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Dark Money Groups' Failure To Report 2012 Political Activity Raises Questions

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By Julie Patel, Center for Public Integrity

Two of the tightest races for U.S. Senate in 2012 were in Nevada and Arizona. Republican candidates eked out wins in both states with help from four so-called “dark money” nonprofits.

Then-Rep. Jeff Flake of Arizona and incumbent Sen. Dean Heller of Nevada benefited from $3.1 million in spending by the groups. Voters in the states had no idea who was funding the attacks because the organizations were not required to reveal their donors.

Adding insult to injury for the Democratic contenders, Shelley Berkley in Nevada and Richard Carmona in Arizona, it turns out one of the groups’ nonprofit benefactors explicitly warned them not to spend the money on that sort of politicking.

The fact that the four nonprofits — Americans for Responsible Leadership, American Future Fund, American Commitment and Americans for Tax Reform — did so anyway, without suffering any apparent harm, shows how little oversight a new wave of political nonprofits have received in the wake of the 2010 U.S. Supreme Court decision that has allowed them to flourish.

The group that supplied some of the funds for the four groups’ political spending was the Center to Protect Patient Rights — which is basically a mailbox and a bank account. The group, effectively financed by billionaire brothers Charles and David Koch and like-minded conservatives, has acted as a sort of bank distributing cash to political nonprofits.

Campaign spending not allowed

In its tax return, the nonprofit Center to Protect Patient Rights notes that it “carefully evaluates the missions and activities of recipient organizations prior to making any grants to ensure that funds are used only for tax-exempt education and social welfare purposes.”

It adds: “Grants are accompanied by a letter of transmittal indicating how grant funds may be used.”

But a Center for Public Integrity review of Internal Revenue Service and Federal Election Commission documents shows that the four groups involved in the Nevada and Arizona races received almost $79 million, or most of the $112 million the Center to Protect Patient Rights doled out. What’s more, they spent some of the non-political grants they received on political campaigning. Yet there were no repercussions.

Lax IRS rules and weak oversight may be to blame, according to interviews in December with a half-dozen nonprofit attorneys.

Meanwhile, the Center for Public Integrity also identified four other nonprofits that reported political spending to the FEC in 2012 but did not report those expenses to the IRS — most denying in IRS documents they spent any money on politics.

The IRS is mulling whether to beef up its rules on political activity by nonprofits that aren’t required to reveal their donors. “Social welfare” nonprofits, known as 501(c)(4) groups, and 501(c)(6) trade associations have played an outsized role in federal elections since the Supreme Court’s Citizens United v. Federal Election Commission decision in 2010.

That decision allowed corporations, unions and certain nonprofits to spend unlimited amounts of cash supporting or opposing candidates in elections.

The proposed IRS rules would more clearly define political expenses for social welfare nonprofits, making them less likely to mis-report political expenses to the IRS, and would effectively bar the groups from using social welfare grants on political activity. But opposition to key parts of the proposal from both liberals and conservatives could kill it, at least in its current form.

Adam Rappaport, senior counsel of Citizens for Responsibility and Ethics in Washington, argues that “dark money” groups should go further by reporting the true sources of funding for their political expenses.

“The public should know who is paying for political ads that can sway elections,” he said.

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Restricted grants spent on politics

The Center to Protect Patient Rights and Freedom Partners Chamber of Commerce are both part of the network of nonprofits backed by the Koch brothers. The groups’ IRS documents say they don’t engage, even indirectly, in political activity.

But some of the funds they provided to nonprofits apparently were spent on just that.

The Arizona-based Americans for Responsible Leadership is led by former Arizona House Speaker Kirk Adams, who was listed as the group’s president.

The organization received 97 percent of its $25.3 million in revenue from a Center to Protect Patient Rights grant, according to tax returns from both groups.

That means all but about 6 percent of Americans for Responsible Leadership’s $9.9 million in political spending also came from the Center’s grant. It spent nearly $91,000 supporting Flake and Heller’s runs for Senate, according to the Center for Responsive Politics. Flake won by a margin of about three percentage points, while Heller won by an even narrower margin.

Officials from Americans for Responsible Leadership didn’t return phone calls and emails seeking comment.

The Iowa-based American Future Fund, founded by Nick Ryan, a GOP consultant, received a $49.2 million grant from the Center and another $13.6 million from Freedom Partners Chamber of Commerce. Freedom Partners, on its tax return, said that its letters of agreement for grants included “express prohibitions or protections against the use of grant funds for electioneering purposes.”

The combined $62.8 million in grants make up most of the Fund’s $67.9 million in revenue.

The group spent $26.7 million on political activity and ranked third among social welfare nonprofits for spending in the 2012 federal election, according to the Center for Responsive Politics. That included more than $20 million in spending aimed to oust President Barack Obama and $1.3 million to defeat Heller’s opponent, then-Rep. Berkley. Ryan declined to comment, and Sandy Greiner, a state senator in Iowa who was listed as American Future Fund’s president, did not return phone calls or emails.

Washington, D.C.-based American Commitment received a combined $11 million in restricted grants from the Center to Protect Patient Rights and Freedom Partners — out of its $11.7 million in overall revenue. That means most of American Commitment’s $1.9 million in political campaign expenses came from those grants.

The bulk of its political expenses went toward television advertisements for Flake and against his opponent, former U.S. Surgeon General Carmona, according to the Center for Responsive Politics and American Commitment news releases.

