Senate Scrutiny of Nonprofits Spurring Disclosure: Taxes

Photographer: Andrew Harrer/Bloomberg

U.S. Senator Carl Levin, a Democrat from Michigan, and chairman of the Permanent Subcommittee on Investigations, said he will ask IRS officials why they didn’t move to prevent this nonprofit spending on U.S. elections. Close

U.S. Senator Carl Levin, a Democrat from Michigan, and chairman of the Permanent... Read More

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Photographer: Andrew Harrer/Bloomberg

U.S. Senator Carl Levin, a Democrat from Michigan, and chairman of the Permanent Subcommittee on Investigations, said he will ask IRS officials why they didn’t move to prevent this nonprofit spending on U.S. elections.

Senate hearings, lawsuits and an Internal Revenue Service questionnaire are placing new scrutiny on nonprofit groups that spend millions of dollars on political campaigns without disclosing their donors.

Senator Carl Levin, a Michigan Democrat, said he would hold hearings on why nonprofits could spend their money on elections without the IRS questioning whether such efforts are proper.

For its part, the tax agency sent questionnaires to more than 1,300 nonprofits, asking them to justify their status. And a government ethics watchdog group petitioned and is suing the IRS to force the agency to keep nonprofits out of politics. The Securities and Exchange Commission is also considering a rule requiring publicly-traded corporations to disclose donations to such groups.

A crackdown on nonprofit political spending could lead to greater disclosure of who is financing independent attack ads and other activity waged by individuals or special interest groups, though it’s unlikely to end the escalating costs of campaigns. Donors could shift their money to super-political action committees, which can accept unlimited checks and must make public the identity of their contributors.

“It’s like whack-a-mole,” said Bill Allison, editorial director for the Sunlight Foundation, a Washington-based watchdog group, “The money will all flow to the super-PACs.”

Photographer: Brendan Smialowski/AFP via Getty Images

Nonprofits such as Priorities USA, founded by former aides to President Barack Obama, and Crossroads GPS, created with the help of Republican strategist Karl Rove, pictured, proliferated since the U.S. Supreme Court’s 2010 Citizens United decision that removed contribution limits on corporations and union giving to independent groups. Close

Nonprofits such as Priorities USA, founded by former aides to President Barack Obama,... Read More

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Photographer: Brendan Smialowski/AFP via Getty Images

Nonprofits such as Priorities USA, founded by former aides to President Barack Obama, and Crossroads GPS, created with the help of Republican strategist Karl Rove, pictured, proliferated since the U.S. Supreme Court’s 2010 Citizens United decision that removed contribution limits on corporations and union giving to independent groups.

Nonprofits Expansion

Nonprofits such as Priorities USA, founded by former aides to President Barack Obama, and Crossroads GPS, created with the help of Republican strategist Karl Rove, proliferated since the U.S. Supreme Court (1000L)’s 2010 Citizens United decision removing limits on corporate and union spending on elections.

Those organizations spent more than $300 million on the 2012 campaign, up 280 percent over the $79 million spent four years earlier, according to the Center for Responsive Politics.

“We’re in a situation where we do not have the disclosure that the Supreme Court said in Citizens United that we should have for the good of the country,” said former Federal Election Commission Chairman Trevor Potter, president of the Campaign Legal Center, a Washington-based advocacy group that supports laws requiring nonprofits to identify their donors.

Another former FEC chairman, Bradley Smith, founder of the Center for Competitive Politics, takes the counter view. He said the undisclosed money accounted for just 4 percent of the estimated $7 billion spent on the 2012 elections.

“This is blown vastly out of proportion,” said Smith, whose Alexandria, Virginia-based group opposes limits on campaign spending.

Senate Hearing

Levin, chairman of the Permanent Subcommittee on Investigations, said he will ask IRS officials why they didn’t move to prevent the nonprofits’ spending on U.S. elections.

Nonprofits “are not allowed to engage in political activities and must be exclusively into social welfare efforts,” Levin said in an interview. “Why has the IRS not enforced our laws?”

Melanie Sloan, executive director of Washington-based Citizens for Responsibility and Ethics, asked the same question. CREW is suing the IRS and petitioning the agency to enforce the law more literally and ban nonprofits from political spending.

‘Common Good’

According to the group’s filing, federal law requires such nonprofits, incorporated under the tax code’s Section 501(c)(4), to be “operated exclusively” for social welfare activities. IRS regulations say only that such groups must be “primarily engaged” in promoting “the common good and general welfare.” Organizations have interpreted the regulations to mean they may engage in political activities as long as that makes up less than 50 percent of their spending, the petition said.

