As Election Day approaches, incumbent politicians and campaign finance interest groups are ratcheting up a concerted campaign to deter donors from contributing to politically-active nonprofits.
After the U.S. Supreme Court ruled in Citizens United v. Federal Election Commission that Congress could not prohibit businesses, labor unions and advocacy groups from advocating for or against federal candidates, Democratic congressional leaders and the self-styled reform community have sought to subvert the decision.
Their supposed remedy, the DISCLOSE Act, passed the House but twice failed to muster enough votes to pass the Senate. The DISCLOSE Act would have required all groups airing “express advocacy” and “electioneering communications” ads to disclose their donors over a certain threshold and include an on-air disclaimer by the leader as well as another message from the top donor (if applicable). The bill would have banned many businesses (government contractors and companies with as little as 20 percent international investment) from airing political ads but no unions would have been similarly restricted.
Failing to pass outright speech bans targeting business groups and an onerous disclosure regime, politicians and pro-regulation groups are trying different tactics: calls for an Internal Revenue Service investigation of a prominent GOP-leaning group, flimsy allegations of foreign influence by the U.S. Chamber of Commerce and a public pressure campaign led by a New York official to sway companies into silence.
‘Reformers,’ leading Democrats target Crossroads GPS
The Campaign Legal Center and Democracy 21, both organizations that advocate for strict campaign finance regulations, fired off a letter to IRS officials Tuesday alleging that Crossroads Grassroots Policy Strategies (Crossroads GPS), a nascent nonprofit group, has violated tax laws and improperly shielded donors.
“If, in fact, Crossroads GPS is impermissibly operating as a section 501(c)(4) organization in order to conceal its donors from the American people, the IRS has an obligation to take steps to protect the integrity of our tax laws and to make clear that such abuses will not be permitted in future elections,” according to the letter, authored by Campaign Legal Center Executive Director J. Gerald Hebert and Democracy 21 President Fred Wertheimer.
The letter follows a similar missive sent by Sen. Max Baucus (D-Mont.), the top Democrat on the tax-writing Senate Finance Committee, asking the IRS to investigate nonprofits. Baucus cited only GOP-leaning groups, including Crossroads GPS, Americans for Job Security and the American Action Network. The letter, sent late last month, also requested that the IRS undertake a survey of major 501(c) groups and noted that the Senate Finance Committee may open its own investigation or advance “appropriate legislative action” based on an IRS report.
501(c)(4) organizations date to the Revenue Act of 1913 and are now governed by the Internal Revenue Code [26 U.S.C. § 501(c)(4)]. According to the IRS website section on “Social Welfare Organizations, “[t]he promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity” [Reg. 1.501(c)(4)-1(a)(2)(ii)].
The IRS guidelines further state, “[s]eeking legislation germane to the organization’s programs is a permissible means of attaining social welfare purposes. Thus, a section 501(c)(4) social welfare organization may further its exempt purposes through lobbying as its primary activity without jeopardizing its exempt status.”
So, what exactly does “primary activity” mean? The IRS has never definitively determined this issue, and it’s rare for a 501(c)(4) organization to lose its status as a nonprofit because of political activity. The general guideline, though, is that 501(c)(4)s should spend at least half of their activities on non-political activities such as lobbying. Also, there’s no definitive standard from the IRS as to what period the activity would be measured in an investigation—Annually (calendar or fiscal year)? During an election cycle?—but generally the IRS determines similar provisions on an organization’s fiscal (taxable) year.
Per IRS guidelines, the determination of whether an organization has “participated or intervened in a political campaign”—in order to discern the group’s “primary” purpose—is a “facts and circumstances” test. Despite the mind-numbing clarity of a 66-page IRS “Technical Instruction Program” report on the “Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations”-including a three paragraph answer to the question, “What Is Legislation?”-there’s no specific test to determine under what circumstances a group would lose its 501(c)(4) status because of excess political activity.
So, what are the facts and circumstances of Crossroads GPS?
A major part of the complaints by Baucus and the “reform” groups allege that, so far, the activities of Crossroads GPS have been primarily political. The Campaign Legal Center/Democracy 21 (CLC/D21) letter alludes to the “known facts and circumstances surrounding the creation, operations and activities of Crossroads GPS in 2010.” [emphasis added]
That’s ridiculous.
Crossroads GPS formed in July of this year (Crossroads GPS is affiliated with American Crossroads, a political committee organized under section 527 of the IRC). CLC/D21 could not possibly know whether or not Crossroads GPS will meet the “primary purpose” standard for this calendar year [later in the letter, CLC/D21 says that the IRS should apply the primary purpose test to Crossroads GPS according to its activity in this calendar year, based on an unrelated standard for the lobbying expenditures of 501(c)(3) groups]. But to apply a calendar year test to a nascent group that formed in the latter half of an election year doesn’t make much sense.
