EXHIBIT A

Moi\X 9AUCUS, MONTANA, CHAIRMAN

JOHN 0 . ROCKEFHLER IV, W!:ST VIRGINIA
KENT CONRAD, NORTH DAKOTA
JEFF Bll'iGAMAI'i, NEW MEXICO
JOHI'i F KERRY, MASSACHUSETTS
BLANCHE L LINCOLN, ARKANSAS
RON wYOEI'i, OREGON
CHARLES E. SCHUMER, NEW YORK
DEBBIE STABENOW, MICHIGAN
MARIA CANTWELL. WASHINGTON
BILL NELSON, FLORIDA
ROBERT MENENDEZ. NEW JERSEY
THOMAS R CAAPfR. DELAWARE
CHUCK GRASSLEY, IOWA
ORRIN G. HATCH, UTAH
OLYMPIA J . SNOWE, MAINE
JON KYL. ARIZONA
JIM RUNNING, KENTUCKY
MIKE CRAPO, IDAHO
PAT ROBERTS. KANSAS
JOHN ENSIGN, NEVADA
MICHAEL B. ENZI, WYOMING
JOHN CORNYN, TEXAS
RUSSELL SULLIVAN. STAFF DIRECTOR
KOLAN OA\115, REPUBLICAN STAFF DIRECTOR AND CHIEF COUNSEL
The Honorable Douglas H. Shulman
Commissioner
Internal Revenue Service
IIII Constitution A venue, N. W.
Washington, DC 20224
Via Electronic Transmission
Dear Commissioner Shulman:
tinitcd ~ t a t r s ~ r n a t r
COMMITIEE ON FINANCE
WASHINGTON, DC 20510-6200
September 28, 20 I 0
The Senate Finance Committee has jurisdiction over revenue matters, and the
Committee is responsible for conducting oversight of the administration of the federal tax
system, including matters involving tax-exempt organizations. The Committee has
focused extensively over the past decade on whether tax-exempt groups have been used
for lobbying or other financial or political gain.
The central question examined by the Committee has been whether certain
charitable or social welfare organizations qualify for the tax-exempt status provided
under the Internal Revenue Code.
Recent media reports on various 50I(c)(4) organizations engaged in political
activity have raised serious questions about whether such organizations are operating in
compliance with the Internal Revenue Code.
The law requires that political campaign activity by a 50I(c)(4), (c)(5) or (c)(6)
entity must not be the primary purpose of the organization.
If it is determined the primary purpose ofthe 50I(c)(4), (c)(5) and (c)(6)
organization is political campaign activity the tax exemption for that nonprofit can be
terminated.
Even if political campaign activity is not the primary purpose of a 50 I (c)( 4 ),
(c)(5), and (c)(6) organization, it must notify its members of the portion of dues paid due
to political activity or pay a proxy tax under Section 6033(e).
Also, tax-exempt organizations and their donors must not engage in private
inurement or excess benefit transactions. These rules prevent private individuals or
groups from using tax-exempt organizations to benefit their private interests or to profit
from the tax-exempt organization's activities.
A September 23 New York Times article entitled "Hidden Under a Tax-Exempt
Cloak, Private Dollars Flow" described the activities of the organization Americans for
Job Security. An Alaska Public Office Commission investigation revealed that AJS,
organized as an entity to promote social welfare under 501(c)(6), fought development in
Alaska at the behest of a "local financier who paid for most of the referendum
campaign." The Commission report said that "Americans for Job Security has no other
purpose other than to cover money trails all over the country." The article also noted that
"membership dues and assessments ... plunged to zero before rising to $12.2 million for
the presidential race."
A September 16 Time Magazine article examined the activities of Washington
D.C. based 501 (c)( 4) groups planning a "$300 million ... spending blitz" in the 20 I 0
elections. The article describes a group transforming itself into a nonprofit under
501(c)(4) ofthe tax code, ensuring that they would not have to "publically disclose any
information about its donors."
These media reports raise a basic question: Is the tax code being used to eliminate
transparency in the funding of our elections- elections that are the constitutional bedrock
of our democracy? They also raise concerns about whether the tax benefits of nonprofits
are being used to advance private interests.
With hundreds of millions of dollars being spent in election contests by tax-
exempt entities, it is time to take a fresh look at current practices and how they comport
with the Internal Revenue Code's rules for nonprofits.
I request that you and your agency survey major 501(c)(4), (c)(5) and (c)(6)
organizations involved in political campaign activity to examine whether they are
operated for the organization's intended tax exempt purpose and to ensure that political
campaign activity is not the organization's primary activity. Specifically you should
examine if these political activities reach a primary purpose level- the standard imposed
by the federal tax code - and if they do not, whether the organization is complying with
the notice or proxy tax requirements of Section 6033( e). I also request that you or your
agency survey major 501(c)(4), (c)(5), and (c)(6) organizations to determine whether they
are acting as conduits for major donors advancing their own private interests regarding
legislation or political campaigns, or are providing major donors with excess benefits.
Possible violation of tax laws should be identified as you conduct this study.
Please report back to the Finance Committee as soon as possible with your
findings and recommended actions regarding this matter.
Based on your report I plan to ask the Committee to open its own investigation
and/or to take appropriate legislative action.
Sincerely,
} 4 . ~
MaxBaucus
Chairman
EXHIBIT B
201 0 Outside Spending, by Groups I OpenSeerets http:/ /www.openseerets. org/ outsidespending/summ. php ?eye le=20 I 0&
1 of4

OpenSecrets.org
Center for Politi< I
2010 Outside Spending, by Groups
These groups are 501 c non-profits that are not required to disclose their donors. The groups are spending money on independent expenditures and electioneering
communications by using funds from their undisclosed donors.
Spending by disclosure for Non-Disclosing Groups
by Group Viewpoint by Recipient Party by Disclosure of Group
select CYCLE:
2010
select Fll TER:
IAII types ---------i
1
!ndependent Expenditures II
1- Super PACs ,
i Electioneering Communications i
; Non-Party CommiHees !
