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The End of Dark Money? | The Nation

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Zoe Carpenter

Zoë Carpenter

DC dispatches. E-mail tips to zoe@thenation.com.

The End of Dark Money?

Dark money

A new proposal from the IRS aims to limit the political activities of 501(c)(4) nonprofits. (Reuters/Mark Blinch)

Last spring, news that the Internal Revenue Service used keywords like “Tea Party” and “Occupy” to select groups applying for nonprofit status for extra scrutiny prompted media outrage, resignations, internal investigations and a series of congressional hearings. There was comparatively little fury about the fact that many of these “social welfare” organizations were getting tax breaks in exchange for flooding elections with anonymous cash.

The power these dark money groups wield in future elections could be undercut by a new proposal from the IRS, which would put clearer boundaries around the political activities of 501(c)(4) nonprofits. Released just before Thanksgiving, the guidelines lay out some specific definitions of “political activity,” that social welfare groups would have to limit in order to retain their tax-exempt status, such as expressing an opinion about a particular candidate.

Watchdogs are encouraged that the Obama administration has affirmed the need for clarity on the laws governing social welfare groups and their influence in elections. But the rules as written are broad, limiting activities like voter registration drives, get out the vote campaigns and candidate debates. Many groups see these as critical civic engagement programs, and essentially nonpartisan.

“Though the new definitions attempt to clarify existing rules, they also create a danger to citizen participation in our democracy,” a progressive coalition called Alliance for Justice warned in a statement. “These regulations will not run 501(c)(4)s out of politics. Rather, the big players will hire lawyers and accountants to help them avoid the rules. Small players can’t afford this kind of assistance.”

Dark money groups are the legacy of the Supreme Court’s ruling in Citizens United, which permitted unlimited campaign spending by corporations and nonprofits. The latter may advertise for or against candidates without disclosing their donors, making them perfect fronts for individuals wanting to peddle influence anonymously. Crossroads GPS, a 501(c)4 founded by conservative Karl Rove, spent more than $74 million in 2012, exceeding all but two Super PACs.

To keep its tax-exempt status, a group like Crossroads GPS has to prove that “it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.” Lacking firm criteria, tax lawyers have interpreted that to mean that no more than 49 percent of their budget can support political activities.

The problem is, until now the IRS hasn’t defined political activity, leaving agency employees to evaluate “all the facts and circumstance” of an organization’s actions to determine which are political or for the social good. The murkiness of facts and circumstances has made it easier for groups whose main purpose is really to influence elections to get tax exemptions, and the cover of anonymity for their donors. With so many loopholes, it’s no wonder a flood of applications for 501(c)(4) status followed Citizens United.

“What this [rule] is attempting to do is to say, ‘if you see this type of activity it’s political, or it’s not,’ ” said Public Citizen’s Lisa Gilbert. However, the IRS’s proposal doesn’t lay out a new benchmark for how much of a nonprofit’s activities can be political. The agency asked for suggestions on that point during the public comment period. “It’s hard to talk about how much you can do of anything, if you don’t know what that anything is,” Gilbert explained. In her opinion, a nonprofit’s political activities should be closer to 5 or 10 percent of its operations than to 49 percent.

The key to a successful final rule from the IRS will be in balancing competing objectives: promoting participation in the political system in general, while stamping out abuses of “social welfare” status for the purpose of manipulating elections. “We certainly welcome this as an important first step,” said Gilbert. “We just have a series of concerns about how to do this in such a way that it doesn’t cut off legitimate, nonpartisan nonprofit activity.” The rules would also create different standards for 501(c)(4)’s and other nonprofits, particularly trade organizations, which are also allowed to spend money in elections. How well the IRS will enforce the final rules is another significant question.

A project called Bright Lines, which is sponsored by Public Citizen and staffed by nine tax lawyers, has laid out a proposal for defining nonprofit political activity that is more nuanced than the IRS’s initial guidelines. Under the Bright Lines proposal, social welfare groups would be limited in their ability to endorse or contribute to a candidate, party or PAC, while education campaigns around specific policy positions held by candidates would not count as political activity.

Conservative organizations accounted for 85 percent of the spending by social welfare groups in 2012, so it’s no surprise that they objected most strongly to the IRS’s proposal. “We are all going to spend a tremendous amount of time and energy fighting back against this,” Dan Backer, a lawyer who represents several conservative nonprofits, told The Washington Post. “These proposed new regulations put the First Amendment rights of Americans at even greater risk,” said Jay Sekulow, a lawyer with the right-wing American Center for Law and Justice and one of the authors of the Defense of Marriage Act.

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It’s important to note that new rules won’t ban social welfare groups from doing any of the political activities defined by the IRS. They will simply add clarity to limits on political activity that already exist in theory but are poorly understood, unevenly applied and much abused.

They also won’t do anything about the “dark” part of dark money—the fact that groups engaged in political spending are not required to reveal the source of their funds. The Securities and Exchange Commission was expected to consider a proposal that would expose some of that secret cash at its source, by requiring corporations to disclose political donations to their stockholders. But the agency recently decided to remove the item from its agenda, putting its prospects in limbo.

Lee Fang obtained tax returns that shed light on the role of dark money in the 2012 election.

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