Five Easy Steps That Let You Play Big in Politics, Keep Your Donors Hidden and Game the IRS

A Center for Responsive Politics Report

by Robert Maguire and Viveca Novak

April 2013

Let’s say you want to be a player in Washington. Maybe there are policy issues that matter to you, or you simply want to help elect more politicians on the right or the left. And let’s say you also have some potential donors who could help propel your cause. Problem is, they don’t want their names made public. 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 groupspumped 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"

"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 themselveall while avoiding more than glancing oversight by f 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.*

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s, ederal regulators.

Step 1: Create a 501(c)(4) tax-exempt group, and spend away The first and most critical step, for those who want to be politically active while keeping their donors out of the public eye, is to form a group under the 501(c)(4) provisions of the Internal Revenue Service. Why a 501(c)(4) and not a super PAC -- another type of group that's allowed to raise and spend unlimited amounts of money? Secrecy. These groups are regulated by the IRS, where confidentiality is routine, rather than the FEC, where disclosure is the rule. 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.

Surprisingly, groups aren't required to seek the IRS' approval before they start operating as 501(c)(4)s. Social welfare organizations can self declare and start raising and spending money right away. Some do request official approval, but the process is complicated and often time-consuming: Crossroads GPS, one of the best-funded shadow money groups, asked for the IRS' blessing in mid-2010 and after three years it still hasn't received it -- though that hasn't stopped the group from operating on a grand scale.

Crossroads, started by GOP operatives that include Karl Rove, former uberaide to President George W. Bush, opened for business about five months after the Supreme Court's January 2010 decision in the case Citizens United v. Federal Election Commission. That decision said corporations could spend unlimited money in campaigns, as long as their spending occurred independently of the candidate who stood to benefit. The ruling applied to nonprofit corporations as well as it did to for-profit companies, a fact that was key to the future strategies of Crossroads and similar groups.

In its first year, Crossroads GPS -- a sister group to the super PAC American Crossroads -- reported to the FEC that it spent $16.7 million on ads directly and indirectly advocating for or against candidates. (Even 501(c)(4) groups, while not required to reveal much to the FEC, must disclose when they run certain kinds of ads and how much they spend on them -- and they must do so promptly.) It later told the IRS, in its first tax form 990 filed with the agency, that it spent $15.9 million on politics. Both figures understate the reality of what GPS spent in the political arena by millions. In either case, they are well under half of GPS' reported overall spending of $42.3 million (including salaries, overhead and so on) that year. Likewise, other members of the Crossroads-CPPR network were careful to abide by the 49 percent rule, at least in a technical sense. The 60 Plus Association reported to the FEC that it spent $7.1 million in 2010; that's just under half of its total IRS-reported expenditures of $15.5 million. Former New York Gov. George Pataki's Revere America filed expenditure reports with the FEC that came to $2.3 million, safely below half of the $6.3 million it spent that year. Crossroads GPS' 2010 spending may well have helped the GOP take control of the House. And the group came out with guns blazing in 2012. In that election cycle, it told the FEC it spent more than $71 million -- almost as much as the entire GPS-CPPR network had spent, combined, in 2010. Crossroads likely won't send the IRS its form 990 for 2012, in which it will reveal its total expenditures last year, until autumn of 2013 (stay tuned for Step 4 of our series for more on the lag time), but logic dictates the group will need to show a $130 million increase over its 2010 overall expenditures in order to stay under the 49.9 percent threshold for political spending in 2012 -- by any measure, a staggering increase. The shadow money mailbox Crossroads GPS is one kind of shadow money group. But other kinds of politically active groups operate under the 501(c)(4) designation. They're little more than glorified mailboxes.

Foremost among them is the Center to Protect Patient Rights, which OpenSecrets Blog first uncovered last year. From 2009, when it was founded, until the end of 2011, CPPR raised $101 million. More than $70 million of that went out the door to other shadow money groups. CPPR has no activities of its own: It doesn't run ads for or against candidates; it doesn't conduct research; it doesn't spearhead public education campaigns. It appears to be little more than a conduit funneling money to other shadow money groups that spend the money. During the 2010 cycle, CPPR made $47.9 million in grants to groups that told the FEC they spent $37.2 million on political ads.

