The Washington Post’s Wonkblog

‘Crossroads GPS and Priorities USA were created for the purpose of hiding donors’

By Dylan Matthews

Fred Wertheimer is the founder and president of Democracy 21, a leading campaign finance reform organization. He worked for Common Cause for 24 years, serving as a lobbyist for the Watergate reforms and as a counsel for the organization in the landmark Buckley v. Valeo case before the Supreme Court and as president from 1981 to 1995.

He has been involved in the passage of numerous reform measures, including the Federal Election Campaign Act and its amendments, the Bipartisan Campaign Reform Act (aka McCain-Feingold), and the Honest Leadership and Open Government Act.

We spoke on the phone Tuesday afternoon; a lightly edited transcript follows.

Dylan Matthews: There’s a lot of confusion about what 501(c)(4)s are and aren’t allowed to do. What are the rules here? Can they endorse candidates, run campaign ads, etc.?

Fred Wertheimer: Well, let me take you through it. They are allowed to conduct campaign activity, and the question is “how much?” If you read the statute, the statute says that these groups must engage exclusively in social welfare activity, and IRS regulations state that campaign activity is not social welfare activity. The literal language of the IRS statute says you can only engage in social welfare activity.

The IRS regulations, which are more than a half-century old at this point, say that your primary activity must be social welfare activities — and keep in mind that other IRS regulations made clear that engaging in campaign activity is not a social welfare activity. So we go from a statute that says “exclusively social welfare activity” to the IRS regulations that say “social welfare activities must be your primary activity,” and then to court decisions which have interpreted “primary activity” to mean that you cannot engage in a substantial amount of non-social welfare activity, or, it is sometimes worded, you can only engage in an insubstantial amount of non-social welfare activity.

On top of all this, there has been an established view in the nonprofit world that the “primary” standard means as long as you do less than 50 percent of your activity as campaign activity, you can do it. That view says you can spend up to 49 percent of your annual expenditures on campaign activity, and still be eligible for 501(c)(4) status. That is not a written rule of the IRS, you can’t find it anywhere, but that’s the common understanding in the nonprofit world.

We have challenged the IRS regulation as being contrary to the law, which says “exclusively engaged in social welfare activity” and contrary to these court interpretations. We petitioned the IRS in 2011 to hold a new rule-making, but they’ve yet to do anything about that.

When did these politically oriented 501(c)(4)s start to crop up?

This followed in the wake of the Citizens United decision, and this was a clear reaction to that decision by some groups. Nonprofits are all corporations, so up until Citizens United, the nonprofit groups couldn’t make direct expenditures to influence federal elections, because corporations were prohibited from making those expenditures. Citizens United opened the door to corporations, including nonprofit corporations making expenditures to influence federal elections.

In the summer of 2010, some of these groups started appearing, the most significant one being Crossroads GPS. Democracy 21, joined by the Campaign Legal Center, first wrote to the IRS in October 2010, making the case that Crossroads GPS was not entitled to 501(c)(4) status, and that the IRS should take appropriate action.

We then added other groups that we asked the IRS to investigate, including the pro-Obama group Priorities USA, which was created by two former White House officials, the American Action Network and Americans Elect. We have written about a dozen letters — in 2010, 2011 and 2012 — to the IRS, asking for investigations of these groups and asking the IRS to take appropriate action against them.

In our letters, we have documented why we think none of these groups are entitled to 501(c)(4) status. For example, the Americans Elect group was registering as a political party in a number of states, in order to have the opportunity for a candidate they planned to nominate to run for president. You cannot register as a political party and be a social welfare group. It’s just not possible under the tax law.

In the case of the American Action Network, in 2010 they reported 87 percent of their expenditures to the FEC as either independent expenditures or electioneering communication activities. By the very nature of their reporting, they certainly demonstrated that their primary activity was not social welfare activity. And we documented the cases on Crossroads GPS and Priorities USA as well.

I imagine Organizing for Action, the new Obama group, would be suspect for similar reasons.

They may be. You have to wait and see what they do. You have to see what they are spending their money on. That group just started.

A lot of these groups have super-PACs attached to them. Why?

So American Crossroads is a super-PAC, and they’re affiliated with Crossroads GPS, which is a 501(c)(4). Priorities USA Action was the Obama-supporting super-PAC, and it was affiliated with Priorities USA, a 501(c)(4).