, Non-Disclosing Groups I
Group
US Chamber of Commerce 0 t:J
0 t:J
Total
$32,851,997 c
$26,088,031 c
Crossroads Gralll>roots 0 Q $17,122,446 C
A.rn!!ri!<i!n_F\it\ir!! F.!!n9. o CJ
o
0 Plus.P-J!.gJ o 1-J
ArneriC!!Ollf.Qf Ia_x Reform o
VoteVets.Q[9 0
Our Future Ohio PAC 0
o t:J
Center_fQL!m;!!Yidual Freedom 0
Secyri!Y 0
Nn!!rir<!!.!IllJQLErQsP!!fitY 0
Coalition o
$9,599,806 c
$8,991,209 c
$7,096,125 c
$4,140,044 c
$3,218,871 L
$3,068,144 L
$2,572,366 c
$2,500,617 c
$1,391,880 L
$1,322,060 c
$1,143,465 c
Women's Voices Women Vote Action Fund 0 $1,128,162 L
o $1,021,378 c
National Assn of Manufacturers o $886,764 C
.t!.Y.m,gne S<2QI!!y of the US 0
Citizenlink 0
Alliance for America's Future 0
fgr GQ.rnrn...QIJ Sens!! o
$750,826
$701,278
$692,177
$637,812
X
c
c
L
Independent
Expenditures
Elec
Comm
Comm
Costs
$0 $32,851,997 $0
$5,669,821 $20,418,210 $0
$16,017,664 $1,104,782 $0
$7,387,918 $2,211,888 $0
$4,406,902 $4,584,307 $0
$6,698,287 $397,838 $0
$4,140,044 $0 $0
$2,360,867 $858,004 $0
$3,068,144 $0 $0
$2,572,366 $0 $0
$0 $2,500,617 $0
$0 $1,391,880 $0
$0 $1,322,060 $0
$1,143,465 $0 $0
$249,715 $878,447
$1,021 ,378 . $0
$0 $886,764
$750,826
$701,278
$692,177
$637,812
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Super
PAC
501c
501c

501c
501c
501c
501c
501c
501c
501c
501c
501c
501e
501e
501c
SOle
501e
501c

SOle
501c
11/7/2011 10:34 j
201 0 Outside Spending, by Groups I OpenSecrets
2 of4
Group
West Virginia Conservative Foundation 0
<;;g1!!JYQn IQ.Efotect Senl qr 0
Advancing Wisconsin o
.NARAJ,pro-Ch.Qlge o
]ndeoendent Women's Voice 0
Americans United 4 Life Action 0
People for the American Way 0
Planned Parenthood 0
0
Our Community Votes 0
Faith & Freedom Coalition 0
1:-!ational Organization for Marriage 0
Illinois Chamber of Commerce 0
,A.meric<ln Ml!jQrity Action 0
Protecting America's Retirees 0
Environment Colorado Action Fund 0
!;;ARE MembershiQ..Qrganization 0
Indiana Chamber of Commerce 0
Total
$634,974
$464,347
$457,036
$425,168
$359,415
$349,615
$319,074
$309,430
$293,066
$272,445
$216,441
$208,176
$200,000
$158,370
$157,223
$143,158
$130,570
$126,410
Progressive Future 0 $120,412
Campaign for Community Change 0 $118,597
Foundation for a Secure & Prosperous Ame 0 $111,407
American Princi!llils in Action o $107,920
Enterprise Freedom Action Cmte 0
Bull Moose Sportsmen's Alliance 0
Hispanic Leadership Fund 0
Building a Stronger Wisconsin 0
Florida New M@jQ!ily 0
Judicial Crisis Network 0
Mili.\!!!"Y o
USAction 0
A<;tiQn 0
NH Citizens Alliance for Action 0
America's Voice 0
1!1 Ac\ion 0
Sealaska Corporation 0
fqr LJfe 0
Accountable America 0
Civic Participation Campaign 0
9omb!!_! Veterans for Congress 0
Taxpayers for Not 1 More Acre 0
AITl_E1riq1J 0
Qatholics U.Dited o
Service Employees International Union 0
Conservation Voters for Idaho 0
$105,979
$105,641
$100,000
$95,004
$63,990
$47,245
$23,035
$18,412
$18,171
$15,392
$13,692
$13,093
$12,540
$10,758
$10,210
$10,000
$7,983
$6,109
$5,728
$4,957
$4,045
$3,846
Environment Marvland 0 $2,899
$1Jmner_!)nited for RepQnible Ggvernment 0 $2,100
View
c
c
L
L
c
c
L
L
L
L
c
c
c
c
L
L
u
c
L
L
c
c
c
X
c
L
L
c
X
L
c
L
L
L
c
c
L
u
c
u
L
L
L
c
L
c
http://www.opensecrets.org/outsidespending/summ.php?cycle=20 1 0&
Independent
Expenditures
$49,829
$464,347
$457,036
$256,401
$0
$349,615
$319,074
$309,430
$293,066
$272,445
$6,453
$208,176
$200,000
$158,370
$157,223
$143,158
$0
$126,410
$120,412
$118,597
$111,407
$107,920
$30,491
$105,641
$0
$95,004
$63,990
$0
$23,035
$18,412
$18,171
$15,392
$13,692
$13,093
$12,540
$0
$0
$10,000
$7,983
$6,109
$5,728
$4,957
$0
$3,846
$2,899
$2,100
Elec
Comm
$585,145
$0
$0
$0
$359,415
$0
$0
$0
$0
$0
$209,988
$0
$0
$0
$0
$0
$130,570
$0
$0
$0
$0
$0
$75,488
$0
$100,000
$0
$0
$47,245
$0
$0
$0
$0
$0
$0
$0
$10,758
$10,210
$0
$0
$0
$0
$0
$0
$0
$0
$0
Comm
Costa
$0
$0
$0
$168,767
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4,045
$0
$0
$0
Super
PAC
327
S27
501c
.SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SOle
SO It
SOle
SOle
SOle
SOle
SOle
SOl<
SOle
SOle
SOle
SOle
SOle
SOle
501<
SOl<
11/7/2011 10:34 p
201 0 Outside Spending, by Groups I Open Secrets http://www.opensecrets.org/outsidespending/summ.php?cycle=20 1 0&
3 of4
Group Total
Equality California 0 $455 L
Independent
Expendlturoa
$455
Elec
Comm
$0
Comm
Coats
$0
C = Conservative. L = Liberal. X = BIPartlsan. U = Unknown
Super
PAC
501c
501c
t Indicates that this organization has a 527 committee registered with the IRS. The committee's 527 spending oulslde of elactloneerlng communications Is NOT Included In these totals. !'!.m!Q "'91!! about
ill!.
0 = No disclosure of donors
0 = Partial disclosure of donors
e = Full disclosure of donors
0 =Ad available
Based on data released daily by the FEC. Last update on Monday, November 07,2011
Feel free to distribute or cite this material. but please credit the Center for Responsive Politics. For permission to reprint for commercial uses. such as textbooks,
The Center for Responsive Politics
Except for the Revolving Door section, content on this site Is licensed under a
...J . QJ!..nf.tll.l:! .. ..
by OpenSecrets.org. To request permission for commercial use, please
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1117/2011 10:341
EXHIBIT C
Political spending: Obama could force disclosure of corporate politica. .. http://articles.latimes.com/print/20 11/may/08/nation/la-na-0509-dono
1 of2
[os Angeles <!!intcs 1 ARTICLE
- Back to Original Article
Obama order could make corporate political spending public
An executive order being considered by President Obama would require companies bidding for federal contracts to disclose political
spending they may now keep secret.
May 08, 2011 I By Matea Gold and Tom Hamburger, Washington Bureau
Reporting from Washington- A lobbying battle is raging largely behind the scenes over a seemingly obscure executive order that could- if signed by
President Obama - make public the political spending that many corporations can now keep secret.
Under the proposed order, all companies bidding for federal contracts would be required to disclose money spent on political campaign efforts, including
dollars forwarded through associations like the U.S. Chamber of Commerce and other private groups.
Election spending by such organizations soared to new heights in 2010, thanks in part to the Supreme Court's ruling in the Citizens United case, which allowed
corporations and unions to make direct political expenditures. The majority opinion endorsed disclosure of the new political spending, but many groups have
formed as nonprofits, which do not have to reveal their funding sources.
Since then, campaign finance reform advocates and their Democratic allies have sought to unmask the secret contributions fueling the groups, arguing that
such spending allows wealthy individuals, corporations and other special interests to have an outsized influence on elections without voters knowing who is
behind the effort.
At stake are tens of millions of dollars in donations provided by corporations to trade associations and other not-for-profit groups that use the money for
independent campaign expenditures. In the last election cycle, most of the money spent by the groups benefited GOP candidates. Democrats, worried about
that advantage, sought to restrict this kind of undisclosed independent spending. When that effort failed, some prominent party members began forming their
own not-for-profit organizations to compete with the GOP.
If Obama issued the draft executive order, he would effectively discourage previously undisclosed donations to groups like the U.S. Chamber of Commerce,
which - with some exceptions - have been generally helping Republican candidates. It would also give the president a chance to quiet critics who want him to
be more outspoken in demanding disclosure oflarge contributors.
But business interests are trying to quash the measure.
The chamber is pressing top White House officials, including Chief of Staff William Daley, who worked closely with the group when he was an executive at
JPMorgan Chase, to push Obama to drop the executive order.
The chamber also has corralled its allies on Capitol Hill. More than two dozen Republican senators, House Majority Whip Kevin McCarthy (R-Bakersfield) and
chairmen of 19 House committees signed letters to the president arguing that the order would inject political favoritism into the contracting process. Two
House committees will hold a joint hearing Thursday to push administration officials on the matter.
"The way the order is drafted, it hijacks the very powerful engine of the federal procurement SYStem and it takes it and tries to achieve political and electoral
ends," said Lily Fu Claffee, the chamber's general counsel, who charged that the measure would "chill the free-speech rights of corporations."
