IRS Denial of Tax Exemption to U.S. Political Group Spurs Alarms

An Internal Revenue Service decision revoking the tax-exempt status of a small political nonprofit organization may foreshadow an investigation into groups such as Crossroads GPS and Priorities USA that spend millions on the 2012 U.S. presidential election.

At risk would be the groups’ nonprofit status, which lets them collect millions of dollars from individuals and corporations while keeping donors anonymous.

President Barack Obama and Republican challenger Mitt Romney are benefitting from such nonprofits. Crossroads GPS was started with help from former President George W. Bush’s chief political strategist, Karl Rove. Priorities USA was co-founded by Bill Burton, a former Obama aide.

The recent IRS decision sends a signal that it may turn its attention after November’s election to major nonprofits involved in this year’s election, said Marcus Owens, a lawyer and former IRS director who oversaw nonprofits.

“The message is groups like Crossroads need to be prepared to explain to the IRS why they’re entitled to tax-exempt status,” said Owens.

The IRS decision released last month involved a so-called campaign school in which a partisan group trained candidates.

“You are not operated primarily to promote social welfare because your activities are conducted primarily for the benefit of a political party and a private group of individuals, rather than the community as a whole,” said the IRS letter telling the group it was losing its exempt status.

Emerge America

While the nonprofit wasn’t named, it was Emerge America, its president, Karen Middleton, told Bloomberg News. The national organization is based in San Francisco and works with nine state affiliates that train Democratic women candidates.

Middleton said in an e-mail that the national and state organizations are now incorporated under Section 527 of the tax code, which requires them to disclose their donors.

Critics of political nonprofits such as Crossroads and Priorities USA said the same IRS reasoning should apply to those groups. The organizations are incorporated under Section 501(c)(4) of the tax code, giving them exempt status as social- welfare organizations and barring political activity as the primary focus.

Primarily Political

“There’s a boatload of groups that they should looking at,” said Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington, a watchdog group. “When you look at the budgets of these groups, it’s clear that their primary purpose is political activity.”

Sloan said donations would shrink if the nonprofits lose their exempt status and contributors had to be identified.

“There are people who are now making the choice to give because they want their identities hidden,” she said. That fundraising advantage “will disappear if a few of those donors are revealed.”

Sloan’s group yesterday asked the IRS to investigate whether the nonprofit American Action Network qualified for tax- exempt status. American Action Network spent $26 million in the 2010 midterm campaign to help elect Republican candidates, more than any other 501(c)(4) group, according to the Center for Responsive Politics, a Washington-based research group that tracks campaign contributions.

Familiarity Needed

The IRS should become more familiar with the operations of the large-scale political nonprofits, said another tax expert, University of Miami law Professor Frances Hill.

“Once they decide that something is a priority, they have capable people who have a long history of being involved in looking at political activities of exempt entities,” Hill said. “I don’t think they’re going to turn a total blind eye to this.”

Even so, any IRS interest won’t affect the groups in 2012, Hill said. “Organizations that are prepared to be super- aggressive until the election probably can,” she said.

The IRS has faced differing pressures from the major political parties over regulating nonprofits. Senate Democrats in March urged the agency to impose limits on how much nonprofits can spend on politics. That same month, Senate Republicans suggested the IRS was singling out pro-Republican Tea Party groups in seeking more information from them before deciding whether to grant them nonprofit status. No decision has been announced.

Court Decision

The January 2010 U.S. Supreme Court decision in the Citizens United case removed restrictions on corporate and union campaign expenditures, spurring an increase in nonprofit spending on political campaigns.

Groups keeping their donors secret spent $138 million in the 2010 midterm elections compared with $1.3 million in the 2006 midterm vote, according to the Center for Responsive Politics.

Crossroads GPS -- whose founders include Ed Gillespie, now a senior adviser to Romney -- spent $21.7 million on advertising related to the 2012 presidential race through June 4, according to New York-based Kantar Media’s CMAG, which tracks such expenditures.

Priorities USA spent $3.8 million, according to CMAG.

A spokesman for Crossroads GPS, Jonathan Collegio, said the group’s tax status shouldn’t be an issue.

“Crossroads GPS advocates for lower taxes and limited government in the same way that well-established environmental groups advocate” for more regulations, Collegio said. “The only difference is the issue set -- and the government doesn’t arbiter tax status on the basis of issue set.”

Burton, the Priorities USA co-founder, said, “We closely adhere to all rules and regulations regarding our organization.”

To contact the reporter on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net.

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net.

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