POLITICS
12/05/2013 01:14 pm ET | Updated Jan 23, 2014

How To Make Sure Your Dark Money Group's Million-Dollar Donors Stay Secret

ASSOCIATED PRESS

WASHINGTON -- "Dark money" nonprofit groups go to endless lengths to ensure that their political activities do not jeopardize their tax-exempt status and thus their ability to keep their donors secret. They navigate the overlapping rules of the Internal Revenue Service and the Federal Election Commission with the advice of lawyers who specialize in stepping up to, but not over, the lines.

Watchdog groups have challenged these legalistic contortions and repeatedly criticized the current IRS rules, which state that social welfare nonprofits -- the most common form taken by groups seeking to participate in politics but hide donors' identities -- must be engaged "primarily" in their social welfare function. A major problem is that the IRS does not clearly define "primarily." While the agency has proposed new rules, they will not go into effect for some time and, in any case, do not address the amount of permissible political activity.

In the meantime, attorneys go on advising dark-money groups with millions in donations how to stay within the bounds of nonprofit law.

At the Fundraise to Win conference hosted by Campaigns & Elections magazine on Nov. 21, Sean Cairncross, a lawyer with HoltzmanVogelJosefiak, revealed some of that advice. HoltzmanVogelJosefiak, a publicity-shy law firm, represents Karl Rove's Crossroads GPS and a host of groups associated with the billionaire Koch brothers, including Americans for Prosperity and the Center to Protect Patient Rights.

Cairncross said dark-money groups that keep their political spending under 40 percent of their annual budget fall within a "safe harbor or the threshold that is considered safe" by IRS enforcement officials.

"[If] more than 40 percent of their activities is political, then they risk losing their tax-exempt status," Cairncross warned.

A group with higher political spending could still potentially try to win the status argument during an IRS audit, he said, but he didn't deem that a "prudent course of action."

Items that must be reported as political activity include grants to political organizations and independent expenditures expressly advocating for the election or defeat of a candidate that are reported to the FEC, according to Cairncross.

One major dark-money group funded by a key HoltzmanVogelJosefiak client does not appear to be following such advice.

Americans for Tax Reform, the anti-tax group run by Grover Norquist, reported spending $9.8 million on political activities in 2012 to the IRS, but reported $15.7 million in independent electoral expenditures to the FEC. The difference between the two amounts is the difference between the group's spending 32 percent or 51 percent of its budget on politics.

If the IRS enforces the rules as they are described by lawyers like Cairncross -- and counts the larger $15.7 million as political spending -- Americans for Tax Reform could lose its tax-exempt status and its "donors may be subject to disclosure."

John Kartch, communications director at Americans for Tax Reform, said, "ATR knows the rules of the FEC and the IRS, and our reporting meets the requirements of each."

As ProPublica and the Center for Responsive Politics have reported, the political spending by Americans for Tax Reform also casts a light on the political spending by Crossroads GPS, the conservative dark-money behemoth that reported $74.5 million in such spending last year to the IRS.

Crossroads GPS provided Americans for Tax Reform with a grant of $26.4 million in 2012, making it the source of 85 percent of the funds raised and spent by the latter group. According to Crossroads GPS' own IRS filing, this grant was supposed to be used for social welfare activity “and not for political expenditures." But clearly some of it funded those independent expenditures that Americans for Tax Reform reported to the FEC -- a category of spending that Cairncross indicated should also be reported as political activity to the IRS.

In reviewing the expenses and holdings of Americans for Tax Reform, ProPublica calculated that at least $11.2 million of the $26.4 million grant from Crossroads GPS was spent on political activities.

Here's where the nature of IRS rules, with their focus on the "facts and circumstances" of particular cases, complicates the matter. If Crossroads GPS provided a grant for social welfare activity and reported that grant as for social welfare activity, then when it learned -- or learns -- that Americans for Tax Reform apparently spent several million of those dollars on politics instead, it should arguably have responded in some way.

“They have a bad grantee here,” Marcus Owens, the former head of the IRS’s exempt organizations division, told ProPublica. “My question would be, ‘What has Crossroads done to recover that money?’ That’s what the IRS would expect.”

But if Crossroads GPS is letting the matter lie, it could be argued that the group, in fact, spent at least $85.7 million on political activities last year, or nearly 45 percent of its total budget -- over the "safe harbor" threshold generally advised by Cairncross, whose firm represents Crossroads.

When asked whether his advice applied to the situations of Americans for Tax Reform and Crossroads GPS, Cairncross said, "I'll pass on commenting other than to say that anything under 51 percent is fine -- something that IRS officials themselves testified to before Congress in the recent hearings on the IRS targeting matter -- but with the uncertainty of the IRS's subjective decision-making, it pays to give yourself wiggle room."

Crossroads GPS did not immediately respond to a request for comment.

Citizens for Responsibility and Ethics in Washington, a liberal watchdog group, has filed a complaint with the IRS over the disparity between the total political spending reported by Americans for Tax Reform to the tax agency and to the FEC.

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