That is simply one part of the case that shows that groups like Crossroads GPS and Priorities USA were created for the purpose of hiding donors. Donors were basically told: “You can give your money to the super-PAC, but you’ll be disclosed. If you don’t want to be disclosed give it to our 501(c)(4), and we’ll hide who you are.”

They weren’t created to be “social welfare organizations.” They were created to hide the donors from the American people, who were financing the campaign expenditures by these groups.

Super-PACs have to disclose, but if a super-PAC gets a contribution from a 501(c)(4), it just discloses that the (c)(4) gave it the money. So this is one way the super-PACs could get undisclosed money. There were some examples of groups that did that in 2012. Not a whole lot, but that could become a growing activity.

Why is the IRS not cracking down on these big groups?

It’s hard to speculate. The IRS has always been sensitive about getting involved in matters that involve the political arena, which makes it very strange to see the choices they made. In our view, there’s no question that they had to get involved in the cases we were bringing to them, because these groups were undermining the integrity of the tax laws and were hiding information that the American people had a right to know.

At the same time, they chose to get involved in a formulaic way in targeting other groups simply because of their names, and that was just wrong, and now they’ve got themselves in a very difficult situation. It’s very hard to know what went on here.

What is clear, in my view, is that the IRS got this wrong twice. They got it wrong in targeting conservative groups for review based on their names and their identified interests, and they got it wrong in not investigating and acting against groups that in our view were blatantly abusing the tax laws by improperly claiming to be 501(c)(4) groups so they could keep the donors paying for their campaign activities secret from the American people.

Just to get really concrete, if I’m a 501(c)(4), am I allowed to put out an ad that says, “Vote for John Smith” or “Vote against John Smith”?

Yes you are, post-Citizens United. Prior to Citizens United, you would not have been able to do that, because no corporation could do that in federal elections, and 501(c)(4)s are corporations. Citizens United opened the door to 501(c)(4)s becoming a vehicle for laundering secret money into federal elections.

How common is it to actually revoke these groups’ status for being too political? There was one group that had that happen to it last year, but is that common?

I don’t think it’s common, but I can’t answer for sure how rare it is. There is a whole other avenue that exists for determining 501(c)(4) eligibility. There’s another standard besides primary activity, and that standard is you can’t use a 501(c)(4) for your own private political interests. We have raised that issue with the IRS in terms of Crossroads GPS, and that’s an area we’re going to explore in other cases. But the bottom line is, I don’t know. I don’t think it’s common to shut these down, but I don’t know how often it happens.

Just to be clear there, if groups are working for themselves and not the “social welfare,” that’s not allowed?

The question is whether they meet the standard of the IRS in terms of being a social welfare organization, or whether the group is being used to advance personal, political interests. My mind has a very hard time grappling with the notion that Karl Rove created Crossroads GPS to engage in social welfare work. He is not known for his social welfare activities. He is known 100 percent for his political and campaign activities.

What would your preferred reforms in this area look like?

We need a couple of major changes here. First of all, we need disclosure legislation, to bring an end to the secret money being laundered into our elections. That would play a very large role in preventing the misuse of 501(c)(4)s for campaign purposes, because it’s being done now as a vehicle to hide donors.

We also need a bright-line test so that it’s very clear what the rules are for being eligible for 501(c)(4) status. 501(c)(4)s were never intended to be organizations that engaged in lots of campaign activity. Go back to the statute. They’re supposed to be exclusively for social welfare purposes, according to the statutory language. There should be a bright-line limit on the percentage of money that can be used for campaign-related purposes, and the limit should be a relatively small percentage of the total expenditure that a 501(c)(4) makes.

If 501(c)(4)s want to do more than that, they should set up a 527 political organization and have those groups spend the money, and those groups are subject to disclosure. We ought to return 501(c)(4)s to their original purpose, which did not include campaign activities, by limiting to a small percentage of their expenditures the amount of campaign activities they can undertake and still quality as (c)(4)s. We also ought to pass comprehensive disclosure legislation so citizens can once again fully know who is financing the campaign expenditures that are being made to influence their votes.

Would that stop people from, say, starting shell corporations to stay anonymous while dispensing cash?

If we were to pass the approach in the DISCLOSE Act, this has protections against that happening. The provisions are designed to deal with people who want to set up dummy organizations in order to hide the donors financing campaign expenditures, and I think it would capture almost all of the efforts to evade disclosure.