Backers of the disclosure measure say that it is intended not to reward political donors with federal contracts but to shed light on corporate influence over
elections. They argue the business opposition is driven by self-interest.
"Many of the government contractors that would be captured under the executive order probably are the big contributors to the Chamber of Commerce, so as a
result, the chamber is pursuing their battle against this with extreme vigilance," said Craig Holman, lobbyist for the consumer advocacy group Public Citizen,
one of 30 organizations that sent Obama a letter last week urging him to sign the order.
Nonprofit 501(c) groups, as the third-party groups are legally known, plowed at least $134 million from secret donors into the last election- $119 million of
which was spent by GOP allies, according to an analysis by the nonpartisan Center for Responsive Politics.
The executive order would require any company seeking a federal contract to disclose all of its federal political spending over $5,000 for the previous two
years - including contributions to third-party groups.
Some of this information is already available: Government contractors, like all companies, have to disclose contributions to their political action committees,
as well as their independent political expenditures. But the proposed order would create one central database - on the website data.gov- listing the political
activities of government contractors and their affiliates and officers.
More than 138,000 companies are prime federal contractors and could fall under the measure, according to government data. That includes Fortune 500
companies such as Apple, Southwest Airlines, Coca-Cola and FedEx. It would also affect some unions that have federal contracts to provide services, such as
worker training.
As of now, the 2012 campaign is poised to see an even greater influx of undisclosed political spending than the last election, in part because of the Democratic
rush to set up the same nonprofit political vehicles that Republicans exploited in 2010. But if Obama signs the executive order, some corporations - wary of
being dragged into partisan politics - could shy away from funding efforts on behalf of either side.
1111/2011 3:55]
Political spending: Obama could force disclosure of corporate politica.. . http:/larticles.latimes.com/print/2011/may/08/nation/la-na-0509-dono
2 of2
There is recent precedent for that: After Target Corp. suffered a consumer backlash last year for supporting an organization that backed a candidate opposed
to gay rights, it adopted a new policy restricting how the company's funds are used for political purposes.
The chamber's Claffee said the message sent by the executive order will be: "If you want to get a fair shake in the contracting sphere, you should avoid political
spending that raises eyebrows" and instead donate to the party in power.
Other critics, such as Steven Law, president of conservative nonprofit groups American Crossroads and Crossroads GPS, maintain that the proposed order
could usher in a new era of dirty politics.
"When I was in the executive branch, mixing politics with procurement was called corruption," Law, who served as deputy secretary of Labor for President
George W. Bush, wrote in an email.
The battle puts the chamber at sharp odds once again with the Obama administration, with which it tangled during the 2010 election.
The fate of the executive order, which remains under review at the Office of Management and Budget, is unclear. Daley, the chief of staff hired in part to
smooth administration relations with business, called it "just a proposed rule" that the White House was considering.
"We're going to do things they like, do things they don't like," Daley said of the chamber. "We're not going to do things because they do or don't like them.
That's just the way it is."
Advocates are cautiously optimistic.
"I expect President Obama to sign an executive order sometime in the near future," said Fred Wertheimer, president of Democracy 21. "This is their idea-
there's no reason for them to back away from it."
But lack of a signature so far, Holman said, "means we have to keep applying the pressure and reassuring the White House that despite the screaming of the
Chamber of Commerce, the rest of America wants to have this kind of transparency."
matea.gold@latimes.com
tom.hamburger@latimes.com
Melanie Mason and Christi Parsons in the Washington bureau contributed to this report.
1to.s .An.gelt.s <times copyright 2011 Los Angeles Times Index by Keyword I Index by Date I Privacy Policy I Tenns of Service
11/1/2011 3:551
EXHIBIT D
Fine line between politics and issues spending by secretive 50l(c)(4) ... http://www. iwatchnews. org/print/72
1 of8
iwatch
news
Published on iWatch News (http://www.iwatchnews.org)
Home> Fine line between politics and issues spending by secretive 501(c)(4) groups
Politics [11
Fine line between politics and issues spending by
secretive 501 (c)(4) groups [2]
The conservative American Action Network, a leading independent player in last year's
election, poured $26 million -out of some $30 million in spending -from secret donors
into political ads and activities to help Republican candidates.
Set up in 2009, the network enjoys a prized tax status from the Internal Revenue Service as
a social welfare, tax-free 501 (c)(4) organization, which permits it to accept secret donations
and engage in some political advocacy. But to qualify for this special status, an organization
cannot spend the majority of its money on politics, and its primary advocacy must be on
issues.
As required by law, the network reported the $26 million !31 it spent on political activities to the
Federal Election Commission before Election Day.
But the network's hefty spending on politics poses an important question: is its primary
purpose social welfare, as the IRS intended, or political activity?
Former Sen. Norman Coleman, who chairs the network, told iWatch News his organization
"followed the law" in spending its almost $30 million.
Justifying their spending, Coleman's group further said that $20.4 million went to broadcast
ads close to the elections - officially called "electioneering communications" -that
mentioned candidates' names but didn't recommend a vote for or against the candidate.
These ads mostly "urged center-right action on issues" before Congress, the group said. The
remaining $5.7 million was spent on ads that directly called for the election or defeat of
candidates.
"Not all electioneering communications are candidate advocacy under the campaign finance
or tax laws," network president Brian Walsh said.
However, some veteran tax experts say the group's status with the IRS could be in jeopardy.
"If over 80 percent of a group's expenditures are for political purposes that require reporting
to the FEC, then that organization will not qualify for tax-exempt status under section
501 (c)(4 )," Marc Owens, who was director of the IRS exempt organizations division for a
decade, told iWatch News.
11/1120114:091
Fine line between politics and issues spending by secretive 501(c)(4) ... http://www.iwatchnews.org/print/72
2 of8
"They're saying they can dress up electioneering communications that they've reported to
the FEC as a lobbying message, and have the IRS view that with blinders."
IRS rulings indicate that advocacy communications do not have to expressly support a
candidate to qualify as political activity, say tax and election lawyers.
Dozens of other GOP-allied 501(c)(4) groups- and a smaller number of Democratic ones
-are on spending sprees fueled by donor secrecy and the Supreme Court's historic
Citizens United vs. FEC decision last year. That ruling gave the green light to corporations,
unions and individuals making unlimited contributions for ads and other political tools that
back specific candidates, provided there is no coordination with campaigns or party
committees.
As a result of this secrecy, voters will never know how much money is manipulating the 2012
elections.
Almost no reporting required
These 501(c)(4) groups- nicknamed after the provision in the IRS code that allows them-
are taking in and spending tens of millions of dollars and reporting only a fraction of it to the
FEC as political activity. Donors never have to be disclosed publicly by these groups - only
to the IRS.
TV viewers are being bombarded with ads on issues such as taxes and regulations that
often mention candidates and are only being reported in a general way, long after the fact, to
the IRS. How do these organizations, run by veteran political operatives whose ideology is
well-known, manage to largely escape scrutiny by regulators and public disclosure on the
small fortune they spend on these ads?
Since the Watergate-era campaign finance scandal, following the money has been a
Washington obsession, but the emergence of 501 (c)(4)s has created a murky labyrinth.
"The fact that so far 501 (c)(4 )s are only reporting a fraction of what they're spending- and
nothing at all about their donors - underscores the wholesale inadequacy of our disclosure
requirements," Sheila Krumholz, executive director of the Center for Responsive Politics
(CRP), told iWatch News .
"Our current system of campaign finance disclosure is on shaky ground."
The limited evidence available shows that 501(c)(4)s have become magnets for big money:
last year at least 65 groups reported spending over $89 million on political activities to the
FEC, according to a CRP analysis.
Krumholz predicts a dramatic increase next year in 501(c)(4) spending on political activities.
"I think it's plausible that the number of c4s reporting political activity to the FEC will double
this cycle," she said. "Last year was viewed as a toe-in-the-water post Citizens United, and
now more liberal groups have formed too."
