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Karl Rove's Donor Plan Could Run Afoul Of IRS, Congressional Report Suggests

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WASHINGTON -- A new report from Congress' nonpartisan research arm suggests that the Internal Revenue Service won't have much patience with the argument from groups like Karl Rove's Crossroads GPS that the ads it buys shouldn't be counted as political campaign activity.

The claim that ads attacking candidates aren't political -- as long as they avoid words like "vote" or "elect" -- is key to the empire of shadowy non-disclosing political groups that Rove, the Koch Brothers and other major political players have created.

By insisting that most of their budget goes toward "issue advocacy," rather than influencing elections, these groups exploit a loophole that allows certain non-political groups to keep their donors secret.

The Aug. 30 report from the Congressional Research Service (CRS), first reported by Diane Freda for Bloomberg BNA, reviews IRS rulings on what qualifies as issue advocacy, and strongly indicates that the Rove-style ads wouldn't be a tough call for the agency -- which could revoke an organization's tax-exempt status.

For instance, a recent $4.2 million Crossroads GPS ad buy attacked four Democratic Senate candidates, using the figleaf of calling on them to do such things as repeal health care or "cut the debt" -- as if there was imminent action about to be taken on the Hill.

The CRS report notes, however, that "when there is no pending legislative vote or other non-electoral activity, the IRS rulings suggest it can be difficult for an ad to avoid being classified as campaign activity."

Crossroads GPS publicly released its 2010 and 2011 tax filings in April, claiming tax-exempt status as a social welfare group under section 501(c)(4) of the tax code.

But the IRS has not yet approved its status. Should the IRS conclude that the group is primarily political in nature, the results could be politically explosive. Tax experts tell The Huffington Post that political groups that don't disclose their donations and expenditures to the IRS are subject to a 35 percent penalty on all donations that should have been disclosed but weren't and another 35 percent for the expenditure of that donation.

So a reclassified group could be on the hook for a 70 percent tax bill -- and might have to disclose its donors, to boot.

Campaign finance reform groups, including Democracy 21, argue that 501(c)(4) status should be denied to any group -- Republican or Democratic -- that is trying to disguise its political nature in order to avoid disclosure.

“We have long believed that groups like Karl Rove’s Crossroads GPS, Priorities USA and American Action Network are abusing the tax laws and are not entitled to tax-exempt status as 501(c)(4) 'social welfare' organizations," Democracy 21 President Fred Wertheimer told HuffPost on Friday. "That’s why we have sent a series of complaints to the IRS asking for these groups to be investigated and for the IRS to take appropriate action against them.”

But even the smallest indication that the IRS was pushing back on c4 status led Republican congressional leaders to accuse the IRS of pursuing a political vendetta.

Jonathan Collegio, a spokesman for Crossroads GPS, could not be reached for comment Friday.

The groups do have one thing going for them: IRS decisions in this area are based on individual determinations, rather than "bright line" rules. For instance, even when an ad refers to candidates or to voting in an upcoming election, the IRS states that "the communication must still be considered in context before arriving at any conclusions.”

Nevertheless, the factors the IRS takes into account appear to be commonsense -- and therefore inauspicious as far as Rove and others are concerned.

The reports notes among the key factors in determining that an ad has crossed the line into campaign intervention:

• whether it identifies a candidate for a given public office by name or other means
• whether it expresses approval or disapproval for any candidate’s positions or actions
• whether it is delivered close in time to an election
• whether the issue it addresses has been raised as one distinguishing the candidates
• whether it is part of an ongoing series by the group on the same issue and not timed to an election
• whether the communication is targeted at voters in a particular election

The report comes as congressional Republicans have shut down any legislative attempts to close disclosure loopholes.

But a recent federal district court ruling has nevertheless forced Rove and others to make some quick adjustments."

The ruling, in a suit brought by Rep. Chris Van Hollen (D-Md.), partly closes the c4 loophole by requiring disclosure of the donors paying for any ad that mentions federal candidates -- without expressly advocating for their defeat or victory -- within 30 days of a primary or convention, or 60 days of a general election.

Oddly enough, the loophole remains open for ads that expressly advocate for or against the candidates. So groups like Rove's quickly adjusted -- either by stopping their ads in the presidential race, which had already entered that time frame -- or by abandoning issue advocacy.

As NPR reports, the Koch-brothers-backed Americans for Prosperity recently began a $25 million ad campaign flatly telling voters to vote against Obama.

That solved the problem for now, but in the long run, will only make it harder for them to prove to the IRS that they are not primarily intervening in elections.

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