Category Archives: tax law and election law

Alliance for Justice: “The regulations governing federal campaign finance are constantly changing, even during an election year. Unfortunately, for nonprofit organizations engaged in issue advertising, the rules about disclosure just got murkier. Last week, the U.S. District Court for the District of Columbia denied motions for a stay of its March ruling making significant changes to how corporations, including nonprofits, must disclose their donors. We are concerned this ruling will prevent nonprofit organizations from exercising their rights to speak and petition the government through the use of broadcast media.”

Must-read Dan Eggen report for WaPo: “Nearly all of the independent advertising aired for the 2012 general-election campaign has come from interest groups that do not disclose their donors, suggesting that much of the political spending over the next six months will come from sources invisible to the public. Politically active nonprofits that do not reveal their funding have spent $28.5 million on advertising related to the November presidential matchup, or about 90 percent of the total through Sunday, a Washington Post analysis shows.”

I do have a question about one part of the story:

One Crossroads GPS spot currently running in Virginia, for example, castigates the president for high energy costs. “No matter how Obama spins it, gas costs too much,” the female narrator says. “Tell Obama: Stop blaming others and work to pass better energy policies.”

Despite its anti-Obama message, the ad is not considered an election-related message under FEC and IRS guidelines. That means the money spent to air the spot — about $204,000 in the Richmond, Charlottesville and Washington markets — will not count as part of the group’s political budget, experts say.

I take it that the only reason that this ad is not considered an election related message under FEC regulations is that it is not run in the electioneering communications time window (60 days before the general–a period which would be extended under the DISCLOSE Act). But would the IRS not consider this to be a political ad in judging the 501c4′s primary purpose?

iWatch:

Sixty-two percent of funds raised by two conservative groups associated with former Bush adviser Karl Rove have come from mystery donors, a statistic that shows the increasingly important role being played by nonprofits in a post-Citizens United political world.

American Crossroads, a super PAC, and Crossroads Grassroots Policy Strategies, a nonprofit, were founded in 2010 by Rove and another former Bush adviser, Ed Gillespie. Together, they raised $123 million through the end of 2011, according to an iWatch News review of Federal Election Commission data and Internal Revenue Service filings.

Of that sum, $76.8 million, or 62 percent, went to Crossroads GPS, which is a nonprofit, “social welfare” group organized under section 501(c)(4) of the U.S. tax code. Like American Crossroads, Crossroads GPS can pay for advertising that attacks political opponents by name and urges viewers to vote against them.

No breakdown yet on how much to its secret GPS arm.

Politico reports.  UPDATE: The article links to the tax returns themselves.

Bloomberg BNA: “Crossroads GPS, a Republican-leaning group organized under Section 501(c)(4) of the tax code, reported to the Internal Revenue Service that it spent less than a quarter of its budget in 2010 and 2011 for ‘political campaign and lobbying activities,’ according to tax forms released April 17. The proportion of spending that Crossroads GPS devotes to political activities is key to a dispute over its tax status because IRS rules require that 501(c)(4) groups do not have politics as their ‘primary purpose.’ Legal experts say this means such groups are not allowed to spend more than half of their budget on political activities”

I’m no tax lawyer, but on its face this looks like a reasonable point. A c3 cannot engage in substantial lobbying and legislation is necessary to achieve its ends.

What am I missing?  (And I concede I may be missing something—I’m way outside my comfort zone here.)

Greg Colvin:

It is very difficult to create rules that accurately trace political spending back to original sources in a multi-purpose organization. How far back do you go? Do you count the dollars first-in first-out or last-in first-out? Do you allocate the spending proportionately over all the donors? Do you let the organization say that the money came from investments, T-shirt sales, and small donors, and not from any big donors?

The danger is that those who paid with no idea that their dues or gifts would be used for politics will get disclosed, losing their privacy, and others who gave with a wink will not.

Therefore, I believe Congress should put its foot down and amend the Internal Revenue Code so that an organization with a good, qualifying nonprofit purpose has a very tight limit on how much political activity the IRS will tolerate. This language would do it:…

Alex Engler has written this article for the Georgetown Public Policy Review.

Stanford Social Innovation Review:

On March 20, two-dozen scholars, practitioners, and policymakers met for a discussion around the theme “Are Nonprofits People, Too? Citizens United and the Future of the Social Sector.” Responding to the expanded roles that certain nonprofit organizations—501(c)(4) social welfare organizations, in particular—are now playing in electoral politics, the group discussed the potential effects of Citizens United on the philanthropic and nonprofit sector as a whole, beyond the particular actions now allowed by law.