Tax experts consulted by CCP note that the IRS has never spelled out this standard, but many tax professionals use the fiscal year standard. Contrary to what CLC/D21 claim, the fiscal year test is the test used by 501(c)(3) organizations choosing Section (h) status, which allows them to engage in some level of lobbying. Section 501(h) repeatedly notes that it is based on a “taxable year,” not the “calendar year” as CLC/D21 claim [See a backgrounder by Loyola Law School Prof. Ellen Aprill, “Background on Nonprofit, Tax-Exempt Section 501(c)(4) Organizations“]. Furthermore, Aprill notes that “[m]any exempt organization practitioners have expressed a belief that the IRS will be satisfied if this 50% test [to determine political activity] is done based on expenditures per each fiscal year.” [emphasis added]
Even if it is the case that, so far, Crossroads GPS has spent a majority of its expenditures on political activity, it does not follow that the group is violating tax law. Crossroads could presumably spend a significant amount of resources lobbying Congress during the lame duck session and the next legislative session. Indeed, it has indicated that it plans a significant legislative advocacy effort over the next few months and recently ran a policy-focused ad (on S. 3773, the Tax Hike Preven
tion Act) in Capitol Hill newspapers.
Considering this evidence, the allegation by CLC/D21 that the group is “engaged primarily, if not exclusively, in activities to promote and support Republican candidates and to oppose and attack Democratic candidates in the 2010 congressional elections” [emphasis added] seems demonstrably false—or at the very least premature
Related to that allegation, CLC/D21 then implies that Crossroads GPS is a group that has formed only for the 2010 campaign cycle and could disband soon after, calling such a scenario a “farce.”
The problem, again, is that Crossroads GPS officials have explicitly stated their intent to continue operations, including permissible lobbying activities, for many years. According to a statement by the group’s communications director to Politico, Crossroads GPS has already launched a seven-part legislative push “which we plan to engage thoroughly in the lame duck session and throughout 2011 and beyond. As we’ve said everywhere, we plan to be around for a long, long time…”
Next, the CLC/D21 letter asks the IRS to “address the problem of whether section 501(c)(4) groups are being improperly used as vehicles for groups to spend money to influence federal elections while hiding the identities of the funders of these activities.”
But the IRS does not have any interest or duty to go on a wild goose chase for political groups that decline to publicize their donors, as is allowed by law. CLC/D21 failed to convince Congress to pass the DISCLOSE Act, so they’re attempting an end-run around Congress to push the IRS into doing the dirty work of intimidating donors into not giving by implying that groups such as Crossroads GPS are violating the law. As Prof. Donald Tobin recently noted, Congress could amend § 501(c)(4) to require disclosure of donors. It has not done so. And even if some groups might be operating improperly by making political activity their major purpose, it is impossible for the IRS to make such a determination before the end of each group’s taxable year. The IRS has no more basis to investigate the targeted groups at this time than it does to investigate Democracy 21 or CLC.
Finally, the CLC/D21 letter addresses the IRS test to determine whether an organization’s activities meet the standard of “political campaign activity,” supposedly clarifying the line between acts that may be the primary activities of 501(c)(4) groups and those that may not.
The authority that CLC/D21 cites for this is Revenue Ruling 2004-6, which describes exempt functions as they pertain to the tax status of nonprofits. Even if one accepts CLC/D21’s strained reading of the facts and circumstances involving Crossroads GPS to arrive at the strictest possible interpretation of the group’s activity, including deeming issue ads focusing on policy “political activity,” the Revenue Ruling does not support the notion that a group’s activities during the first few months of its existence can determine its permanent tax status.
Despite cherry-picked statements by CLC/D21 alleging a nefarious conspiracy by Crossroads GPS officials to violate tax law, there’s no solid evidence to that effect. As Ben Smith noted in Politico, “the letter is aimed at suggesting to donors and groups that they might not be in the clear.”
Foreign money at the U.S. Chamber of Commerce?
Tuesday, ThinkProgress, a blog run by the Center for American Progress Action Fund, alleged that the U.S. Chamber of Commerce, a 501(c)(6) organization “funds its political attack campaign out of its general account, which solicits foreign funding.”
Citing unnamed “legal experts consulted by ThinkProgress,” blogger Lee Fang claims that the Chamber is “likely skirting longstanding campaign finance law that bans the involvement of foreign corporations in American elections.” The report claimed that the Chamber has accepted at least $300,000 in annual dues from foreign companies (0.4 percent of the $75 million the Chamber reportedly plans to spend on politics this election cycle).
Note the caveats: according to anonymous legal experts the Chamber is “likely” violating campaign finance laws. The evidence, though, is quite thin. According to ThinkProgress, the Chamber has raised solicited money from foreign companies for its general fund, which is used, in accordance with Citizens United, to fund political ads. Fang hypothesizes that foreign companies want to defeat Democratic candidates because Democrats oppose outsourcing and “unfettered” free trade deals.
The Chamber responded quickly: “No foreign money is used to fund political activities. All allegations to the contrary are totally and completely false,” according to a statement on its website.
