Secret Election Financing Surges With Evasion of IRS Scrutiny

Secret Election Financing Surges With Evasion of IRS Scrutin
Revere America, chaired at the time by former Republican New York Governor George Pataki, started spending $2.6 million, much of it on television commercials urging voters to defeat Democrats or elect Republicans. Photographer: Alex Wong/Getty Images

Last May, New York lawyer John Cahill filed an application with the Internal Revenue Service for a tax exemption for Revere America, a group pushing for the repeal of President Obama’s health care law.

Asked on the form whether the organization intended to spend money to influence the election of any candidates, he checked the “No” box. Four months later, Revere America, chaired at the time by former Republican New York Governor George Pataki, started spending $2.6 million, much of it on television commercials urging voters to defeat Democrats or elect Republicans.

Revere America is one of at least four nonprofits that have reported campaign spending to the Federal Election Commission after declaring to the IRS they weren’t planning political activities, according to documents obtained by Bloomberg News under a Freedom of Information Act request.

One of the nonprofits reported $8 million in campaign ads to the FEC in 2008 -- while telling the IRS in its tax return for the year ending four days before the November 2008 election that it had zero political expenditures.

”They are challenging the boundaries of campaign finance restrictions,” said Michael Franz, an associate professor of government at Bowdoin College in Brunswick, Maine, who studied the advertising in last year’s general election. “The enforcement system is so weak, nonfunctional, that pretty much anybody can do whatever they want.”

Secret Donors

The nonprofits are social welfare groups, unions or trade associations that are allowed under U.S. tax laws to keep donors’ identities secret. They may spend on politics as long as it isn’t their primary purpose, and they are asked by the IRS each year to disclose any political spending.

Anonymous-donor groups like Revere America spent $137 million on the 2010 federal elections, 25 times what they did in 2006, according to the nonpartisan Center for Responsive Politics. CRP tracks FEC filings and is the source for spending figures reported to the agency in this story.

The growth of the nonprofits, recent Supreme Court rulings and declining enforcement activity by the FEC have combined to increase the level of secrecy in financing U.S. elections.

The FEC has been stymied in recent years by partisan 3-3 votes blocking action on alleged campaign-law violations. The IRS, which has the authority to audit and impose penalties for inaccurate filings, said in late 2010 that it would increase its focus on the political activity of tax-exempt groups.

“We have yet to determine the extent of our activities,” said Michelle Eldridge, an IRS spokeswoman, in an e-mail.

Changing Positions

Eldridge said the agency has taken action in the past against some nonprofits that engage in “too much” political activity. She declined to provide details. While tax-exempt applications are signed under penalty of perjury, the agency isn’t aware of any prosecutions of politically active nonprofits for this reason, according to IRS spokesman Grant Williams.

“If you are looking to enforce the disclosure of campaign finance activity, the IRS is clearly the wrong agency to be leading the charge,” said Ofer Lion, a Los Angeles attorney whose clients include tax-exempt organizations.

Revere America “changed its position” about the kind of ads it wanted to buy between its IRS filing in May and the ads it bought in September, spokesman Jeffrey Birnbaum said.

The election-related spending for the group, organized under section 501(c)(4) of the tax code as a social welfare organization, will be reflected when it files its first public tax return later this year, he said. “The key is that everything will be disclosed.”

‘Vote Against’

A former head of the IRS exempt organizations office was skeptical. “It strains credulity” for nonprofits “to shift gears completely to massive political advertising” within a matter of months, said Marcus Owens, an attorney at the law firm Caplin & Drysdale in Washington.

American Future Fund, another 501(c)(4), said in its February 2008 IRS exemption application that it planned no election-related spending, and then spent $1.8 million in political ads in the same year, according to FEC records. Nicole Schlinger, who signed the IRS document as president of the group, referred questions to the Des Moines headquarters, which didn’t return calls.

The fund said in FEC filings that it spent $9.6 million in the 2010 election cycle, more than $7 million of it urging the election or defeat of candidates. One of its TV ads criticized Democratic Representative Rick Larsen of Washington for supporting then-House Speaker Nancy Pelosi. A narrator said: “Vote against Rick Larsen.” Larsen won.

The fund’s 2010 IRS tax return hasn’t been made public yet; its 2009 return reported no campaign activities.

‘Grassroots’ Advocacy

At Americans for Job Security, Chief Executive Officer David Carney, who was head of the White House political office under President George H.W. Bush, signed the group’s 1997 tax-exempt application saying no political spending was planned. Its tax returns for the years ended Oct. 31, 2004, through Oct. 31, 2008, stated there were no political expenditures.

In FEC filings in 2008, the group said it spent $8 million on election ads, including $1.8 million worth targeting Kay Hagan, North Carolina’s Democratic Senate candidate. Hagan won.

The $8 million reported to the FEC and the zero reported to the IRS are both right, said Stephen DeMaura, president of the nonprofit. The spending disclosed to the FEC didn’t fit the IRS definition because it was “grassroots and issue advocacy,” he said. At the time, the IRS required reporting of spending “attempting to influence” a candidate’s election. The FEC requires reporting of commercials that clearly identify a candidate and run within 60 days of a general election.

‘Yes Man’

In the 2010 elections, Americans for Job Security told the FEC, it spent almost $9 million, about half of it for so-called “independent expenditure” ads, those that explicitly endorse the election or defeat of candidates. The group’s IRS return for the 2010 election period isn’t available yet.

Americans for Prosperity, another nonprofit that has supported Republicans, said on its 2004 IRS application that it had no election spending plans. The group’s sister foundation of the same name is headed by David H. Koch of closely held refining and chemicals company Koch Industries Inc.

On each annual tax return since it was set up, Americans for Prosperity has said it made no political expenditures. FEC records show it reported spending $341,000 on campaign ads in 2008, and $1.3 million in 2010.

In one commercial last October, the group criticized Representative Chad Causey, an Arkansas Democrat, without calling explicitly for a vote against him. It described him as a “Washington yes man to higher taxes and more government spending.” Causey lost.

American Action

Americans for Prosperity runs only issue ads that don’t tell viewers which way to vote and don’t fit the IRS definition of political activity, said John Flynn, an attorney for the group.

American Action Network, another nonprofit with secret donors, did tell the IRS about planned political spending. The group, started last year by Washington financier Fred Malek and former Senator Norm Coleman, a Minnesota Republican, said on its IRS application that a “minor” part of its activities “may be classified as political campaign intervention.” Such spending may vary from year to year and is expected to average 20 percent or less of spending, the filing said.

The group told the FEC it spent $26.1 million in the 2010 elections, second only to the U.S Chamber of Commerce’s $32.9 million among groups that don’t disclose donors.

Patriot Majority

VoteVets Action Fund, a tax-exempt that raised money from secret donors and favors Democrats, reported $3.2 million in election spending to the FEC in 2010.

The group told the IRS in its filing covering the 2008 election that it had no political activity, while it reported $205,000 in ad spending to the FEC for that year. Questioned about this, Ashwin Madia, the group’s interim chairman, called it a mistake. VoteVets “should have checked yes under political activity,” Madia said. “We’re going back to the IRS to correct that oversight.”

In its latest filing, for the year ended June 30, 2010, the group told the IRS it had campaign activities and reported a $200,000 donation to Patriot Majority, a Democratic-leaning organization whose donors include the American Federation of State, County and Municipal Employees and the Teamsters union.

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