The total universe of organizations granted 501(c)(4) status is enormous, according to IRS
1111/2011 4:09]
Fine line between politics and issues spending by secretive 501(c)(4) ... http://www.iwatchnews.org/print/72
3 of8
data. In 2010, the number of c4s registered with the IRS jumped to over 139,000, up 2,000
from the prior year. These include such organizations as AARP and Disabled American
Veterans.
Gaining c4 status is increasingly popular because it provides "quite a bit of flexibility in
structuring activities with minimal reporting to the Internal Revenue Service and the Federal
Election Commission," Marc Owens said.
While c4s have become more popular post Citizens United, they include older conservative
groups like the 60 Plus Association and liberal bastions like Moveon.org.
Owens, the former IRS official who's now a tax lawyer, said the huge disparity between the
65 groups that reported to the FEC last year and the vastly larger number of these groups
registered with the IRS, is partly attributable to the vagueness about how issue ads are
defined. "Activities that have political impacts can also be dressed up or characterized as
public education of some sort," Owens said.
So how many c4 groups will be players in the 2012 elections? The answer isn't clear, and
never will be, but campaign finance watchdog Krumholz estimates, "There are likely a few
hundred of these c4 groups that are largely focused on issue advocacy, if not electoral
advocacy."
In 2010, GOP-leaning 501 (c)(4) groups accounted for almost $74 million of the $89 million
reported to the FEC, according to CRP.
Seasoned Republican operatives like Karl Rove and Ed Gillespie seized on the opportunity
to raise
undisclosed, unregulated money. The frenetic money chase is exemplified by Crossroads
GPS, a c4 launched by Rove and Gillespie, and its affiliated Super PAC, American
Crossroads. A Super PAC can take unlimited checks but must disclose the names of donors
in filings with the FEC. The Crossroads groups intend to raise $240 million for the 2012
elections, more than triple the $71 million they pulled in last year.
Last year, Democratic operatives were slow to respond to the GOP groups, relying heavily
instead on the tens of millions that several big unions supplied for get out the vote and ads
to boost candidates on Election Day. After losing the House last fall, Democrats vowed they
would not get clobbered again and launched several new 501 (c)(4)s including Priorities
USA, which was started by two former White House aides to help President Obama win in
2012. But at the end of the first half of 2011, fund raising totals were lackluster and paled
beside their GOP counterparts.
Bill Burton, a cofounder of Priorities USA and an allied super PAC Priorities USA Action,
sounds unfazed that the two groups raised just over $5 million in the first half of the year.
"Donors understand the urgency and see the need to keep up with what Rove and the Koch
brothers are doing,"said Burton, former deputy White House press secretary. "I'm confident
we will have the resources that we need."
The two groups are shooting to raise about $100 million.
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Meanwhile, several of the largest GOP allied groups have already spent tens of millions on
ad blitzes on policy issues involving taxes, spending and regulations in states and
congressional districts where they would like to defeat Democratic incumbents.
Coleman of the American Action Network said his group intends to focus their funds and
firepower heavily on keeping the House in Republican hands next year. "You can't take the
House for granted," Coleman said.
In what looks like a synergistic move, Coleman spearheaded the creation of a Super PAC,
the Congressional Leadership Fund, which will also be devoted to bolstering House
members. Its president is the same as Coleman's c4.
"I envision there will be many races in which the Network will be involved and the Super PAC
will be involved too," providing opportunities for the two outside groups to legally coordinate,
Coleman said.
Last summer, Crossroads GPS said it spent $20 million on ads blasting the Obama
administration's economic policies - including ads that targeted five vulnerable Democratic
senators who are running for re-election. The ads featured people fretting about high
unemployment, rising gas prices and other economic worries. The ads charged that the
Democratic senators back "billions in new taxes" and urged viewers [41 to tell their senator:
"No more blank checks."
To counter Crossroads GPS and defend Senate Democrats, a little known c4 group called
Patriot Majority USA has been very active. Last summer it ran $400,000 of issue ads in
Nebraska, Missouri and Montana where Sens. Ben Nelson, Claire McCaskill, and Jon Tester
were being pummeled by Crossroads GPS. The ads from the Democratic c4 attacked a
GOP sponsored budget plan that would have substituted a kind of voucher system for
Medicare. One ad ended with the line [sJ "Tell Congress the Republican plan is wrong for
Missouri."
Patriot Majority USA chief Craig Varoga says the group will raise significantly more than the
$4 million it spent in 2010.
Some c4s have been around for years, but are also ratcheting up their spending plans for
next year. One case in point is the Republican Jewish Coalition, a conservative pro-Israel
group. The RJC plans to spend as much as $5 million next year on electoral and issue
advocacy, or about double its previous high mark, RJC executive director Matt Brooks said.
For RJC, the stakes are high: three Jewish candidates are running for Senate seats in
Florida, Hawaii and Ohio. There are no Jewish GOP senators currently.
Another example is Americans for Prosperity, the grassroots goliath that was launched with
funding from the billionaire Koch brothers. Tracy Henke, AFP's chief operating officer, said
the group spent about $25 million on issue advocacy last year that focused heavily on
cutting regulations and federal spending. Of that sum, only $1.3 million was publicly reported
to the FEC as political activity.
Who are the secret donors?
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Though there is no mechanism to officially identify the people who make big contributions to
the c4 groups, iWatch News has learned the names of a few recent big check writers.
Sheldon Adelson, the Las Vegas casino titan whose net worth has been pegged at
more than $20 billion by Forbes, has for a few years been the RJC's leading financial
angel, according to two board members.
The Libre Initiative, a group that was set up early this year by Dan Garza who worked
in the George W. Bush White House to help promote free enterprise in the Hispanic
community, has received a multimillion-dollar commitment from Koch family interests,
say three fundraisers with ties to the group. The group co-hosted a conference in Las
Vegas with Americans for Prosperity this month.
A secret donor to Crossroads GPS last year was Paul Singer, a billionaire who runs the
hedge fund Elliott Management, say four fund raisers close to the group.
Other secret donors to Koch-connected c4s came to light in September when Mother Jones
obtained a tape [61 of Charles Koch thanking over two dozen GOP donors for making
contributions of $1 million or more in the last year to conservative groups aligned with the
Kochs. Among the prominent conservatives on that list were Art Pope, a North Carolina
businessman who is a director of Americans for Prosperity; long time GOP donors from the
DeVos family that founded Amway; and Ken Griffin, a Chicago hedge fund mogul who heads
Citadel Investments.
Veteran fundraisers plus Democratic and Republican operatives running these groups say
the main reason donors want anonymity is to avoid political retribution.
"Business people don't want to create problems for their own companies," said Mel
Sembler, the former finance chairman of the Republican National Committee, who
acknowledged he has written checks to several 501 (c)( 4 )s.
By way of example, Sembler cited a Minnesota ad campaign last year for a GOP
gubernatorial candidate who opposed gay rights that was partly financed by Target. The
retailer, which helped finance the ad effort by a fledgling c4 called MN Forward, was hit with
a shareholder resolution calling for disclosure of its political contributions and review of them
by independent board members.
Regulation is almost nonexistent
To keep their coveted tax status as social welfare organizations, these groups must spend
the majority of their funds on educational efforts -which can include issue advocacy with
political overtones and grassroots lobbying. Generally, the IRS has allowed these groups
considerable leeway to spend substantial amounts - but under 50 percent- on strictly
political ads. This has expanded to include ads that call for the election or defeat of a
particular candidate since Citizens United made them legal.
Owens, the former IRS official, says that under the rubric of issue advocacy, "activities that
are styled as educational can nevertheless have a very significant political campaign effect
in terms of driving certain groups of voters to the polls and causing other voter groups to
stay away."
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Such efforts, Owens added, are permitted under the tax code and reflect "the increasing
sophistication of political campaigning. Some groups are undoubtedly pushing the envelope
but others are not."Of the 65 non-profit c4s that reported spending to the FEC in the last
election cycle, the lion's share of money went for ads that helped GOP candidates.
Conservative groups spent $74 million while liberal groups spent just $15.1 million in the
midterm elections.