We opened a presentation by Professor Rick Hasen of UC Irvine, who studies election law and created the Election Law Blog. He explained how the legal and political landscape has shifted for 501(c)(4) and (c)(6) nonprofit organizations since January 2010, emphasizing the role they can now play in making electioneering expenditures. From the perspective of campaign finance, 501(c)(4) and (c)(6) nonprofits offer donors a distinctive loophole (or, perhaps, advantage) over other organizations such as political action committees, political parties, and Super PACs: These nonprofits do not need to publicly disclose donors’ identities. Data comparing campaign finance expenditure reports from 2012 to previous presidential election years show a clear shift in dollars from PACs and other 527 groups that do require donor disclosure to (c)(4) and (c)(6) nonprofits. Using data from the Center for Responsive Politics, Hasen found that outside spending in the 2012 presidential election through February was 264 percent greater than the same time in 2008 and more than 600 percent greater than in 2004.

Adam Bonica of the Stanford Political Science Department questioned the degree to which electioneering spending equals influence. His research looks at the many ways commercial corporations seek to influence political decision making—including lobbying, federal election spending, involvement on state ballot measures, and the “revolving door” of relationships between private sector and elected officials and their staff. One notable finding: Nonprofit and commercial corporations spend significantly less on elections than they do on lobbying.

These opening remarks led the group to reach a general consensus that policing one organization structure—say, by imposing disclosure requirements on 501(c)(4) social welfare organizations—would have limited impact on campaign finance per se. Changing the rules for certain nonprofits would be like playing “whack-a-mole” with the money; it would simply pop up somewhere else.

The discussion then branched out in several directions:…

Bloomberg BNA: “The House’s rejection March 27 of a proposal requiring greater disclosure for campaign advertising was just the latest litmus test of Republican and Democratic attitudes toward the issue, with general elections mere months away. Following an afternoon of vigorous floor debate, House Democrats were unable to insert an amendment into the Republican-led Federal Communications Commission Process Reform Act (H.R. 3309) that would have mandated that groups placing political ads on TV disclose contributors of $10,000 or more.”

The service also offers House Democrats Ask IRS, FEC To Enforce Rules on 501(c)(4)s.

Interesting post at NPQ.

Dan Froomkin on the Kochs.

Roll Call reports.

See here.

Lucy Bernholz, who co-organized with Rob Reich today’s fabulous event at Stanford on nonprofits after Citizens United, has written this post at her Philanthropy 2173 blog.

Must-read Eliza column:

In an election that until lately has been dominated by super PACs, politically active nonprofits are the new bad guys, drawing ethics complaints, letters to the IRS and legislative action.

That is bad news for the nation’s 1.6 million nonprofits, which have much to lose as their sector gets dragged into political money controversies. For reform advocates, the problem with big-spending, secretive nonprofits is that they answer to no one and keep voters in the dark. But the worst damage inflicted by unrestricted, undisclosed campaign money could be on nonprofits themselves.

Tomorrow I will be up at Stanford, attending and making a brief presentation at this meeting, Are Nonprofits People Too?. Here are my slides on “Citizens United, Campaign Finance, and Non-Profits. (Data are reprinted with permission of the Center for Responsive Politics.) Comments welcome!

Justin Elliott reports for ProPublica:

Crossroads GPS and Priorities USA did not respond to requests for comment about the proportion of their work that they classify as political. The proportion matters because if corporations are, in fact, deducting donations as business expenses, they cannot deduct the part of the donation that was used for political purposes.

So, where does all this leave us? If a company gave $1 million to Crossroads GPS or Priorities USA and claimed the donation was a business expense, that would be $1 million of the company’s revenue not subject to taxes. If the company was paying a 30 percent tax rate, that would mean savings of $300,000.

But this is entirely hypothetical because we can’t be sure whether this tax strategy is occurring. First, the social welfare groups don’t reveal their donors. So, we don’t know which companies to ask about the deduction issue. And if companies are taking the deduction, it would be detailed in tax returns that are confidential.

This item appears at Tax Prof Blog.

Bloomberg BNA: “Twelve Republican senators March 14 questioned the extent of the questions the Internal Revenue Service has been asking of some civic organizations applying for tax-exempt status.”

The Democratic Senators’ letter to the IRS on c4s is here. The Republican Senators’ letter to the IRS is here.

Bloomberg BNA reports.

Stanford Social Innovation Review:

There is a great deal of discussion about what the Citizens United decision means for elections, campaign finance, and democracy. But what does it mean for the nonprofit sector? This will be the topic of our second Recoding Good charrette, coming up on March 20, 2012, at Stanford.We are asking questions about the many possible ways the new rules for political giving might shape the nonprofit, charitable landscape. These include:

• Will the ability to make unlimited contributions to elections change donor behavior? Will more donors seek to achieve certain social outcomes by influencing elections through (c)(4) and (c)(6) nonprofits? Will they draw against their “charitable” budgets to make these contributions?
• How will the constant drumbeat of media attention to these political nonprofits affect public opinion of and trust in other nonprofit organizations?
• How will calls for greater scrutiny of politically engaged nonprofits affect the oversight of others?
• Will the new landscape of donor behavior entice more charitable nonprofits—501(c)(3) organizations—to start or partner with election-engaged, social welfare nonprofits—501 (c)(4) and (c)(6)’s?
• How will demands for donor disclosure in political settings change the age-old practice of charitable anonymity?
• How will we know any of the answers to the above, given the current state of nonprofit and election disclosure rules?

