Shadow Money Magic: Five Easy Steps That Let You Play Big in Politics, Hide Your Donors and Game the IRS
You’re out of luck, right? Isn’t disclosure the backbone of our campaign finance system? Wasn’t it the solution to the bad old days of special interests passing bags and briefcases full of mystery money to candidates — the core of the post-Watergate reforms?
Hah! Where there’s a will — and a favorable court decision or two — there’s a way. During the 2010 and 2012 elections, dozens of groups pumped hundreds of millions of dollars into the electoral system while dodging the disclosure requirements that apply to almost all other organizations that support or oppose political candidates; it came to be known as “shadow” or “dark” money. The groups took in unlimited amounts of money from people and corporations and spent it on ads or passed it along to friends at other groups that did the spending themselves, all while avoiding more than glancing oversight by federal regulators.
Call it the return of mystery money.
And it wasn’t that difficult. They just had to know their way around the rules.
What follows is a five-part primer on how it’s done by the pros. Our chief protagonists are part of a network of groups that spent more than $76 million in the 2010 election, according to their reports to the Federal Election Commission. Two groups — Crossroads GPS and the Center to Protect Patient Rights (CPPR) — are at the center of this network, having given money to the other groups we’ll mention. In 2012, the network’s reported spending more than doubled, to $190 million, making up nearly two-thirds of all shadow money spent in that election cycle.*
The only catch? These nonprofit organizations are supposed to have “social welfare” as their primary mission. Fortunately for these groups, the definition of “primary” is a little loose. In practice, though not in regulation, it has come to mean anything over 50 percent — so, in theory, such a group can devote up to 49.9 percent of its resources on politics.
| GPS-CPPR Network FEC Spending | 2010 | 2012 |
|---|---|---|
| Crossroads GPS | $16,733,363 | $71,181,940 |
| Americans for Prosperity | $1,330,010 | $36,352,928 |
| American Future Fund | $9,367,283 | $25,414,586 |
| Americans for Job Security | $8,258,099 | $15,872,864 |
| Americans for Tax Reform | $4,160,299 | $15,794,552 |
| American Action Network | $18,945,602 | $11,689,399 |
| Americans for Responsible Leadership | $0 | $9,793,014 |
| NRA Institute for Legislative Action | $0 | $7,448,189 |
| 60 Plus Assn | $7,116,911 | $4,615,892 |
| Republican Jewish Coalition | $1,143,465 | $4,595,666 |
| Susan B Anthony List | $2,277,436 | $1,961,223 |
| Center for Individual Freedom | $2,500,617 | $1,864,735 |
| American Commitment | $0 | $1,858,765 |
| National Fedn of Independent Business | $140,129 | $184,619 |
| Club for Growth | $643,300 | $660,220 |
| Independent Women’s Voice | $514,920 | $989,598 |
| Hispanic Leadership Fund | $100,000 | $838,417 |
| Right to Life | $642,130 | $603,471 |
| Common Sense Issues | $160,482 | $79,907 |
| Americans for Limited Government | $1,021,378 | $0 |
| Revere America | $2,265,727 | $0 |
| TOTAL | $77,323,161 | $211,801,997 |
Yesterday, in the first part of our series, we laid the first step for a group seeking to have a big impact in politics while keeping its donors secret: Form a 501(c)(4) nonprofit under the tax code, and start buying ads. It’s true that as “social welfare” organizations, these groups must keep political spending to a minority of total outlays. But it’s worth paying close attention to the wording of the tax rules: Opportunity lies within.
Observant readers of our report thus far have probably noticed that we’ve mentioned two government agencies, the FEC and the IRS. Politically active tax-exempt groups must report what they spend on some types of political ads to the FEC (as would anybody running such ads), and, much later, they must report revenues and spending — including spending on politics — to the IRS.
Take American Action Network, a 501(c)(4) run by former Republican Sen. Norm Coleman, started the month after Citizens United was decided. AAN told the FEC it spent nearly $20 million on political ads in 2010 — yet reported to the IRS that it had spent only about $5 million on politics. Since the group that year reported spending a total of $25 million in all, the larger amount most likely would have caused the organization to fail the “primary purpose” test that’s meant to keep a 501(c)(4)’s political spending to less than half of its overall expenditures.
Luckily for AAN (though lawyers probably had more to do with it than luck), most of the spending it reported to the FEC was for “issue ads” — ads that don’t tell viewers to vote for or against anyone, but often close with a line that goes something like, “Call Bruce Voight and tell him to stop torturing chipmunks.” Groups must report what they spend on issue ads to the FEC only when the ads run close to an election, which AAN’s did — thus the high number.