Overall, CRP says that c4s along with unions, trade associations and Super PACs reported
to the FEC spending $305 million on election activities in 2010 -or four times what they
spent in 2006.
More millions went into issue ads and get out the vote activities by 501(c)(4)s. These
activities don't have to be reported to the FEC, only to the IRS and typically as part of the
group's general expenditures.
For instance, Crossroads GPS and its affiliated American Crossroads reported to the FEC
that it spent a total of $38.6 million on ads in 2010. Of that sum, GPS spent about $16 million
on advocacy ads that specifically endorsed or opposed candidates, which is now permissible
with unlimited donations post Citizens United .
GPS spent another $10 million on ads last year that fell under issue advocacy guidelines
and therefore were not disclosed to the FEC, American Crossroads president Steven Law
said.
Last summer's $20 million ad blitz by GPS was on similar issues related to the economy
including taxes, while bashing policies of the Obama administration and several Democratic
senators. The ad spending wasn't reported to the FEC since it was part of their educational
mission, Law said. The ads were "aimed at promoting issues that we've continued to
promote this year wholly apart from any election context."
Law also said Crossroads GPS plowed a few million into other areas such as sophisticated
micro-targeting that is used increasingly to help turn out voters sympathetic to candidates.
This too was not reported to the FEC.
Because of concerns that this kind of spending by c4s should be made public, outside
analysts and election watchdogs are calling for more oversight and reporting.
"There's a lack of regulation and enforcement involving outside groups such as c4s and
Super PACs including ones started by people who had ties to the candidates," said Larry
Noble, the former general counsel at the FEC.
Some watchdogs assert that several of these groups are not entitled to c4 status because
they're too involved in politics. Crossroads GPS, the American Action Network and Priorities
USA were singled out in September by Democracy 21 and the Campaign Legal Center,
which wrote the IRS challenging [7] their status as social welfare organizations.
"The overriding purpose of these organizations is to influence elections and this makes them
ineligible for tax exempt status," Fred Wertheimer, the president of Democracy 21 told
iWatch News . "The idea that these groups are social welfare organizations is nonsense."
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The heads of those groups all dispute Wertheimer and defend their tax status with the IRS
as legitimate.
Still another issue that's looming with c4s: foreign donations to 501 (c)( 4 )s can be legally
made as long as the money is not spent on any political activities but only for education.
Owens, the former IRS official, frets that the agency is ill equipped to monitor potential
abuses arising from foreign donations seeping into the American political system.
"IRS reporting rules are not really designed to capture those foreign financial flows," Owens
said. "The whole reporting and oversight mechanism is not designed to generate information
for regulators or law enforcement regarding financial support from the outside the United
States."
Watchdogs are also nervous about possible abuses of foreign donations. "The Citizens
United decision opened the door for foreign countries and foreign entities to launder
undisclosed and unlimited money in our elections through 501 (c)(4) groups making
campaign expenditures," Wertheimer said.
When asked if they had received any foreign funds, Law, Coleman and Burton said they
weren't aware that was an option or had not pursued it.
Only 65 501(c)(4) organizations reported spending in 2010. U.S. campaign disclosure
is "on und " Sheila Krumholz
Karl Rove and Ed Gillespie, principals in Crossroads Lawrence Jackson/AP
Kicker:
[21
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Caplin& Drysdale
Marcus Owens Comments on IRS's Role of Overseeing Campaign Expenditures
September 30, 2010, EO Tax Journal
Marcus Owens, member of Caplin & Drysdale and former Director of the Exempt Organizations Division of the IRS, discusses the
implications of the IRS's role of supervising campaign spending.
From the Desk of Paul Streckfus
Editor, EO Tax Journal
Email Update 2010-139 {Thursday, September 30, 2010)
Copyright 2010 Paul Streckfus
Two events occurred yesterday at about the same time. One was the release of a letter {reprinted below) by the Chairman of the Senate
Finance Committee, Senator Max Baucus. The other was a panel discussion titled "Political Activities of Exempt Organizations This Election
Cycle" sponsored by the D.C. Bar, from which I hope to have a transcript in the near future.
After reading Senator Baucus' letter and accompanying news release, my sense is that Senator Baucus should have been at the D.C. Bar
discussion since he is concerned that political campaigns and individuals are manipulating 501{c){4), {5}, and {6) organizations to advance
their own political agenda, and he wants the IRS to look into this situation.
At the D.C. Bar discussion, Marc Owens of Caplin & Drysdale, Washington, explained that there is little that the IRS can do on a current,
real-time basis to regulate {c){4)s for two reasons. First, a new {c){4) does not have to apply for recognition of exemption. Second, a new
{c){4) formed this year would not have to file a Form 990 until next year at the earliest and the IRS would probably not do a substantive
review of the filed Form 990 until 2012 at the earliest. By then, Owens joked, the winners are in office, and the losers are in another career.
At the same time that the IRS can do little to regulate new {c){4)s, it is not even looking at existing {c){4)s. According to Owens, the IRS has
little interest in regulating exempt organizations beyond {c){3)s. The IRS has "effectively abandoned the field" at a time of heightened political
activity by all exempt organizations, including {c){3)s. Owens added that "we seem to have a haphazard IRS enforcement system now
breaking down completely." This results in a corrosive effect on the integrity of exempt organizations in general and a stimulus to evasion of
their responsibilities by organizations and their tax advisors.
Karl Sandstrom of Perkins Coie, Washington, was equally negative. According to Sandstrom, the IRS is "a poor vehicle to regulate political
activity," in that this is not their focus or interest. in defense of the IRS, he did say Congress was also guilty in foisting upon the IRS regulation
of political activity, using section 527 as an example. At the same time, Sandstrom did not see an active IRS as an answer to current
concerns. Section 501 {c){4) organizations are just the current vehicle du jour. if {c){4)s are shut down, Sandstrom said many other vehicles
remain.
My guess: I doubt if we'll see much of Owens' and Sandstrom's views in the IRS' report to Senator Baucus and the Finance Committee .
.........
Senate Committee on Finance News Release
For Immediate Release
September 29, 2010
Contact: Scott Mulhauser/Erin Shields
{202) 224-4515
Baucus Calls On IRS to Investigate Use of Tax-Exempt Groups for Political Activity
Finance Chairman works to ensure special interests don't use tax-exempt groups to influence communities, spend secret donations
Washington, DC- Senate Finance Committee Chairman Max Baucus {D-Mont.) today sent a letter to IRS Commissioner Doug Shulman
requesting an investigation into the use of tax-exempt groups for political advocacy. Baucus asked for the investigation after recent media
reports uncovered instances of political activity by nonprofit organizations secretly backed by individuals advancing personal interests and
organizations supporting political campaigns. Under the tax code, political campaign activity cannot be the main purpose of a tax-exempt
organization and limits exist on political campaign activities in which these organizations can participate. Tax-exempt organizations also
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cannot serve private interests. Baucus expressed serious concern that if political groups are able to take advantage of tax-exempt
organizations, these groups could curtail transparency in America's elections because nonprofit organizations do not have to disclose any
information regarding their donors.
"Political campaigns and powerful individuals should not be able to use tax-exempt organizations as political pawns to serve their own special
interests. The tax exemption given to nonprofit organizations comes with a responsibility to serve the public interest and Congress has an
obligation to exercise the vigorous oversight necessary to ensure they do," said Baucus. "When political campaigns and individuals
manipulate tax-exempt organizations to advance their own political agenda, they are able to raise and spend money without disclosing a
dime, deceive the public and manipulate the entire political system. Special interests hiding behind the cloak of independent non profits
threatens the transparency our democracy deserves and does a disservice to fair, honest and open elections."
Baucus asked Shulman to review major 501 (c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity. He asked the
Commissioner to determine if these organizations are operating for the organization's intended tax exempt purpose, to ensure that political
activity is not the organization's primary activity and to determine if they are acting as conduits for major donors advancing their own private
interests regarding legislation or political campaigns, or are providing major donors with excess benefits. Baucus instructed Shulman to
produce a report for the Committee on the agency's findings as quickly as possible. Baucus' full letter to Commissioner Shulman follows here.
