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How Dark Money Groups Can Get Away With Breaking the Law

Registered nonprofits are spending anonymous campaign cash on political ads, despite their tax-exempt status.

(Photo: Giving Money via Shutterstock; Edited: LW / TO)

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If you’ve been watching TV in Iowa this primary season, chances are you’ve seen an ad featuring Republican presidential candidate Sen. Marco Rubio waxing poetic about the “American dream.” The ad plugs a list of “new ideas” such as “throwing out the tax code” that mirror Rubio’s campaign platform – but his campaign has nothing to do with the ad, at least not on paper.

The group behind the ad, Conservative Solutions Project, has been accused of violating the tax code by filing as a nonprofit charity that appears to be working for the benefit of only one person: Rubio. But that hasn’t stopped the group from injecting millions of dollars into the campaign without publicly disclosing where that money came from. So far, the group raised and spent more money than both Rubio’s official campaign and a super PAC dedicated to electing him, leaving voters with no idea as to who is paying top dollar for pro-Rubio ads.

Rubio’s campaign is not alone. “Dark money” has exploded into the political scene since the Supreme Court’s 2010 Citizens United decision unleashed a flood of corporate cash into the nation’s elections. Groups that don’t disclose their donors spent $300 million in the 2012 elections and at least $174 million in the 2014 midterms, when they were responsible for 38 percent of all political ads bought by outside groups, according to the Center for Responsive Politics (CRP).

The bulk of this spending is done by a growing number of groups that file with the IRS as 501(c)(4) nonprofits and are considered by law to primarily be social welfare organizations, not political campaigners, and therefore are not required to reveal their donors. Under vague IRS guidelines, political activity is supposed to make up less than half of what these groups do, but they routinely spend most of their money on efforts to influence elections.

For years, campaign watchdogs have called on the IRS and the Federal Election Commission (FEC) to crack down on dark money groups that brazenly circumvent the tax code and even break the law, but their efforts have repeatedly stalled in the face of partisan gridlock.

“If action isn’t taken now, we will see more and more of these groups every year,” said Jordan Libowitz, a spokesperson for Citizens for Responsibility and Ethics in Washington (CREW), which has filed numerous civil – and recently, criminal – complaints against dark money groups and their operatives. “We are filing these complaints to stop them before this problem becomes widespread.”

The Roadmap of Dark Money

Before becoming the chief of North Carolina’s Republican Party in September, Dallas Woodhouse was the president and treasurer of a “social welfare” nonprofit called Carolina Rising, which he founded in March 2014. After the election, Woodhouse said he founded the group to “sort of help the conservatives and Republicans in North Carolina.”

Carolina Rising helped one Republican in particular: Sen. Thom Tillis, who ousted incumbent Democrat Kay Hagan from the Senate in an unusually expensive midterm race. On election night, Woodhouse boasted in an interview with a reporter that Carolina Rising spent $4.7 million on ads to elect Tillis. The group only raised $4.8 million that year, 99 percent of which came directly from another nonprofit: the 501(c)(4) group Crossroads GPS, according to tax documents and CRP.

Crossroads GPS is the brainchild of Karl Rove that has set the industry standard for dark money nonprofit groups. The group has spent over $100 million since its 2010 inception, largely on ads attacking Democratic candidates, according to CRP. About 86 percent of the group’s funding – including the money it funneled to Carolina Rising – came from a dozen anonymous megadonors who gave $1 million or more.

Flush with cash from Crossroads GPS, Carolina Rising hired Crossroads Media, an ad firm run by political operatives who share a revolving door with Crossroads GPS and its super-PAC cousin American Crossroads, to make ads lauding Tillis for his accomplishments in the North Carolina legislature. On the group’s tax return, Woodhouse reported that Carolina Rising did not engage in direct or indirect campaign activities on behalf of any candidates, despite his public statements to the contrary. Woodhouse claimed the ads were “issue ads,” not election endorsements, even as TV stations that ran the ads reported “Thom Tillis” as the issue at hand in their filings with federal regulators.

The North Carolina Democratic Party filed a complaint against Carolina Rising with the FEC in November 2014, and in October, CREW filed a complaint requesting the IRS investigate the group.

The complaints are similar to two separate complaints filed by CREW and other groups with the US Justice Department and IRS against Conservative Solutions Project, which has reportedly spent $8 million of its $18 million war chest on ads featuring Marco Rubio. These complaints allege that neither group qualifies for tax-exempt status as a “social welfare” group because they clearly exist to benefit distinct candidates for political office. Conservative Solutions Project has yet to file taxes, but the CREW complaint against Carolina Rising alleges that Woodhouse flat-out lied to the IRS.

Both Woodhouse and Conservative Solutions Project have denied any wrongdoing, arguing that their ads are meant to educate the public, not endorse a candidate for office. It’s a formula perfected by Rove and Crossroads GPS – the message that ads attacking or praising a political candidate during election season are not considered campaign material as long as they don’t explicitly encourage viewers to vote. Dark money nonprofits are legally barred from working with official campaign committees, so they operate independently on paper, but often with a revolving cast of political operatives, providing donors who wish to remain anonymous with a repository for cash to buy political ads, as long as those ads don’t specifically mention voting.

In their complaints against the dark money groups, the watchdogs argue that such ads should be considered campaign intervention even if they don’t mention the voting booth.

