major donors to pay gift tax on contributions to social welfare nonprofits heavily involved in politics. This essentially gave the green light to donors worried about whether their donations could be taxed.

Bills to strengthen disclosure requirements have failed in the House and the Senate. The Supreme Court opted against reconsidering Citizens United in June.

In July, responding to a court ruling, the FEC said social welfare groups would have to identify major donors to electioneering communications. But groups are already finding work-arounds, coming up with different types of ads or making sure the only donors they have to disclose are other nonprofits.

Watchdogs say they are frustrated that neither the IRS nor the FEC has been willing to enforce or even clarify the rules that exist to force transparency.

"I'm relatively pessimistic right now," said Karl Sandstrom, a former FEC vice chairman who's now with the Perkins Coie law firm. "We have agencies that are in some cases silent, in some cases divided and in some cases as slow as they can possibly be."

The IRS appears to be shifting its attention toward whether 501(c)(4)s benefit a segment of society, not the public as a whole, another requirement for such groups. In the past 18 months, the IRS rejected the applications of at least four groups and revoked the tax-exempt status of one small Democratic nonprofit and its affiliates for this reason. In most of these cases, the agency concluded the groups were run "primarily for the benefit of a political party and a private group of individuals."

"The only ones in the dark will be American voters."

Owens, the former head of the IRS nonprofit division who is now a lawyer at Caplin & Drysdale, said agents are probably examining other social welfare nonprofits using that framework, asking whether a group like Crossroads GPS benefits the community at large or a subset of politicians.

"Crossroads says its issue is free enterprise," he said. "That's their argument: They're really not carrying water for the Republicans. They're carrying water for free enterprise. It will be interesting to see if they make that argument stick. I think it'll be tough."

The IRS also has yet to make a decision on Crossroads GPS' request for recognition of its tax-exempt status, which news reports say was filed in September 2010. Owens and others speculate that the IRS may be looking hard at the group.

Collegio, the spokesman for Crossroads GPS, said in an email that "without an IRS statement on the matter it is wholly irresponsible and unproductive to speculate."

Most experts do not expect the campaign finance landscape to change much before November, leaving social welfare nonprofits and their anonymous backers ample opportunity to influence who wins.

"The candidates and office holders will know where this money came from," said Paul S. Ryan, senior counsel for the Campaign Legal Center. "The political players who are soliciting these funds and are benefiting from the expenditure of these funds will know where the money came from. The only ones in the dark will be American voters."

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