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How Americans for Prosperity Will Keep Hiding Donors in Shifting Election Landscape, but Retain Tax-Exempt Status

Despite a recent court decision that should bring transparency to campaign spending, the non-profit run by David Koch continues to hide its donors as it drops $27 million on the presidential race

In response to a recent court decision that was expected to bring greater transparency to election spending, the nonprofit created and chaired by billionaire industrialist David Koch, Americans for Prosperity (AFP), is shifting its electoral strategy to continue hiding its donors as it drops $27 million on the presidential race, with millions more likely to be spent as the election approaches.

Although AFP and other “dark money” groups seeking to conceal funders under current election rules could face additional problems under tax law, AFP may sidestep those issues by tapping its deep-pocketed donors for more funds.

Circumventing Lawsuit Intended to Increase Election Transparency

In March, a federal court partially closed a loophole that had allowed groups running “issue ads” near a campaign to avoid disclosing their donors by claiming none of the donations had been made specifically for the purpose of funding the ads.

Nonprofit corporations like AFP, Karl Rove’s Crossroads GPS, and the US Chamber of Commerce have been spending millions on these types of ads, which name a candidate and might criticize him or her based on energy policy or taxes, but don’t go so far as to urge viewers to vote for or against the candidate. The omission of an explicit call for a candidate’s defeat or victory allowed the groups to claim with a wink-and-a-nod the ads were about “issues,” despite clearly being intended to influence the election, and to hide their donors by claiming the ads were not funded through donations earmarked for the ads. It also allowed these nonprofits, which under tax law cannot spend more than half of their resources influencing elections, to classify these ads as something other than political activity in their IRS filings.

The decision in Van Hollen v. FEC requires that groups making “electioneering communications” — issue ads running within 30 days of a primary or party convention and within 60 days of a general election — must disclose all their donors of more than $1000, rather than only those whose donation is specifically earmarked to air the ads. The FEC subsequently enacted a rule change in response.

While some expected the Van Hollen decision would bring greater transparency to elections, dark money groups like AFP have since made a subtle shift in strategy and in recent weeks have begun making “independent expenditures,” running ads that expressly call for the election or defeat of a candidate. For the average viewer, AFP’s new ads will be largely indistinguishable from the old ones, but the addition of language urging viewers to vote against Obama is important under election law and will allow AFP to keep hiding its donors. The Van Hollen decision was not focused on a related loophole allowing groups running independent expenditures to keep their donors secret by claiming none of the contributions were made for the specific purpose of funding ads.

Subtle Shift in Strategy to Keep Donors Hidden

For many years, members of both parties have advocated for transparency in election spending, even as they disagreed about spending limits. Disclosure has long been seen as a way to not only hold donors accountable for the messages they fund, but also to hold elected officials accountable if their policy decisions are improperly attuned to those donors’ interests. This support for disclosure is quickly changing, though, as the GOP drops at least 16 years of official support for disclosure from their party platform and deep-pocketed donors find new ways to escape public accountability for influencing elections.

AFP adopted its new strategy in early August. The group’s latest round of ads, which are part of a $27 million campaign, feature voters saying “The president has not earned re-election in two thousand and twelve in my book.” Ads from earlier this month urged voters to make Obama’s presidency “a one-term proposition.” The inclusion of language expressly calling for Obama’s defeat classifies the ads as “independent expenditures” that do not trigger the Van Hollen decision’s disclosure requirements.

AFP is not the only group adopting this strategy. The U.S. Chamber of Commerce, for example, has announced similar plans as AFP to run independent expenditure ads expressly urging viewers to vote in a certain way. “You really saw the electioneering communications dry up” after the Van Hollen decision, Bill Allison of the Sunlight Foundation, a nonprofit that advocates for greater transparency in politics, told the Center for Media and Democracy (CMD). “Many groups are now running independent expenditures to continue hiding their donors,” he said.

This new strategy to avoid disclosure under federal election law, however, will require that they also shift their tactics to comply with federal tax law.

“Electioneering Communications” Distinction Had Satisfied the IRS

Before the Van Hollen decision, issue ads and electioneering communications had been the vehicle of choice for nonprofit corporations seeking to influence elections, as it allowed groups like AFP to arguably comply with tax law while continuing to keep their donors secret.