The IRS does not comment on pending investigations, and the complaints have not been resolved.

Partisan Gridlock

In November, the Campaign Legal Center, a nonprofit geared toward enforcing campaign finance laws, filed its own complaint against Conservative Solutions Project with the Justice Department’s tax division. The Campaign Legal Center chose to turn to the Justice Department instead of the IRS because, according to the group’s director, J. Gerald Herbert, the IRS has been “cowed into inaction by a series of congressional hearings intended to intimidate the agency.”

Herbert was referring to the manufactured 2013 uproar over allegations that the IRS had unfairly scrutinized Tea Party groups because of their political beliefs. The allegations lead to fiery partisan debates over defunding the IRS in Congress, but separate investigations by the Senate Finance Committee and the Justice Department found that, while the IRS had mismanaged some filings, the mismanagement had nothing to do with political targeting.

Both liberals and conservatives use dark money groups to influence elections, and a dark money group is currently supporting Democratic presidential candidate Hillary Clinton. However, Libowitz said watchdogs have mainly targeted conservative groups because conservatives spend much more dark money than liberals and openly exploit the tax code. Libowitz said Democrats are not taking some kind of moral high ground when it comes to dark money; they simply have been slower to adopt the tactic.

In 2011, shortly after the Citizens United ruling had helped make the 2010 election the most expensive midterm in history up to that point, watchdog groups petitioned the IRS to tighten its rules and prohibit 501(c)(4) nonprofits that enjoy tax-exempt status from spending a substantial amount of their funds on political campaigning. The watchdogs sued the IRS in 2013 to force the agency to act on the petition, but withdrew the lawsuit after the IRS agreed to reconsider its rules.

The IRS proposed new rules in November 2013, but the proposal was widely criticized as overbroad by advocates on both sides of the political spectrum, sending the IRS back to the drawing board.

Craig Holman, a lobbyist for Public Citizen, the consumer advocacy organization that filed the lawsuit on behalf of the watchdog groups, said the IRS had indicated that it would release another proposal as soon as this December.

“The lawsuit is all ready to [be] re-filed and we have let the IRS know that we will re-file,” Holman said. “We are using this lawsuit as leverage to try to influence what the IRS comes out with.”

The next proposal will go up for public comment, and IRS officials have made it clear that it will not be finalized before the 2016 elections. Holman said putting off the rules until after the elections is a “prudent” move because the IRS is under pressure from congressional Republicans who have pushed to defund the agency in recent budget negotiations. The IRS, he said, does not want to be accused of attempting to sway the elections by issuing new rules for nonprofits in the middle of campaign season.

Public Citizen and other watchdogs have also filed dark money complaints with the FEC, including a 2010 complaint against Crossroads GPS. In 2012, the FEC’s general counsel agreed that Crossroads GPS’s main purpose was to support the election of federal candidates and recommended that the group be found in violation of federal law for failing to register as a political committee and disclose its donors.

However, with three Republicans and three Democrats sitting on the commission, the FEC was deadlocked along party lines and failed to crack down on the GOP’s most powerful dark money group. In 2014, the watchdogs sued the FEC for failing to act, and that lawsuit is still playing out. If successful, the lawsuit could force Crossroads GPS to file as a political committee and disclose its mega-rich donors for the first time, according to Holman, who filed the original complaint.

Holman said a federal court recently allowed Crossroads GPS to intervene as a defendant in the case, so the group would almost certainly appeal any ruling against the FEC even if the Republicans on the commission don’t have enough votes to appeal it themselves.

“Karl Rove is there to appeal, so this case may not be done for while,” Holman said.

A Complaint Turns Criminal

As dark money groups persist practically unfettered, watchdog groups are diversifying their tactics. CREW is suing the FEC for dismissing a complaint against a now-defunct dark money group even after the FEC’s general counsel found that 85 percent – or about $4 million – of the group’s expenditures were used to influence congressional elections in 2010, but no expenditures were reported to the FEC. In an unprecedented move, CREW also recently filed a criminal complaint against former operatives who worked for the group, which was called the Commission on Hope, Growth and Opportunity (CHGO) before the operatives shut it down “at the first sign of investigation,” according to CREW.

The complaint, filed with the US Attorney’s Office, alleges that four political operatives lied to federal investigators about their level of involvement with CHGO after splitting up $1.1 million in leftover funding as an apparent fundraising commission.

Libowitz said the US Attorney’s Office does not disclose information on pending or ongoing investigations, but if investigators take up the case, they will find that the operatives are keeping very busy. William Canfield, who served as the group’s general counsel and told the IRS that the group spent no money related to fundraising that year, now serves as general counsel for Carly for America, a super PAC benefiting Republican presidential candidate Carly Fiorina.

And what about Wayne Berman, the senior Blackstone Group adviser whose lawyer told FEC investigators that he only supplied CHGO with “infrequent fundraising advice strictly on a volunteer basis,” before another operative admitted that Berman enjoyed a chunk of the $1.1 million in leftovers? Berman is busy this campaign season too, serving as the national finance chairman for Marco Rubio’s campaign.

Like the money itself, those involved in the shady “charitable” organizations that fuel big campaigns often fly under the radar. With campaign finance reform off the table in Congress and the IRS and FEC backed into a political corner, it’s up to watchdogs to shine a light on these dealings before dark-money-driven campaigns simply become business as usual.

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