September 28, 201 0
The Honorable Douglas H. Shulman
Commissioner
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Via Electronic Transmission
Dear Commissioner Shulman:
The Senate Finance Committee has jurisdiction over revenue matters, and the Committee is responsible for conducting oversight of the
administration of the federal tax system, including matters involving tax-exempt organizations. The Committee has focused extensively over
the past decade on whether tax-exempt groups have been used for lobbying or other financial or political gain.
The central question examined by the Committee has been whether certain charitable or social welfare organizations qualify for the
tax-exempt status provided under the Internal Revenue Code.
Recent media reports on various 501 (c)(4) organizations engaged in political activity have raised serious questions about whether such
organizations are operating in compliance with the Internal Revenue Code.
The law requires that political campaign activity by a 501 (c)(4), (c)(5) or (c)(6) entity must not be the primary purpose of the organization.
If it is determined the primary purpose of the 501 (c)(4), (c)(5) and (c)(6) organization is political campaign activity the tax exemption for that
nonprofit can be terminated.
Even if political campaign activity is not the primary purpose of a 501(c)(4), (c)(5), and (c)(6) organization, it must notify its members of the
portion of dues paid due to political activity or pay a proxy tax under Section 6033(e).
Also, tax-exempt organizations and their donors must not engage in private inurement or excess benefit transactions. These rules prevent
private individuals or groups from using tax-exempt organizations to benefit their private interests or to profit from the tax-exempt
organization's activities.
A September 23 New York Times article entitled "Hidden Under a Tax-Exempt Cloak, Private Dollars Flow" described the activities of the
organization Americans for Job Security. An Alaska Public Office Commission investigation revealed that AJS, organized as an entity to
promote social welfare under 501 (c)(6), fought development in Alaska at the behest of a "local financier who paid for most of the referendum
campaign." The Commission report said that "Americans for Job Security has no other purpose other than to cover money trails all over the
country." The article also noted that "membership dues and assessments ... plunged to zero before rising to $12.2 million for the presidential
race."
A September 16 Time Magazine article examined the activities of Washington D.C. based 501 ( c)(4) groups planning a "$300 million ...
spending blitz" in the 2010 elections. The article describes a group transforming itself into a nonprofit under 501 (c)(4) of the tax code,
ensuring that they would not have to "publically disclose any information about its donors.
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These media reports raise a basic question: Is the tax code being used to eliminate transparency in the funding of our elections-- elections
that are the constitutional bedrock of our democracy? They also raise concerns about whether the tax benefits of nonprofits are being used to
advance private interests.
With hundreds of millions of dollars being spent in election contests by tax-exempt entities, it is time to take a fresh look at current practices
and how they comport with the Internal Revenue Code's rules for non profits.
I request that you and your agency survey major 501 (c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity to examine
whether they are operated for the organization's intended tax-exempt purpose and to ensure that political campaign activity is not the
organization's primary activity. Specifically you should examine if these political activities reach a primary purpose level - the standard
imposed by the federal tax code - and if they do not, whether the organization is complying with the notice or proxy tax requirements of
Section 6033(e). I also request that you or your agency survey major 501(c)(4), (c)(5), and (c)(6) organizations to determine whether they are
acting as conduits for major donors advancing their own private interests regarding legislation or political campaigns, or are providing major
donors with excess benefits.
Possible violation of tax laws should be identified as you conduct this study.
Please report back to the Finance Committee as soon as possible with your findings and recommended actions regarding this matter.
Based on your report I plan to ask the Committee to open its own investigation and/or to take appropriate legislative action.
Sincerely,
Max Baucus, Chairman
Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200
2011 Caplin & Drysdale, Chartered 1 Attorney Advertising 1 Terms & Conditions
111112011 3:19 1
EXHIBIT F
CREW
I
citizens .for.
and ethtcs tn washtngton
Douglas H. Shulman
Commissioner
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
March 8, 2011
Re: Complaint Against American Action Network. Inc.
Dear Commissioner Shulman:
Citizens for Responsibility and Ethics in Washington ("CREW") respectfully requests an
Internal Revenue Service ("IRS") investigation into whether the American Action Network, Inc.,
("AAN"), a non-profit organization exempt from taxation pursuant to section 501(c)(4) of the
Internal Revenue Code ("Code"), is operating with the primary purpose of influencing political
campaigns in violation of the Code.
1
Despite the fact that AAN told the IRS only a minor portion of its activities would be
political, AAN extensively participated in political campaigns throughout the 201 0 campaign
cycle. Because of the serious nature of the tax law violations, the IRS should consider revoking
AAN's tax-exempt status and/or impose appropriate excise taxes and penalties on the
organization.
Under the law, section 501(c)(4) organizations such as AAN must be primarily engaged
in the promotion of social welfare,
2
which does not include "direct or indirect participation or
intervention in political campaigns on behalf of or in opposition to any candidate for public
office."
3
The Code does not state precisely what constitutes political activity, but some activities
unquestionably are political, such as explicitly advocating tl1e election or defeat of a candidate for
public office.
4
For other activities, the IRS currently applies a facts and circumstances test to
detennine whether an organization has intervened in a political campaign.
5
1
CREW submits this letter in lieu ofFonn 13909; a copy is being sent to the Dallas office.
2
26 U.S.C. 501(c)(4); Treas. Reg. 1.501(c)(4)-1(a)(2)(i) ("an organization is operated
exclusively for the promotion of social welfare if it is primarily engaged in promoting in some
way the common good and general welfare of the people of the community").
3
Treas. Reg. 1.501(c)(4)-1(a)(2)(ii). While the Supreme Court's landmark decision in Citizens
Unitedv. FEC, 130 S. Ct. 876 (2010) greatly expanded the types of political activities in which
section 501 (c)( 4) organizations could engage, it did not alter the requirement that political
activity may not be the primary activity of these organizations.
4
See Election Year Issues, 2002 EO CPE Text at 349, 388; see also Rev. Rul. 2004-6.
5
Rev. Rul. 2007-41.
1400 Eye Street, N.W., Suite 450, Washington, D.C. 20005 I 202.408.5565 phone I 202.588.5020 fax I WW\v.citizensforethics.org
Douglas H. Shulman
March 8, 2011
Page2
AAN was aware that, as a section 501(c)(4) organization, its primary activity could not be
participation in political campaigns. Nevertheless, a review of AAN's activities demonstrates
that the organization's primary activity in 2010 was sponsoring express advocacy independent
expenditures and clearly political electioneering communications.
The American Action Network's Representations to the IRS
AAN was established in 2009, and submitted under penalty of perjury an application for
recognition under section 501(c)(4) in February 2010.
6
In a lengthy statement in support of its
application, AAN claimed its primary purpose was to promote social welfare by advocating for a
range of economic and national security policies, and that only a "minor portion" of its plalUled
activities would be politicaU Specifically, AAN identified several activities through which it
plalUled to pursue its purported mission, including policy advocacy, citizen forums, town hall
meetings, college tours, policy conferences, training programs, new media, direct lobbying, and
press and public outreach.
8
AAN represented that while it plaimed to "primarily focus" on
lobbying and educational efforts, a "minor portion" of its activities might be classified as
political campaign intervention.
9
These political activities included endorsing or criticizing
proposals advanced by public officials, providing training and materials to candidates for office,
and "in unusual cases" distributing candidate surveys, voter guides, and voting records of
officials and candidates.
10
AAN further told the IRS that "[i]n certain cases, and within the limits allowed by federal
tax law and federal and state election laws, it may also run advertisements in support of
candidates."
11
AAN promised to adopt appropriate intemal controls to guarantee that its political
activity "remains a minor activity, and does not become its primary activity."
12
AAN represented
that it expected its political campaign activity to be 20 percent or less of it activity, and claimed
the amount might vary from year to year.
13
6
See Form 1024, Application for Recognition Under Section 501(a) ("AAN Form 1024")
(attached as Exhibit A).
7
See Statement in Support of Application for Tax-Exempt Status (Exhibit A to AAN Form 1024)
at 1-2, 4.
