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The Center for Public Integrity

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Secretive 501(c)(4) nonprofits report only a fraction of elections fundraising and spending

Posted: 10/31/2011 9:05 am

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The conservative American Action Network, a leading independent player in last year's election, poured $26 million -- out of some $30 million in spending -- from secret donors into political ads and activities to help Republican candidates.

Set up in 2009, the network enjoys a prized tax status from the Internal Revenue Service as a social welfare, tax-free 501(c)(4) organization, which permits it to accept secret donations and engage in some political advocacy. But to qualify for this special status, an organization cannot spend the majority of its money on politics, and its primary advocacy must be on issues.

As required by law, the network reported the $26 million it spent on political activities to the Federal Election Commission before Election Day.

But the network's hefty spending on politics poses an important question: is its primary purpose social welfare, as the IRS intended, or political activity?

Former Sen. Norman Coleman, who chairs the network, told iWatch News his organization "followed the law" in spending its almost $30 million.

Justifying their spending, Coleman's group further said that $20.4 million went to broadcast ads close to the elections -- officially called "electioneering communications" -- that mentioned candidates' names but didn't recommend a vote for or against the candidate. These ads mostly "urged center-right action on issues" before Congress, the group said. The remaining $5.7 million was spent on ads that directly called for the election or defeat of candidates.

"Not all electioneering communications are candidate advocacy under the campaign finance or tax laws," network president Brian Walsh said.

However, some veteran tax experts say the group's status with the IRS could be in jeopardy. "If over 80 percent of a group's expenditures are for political purposes that require reporting to the FEC, then that organization will not qualify for tax-exempt status under section 501(c)(4)," Marc Owens, who was director of the IRS exempt organizations division for a decade, told iWatch News.

"They're saying they can dress up electioneering communications that they've reported to the FEC as a lobbying message, and have the IRS view that with blinders."

IRS rulings indicate that advocacy communications do not have to expressly support a candidate to qualify as political activity, say tax and election lawyers.

Dozens of other GOP-allied 501(c)(4) groups -- and a smaller number of Democratic ones -- are on spending sprees fueled by donor secrecy and the Supreme Court's historic Citizens United vs. FEC decision last year. That ruling gave the green light to corporations, unions and individuals making unlimited contributions for ads and other political tools that back specific candidates, provided there is no coordination with campaigns or party committees.

As a result of this secrecy, voters will never know how much money is manipulating the 2012 elections.

Almost no reporting required

These 501(c)(4) groups -- nicknamed after the provision in the IRS code that allows them -- are taking in and spending tens of millions of dollars and reporting only a fraction of it to the FEC as political activity. Donors never have to be disclosed publicly by these groups -- only to the IRS.

TV viewers are being bombarded with ads on issues such as taxes and regulations that often mention candidates and are only being reported in a general way, long after the fact, to the IRS. How do these organizations, run by veteran political operatives whose ideology is well-known, manage to largely escape scrutiny by regulators and public disclosure on the small fortune they spend on these ads?

Since the Watergate-era campaign finance scandal, following the money has been a Washington obsession, but the emergence of 501(c)(4)s has created a murky labyrinth.

"The fact that so far 501(c)(4)s are only reporting a fraction of what they're spending -- and nothing at all about their donors -- underscores the wholesale inadequacy of our disclosure requirements," Sheila Krumholz, executive director of the Center for Responsive Politics (CRP), told iWatch News .

"Our current system of campaign finance disclosure is on shaky ground."

The limited evidence available shows that 501(c)(4)s have become magnets for big money: last year at least 65 groups reported spending over $89 million on political activities to the FEC, according to a CRP analysis.

Krumholz predicts a dramatic increase next year in 501(c)(4) spending on political activities. "I think it's plausible that the number of c4s reporting political activity to the FEC will double this cycle," she said. "Last year was viewed as a toe-in-the-water post Citizens United, and now more liberal groups have formed too."

The total universe of organizations granted 501(c)(4) status is enormous, according to IRS data. In 2010, the number of c4s registered with the IRS jumped to over 139,000, up 2,000 from the prior year. These include such organizations as AARP and Disabled American Veterans.

Gaining c4 status is increasingly popular because it provides "quite a bit of flexibility in structuring activities with minimal reporting to the Internal Revenue Service and the Federal Election Commission," Marc Owens said.

While c4s have become more popular post Citizens United, they include older conservative groups like the 60 Plus Association and liberal bastions like

Owens, the former IRS official who's now a tax lawyer, said the huge disparity between the 65 groups that reported to the FEC last year and the vastly larger number of these groups registered with the IRS, is partly attributable to the vagueness about how issue ads are defined. "Activities that have political impacts can also be dressed up or characterized as public education of some sort," Owens said.

So how many c4 groups will be players in the 2012 elections? The answer isn't clear, and never will be, but campaign finance watchdog Krumholz estimates, "There are likely a few hundred of these c4 groups that are largely focused on issue advocacy, if not electoral advocacy."

In 2010, GOP-leaning 501(c)(4) groups accounted for almost $74 million of the $89 million reported to the FEC, according to CRP.

Seasoned Republican operatives like Karl Rove and Ed Gillespie seized on the opportunity to


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