But in its 2010 form 990 for the IRS — not sent to the agency until May 2012 — much of the money AAN spent on ads had undergone a makeover. Now, the funds had been used for grassroots “lobbying.” The form hints how the group redefined some of its activities. The first version of the document revealed that it made a $500,000 grant to Crossroads GPS’s sister group, super PAC American Crossroads. AAN later amended the report to delete the grant, saying it had been “inadvertently reported.” In the same amended report, the groupincreased the amount it reported for “lobbying” by $500,000. Later, it came out that the grant was actually a payment to Crossroads Media, the political admaker that counts both American Crossroads and Crossroads GPS as clients and was cofounded by formerAmericans for Job Security President Michael Dubke.
Similar wordsmithing has been deployed by other groups in the network that revolves around Crossroads GPS and the shadow money mailbox known as the Center to Protect Patient Rights. Americans for Job Security (which technically is a 501(c)(6) trade association but functions under many of the same rules as the other groups in the network)reported $8.3 million to the FEC, but only $4.4 million in “political expenditures” to the IRS — even though it also told the tax agency it spent $10.4 million for “media services/placeme[nt].”
A definitional disconnect
In fact, politically active nonprofits rarely report matching numbers to the two federal agencies when it comes to political outlays. The election authorities and the tax officials don’t speak with one voice when it comes to defining those expenditures, nor do they speak to each other in an effort to corroborate a particular group’s activities.
The FEC’s filing requirements are triggered by such relatively cut-and-dried factors as the date of the ad and the language used in it.
The IRS, on the other hand, has a deeply contextualized definition of when an “issue ad” becomes a political ad. In some cases the IRS’ definition of what counts as “political” might be more stringent than that of the FEC. Yet the agency’s standards are undercut by the fact that its determination of “campaign activity,” according to a Congressional Research Service report, is “entirely dependent on the facts and circumstances of each case.” This means “looking at the ad in question, as well as being familiar with some of the organization’s other activities (e.g., has the group run a series of similar ads?) and the election (e.g., has the issue been raised to distinguish among the candidates?).”
But a case-by-case, contextual analysis of individual ads is a staggering task. Consider that members of the Crossroads-CPPR network filed more than 2,000 spending reports with the FEC in more than 170 races in 2010. In 2012, the total number of races fell to about 140, but the group filed more than 3,000 individual spending reports.
Good luck with assessing the content and context of those ads — about which, by the way, there is no information on the 990 forms. Even diligent spot checking would take an army of auditors — far more than the IRS Exempt Organizations division has at its disposal.
Making the task still more difficult is the fact that the IRS doesn’t communicate with the FEC. As Deputy Commissioner for Services and Enforcement Steven Miller wrote in response to questions from Sen. Carl Levin (D-Mich.) last month, the agency doesn’t have “a system that formally tracks FEC filings of 501(c)(4) organizations.” Not only that, but the IRS says it lacks the authority to “formally coordinate with the FEC on matters related to 501(c)(4) organizations” because it is prohibited under Section 6103 of the US Code to disclose “information about specific taxpayers unless the disclosure is authorized by some provision of the Internal Revenue Code,” Miller wrote.
Put simply, the IRS has no realistic capacity to enforce its own rules consistently. The IRS doesn’t routinely ask for detailed financial breakdowns of what shadow money groups are defining as “lobbying” or “grassroots advocacy,” nor does it require descriptions of the content of “media buys.” Apparently, shadow money groups are rarely questioned on what they’ve told the agency about their political spending.
In the first two parts of our report, we showed that anyone seeking to build a secretly funded political group that can make some waves in elections has a ready option in the 501(c)(4) section of the tax code. Groups formed under its provisions — officially, “social welfare” organizations — are supposed to keep their political spending to less than half of their total expenditures (an unofficial, but widely recogized rule), which is easier than it might sound due in part to the IRS’ apparently narrow interpretation of what qualifies as political.
But once an organization, awash with money, has exhausted most of its own political spending options, it can turn to another maneuver: It can put on a Santa suit and dole out millions in grants to groups with similar agendas — as several of the politically active nonprofits in the Crossroads-Center to Protect Patient Rights network have done. Then the recipients can use the money to buy ads attacking politicians that both groups don’t like.
The groups making the gifts thus can exceed — de facto — the 49 percent limit.
Members of the network together spent $77 million on the 2010 elections, according to their FEC reports. More than $66 million of that was spent on races in which three or more of the groups ran ads. Almost all of that money was used to oppose candidates for office, and two-thirds went towards directly and explicitly calling on voters not to elect certain candidates.