8
Id. at 2-4.
9
Id. at 4.
10 !d.
11
See Statement in Support of Application for Tax-Exempt Status (Exhibit A to AAN Form
1024)at4.
12
!d. at 5, 8-9.
13
!d. at 5.
Douglas H. Shulman
March 8, 2011
Page 3
In further support of its application, AAN submitted a budget for three fiscal years
between July 2009 and June 2012.
14
AAN represented its total expenses for the 2010 election
cycle would be no more than $2.4 million- $715,640 for July 2009-June 2010 and $1.68 million
for July 2010-June 2011.
15
Although AAN asserted in its application that it might run political
advertisements, the budget it submitted did not identify any expected expenses related to
television, radio, or internet advertising.
16
Based on these submissions, the IRS granted AAN's application for section 501(c)(4)
status on April 3, 2010.
17
The American Action Network's Political Activity
Contrary to its sworn application for tax-exempt status, AAN extensively participated in
political campaigns in 2010, making political activity its major purpose, not just a minor one. As
a result, AAN violated its tax-exempt status under section 501(c)(4).
While the exact amount of AAN's total spending on political activity in 2010 cannot be
ascertained from public data, it unquestionably dwarfed the organization's total planned
expenditures of $2.4 million for the entire 2010 campaign cycle. In fact, within days of receiving
the IRS's approval of AAN's section 501(c)(4) status, the organization acknowledged it planned
far greater political activity in 2010 than it represented on its application. AAN Chief Executive
Officer (and former Minnesota Republican Senator) Norm Coleman publicly announced the
group hoped to be active in 8-1 0 Senate races and 25 House races in 2010, and AAN reportedly
sought to raise $25 million to fund a political advertising "blitz."
18
Days before the November
14
See Statement of Revenue and Expenses (Exhibit C to AAN Form 1024).
15
!d. AAN further projected its total expenditures for July 2011 through June 2012 would be
$1.73 million. !d.
16
!d. For each of these three years, more than half of AAN's expenses were to be consumed by
compensation of officers and directors, and other salaries. !d. AAN further represented that the
bulk of this compensation was to be paid to chief executive officer Norm Coleman ($250,000 per
year) and president Rob Collins ($200,000 per year). See Officers and Directors (Exhibit B to
AAN Form 1024).
17
See Letter from the IRS to AAN, April3, 2010 (attached as Exhibit B).
18
See Peter H. Stone, Party Allies Raising Millions, National Journal, Apri116, 2010 (attached
as Exhibit C).
Douglas H. Shulman
March 8, 2011
Page4
2010 election AAN president Rob Collins predicted the organization would meet its $25 million
fundraising goal.
19
Based on reports submitted to the Federal Election Commission ("FEC") of its
independent expenditures and electioneering communications, AAN spent at least $18 million on
political campaigns in 2010. Specifically, AAN spent more than $4 million on independent
expenditures expressly advocating the election or defeat of candidates for public office, and at
least $14 million on electioneering communications - advertisements that mention a candidate by
name close to an election.
20
AAN's independent expenditures included $850,000 to broadcast adve1tisements against
Bill Keating, a Democrat running for a House seat in Massachusetts, and millions more for
advertisements against Sen. Russ Feingold (D-WI), and congressional candidates Bryan Lentz
(D-PA), Dan Seals (D-IL), and Chad Causey (D-AR).
21
AAN also intervened in the New
Hampshire Senate race between Democrat Paul Hodes and Republican Kelly Ayotte, sponsoring
a website that asked for signatures on a petition to "help send Hodes packing"
22
and spending
more than half a million dollars on television, radio, and internet advertisements calling Hodes
"unaffordable."
23
As independent expenditures repmted to the FEC, these activities
unquestionably represent participation in political campaigns.
The more than $14 million AAN spent on electioneering communications reported to the
FEC also constitutes political activity. While these advertisements stop short of expressly
advocating the election or defeat of candidates, they represent political campaign intervention
under IRS authority. In Revenue Ruling 2007-41, the IRS promulgated guidance on the
19
See Jason Horowitz, Money Makes his World Go Round, Washington Post, October 25, 2010
(attached as Exhibit D).
20
See http://guery.nictusa.com/cgi-bin/fecimg/?C90011230 (FEC reports of independent
expenditures); http://guel:y.nictusa.com/cgi-bin/fecimg/?C3000 1648 (FEC reports of
electioneering communications). See also Sunlight Foundation, Follow the Unlimited Money,
American Action Network. Inc. (summarizing independent expenditures) (attached as Exhibit E);
Sunlight Foundation, Follow the Unlimited Money, American Action Network (summarizing
electioneering communications) (attached as Exhibit F).
21
See Sunlight Foundation, Follow the Unlimited Money, American Action Network. Inc .. The
adve1tisements AAN broadcast can be seen on the YouTube Channel the organization
established. See http:/ /www.youtube.com/user/ AmericanActN et.
22
See www.hodesmustgo.com.
23
See http://www.youtube.com/user/AmericanActNet#p/u/55/wqoOp8ugflE.
Douglas H. Shulman
March 8, 2011
Page 5
distinction between issue advocacy and political campaign intervention.
24
The IRS takes into
consideration all the facts and circumstances of a particular communication, and identified the
key factors as: (1) whether the statement identifies one or more candidates; (2) whether the
statement expresses approval or disapproval for a candidate's position; (3) whether the statement
is delivered close to an election; (4) whether the statement makes reference to voting or an
election; (5) whether the issue addressed has been raised as an issue distinguishing candidates for
an office; (6) whether the communication is part of an ongoing series of communications by the
organization on the issue that are made independent of the timing of any election; and (7)
whether the timing of the communication is related to a non-electoral event such as a scheduled
vote on specific legislation by an officeholder running in an election.
25
Applying these factors,
nearly all of the advertisements AAN broadcast in 201 0 constitute political campaign
participation.
For example, starting on October 22, 2010, AAN spent $725,000 broadcasting an
advertisement against Rep. Ed Perlmutter (D-CO) expressing disbelief that "convicted rapists can
get Viagra paid for by the new health care bi11."
26
Noting Rep. Perlmutter had voted for the
legislation, the advertisement encouraged viewers to "tell Congressman Perlmutter vote for
repeal in November" and to "vote yes on H.R. 4903.'>27 The advertisement identified Rep.
Perlmutter, expressed disapproval for his position on the health care bill, was broadcast very
close to the election, does not appear to have been part of any ongoing series of communications
by AAN independent of the election, and addressed an issue that distinguished Rep. Perlmutter
from his opponent.
28
Moreover, the timing of the advertisements was not related to any
scheduled vote on repealing health care legislation. The House went into recess at the end of
September,
29
and no votes were scheduled on H.R. 4903 or any other bill repealing the health
24
While Revenue Ruling 2007-41 addresses political activity by section 501(c)(3) organizations
(which may not participate at all in political campaigns), the IRS applies the ruling's analysis to
determine if the activities of a section 501 (c)( 4) organization are political. See, e.g., Frances R.
Hill, Exempt Organizations in the 2008 Election: Will Wisconsin Right to Life Bring Changes?,
19 U. Fla. J.L. & Pub. Pol'y 271,284 (2008).
25
Rev. Rul. 2007-41.
26
See http://query.nictusa.com/pdt7181/1093175918111093175918l.pdf#navpanes=O;
http://www .youtube.com/user/ AmericanActN et#p/u/25N3nnl9P 8eN c.
27 !d.
28
See Ryan Frazier for Congress, Healthcare page (stating his position supporting an "Immediate
Repeal of ObamaCare" which must be "a top priority" of the incoming Congress) (available at
http://www. frazierforco I ora do. com/?q=healthcareissue ).
29
See David M. Herszenhorn, Congress Wraps Up Session Early as Midterm Races Loom, New
York Times, September 30, 2010 (attached as Exhibit G).
Douglas H. Shulman
March 8, 20 11
Page 6
care law dwing November 2010 or in the remainder of the 111 th Congress.