GPS-CPPR Network FEC Spending 2010 2012 Crossroads GPS $16,733,363 $71,181,940Americans for Prosperity $1,330,010 $36,352,928American Future Fund $9,367,283 $25,414,586Americans for Job Security $8,258,099 $15,872,864Americans for Tax Reform $4,160,299 $15,794,552American Action Network $18,945,602 $11,689,399Americans for Responsible Leadership $0 $9,793,014NRA Institute for Legislative Action $0 $7,448,18960 Plus Assn $7,116,911 $4,615,892Republican Jewish Coalition $1,143,465 $4,595,666Susan B Anthony List $2,277,436 $1,961,223Center for Individual Freedom $2,500,617 $1,864,735American Commitment $0 $1,858,765National Fedn of Independent Business $140,129 $184,619Club for Growth $643,300 $660,220Independent Women's Voice $514,920 $989,598Hispanic Leadership Fund $100,000 $838,417Right to Life $642,130 $603,471Common Sense Issues $160,482 $79,907Americans for Limited Government $1,021,378 $0Revere America $2,265,727 $0TOTAL $77,323,161 $211,801,997 In one case, CPPR's role as a pass-through for big political money was outed by the courts. Last November, California authorities demanded that another Arizona shadow money group, Americans for Responsible Leadership, to turn over its donor information. Eventually, under court order, it did so. What did the public learn? That another politically active nondisclosing group, Americans for Job Security, had passed $11 million to CPPR, which then passed it to Americans for Responsible Leadership. In a twist that is almost certainly no coincidence, Americans for Job Security itself had received $4.8 million from CPPR in 2010. None of this, of

course, was very helpful. With the funds going through several 501(c)(4) groups, it was unlikely that the original source or sources of the money that wound up with Americans for Responsible Leadership -- the group that California election authorities were interested in to begin with -- would be revealed. CPPR is by no means the only prominent shadow money mailbox. Another such group: TC4, first reported by OpenSecrets Blog last December. Despite its colorless name, the organization shelled out nearly 80 percent of its $46.3 million in revenues to other groups in its first two years of operation -- including some of the same ones that received money from CPPR. The two groups overlap to the tune of more than $41 million.

Cash in, cash out. And all these groups in the Crossroads-CPPR network stay on the right side of the IRS' 49 percent "primary purpose" test. Sometimes, though, they need to use a little creativity to keep their IRS-reported numbers within bounds.

Step 2: Exploit definitions and disarray It's true that as “social welfare” organizations, 501(c)(4) 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.

One might expect that whatever qualifies as reportable spending for the FEC would also count as political spending for the IRS. As it turns out, though, “politics” is in the eye of the beholder. The FEC defines it one way, the IRS another -- and that difference can work in a group’s favor. 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 group increased 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 former Americans 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]." American Future Fund told the IRS its political spending totaled just $8.5 million, while it reported $9.4 million to the FEC. Yet it also told the IRS it spent $14.7 million for "media services," much of it going to the same big-name political admakers and consultants -- Mentzer Media, Direct Response, and OnMessage -- that AFF used for the ads it reported to the FEC. The Center for Individual Freedom reported spending $2.5 million to the FEC, but all of it appears to have been reported to the IRS under the category "multi-media announcemen[t]." Furthermore, CIF said on its 990 that it had not engaged in "direct or indirect campaign activities on behalf of or in opposition to candidates for public office." And then there’s Crossroads GPS, which reported $15.9 million in political spending to the IRS, and $16.7 million to the FEC. The numbers are low relative to its overall spending in 2010 of $42.3 million. But Crossroads also told the IRS it made $15.9 million in grants, which mostly went to other politically active nonprofits; that its two largest expenditures were $15.5 million in “political direct” spending and $8.2 million for “grassroots issue advoca[cy];” and, in another section of the form, that it paid outside contractors at least $19.3 million for “media services.” It's likely that there's overlap between the media spending and some of the other categories. Nevertheless, the numbers raise questions about what's being counted as "politics." 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 spendin 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

g reports.