Take the Pennsylvania Senate race between Democrat Joe Sestak and Republican Pat Toomey. In that 2010 barnburner, seven members of the Crossroads-CPPR network spent a total of $2.6 million to help Toomey, accounting for 18 percent of all non-party outside spending in the race. The network’s top three spenders in the contest — the Republican Jewish Coalition, Americans for Tax Reform and Crossroads GPS – all gave money to or received it from one another that year, in the millions of dollars.
Here’s how the RJC says it spent about $1 million in Pennsylvania — an appeal to fear that FactCheck.org found fault with:
Americans for Tax Reform, in particular, illustrates how the “money churn” between groups can work. Founded in 1985, ATR had never filed a single report with the FEC prior to 2010. Its tax filings show that its annual revenue had rarely fluctuated far from the $4 million range. Yet suddenly, in the 2010 midterm elections, ATR told the FEC it spent $4.2 million on adsattacking congressional candidates. Its tax forms, filed with the IRS nearly a year after the election, revealed a spike in revenues of more than $8 million.
That form also indicated it spent “$8 million in election related advertisements” – only $1.9 million of which it reported as political expenditures in the same filing. As it happens, $8 million was just about exactly the amount ATR received in grants from Crossroads GPS and CPPR, the two groups at the heart of the network. ATR appears to have received a large influx of money from two politically active nonprofits, only to turn around and spend the money it received on politics — functioning as a sort of proxy.
Crossroads’ $4 million grant to ATR was one of 12 grants, totaling $15.9 million, that it handed out in 2010. Had the money its recipients spent on politics counted against Crossroads GPS’ political spending, it easily would have caused the group to exceed its 49 percent limit.
Another example: The Republican Jewish Coalition diligently churned the money it oversaw. In 2010, the RJC’s total expenses skyrocketed more than fivefold over those of the previous year, to more than $12 million. Little is known for sure about its funding sources, other than two modest grants from Crossroads GPS and the American Action Network — $250,000 and $500,000 respectively.
The same year, the RJC gave grants of $4 million each to those same organizations. And it spent nearly $3.8 million for the purpose of, in its own words, “running issues ads that are intended, in part, to influence elections.” Thus, the RJC spent about a third of its outlays on politics, and two-thirds on gifts to two of the most politically active nonprofit organizations in operation. RJC was counting the grants as “social welfare” expenditures — or else the group would have devoted well over half its outlays to politics.
According to IRS rules, “the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate for public office.” But the facts on the ground raise questions about how these organizations report political spending to the IRS and whether grants they give to other, highly political nonprofits are legitimate “social welfare” expenditures.
“The best practice would be for [the donor groups] to give the money specifically earmarked for the other organization’s social welfare activities,” said Ellen Aprill, a tax law professor at Loyola University. In reality, though, most of the grants are given for “general support” or some similarly broad purpose.
Because there’s no rule barring coordination between nonprofits — as long as they don’t coordinate with any candidate that would benefit — the groups involved in the Crossroads-CPPR network, which invested in 252 races in 2010, can, and sometimes do, strategize with one another about how, when and where they will spend their money for maximum impact. Some have been regulars at meetings of the Weaver Terrace Group, named for the street on which Karl Rove’s house — where the group used to convene — sat.
One measure of the network’s impact: In the 10 House races in which its members spent the most money in 2010, the groups’ outlays made up an average of 64 percent of all nonparty outside spending.
And in the top 10 most expensive races of 2010, House and Senate, spending by the network made up about one-fifth of the total spending.
Now that we’ve gone over the advantages of setting up a tax-exempt group that can hide its donors, spend lots of money for political purposes and give more to like-minded groups that will do the same, it’s time to wonder: What do these organizations do in their down time?
In many cases, the answer seems to be “not much,” though some of the politically active nonprofits do have legitimate “social welfare” activities. It would be difficult to argue that Americans for Tax Reform, for example, doesn’t conduct activities that fit the IRS definition of the term: “promoting in some way the common good and general welfare of the people of the community.”
What ATR’s tax filings suggest, though, is that it acts as a pass-through for political spending in election years in addition to carrying on with its “social welfare” work.
On the other hand, it might be harder for an average person to see how the social welfare exemption is earned by groups like Crossroads GPS, American Action Network, American Future Fund, the Center to Protect Patient Rights and others. The same would be true for some groups on the left, such as American Bridge 21st Century Foundation, Citizens for Strength & Security, and Patriot Majority.