Phil Kerpen, president of American Commitment, denied that it used non-political funds for politics, writing in an email that all of the group’s “2012 political spending was from our organization's general treasury and we are in full compliance with all applicable laws and regulations” as well as commitments to donors.

Americans for Tax Reform, led by anti-tax activist Grover Norquist, received $350,000 from the Center to Protect Patient Rights. It also received $26.4 million for tax “exempt purposes, and not for political expenditures” from Crossroads Grassroots Policy Strategies as previously reported by the Center for Responsive Politics.

The two grants comprised most of Americans for Tax Reform’s overall revenue of $31 million in 2012, according to its tax return. That year, the nonprofit reported $15.8 million in independent expenditures to the Federal Election Commission, meaning at least some of the political spending was from grant money.

Americans for Tax Reform spent $320,514 opposing Berkley and most of the rest of its political dollars on competitive U.S. House races.

Officials from the nonprofit did not return calls or emails requesting comment.

James Davis, a vice president of Freedom Partners, wrote in an email that the group “places strict standards around all awarded grants, and our grants are fully compliant with the applicable IRS regulations.”

Officials from the Center to Protect Patient Rights and Crossroads GPS did not return calls or emails seeking comment.

More stories in the Consider the Source investigation from the Center for Public Integrity.

Donor intent

Some nonprofit attorneys say the nonprofit grantees could get in trouble for not following their donors’ wishes. A state attorney general, for example, could go after the groups and the IRS could follow suit, said James Joseph, a nonprofit attorney and a partner at Arnold & Porter.

“The IRS can take away tax-exempt status if a nonprofit violates a non-tax law; so here the IRS might argue the grantee is violating state law relating to donor intent,” he wrote in an email.

Representatives of several attorneys general in states where the nonprofits are based said it’s possible their offices would look into such an issue.

“Generally speaking, we’d have concerns about a grantee organization that is alleged to have clearly violated donor intent restrictions,” Geoff Greenwood, communications director for Iowa Attorney General Tom Miller’s office, said in an email, adding that he can’t comment on whether the office is investigating or will investigate a particular organization.

Arizona Attorney General Tom Horne’s office “would likely look into it” — if a complaint was made and the reason seemed valid, and the office had the jurisdiction and resources, said Stephanie Grisham, Horne’s press secretary.

A spokesman for Washington, D.C., Attorney General Irvin Nathan declined to comment on whether it would take action. The IRS also declined to comment.

Odds are the agency won’t, Rappaport said.

“Even before the IRS scandal, they weren’t particularly aggressive. Since [then], I fear they are very reluctant to take on the harder issues of enforcement,” he said, referring to reports in 2013 that IRS officials singled out tea party and other right-leaning nonprofit groups for enhanced scrutiny.

Most nonprofits err on the side of caution, said Ronald Jacobs, a partner at Venable law firm and co-chairman of its political law practice. He said he works with trade associations that are careful to use grant money from similar groups on appropriate non-political activity such as promoting “common business interests.”

No accountability for spending?

The Center to Protect Patient Rights and Freedom Partners claimed on their tax returns — under penalty of perjury — no “direct or indirect” political activity in 2012.

Yet 70 percent of the Center’s $112 million in grants went to four nonprofits that spent some of their social welfare grants on politics. And more than half of Freedom Partner’s grants went to two of those nonprofits and the Center combined.

“There’s not a lot [of regulation] on how grants are counted right now” said Jacobs said, adding that “there’s nothing that requires the [grantor] to look at how [the money] was actually spent.”

The Center to Protect Patient Rights notes in its tax return: “The organization does not currently have procedures for monitoring the use of grant funds in the United States once grants are made.” Freedom Partners says in its tax return that it reserves the right to review how grants were spent on a case-by-case basis.

That said, the IRS may have some tools to hold grantors culpable.

“If the grantor were to discover after the fact that the grant had been used in violation of the restriction, I’d argue that the grantor would have to at least look into the possibility of trying to get the funds back from the grantee. This approach echoes similar … ‘expenditure responsibility’ rules that foundations are required to use when making [certain] grants,” John Pomeranz, an attorney with Harmon, Curran, Spielberg & Eisenberg law firm, wrote in an email.

The grantors are ultimately beholden to the IRS for the privilege of not paying taxes, said Gregory Colvin, a principal of San Francisco-based law firm Adler & Colvin. Colvin, a leader on the American Bar Association’s Exempt Organizations Committee from 1991 to 2009, said regulators “can re-characterize as political what the grantor reports on its tax return as non-political, which may have tax consequences … The grant could become taxable at 35 percent.”

Also, if the grant’s new use bumps up the grantor’s political spending to the point that it’s the primary activity, the IRS could remove the group’s tax-exempt status and make it subject to corporate income tax.

Social welfare grants allow grantors a double benefit: They can count the money as social welfare spending, legitimizing their tax-exempt status.

Meanwhile, the money is going to politically aligned groups that might very well spend the money on politics — all the while the grantor gets a tax break and shields donors’ identities under the auspices being a social welfare nonprofit.

“Grantors do this so that they don’t have to acknowledge any amount of political activity, so they can [be assured of] retaining their 501(c) status,” Rappaport said. “It’s one part of a broad scheme to keep secret who is funding hundreds of millions of dollars of political activity. CPPR and Freedom Partners act as middlemen in this scheme, yet they’re trying to say they have no part in it.”

This story was published by The Center for Public Integrity, a nonprofit, nonpartisan investigative news organization in Washington, D.C.

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