“We’ll use every tactic we can think of to force the IRS to do something,” Sloan said.

The IRS this year asked more than 1,300 nonprofits for information about their activities, including whether they’ve engaged in politics.

The questionnaire went to nonprofits that have claimed tax-exempt status without filing an application with the IRS, which is permissible. It wasn’t sent to organizations such as Crossroads, which has asked for nonprofit status and is waiting for an IRS ruling.

Besides inquiring about why a group didn’t seek IRS approval of its nonprofit status, the questionnaire asks how much money it spent, if any, on political campaigns, including ads to support or oppose candidates.

IRS Reticent

An IRS spokesman, Anthony Burke, said he couldn’t discuss whether the agency was investigating nonprofits for engaging in political activity. “Under the disclosure provisions of the federal tax law, federal employees cannot disclose tax-return information,” he said.

All the activity, plus news reports on campaign spending, suggest the question of political involvement by nonprofits has attracted the attention of IRS investigators, said Marcus Owens, who used to oversee nonprofits for the agency. “All the traditional indicators of a project either underway or soon to be underway are there,” he said.

Election lawyer Michael Toner, another former FEC chairman, said he expects the question of whether nonprofits can spend money on political ads without disclosing their donors to wind up in court. He said the IRS may decide to challenge one Democratic-leaning and one Republican-leaning organization and let judges sort it out.

Test Cases

“Test cases are inevitable,” Toner said. “Litigation in the courts is only a matter of time.”

While the nonprofits continue to keep their donors hidden, some of their contributors’ names have become public through IRS filings and voluntary disclosures by corporate contributors.

The Securities and Exchange Commission is considering a rule requiring publicly traded companies to disclose donations to nonprofits, and has received more than 500,000 comments. Target Corp. (TGT) faced a boycott by gay-rights advocates in 2010 after the company gave $150,000 to a business group supporting Minnesota Republican gubernatorial candidate Tom Emmer, who opposed same-sex marriage.

“Spending money in this way can hurt the bottom-line interests of the corporation,” Thomas DiNapoli, New York’s state comptroller who has advocated broader disclosure in state elections, said today on a conference call with reporters. “It really underscores why transparency is a very important part of accountability.”

Republican Consultant

The Center to Protect Patient Rights, a Phoenix-based nonprofit led by Sean Noble, a Republican consultant linked to billionaire energy executives Charles and David Koch, spent $23 million in 2011. It spread that wealth around; $2.4 million went to the 60-Plus Association, which favors privatizing Social Security and spent $4.6 million on campaigns in 2012. Noble also paid his consulting firms $3 million, its 2011 tax records show.

The Motion Picture Association of America, whose members include News Corp. (NWSA) and the Walt Disney Co., donated $100,000 in 2011 to Grover Norquist’s Americans for Tax Reform, which a year later spent $16 million to elect Republicans, according to the Washington-based Center for Responsive Politics, which tracks campaign donations. An association spokesman, Howard Gantman, declined to comment on its 2011 tax filing and donations.

Drug Industry

Pharmaceutical Research and Manufacturers of America, the Washington-based trade group for the drug industry, reported in 2011 tax filings that it contributed $264,500 to the American Legislative Exchange Council, which championed among other issues voter-identification laws.

Phrma also gave $17,500 to two Congressional Black Caucus-affiliated groups. CBC members have likened voter-ID laws to “Jim Crow-era poll taxes and literacy tests that disenfranchised thousands of African-Americans.”

Matt Bennett, a Phrma senior vice president, said in response to a question about the group’s donations: “As part of our mission, Phrma often makes grants or charitable contributions to organizations that share Phrma’s goals of improving the quality of patients’ lives, increasing the availability of life-saving and life-enhancing medical treatments and supporting the discovery of new treatments and cures by pharmaceutical and biotechnology research companies.”

Merck & Co (MRK). gave $6.2 million to Phrma in 2011, according to the company’s website. Merck also contributed between $100,000 and $249,000 to the Black Caucus Foundation, the charity’s annual report said.

“The company supports organizations that champion innovation and public health issues and encourage debate and advocacy in support of our business and industry,” said Kelley Dougherty, a spokeswoman for Whitehouse Station, New Jersey-based Merck. “Funding of any one organization should not be construed to reflect support for all of the positions of that 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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