American Chambers of Commerce Abroad (AmChams) have existed since 1896, when the first one was formed in France. The India affiliate, cited by ThinkProgress, was formed in 1992. The groups, according to their bylaws, are not allowed to accept any financial aid from foreign governments, and their minimal contributions to the U.S. Chamber are simply not used for political activity. This is not a new issue, and there’s absolutely no evidence that the Chamber is doing anything improper this election cycle.
Late yesterday, the Star Tribune reported that Sen. Al Franken (D-Minn.) joined the fray, asking the Federal Election Commission to investigate the hyped-up charges of foreign political funding. Franken notes that the charges that the Chamber has accepted some foreign money is not “per se” illegal (meaning not illegal), but an entity must be able to demonstrate through a “reasonable accounting method” that its foreign funds were not used in connected with political expenditures.
David Donnelly, national campaigns director for Public Campaign Action Fund, e-mailed Politico to pile on: “They basically say, ‘trust us’ when there’s mounting evidence they’re outsourcing the funding of their political attacks ads? Yeah, right.”
Actually, in America, that’s exactly how it’s supposed to work. Individuals and groups are not presumed to have violated the law based on a bogus blog post from a political opponent which cites tenuous evidence to show “likely” violations of the law.
Consider international labor unions that are political active. It’s quite possible—maybe even “likely”—that labor unions such as the AFL-CIO accept minimal funds from foreign entities, either in the form of dues from foreign members or payments from foreign affiliates. Scandal! Under the logic of ThinkProgress, these unions are violating the law, even if they have internal controls to prevent such funds from being spent on political activity. According to an attorney familiar with the operations of the Service Employees International Union, out of an abundance of caution, the union does not accept funds from its Canadian affiliate into its general fund. It would not be illegal to do so if the union had an accounting procedure to ensure foreign funds weren’t being spent on politics. Furthermore, this official notes that unions are prohibited from accepting money from employers, so it would never accept money from a foreign business entity.
On a si
de note, ThinkProgress noted that “longstanding campaign finance law … bans the involvement of foreign corporations in American elections.” Fang is correct on that point. As CCP has noted numerous times, U.S. law [2 U.S.C. § 441(e)] and FEC regulations [11 CFR 110.20(i)] already prohibit political activity by foreign nationals. These prohibitions remain in place after Citizens United. This didn’t stop President Obama from claiming that Citizens United “open[ed] the floodgates for special interests—including foreign corporations—to spend without limit in our elections” in his State of the Union address [the President made similar comments in two recent weekly addresses]. Perhaps now the White House will change its tune.
Pressure campaign by incumbent politicians
In an interview with The Huffington Post published Tuesday, House Speaker Nancy Pelosi said the “‘plutocracy’ and ‘oligarchy’ … threatened to overwhelm the Democratic [sic] process with a flood of corporate money.”
Pelosi absurdly claimed that but for Citizens United, the Democrats would maintain their House majority: “Absent this [Supreme-Court-sanctioned corporate spending], we were really pretty confident about winning the election… But this makes it harder. “Somebody said to me, ‘You can survive being outspent eight to one.’ I said, ‘Just as long as the one is there. Eight to one? Okay. Eight to nothing? No I don’t think so.'” [filler by HuffPost Hill]
Pelosi then described her effort to tar Republican candidates by an association with such political groups, which, by law, cannot coordinate with candidates: “Whenever you get hit with an overwhelming weight, you have to jujitsu it. So we want to turn it against them… I want to tattoo [corporate spending] right on to the Republican candidate,” she said, smacking her hand for emphasis. “Big oil, big banks, big health insurance: We’re going to tattoo you with that, so it’s like doggy-do stuck on your shoe. Wherever you go, people will know.”
Interestingly, Democratic candidates and the national Democratic Party committees have actually had a cash advantage in this election year. So, it’s not quite 8-to-1.
Meanwhile, a new organization formed by New York City Public Advocate Bill de Blasio has kicked off a campaign “aimed at pressuring major companies to foreswear using corporate money on political campaigns,” according to The Washington Post. Blasio, a Democrat, is joined by Illinois Gov. Pat Quinn and other Democratic officials, as well as MoveOn.org and other left-leaning political groups.
Blasio seeks to use the Coalition for Accountability in Political Spending to shame companies into staying silent. A previous effort succeeded in convincing Goldman Sachs, J.P. Morgan Chase and Morgan Stanley to adopt policies against independent political spending. These mega-corporations will still spend millions of dollars lobbying and on direct political contributions from their employees via political action committees. These large firms didn’t need Citizens United to be able to speak out on politics; smaller firms that may seek to protect their shareholders’ interests through political spending may be adversely impacted by this campaign, though.
Despite a potential threat to the Democratic majority in Congress, independent political spending does not pose a threat to democracy. On Election Day, voters will decide for themselves how to cast their ballots-notwithstanding ads from 501(c)(4) groups urging them to vote one way or the other. Political nonprofits can no more “buy” elections than businesses can “buy” consumers with 30 second spots. Notwithstanding this campaign by politicians and “reformers” to intimidate donors from giving to political groups, democracy thrives by ensuring all voices can contribute to a vibrant debate—including labor unions, ideological groups and, yes, business associations.