Nonprofits organized under Section 501(c)(4) of the federal tax code, like AFP, can keep their funders secret but electoral politics cannot be their “primary purpose,” which has been construed to mean that no more than half of their staff time or financial resources can be directed towards political endeavors.

As ProPublica reported last week, in recent years many nonprofits have avoided running afoul of the IRS by classifying their electioneering communications as “education,” “lobbying,” or “issue advocacy,” rather than political activity. While the Federal Elections Commission (FEC) has specific rules for what constitutes a political ad, the IRS takes a more vague, case-by-case approach that some nonprofits have construed very broadly.

AFP, for example, reported to the FEC that it spent $1.3 million on electioneering communications in the 2010 elections (although the total may be much higher), but told the IRS that it did not spend a penny on political expenditures. Another 501(c)(4), the American Action Network, spent $15.4 million on federal electioneering communications in 2010, but appeared to classify this as “lobbying” rather than political expenditures, despite the ads running near the elections and clearly being intended to tell people how to vote. Neither of these groups disclosed the identity of those funding the ads.

“Independent Expenditures” May Raise Problems with Tax Compliance

In contrast with the so-called “issue ads” and electioneering communications that groups like AFP had been running previously, “once they shift to express advocacy” — meaning the ads include an express call to vote for or against a candidate — “they can no longer claim the ads are anything but political,” says Lloyd Hitoshi Mayer, an associate dean and law professor at Notre Dame Law School whose research focuses on the intersection of election law and tax law.

And depending on the size of the group, this could make it more difficult for nonprofits to claim political activity is not their primary purpose, thereby endangering their tax-exempt status. This may be less of a threat for trade groups like the U.S. Chamber of Commerce, which engage in a variety of activities besides running political ads, but it may pose problems for groups that do little else besides influence elections, like the American Action Network.

Although AFP does engage in other activities, its spending so far this year on political ads, based on its overall spending in recent years, would greatly surpass the point of political activity being its primary purpose.

In 2010, the year of AFP’s most recent IRS filings, AFP’s total spending for the year was around $22 million. The group has surpassed that number in its election-related spending in this month alone, where it dropped $27 million on a multi-state ad buy — which AFP cannot argue is anything but “political” since the ads were independent expenditures involving express advocacy.

What Will AFP Tell the IRS This Year?

Even if AFP and similar groups are engaging in a greater degree of undeniably “political” activity than in years past, Mayer says they will likely find other ways to continue reaping the benefits of tax-exempt status while influencing elections.

AFP may tell the IRS that political activity is still not its primary purpose by claiming that less than half of its overall program resources went towards political activities, which under current interpretations includes not only financial expenditures but also staff time. Even if more than half of its financial resources went towards political intervention, AFP could arguably claim that other activities not related to politics were more staff-intensive.

For example, in addition to its ad spending, AFP has been getting increasingly involved with targeted get-out-the-vote efforts, which Mayer says could be classified as promoting “civic participation” rather than politics, if AFP claims it is motivating people to vote based on particular issues rather than for particular candidates. Organizing and knocking on doors would involve significant staff time which, if considered non-political, might help AFP argue that less than half of its total resources went towards running political ads.

Mayer says “the IRS might disagree” that AFP’s get-out-the-vote activities are non-political, and would apply the same “facts-and-circumstances” test that it would to issue ads to determine whether the activities could be classified as electoral. AFP’s get-out-the-vote activities during Wisconsin’s recall election, for example, appeared to involve door hangers picturing Governor Scott Walker and Lieutenant Governor Rebecca Kleefisch, which would make it harder to argue that the effort was not about particular candidates.

AFP could also “go back to its donors after the election and ask for lots of money for lots of lobbying,” says Meyer, and through the magic of accounting, “that can tip the balance” back towards the group spending less than half of its financial resources on political activities. Incredibly, this means that AFP might spend millions on election ads and still retain its tax-exempt status by getting more funding to participate in events like “hands off my healthcare” rallies, bus tours, and “stand with ALEC” petition drives.

With the nearly unlimited resources of AFP’s ideological leader, David Koch, the prospect of raising additional funds may not be remote. But it also means the public will continue to remain in the dark about the true financial and ideological interests funding the political ads flooding our airwaves.