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Dark Money Groups Free To Spend Money Without Disclosure Again After Appeals Court Ruling

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David Koch, billionaire co-owner of Koch Industries, has pledged to secretly spend more than $100 million to defeat President Barack Obama in 2012.
David Koch, billionaire co-owner of Koch Industries, has pledged to secretly spend more than $100 million to defeat President Barack Obama in 2012.

WASHINGTON -- An appeals court Tuesday overturned a ruling issued earlier this year that required independent groups spending money in elections to disclose their donors if they ran a certain type of campaign ad. The decision will immediately open the door for non-profit groups spending millions on this fall's election, like the Karl Rove-founded Crossroads GPS and the Koch brothers' Americans for Prosperity, to shift their funds back to these ads in order to help protect their tax-exempt status under Internal Revenue Service regulations.

The appeals court overturned a March 30 ruling by district court judge Amy Berman Jackson in Van Hollen v. Federal Election Commission. Jackson had found that a 2007 FEC regulation improperly interpreted the McCain-Feingold campaign finance reform law and wrongly required groups spending money on so-called "electioneering communications" to only disclose donors who had earmarked their contributions for that specific expense, when it should have required the disclosure of all donors.

The March Van Hollen decision was seen as a victory for advocates of disclosure for independent groups that have flooded the 2012 election with an unprecedented amount of spending on campaign ads. The biggest spenders have been groups that do not disclose their donors because they are organized under section 501(c)(4) of the tax code covering non-profits. These groups have spent well over $200 million so far this cycle.

While the Van Hollen ruling was seen as a victory for disclosure, it did not wind up forcing any group to expose its donors. Non-profit groups simply shifted their spending from "electioneering communications," which are ads that mention a candidate but do not call for their election or defeat, to "independent expenditures," ads that explicitly take a position on the candidate's election.

"We think the court is wrong and that the district court absolutely understood what was going on here," said Fred Wertheimer, president of Democracy 21, a campaign finance reform group that is part of the legal team in Van Hollen v. FEC.

The appeals court ruled against the district court's finding that Congress' intent in the McCain-Feingold law was clearly and unambiguously to mandate disclosure of all donors to groups making "electioneering communications." It found that the district court's use of dictionaries to define the word "contribute" as lacking a "purpose or intent element" acted as "a sort of optical illusion, conveying the existence of certainty."

The case has now been sent back to both the district court and the FEC, where commissioners must either come up with a new regulation or decide to defend the old one again in district court. The appeals court stated that the district court must find that the FEC regulation, whether it is the old one or a new one, is "arbitrary and capricious" in order to overturn it.

One immediate effect of the ruling will be that non-profit groups, which must spend more than half of their funds on non-political work, can now shift their spending back to "electioneering communications," which many of them refuse to label campaign expenses.

"It does allow the (c)(4) groups that are abusing the tax law and wrongly claiming (c)(4) status to hide their donors, to stop making independent expenditures and switch back to campaign ads that they will claim are not made to influence federal elections," Wertheimer said.

These groups had been pushed to spend money on "independent expenditures" under the original Van Hollen ruling, which could have jeopardized their tax-exempt status before the IRS. The appeals court's ruling provides further cover for them to spend freely this fall and not worry about the future nature of their tax-exempt status or the disclosure of their donors to the public.

Wertheimer disputes that "electioneering communications" can be categorized as non-political expenses and has challenged this with the IRS. He said Tuesday that the team that brought the initial challenge to the FEC regulations, which includes Rep. Chris Van Hollen (D-Md.), Public Citizen and the Campaign Legal Center, will continue to push for more disclosure and is considering their options in this case.

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