Whatever the actual business of these groups is, the data shows an undeniable link between election cycles and cashflow. We’ve already noted the dramatic jump in revenues and spending at some of these organizations in 2010. So what happened in 2011? Those numbers dropped back down again like a popped balloon.
A note here on why we’re talking about 2010 and 2011 — and not so much 2012 — in this 2013 report: We don’t have 2012 information yet. While these 501(c)(4) groups must tell the FEC in real time when they pay for certain kinds of political ads, that’s about all they have to tell the agency. They report mainly to the IRS, which requires just one filing per year from them (compared to several reports or more each year that the FEC requires from PACs, super PACs, candidate committees and others within its jurisdiction).
The IRS schedule simply doesn’t keep pace with an election cycle. There’s significant lag time before that annual report to the IRS — the Form 990 — is due. The clock starts ticking at the end of a group’s fiscal year, which is up to the group to decide. Technically, the 990 is due five months later — but every group gets an automatic three-month extension. Then, at the end of that time, the group can request another three-month extension — which, according to tax lawyers, invariably is granted. All in all, a nonprofit has up to eleven months after the end of its fiscal year to file its report with the IRS.
The late deadlines ensure that by the time the 990 filings covering the last election cycle are finally available, the next cycle is well out of the starting gate, providing ample distraction from what by then is history. Tax-exempt social welfare groups weren’t meant to be political committees in the classic sense — even though more and more of them are functioning that way.
Many of these groups’ 2011 reports only began trickling in last November. The 990s covering 2012 for Crossroads GPS — and most of the other groups mentioned in this report — likely won’t arrive at the IRS till November 2013.
Even then, it takes months for IRS employees to process and scan the PDF reports, and the agency doesn’t make them public on its website. Instead, it sells copies of its bulk files forthousands of dollars. Websites like Guidestar, which have a special arrangement with the agency for access to the reports, don’t usually get copies posted for months, either.
Citizens, and groups like the Center for Responsive Politics, can request a 990 directly from an organization, which must provide the document within 30 days. But staying as current as possible with the reports requires knowing when a particular group’s filing deadline is, which takes a bit of research. And getting the documents from multiple organizations quickly becomes a large task.
Maybe it’s the moon?
Some examples of how spending by groups in the Crossroads-CPPR network has surged and ebbed: In 2009, the Republican Jewish Coalition had $2.9 million in total expenditures. Those expenditures exploded to $12.4 million the next year, when the RJC spent millions on ads and distributed $8 million to two politically active nonprofits. In 2011, the organization’s expenditures fell right back to $3.1 million, and the political spending total it reported to the IRS was just $15,000 – down from $3.8 million in 2010.
Looking at the organizations individually, it’s clear that the cycle of election-year boom and off-year bust will continue for most once their reports to the IRS start rolling in later this year. For example, Americans for Tax Reform filed its first ever FEC reports in 2010, the same year it received a cash infusion of more than $8 million from CPPR and Crossroads GPS. Based on ATR’s recent IRS filing for 2011, we know that the group’s overall expenditures fell back to pre-2010 levels at about $3.1 million. But in 2012, ATR’s expenditures asreported to the FEC doubled over its already record 2010 levels. A group that survived for years with an annual budget that usually registered around $4 million may have spent well over $30 million overall in 2012 — though we won’t know for sure until November.
It probably comes as little surprise that ATR isn’t alone. Some others:
- Crossroads GPS spent at least $71 million on political ads in the 2012 cycle, as it told the FEC, up from about $16.7 million it reported to the election agency in 2010. The 2012 FEC-reported spending was more than the amount it reported spending overall to the IRS for the first 18 months of its existence, $64.7 million. The group’s total expenditures for the subsequent twelve-month period are likely to show a considerable jump.
- American Future Fund’s outlays plummeted in 2011, from the lofty $21.3 million it spent in 2010 to just $3.6 million, according to its IRS reports. Yet it seemed to rebound spectacularly in 2012, when it told the FEC it spent $25.4 million on political advertising, compared with $9.4 million in 2010. Its fundraising in 2012 will likely turn out to have taken a similarly spectaular turn over 2011′s, when we see the group’s 990 later this year.
-
Americans for Job Security fell from $12.2 million in overall expenditures in 2010 to $2.3 million in 2011. As with many of the other groups in the Crossroads-CPPR network, there’s dramatic elasticity in the numbers depending on the year. AJS’ FEC-reported political spending in 2012 was more than the entirety of its total revenue in 2010, $15.9 million.
In the chart below, we estimate what the total 2012 expenditures of some of the groups in the network might look like, based on IRS reports from prior years and spending the groups reported to the FEC in 2012.
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