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. Step 3: Sharing is Caring

But once an organization, awash with money, has exhausted most of its own political spending options -- including some of the more creative ones -- 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:

http://www.youtube.com/watch?v=5‐uJjKIkFIc

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 ads attacking 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. As for CPPR, the "shadow money mailbox," it never spent funds on direct advocacy, so hasn’t been at risk of transgressing IRS political spending limits -- if one buys the argument that sending grants totaling tens of millions of dollars to other 501(c)(4) groups (such as American Future Fund, which received $11.7 million from CPPR in 2010) is legitimate “social welfare” spending. If the group had given the same amount of money to super PACs, which in many cases run the same types of ads, its tax exempt status likely would have been in serious jeopardy. 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.

Step 4: Return to business as usual. Um, what was that again? 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 argAmericans for Tax Reform, for example, doesn't conduct activities that fit the IRS definition of the term: "

ue that

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.

What Crossroads GPS, for example, says about its activities on its Form 990 is like Jell-O -- it goes down easy, but you'd have trouble nailing it to a wall: The group is dedicated to "educating, equipping and engaging American citizens to takaction on important economic and legislative issues that will help shape our nation's future," its form says in part. "The organization conducts public communications and builds

grassroots to influence policy outcomes through grassroots mobilization an

e

d strategy." 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 for thousands 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.

Step 5: Relax, Regroup and Procreate Nondisclosing groups -- most of them 501(c)(4) organizations -- told the FEC that they spent more than $300 million in the 2012 elections. But a clearer picture of how they operated won’t emerge until autumn, 2013, when some will be turning in their IRS tax forms. Others -- who formed late in the election season or whose fiscal year ends in the summer -- won't file all or most of their 2012 spending until well into 2014. That’s long after the hurly burly of the 2012 campaign. And it's just the starting point of any process in which the

tax cops might begin to audit and question a group's creative interpretations or misapplications of the agency's rules. However, the truth is, there is very little chance of any of that happening. In recent years, whenever the IRS has made a move to rein in activity in this arena, Republican lawmakers have pushed back very publicly. In 2011, tax authorities began poking around on the

subject of applying the gift tax to large contributions to 501(c)(4) groups, sending letters to a handful of big donors. The agency received a swift and forceful response from Republican Sens. Orrin Hatch (Utah), John Kyl (Ariz.) and several others inquiring whether the IRS was acting on the basis of partisanship. Then in March, 2012, several tea party groups reported receiving information requests from the IRS in connection with their applications for tax-exempt status. In addition, some Senate Democrats wrote the agency asking for a bright-line test delineating what counts as political

activity by 501(c)(4)s (in Step 2 of our report, we discussed the IRS' imprecise rules in that critical area). Hatch again struck quickly with a letter, also signed by Senate Minority Leader Mitch McConnell (Ky.), Sen. Chuck Grassley (R-Iowa) and nine other GOP senators, implying that the IRS had embarked on a partisan crusade. The next round came in July with a letter from IRS Commissioner Doug Shulman saying the IRS “will consider proposed changes" with respect to (c)(4)s that “identify tax issues that should be addressed through regulations and other published guidance.” The missive back from Republican senators, including once again Hatch, Kyl and McConnell, came less than a month later. They said they believed the pleas for tighter regulation "have less to do with concerns about the sanctity of the tax code and more about setting the tone for the upcoming presidential election, and we urge you to resist allowing the IRS rulemaking process to be subverted to achieve partisan political gains."

The IRS' appetite for wading into a battle that is cast as political -- and risk being accused of conducting a witchhunt or seeking to chill free speech -- appears to be low. Pretty much everything the IRS does in connection with individual taxpayers (or non-taxpayers, in this case) is confidential. However, there are no indications that the agency has acted to revoke the 501(c)(4) status of any of the major, politically active organizations we've mentioned in our report. And if it did, that's no assurance that the group would have to disclose its donors. Many of the groups pushing the bounds of the rules that apply to 501(c)(4)s -- including Crossroad GPS -- have applied for but not yet received exempt status after years of waiting. If the IRS were to deny that status, the group would would be required to pay back federal income taxes, but that's about it, according to IRS Deputy Commissioner of Services and Enforcement Steven Miller. "There is no penalty specifically applicable to an organization as a result of denial of tax-exempt status," Miller told Sen. Carl Levin (D-Mich.) in a letter last year. The groups can just fade into the ether. Denial letters are heavily redacted before they're made public: Any information identifying the

