Thumbing Their Noses at Us: Election-Based Nonprofits Flouting Their Charters (Part One)

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We interact with nonprofit organizations every day – little league, Girl Scouts, churches, League of Woman Voters, the PTA, the Rotary Club, volunteer firefighter organizations and veterans’ service organizations. The US tax law set up two main types of nonprofit organizations to help the general society. The IRS describes them this way:

501(c)3 non profit organization – Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations.

501(c)4 non profit organization – Civic Leagues, Social Welfare Organizations and Local Associations of Employees

C3 organizations do not have to pay tax on their income, and donors can take a charitable tax deduction. C3 organizations are not allowed to be involved in political campaigns, but can do limited lobbying for legislation that involves their mission.

C4 organizations also don’t have to pay taxes on their income, but donors cannot take tax deductions. C4 organizations are allowed to lobby and even be involved in political campaigns, with restrictions. Both C3 and C4 organizations do not have to divulge the names of their donors. According to Wikipedia:

501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of social welfare, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood and with net earnings devoted exclusively to charitable, educational, or recreational purposes.[32] 501(c)(4) organizations may lobby for legislation and unlike 501(c)(3) organizations they may also participate in political campaigns and elections, as long as its primary activity is the promotion of social welfare.[33]

The actual IRS language is more blunt on the limitations for C4 political activity:

The 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. However, any expenditure it makes for political activities may be subject to tax under section 527(f).

As with any law in the United States, it is only as effective as the government’s willingness to enforce it. Right now, under the current “anything goes” mentality since the US Supreme Court’s Citizens United case, some wily “educational” “charitable” and “social welfare” C3 and C4 organizations have opened the floodgates to unlimited political money and they don’t have to tell us who is giving it to them. The IRS stated limitations above have become election year road kill, especially since these groups know that any excessive violations of the political restrictive rules won’t be looked at until after the elections or perhaps not at all.

In fact, even though the media and the public have been fixated on the new super PACs, which have been flooded with seemingly unlimited money from selected millionaires and billionaires, the 2010 election cycle showed that C4 nonprofit organizations continue outspending them. According to a June article by iWatch:

A joint investigation by the Center for Public Integrity and the Center for Responsive Politics has found that more than 100 nonprofits organized under section 501(c)(4) of the U.S. tax code spent roughly $95 million on political expenditures in the 2010 election compared with $65 million by super PACs.

Nearly 90 percent of the spending by these nonprofits – more than $84 million – came from groups that never publicly disclosed their funders, the joint analysis of Federal Election Commission data found. Another $8 million came from groups that only partially revealed their donors.

Unlike the nonprofits, super PACs are required to release the names of their contributors.

In terms of party allegiance, conservative “social welfare” groups outspent liberal groups $78 million to $16 million, nearly 5-to-1, according to the analysis.

Three of these Republican-leaning C4 organizations made up for the bulk of the campaign money spent, including Crossroads GPS, which is run by former Bush administration operative Karl Rove. Crossroads GPS spent $17 million alone in the 2010 midterm election cycle where there weren’t presidential candidates on the ballot.

On Crossroad GPS’ web site, three of the four news items listed were about the organization’s “issue ads” they were running against Obamacare and wasteful spending by the Democrats. Yet, on that same web site, Crossroads GPS emphasized that they were a grassroots organization with language that made them look like a “social welfare” advocacy group that hadn’t spent huge sums on Republican-based political attack ads and were gearing up for the 2012 elections with more undisclosed money for more attack ads. Yet, the IRS rules strictly say that a C4 organization can be involved in “some political activities, so long as that is not its primary activity.” Is the public really supposed to believe that Mr. Rove and his associates do not plan to spend the rest of this year, as they did in the election of 2010, running political advertisements as their “primary” activity?

Here is Crossroads GPS’ explanation of what their primary activity is from their web site:

Crossroads GPS is a policy and grassroots advocacy organization that is committed to educating, equipping and mobilizing millions of American citizens to take action on the critical economic and legislative issues that will shape our nation’s future in the years ahead.

Our goal is to provide a clear road map for concerned Americans on the most consequential issues facing our country, empowering them to set the direction of policymaking in Washington rather than being the disenfranchised victims of it.

The Democrats are using C4 organizations to also raise money for ads, but have raised more money through their super PACs. It is a touchy subject since many Democrats have heavily criticized the practice of not disclosing the C4 donors and have put in legislation to force all organizations to disclose donors who are giving to election activities. The Democrats have not been nearly as successful as the Republicans in raising money through the C4 organizations. However, Bill Burton, who runs both of the two main organizations (Priorities USA and Priorities USA Action) that support President Obama’s re-election, is unapologetic about running election-based money through a C4 organization.

According to Nonprofit Quarterly, “since getting out-advertised by Republican (c)(4)s last time around, the Democrats feel they have no choice but to play the game. Bill Burton, Obama’s former deputy press secretary who runs both the Priorities (c)(4) and its PAC, said, “We may not like the rules, but we’re not going to let Karl Rove and the [conservative billionaire] Koch brothers play by one set of rules while we are overrun with their millions.”

Burton has admitted that Priorities USA, his C4 organization, will also follow the lead of the Republicans and not disclose all their donors. Priorities USA also has a similar bland explanation of their mission that is as nondescript as the Crossroads GPS mission statement above, but it is interesting that Crossroads GPS specifically tells donors on their donor page that it is their stated policy that their donations will not be made public. There is no such promise on the Priorities USA page.

So, is there truly a serious problem with these C4 organizations being used way beyond their legal charters and as a place to put undisclosed donors? Consider what happened to one campaign in the 2010 elections, according to iWatch:

Alexi Giannoulias “can’t be trusted,” the 2010 election ad said. His family’s bank loaned money to mobsters, he accepted an illegal tax break and he even squandered money that families were saving for college.

If the charges were true, the U.S. Senate candidate from Illinois must have been a real creep. But they were bogus. Giannoulias, the Democratic candidate, lost anyway.

His accuser was not his opponent. It was an anonymously funded, pro-Republican nonprofit called Crossroads GPS, a “social welfare” organization that, thanks to the U.S. Supreme Court’s Citizens United decision, can accept unlimited donations from corporations, wealthy individuals and unions and run attack ads.

This type of bastardization of valid rules on nonprofit C3 and C4 charities and social welfare groups not only hurts the transparency of our elections, but also threatens the actions and safeguards of real and legitimate advocacy groups. There have been several waves of attempts to reform this system that have failed in the gridlock of Congress. However, the other question is: why isn’t the IRS enforcing their own rules?

Next week’s column will explore realistic possibilities for reforming the laws to prevent the circumvention of IRS nonprofit rules, and whether or not the IRS has the strength and internal will to enforce their own rules during one of the most expensive, unfair and highly politically charged elections since 1972.

If Truthout readers have information and/or ideas on this broken system, contact me at [email protected].