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Stephen Colbert's Super PAC Follows Karl Rove In Secret Money Quest (Part 4)

First Posted: 01/19/12 11:20 AM ET Updated: 01/20/12 12:15 PM ET

This is part four of a five-part series by The Huffington Post about Stephen Colbert's ongoing exploration of the nation's campaign finance laws. Read about his PAC launch in part one, his super PAC launch in part two, his storming of the FEC in part three, and his mockery of the anti-coordination rule in part five.

WASHINGTON -- After Stephen Colbert received the blessing of the Federal Election Commission for his super PAC, the Comedy Central host proudly touted the names of donors in a crawl at the bottom of the television screen on his show, "The Colbert Report."

But then he thought better of it.

Colbert soon realized that he would not be in the same league as his fundraising idol, GOP strategist and pundit Karl Rove, without taking things one step further -- by letting his donors give their money in secret.

American Crossroads, the Rove-linked super PAC, also has a sister group called Crossroads GPS, which is a nonprofit formed under Section 501(c)(4) of the tax code. That group can raise unlimited money -- just like a super PAC -- but it does not have to disclose its donors.

In fact, Crossroads GPS has taken in considerably more money than the super PAC.

EASY TO CREATE

And it turns out that starting a 501(c)(4) is even easier than starting a PAC. You just file your application for nonprofit status with the Internal Revenue Service and -- because approval has typically just been a formality -- you are allowed to declare yourself a 501(c)(4) even before you are approved.

But unlike section 527 of the tax code, which was explicitly created for political advocacy groups, section 501(c)(4) was intended for what are known as "social welfare" groups. IRS guidelines for (c)(4) status state that intervening in political campaigns, while not prohibited, cannot be the primary activity. Instead, such groups "must operate primarily to further the common good and general welfare of the people of the community."

So how can organizations that are so clearly political in nature make that claim?

The distinction that groups like Crossroads GPS use to argue that they are not primarily political campaign groups is based on FEC (not IRS) rules that split political advertisements into two categories. Ads that call for the election or defeat of a candidate are deemed political. But other ads, even if they praise or criticize a candidate, are deemed to be non-political as long as they ask the viewer to take some sort of action on a policy or issue -- or if their main focus is on an issue, such as offshore drilling, free trade or collective bargaining rights, rather than a candidate. Those ads fall under the rubric of "issue advocacy."

Political 501(c)(4)s across the spectrum insist that the ads qualify as legitimate "social welfare" expenses -- even when their election-related goal is utterly transparent.

Crossroads GPS, for instance, argues that it can spend millions of dollars attacking not just incumbents, but candidates like Massachusetts Senate candidate Elizabeth Warren, and count that spending on the non-political side of the ledger. Often, these ads end by asking viewers to call the candidate's office to express support for a particular issue.

The fact that so many overtly political groups, like Crossroads GPS, are operating as 501(c)(4)s has ignited calls from senators and campaign finance watchdogs for the IRS to investigate, then reject, their applications. And indeed, many of their applications -- including that of Crossroads GPS -- are still pending. But the IRS, likely fearful of stepping into a major political controversy, has so far not taken any action.

ANOTHER WAY TO STAY SECRET

In the same Sept. 29 2011, episode in which they created a 501(c)(4), Colbert and his lawyer, Trevor Potter, also created an anonymous shell corporation.

501(c)(4) groups are not the only way to provide donors with anonymity -- donors can also form a shell corporation (or a nonprofit of their own) and funnel the money to the super PAC that way.

For instance, in the summer of 2011, the super PAC supporting former Massachusetts Gov. Mitt Romney for president reported a $1 million donation from a previously unknown corporation, W Spann LLC. The corporation was formed in Delaware in time to make the contribution, then immediately dissolved, allowing it to hide the identity of its officers. Such a brazen move provoked intense scrutiny, and eventually the man behind W Spann, former Bain Capital managing director Ed Conard, came forward to end the controversy.

In this case, creating an anonymous shell corporation may have been overkill. But still fun.

There is no sign that Colbert's nonprofit or shell corporation -- which he combined into one entity -- has engaged in any activity, as of yet. Of course, that's the whole point, isn't it? The nonprofit does not need to disclose its donors for ads that are deemed to be "social welfare" expenses. We may find out that his nonprofit, after receiving secret donations, gave money to fund his super PAC, which will then disclose that it received money only from the nonprofit, not from donors who gave to the nonprofit.

Further complicating the picture is that the super PAC doesn't have to disclose its donors to the public until Jan. 31, nearly two weeks after Colbert's run for the presidency of the United States of South Carolina will have ended.

Video produced by Sara Kenigsberg.

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