group is deleted. So the public is never notified if a group isn't granted 501(c)(4) exempt status. The letters are meant solely to serve as illustrations of circumstances that can lead to an organization's status being denied or revoked. Most importantly, the IRS won't inform the FEC, nor does it require the organization to file as a 527 committee -- which would have to disclose its donors; it's ultimately up to the organization itself to change its status, if it chooses to do so. Furthermore, the IRS' focus in evaluating the nonprofit status of a given group is not on the organization's political activity -- which is logical, given that the IRS is responsible for overseeing all kinds of very different nonprofits, political and apolitical. In letters responding to questions from Senator Levin, Miller repeatedly stated that "all the facts and circumstances" are considered in the evaluation of nonprofit activities, "including, but not limited to, the organization's stated purpose, expenditures, principle source of revenue, number of employees and volunteers, and time and effort." That's not the kind of evaluation that can be carried out quickly -- certainly not as fast as an election cycle would warrant. The result is that, of a total of 643 organizations classified as 501(c)(4)s that were investigated since 2007, only 22 were investigated for their political activities. Out of more than hundreds of investigations, 42 501(c)(4)s had their status revoked. It's not clear how many of the 22 investigated for their political activity are among the 42 whose status was ultimately yanked. For the groups that did not yet have exempt status, the numbers are similar for the same period: Between 26 and 28 501(c)(4)s were denied exempt status -- but the numbers are likely higher given that the IRS often forewarns applicants of impending denials, giving them the opportunity to withdraw their applications before receiving denials. So powerful is the culture of nondisclosure at the IRS that even shreds of public information are tightly held. In November, the Center for Responsive Politics called the agency trying to discern a smudged word on a particular organization's form 990 -- a public document. One hour and several IRS staffers later, the agency agreed that the document was public, that the scanned document was illegible, and that it had the information we needed. But, citing its policy of not disclosing information on individual taxpayers, it would not tell us what the word was. (Messages left for the organization, TC4, weren't returned). With few perceived consequences for their actions, newer groups with links to the original Crossroads-Center to Protect Patient Rights cohort began spending money in the 2012 elections. American Commitment, for instance, was started by Sean Noble, the head of CPPR. It spent nearly $2 million in four federal races last year, including the presidential contest. Americans for Responsible Leadership, which received grants from CPPR, is a post office box in Phoenix that helped funnel funds intended for a ballot initiative effort in California through several different nondisclosing groups. California election authorities called it "money laundering." Ironically, the group told the IRS that one of its largest program areas includes lobbying for transparency -- for the government, that is. ARL spent $9.8 million in the 2012 elections at the federal level, all of it from undisclosed donors.

This year, nondisclosing groups waged an unprecedented attack not against a candidate for office, but a nominee up for Senate confirmation: Chuck Hagel. Several groups, most notably SecureAmericaNow.Org -- the head of which is also on the board of the Republican Jewish Coalition -- ran a barrage of ads opposing his nomination to be Secretary of Defense. Other groups involved in the onslaught included the American Future Fund (a member of the Crossroads-CPPR network), the Emergency Committee for Israel and the Log Cabin Republicans. That effort ultimately failed, but could indicate a new willingness by 501(c)(4)s to become heavily involved in other kinds of fights during nonelection years. Still, the pushback from watchdog groups continues. One group, Citizens for Responsibility and Ethics in Washington, is suing the agency over 501(c)(4) political activity.Two others, the Campaign Legal Center and Democracy 21, have sent the IRS multiple petitions for rulemaking on the issue as well as requests that the IRS investigate whether groups such as Crossroads GPS have crossed the line. They've received just one short response from the agency, which said, in part, "These regulations have been in place since 1959. We will consider proposed changes in this area as we work with [high-ranking Treasury and IRS officials] to identify tax issues that should be addressed through regulations and other published guidance." Levin is planning Senate hearings on the topic within the next few months. And there is the possibility that government officials are quietly on the case. The IRS recently

sent out more than 1,300 questionaires to organizations that operate as 501(c)(4)s without seeking IRS permission. The questions focus particularly on political activity by the groups. At a congressional hearing last week, Mythili Raman, an official in the Justice Department's criminal division said that, "Without discussing ongoing investigations, I can tell you that we are incredibly vigilant about the use of thorganizations as an end run around contribution