I’m very much looking forward to participating in this event.

Newsweek and iWatch report.

Check out the fourth slide in this chilling presentation from the Center for Responsive Politics:

Actually, check out the whole thing.

See this press release.

Important report from Dan Froomkin. And it may answer Eric Brown’s question (based on a Politico article): Where’s the corporate money?

NYT’s “The Caucus” reports.

Must read.

Important Roll Call follow up to NYT story.  See also this NYT editorial.

Paul Blumenthal writes for HuffPo.

Big deal: “The Internal Revenue Service is caught in an election-year struggle between Democratic lawmakers pressing for a crackdown on nonprofit political groups and conservative organizations accusing the tax agency of conducting a politically charged witch hunt. In recent weeks, the I.R.S. has sent dozens of detailed questionnaires to Tea Party organizations applying for nonprofit tax status, demanding to know their political leanings and activities. The agency plans this year to press existing nonprofits like American Crossroads, on the Republican side, and Priorities USA, on the Democratic side, to justify their tax-protected status as ‘social welfare’ organizations, a status that many tax professionals believe is being badly abused.”

Expect this to be a major story going forward.

Choose your poison: big money or big(ger?) dark money?

Important Michael Hiltzik column in the LA Times.

PR Watch has this post.

Misleading headline at the Washington Wire.   This is about gifts to 501c4s, not PACs.  And the concern now is not just transfers from c4′s to PACs, but c4 spending itself.

Interesting follow-up to this story.

Here.

Steven Sholk’s publication, updated.

See this LA Times editorial.

iWatch News reports.

iWatch News reports.

Press release: “Democracy 21 and the Campaign Legal Center sent a letter today to the Internal Revenue Service (IRS) challenging the eligibility of four organizations engaged in campaign activity to be treated as 501(c)(4) tax exempt organizations. Democracy 21 took the lead in preparing the IRS letter.”

An extensive must-read report (unfortunately behind a paywall) from BNA.

Ellen Aprill has posted this draft on SSRN (New York University Journal of Law and Public Policy).  Here is the abstract:

The applicability of the gift tax for transfers to section 501(c)(4) social welfare organizations, entities that are permitted to intervene in political campaigns to a significant extent while keeping their donors anonymous, has long been a matter of uncertainty. Applicability of the gift tax to contributions to section 501(c)(4) organizations is of great importance to these organizations because if the gift tax applies and were to be enforced, the amounts such organizations receive are likely to be significantly reduced. In many cases, donors would be expected to take such cost into account and reduce the amount of their contributions.

This issue has gone without resolution because for decades the IRS has not enforced the gift tax in such situations. Recently, however, a furor arose about application of the gift tax to donors to section 501(c)(4) that engage in campaign intervention, only to die down soon after it appeared. The IRS acknowledged in May that it had audits underway for five such donors, only to suspend the audits after receiving letters from Republican members of the Senate Finance Committee and House Ways and Means Committee objecting to the audits. In July, Steven T. Miller, Deputy Commissioner for Services and Enforcement, wrote a memo stating that his office would be coordinating with the Office of Chief Counsel as to whether there is a need for further guidance in the area, closing any outstanding efforts and stating that no examination resources would be expended on the issue until further notice.

The purpose of this piece is to scrutinize the issues raised in connection with applying the gift tax to contributions to section 501(c)(4) organizations. It examines the status of such taxation under current law, the constitutionality of such taxation, and policy considerations. It concludes that, despite precedents that might be interpreted to the contrary, the better view is that such gifts are taxable under current law and that, despite Supreme Court campaign finance reform precedents, such taxation is constitutional under Supreme Court tax law precedents. Nonetheless, important constitutional values are at stake, and Congress should enact a provision explicitly exempting such contributions from the gift tax, as well as a provision taxing donations of appreciated property and a provision requiring donor disclosure. Failure by the IRS to enforce the law is not a satisfactory solution.

Part I explains the structure, history and purpose of the gift tax. Part II describes section 501(c)(4) organizations. Part III presents administrative and judicial precedents. Part IV sets forth constitutional arguments both against and in favor of applying the gift tax to section 501(c)(4) organizations. Part V adds the policy calculus that calls for Congress to enact a provision adding an exemption from the gift tax for section 501(c)(4) organizations. Part VI concludes.

I read an earlier draft of this timely piece.  Highly recommended!