[disclosure]." It's impossible to know how much substance is behind that statement. END NOTES:

ese

*The groups discussed in this report are conservative. They were selected not because of their political leanings, but because they are among the best-funded and biggest-spending examples of two kinds of politically active nonprofits: shadow money groups that spend heavily on political advocacy, and "shadow money mailboxes" -- groups that function as little more than P.O. boxes through which millions of dollars are funneled to other shadow money groups. The closest liberal analog to Crossroads GPS in terms of money raised and money spent on FEC-reported political activity in 2010 was VoteVets.org, founded in 2006. In terms of spending reported to the FEC, Crossroads outspent VoteVets.org by a

magnitude of five-to-one. As for shadow money mailboxes such as the Center to Protect Patient Rights, they abound on the conservative side of the spectrum but are harder to find on the left. For instance, the liberal 501(c)(4) America's Families First also gives much of its money to other shadow money groups, but it only raised $8.6 million in 2010 and 2011 combined -- $7.8 million of which went out the door in grants. Further, Crossroads GPS and CPPR are part of an informal network of conservative groups that often coordinate their work. **Labor unions: Some believe that labor unions are the left's equivalent to shadow money organizations on the right. They do indeed control significant amounts of money and contribute generously to politically active nonprofits. They differ in a few crucial ways, though. First, union membership is measured in the thousands or the millions, whereas many politically active nonprofits boast a member base that can be counted on one's fingers. One of the most politically active unions -- the Service Employees International Union -- had just under 1.9 million members in 2012. The Center to Protect Patient Rights has only two board members, and it had no employees and no volunteers in 2011, according to its IRS report. Maybe more importantly, unions already have to file more timely reports -- with the Department of Labor -- than the (c)(4) groups that file only with the IRS. Those reports are due just a few months after the end of the unions' fiscal year, and they contain much more detailed financial breakdowns than do a social welfare or trade association's filings with the IRS. For example, we know that SEIU paid InvestorTools Inc. $29,700 for consulting in 2012. We'd never know that for a 501(c)(4) filing with the IRS: First, we don't have any 2012 information on those groups yet, and second, they're required to report only the contractors to whom they paid more than $100,000 -- and even then, only their top five. The sources of funding for these groups are fundamentally different, as well. Unions have many dues-paying members. Dividing SEIU's total 2012 receipts by its membership comes out to $219 per member. If that amount were given to a candidate, it would just barely qualify as a contribution that had to be disclosed to the FEC. SEIU's super PAC, too, raised all of its more than $16 million from donors of $!,000 or less. [ Compare that to the complete lack of disclosure of who is behind groups like Crossroads GPS, Patriot Majority, and any number of the other big spenders in the 2012 cycle. Sometimes we get a peek at the number of donors -- never their names -- to those organizations: Crossroads' first Schedule B shows that all their $48.4 million in revenue came from 64 donors. The top 15 donors all gave $1 million or more, and their contributions alone total more than $38 million -- 79 percent of Crossroads GPS' total revenue. ***A note about us: While we repeatedly note in this report that 501(c)(4) groups aren't required to disclose their donors publicly, CRP has been able to identify some of them by combing through hundreds of IRS form 990 tax filings and searching for grants given from one group to another (the organizations don't reveal who they received money from, but they must identify grants they gave to other groups). We hand-key our findings into our database (there is no searchable, downloadable source for the information, which the IRS doesn't require filers to submit electronically). We have included our findings on our website, OpenSecrets.org, on the pages pertaining to the groups in question. Photo of Karl Rove; photo of Norm Coleman; photo of Sen. Carl Levin via Flickr user Jeffrey Simms Photography; Santa Image via BigStockPhoto.com; Image of gelatin molds via BigStockPhoto.com; photo of Sen. Orrin Hatch; photo of Secretary Chuck Hagel via Flickr user Secretary of Defense; photo of Sen. Carl Levin via levin.senate.gov.