30
AAN's reference
to a vote "in November," while ostensibly related to the legislation, appears to be a furtive
reference to the upcoming election in which viewers could vote.
AAN spent another $705,000 broadcasting an identical advertisement against Rep. Dina
Titus (D-NV),
31
$725,000 on a different advertisement also encouraging viewers to call Rep.
Perlmutter "in November" and tell him to vote to repeal the health care law,
32
and nearly $2
million on similar electioneering communications advertisements directed at Reps. Mark Critz
(D-PA), Stephanie Herseth Sandlin (D-SD), Chris Murphy (D-CT), Mark Schauer (D-MI), and
Charlie Wilson (D-OH).
33
All of these advertisements are similar to the hypothetical situation analyzed in Situation
15 of Revenue Ruling 2007-41, in which an organization broadcast an advertisement identifying
an officeholder shortly before an election that was not part of an ongoing series of similar
communications on the same issue, was not timed to coincide with a non-election event, and took
a position on an issue that distinguished the officeholder from his or her opponent.l
4
Such
advertisements, the IRS concluded, constitute political campaign intervention.
35
30
See Library of Congress, Bill Summary and Status, 111th Congress, H.R. 4903 (attached as
Exhibit H).
31
See http://query.nictusa.com/pdf/518/1 0931520518/1 0931520518.pdf#navpanes=O;
http://www.youtube.com/user/ AmericanActNet#p/u/45/PqhySwOOOxg.
32
See http://query.nictusa.com/pdf/170/1 0931541170110931541170.pdf#navpanes=O;
http://www.youtube.com/user/AmericanActNet#p/u/33/uph2ZbxacQI.
33
See http://guery.nictusa.com/cgi-bin/fecimg/?C3000 1648;
http://www.youtube.com/user/ AmericanActNet.
34
Rev. Rul. 2007-41.
35
Id. Several of AAN's electioneering communications were related to bills calling for spending
cuts and extending the Bush tax cuts. See, e.g., http://www.youtube.com/user/
AmericanActNet#p/u/29/NfZMm6eC8wE (encouraging viewers to call Rep. Kurt Schrader (D-
OR) and tell him to vote yes on H.R. 5542, a bill that would have cut certain discretionary
spending); http://www.youtube.com/user/AmericanActNet#p/u/38/tbpnqsWBgdA (encouraging
viewers to call Rep. Steve Kagen (D-WI) and tell him to vote yes on H.R. 4 7 46, a bill that would
have permanently extended the Bush tax cuts). While these issues were raised in the lame duck
session that followed the election, none of the bills referenced or even the broader issues they
addressed were scheduled for a vote at the time AAN broadcast the advertisements. Considering
all the facts and circumstances, these electioneering communications also constitute political
activity.
Douglas H. Shulman
March 8, 2011
Page7
AAN also classified as electioneering communication millions of dollars it spent on
advertisements that did little more than call candidates "extreme" and tie them to former House
Speaker Nancy Pelosi. For example, AAN spent $875,000 on an advertisement claiming that
Ann Kuster, the Democratic candidate for a New Hampshire House seat, supported massive tax
hikes, and asserting that "Nancy Pelosi is not extreme. Compared to Annie Kuster."
36
Similarly,
AAN spent $225,000 on an adve11isement noting that Mike Oliverio, the Democratic candidate
for a West Virginia House seat, supported Mrs. Pelosi and would do whatever she told him to.
37
These advertisements also constitute political activity.
AAN's total spending figures for 2010 are not yet available, and as a new organization
AAN has no Form 990 tax returns for earlier years. Based on its spending, however, it appears
pru1icipation in political campaigns was AAN's primary activity in 2010. AAN's total projected
expenditures for the 2010 election cycle were $2.4 million, a fraction of the $18 million or more
the organization spent on political activity in 20 I 0. While AAN' s other expenditures for 2010
cannot be ascertained from public data cunently available, it does not appear the organization
spent a significant amount of money on non-political issue adve11ising. AAN has placed on its
YouTube channel nearly all of the political adve11isements referenced in its FEC reports.
38
By
contrast, very few of the other videos included on its YouTube channel could be considered non-
political issue advertisements, strongly suggesting AAN did not make and broadcast more of
them. In sum, considering AAN told the IRS it would spend less than 20 percent of its projected
$2.4 million budget on political activities, the fact that it spent at least $18 million out of an
unknown total budget, suggests that statement in its application likely was untrue.
That participation in political campaigns was AAN's primary activity in 2010 is fm1her
underscored by AAN' s coordination of political advertisements with other outside groups and by
its naked political calculations in targeting specific races where it believed it could impact the
outcome. Just weeks after the IRS granted AAN section 501(c)(4) status, AAN began, at the
behest of Karl Rove and former Republican National Committee Chairman Ed Gillespie,
coordinating with American Crossroads, Crossroads GPS, the U.S. Chamber of Commerce, and
other outside groups seeking to influence the 2010 elections.
39
The groups "worked together to
spend millions to take down the Democratic House majority" by targeting specific races and
36
See http://guery.nictusa.com/pdf/557 /10931636557110931636557 .pdf#navpanes=O;
http://www.youtube.com/user/AmericanActNet#p/u/49/0GyCvH-92jE.
37
See http://guery.nictusa.com/pdf/91911 09316369I9/l 093I6369I9.pdf#navpanes=O;
http://www.youtube.com/user/AmericanActNet#p/u/55/F4YT4BTeivU.
38
See http://www.youtube.com/user/ AmericanActNet.
39
See Peter H. Stone, GOP Fundraiser Conclave, Under the Influence blog, April 22, 20 I 0
(attached as Exhibit I); Jim Rutenberg, Pro-G.O.P. Groups Prepare Big Push at End of Races,
New York Times, October 25, 20IO (attached as Exhibit J).
Douglas H. Shulman
March 8, 2011
Page8
deciding which organization would broadcast advertisements in a particular race.
40
Many of the
groups, including AAN, traded information in regular strategy sessions and conference calls, and
divided up races to avoid duplication and put as many Democrats as possible on the defensive.
41
AAN President Rob Collins acknowledged the unabashed political motives of these efforts in
late October, noting the groups "carpet-bombed for two months in 82 races, now it's sniper time .
. . . You're looking at the battle field and saying, 'Where can we marginally push- where can
we close a few places out?'"
42
AAN Chairman Fred Malek similarly admitted that the
organization "carefully calibrated really tight House races" in deciding where to broadcast
political advertisements.
43
The amount of money AAN spent on clearly political advertisements and other political
activity suggests its primary purpose in 2010 was political campaigning.
The American Action Network's Political Ties
In addition to spending heavily on political advertisements against Democratic candidates
and coordinating with other outside groups to target specific Democrats, AAN has extensive and
strong ties to the Republican party. These include:
CEO Norm Coleman previously was a Republican senator from Minnesota and
the Republican mayor of St. Paul, Minnesota.
44
Chairman Fred Malek previously was the national finance chairman of Senator
John McCain's presidential campaign, the campaign manager for President
George H.W. Bush in 1992, and an aide and advisor to four Republican
presidents.
45
Mr. Malek is also a significant Republican fundraiser.
46
40
See Jeanne Cummings, GOP Groups Coordinated Financial Firepower, Politico, November 3,
2010 (attached as Exhibit K).
41
See Rutenberg, New York Times, October 25, 2010.
42 !d.
43
See Kenneth P. Vogel, House is New Front for GOP Groups, Politico, October 13,2010
(attached as Exhibit L).
44
See htt;p://americanactionnetwork.org/senator-norm-coleman-r-minn?phpMyAdmin=yVaoFis
OJaixGsCDOKevn%2Cgw%2CQ9 (attached as Exhibit M).
45
See http://americanactionnetwork.org/frederic-v-malek?phpMyAdmin=yVaoFisOJaixGsCDQ
Kevn%2Cgw%2CQ9 (attached as Exhibit N).
46
See Peter H. Stone, Fred Malek, Center for Public Integrity, October 4, 2010 (attached as
Exhibit 0).
Douglas H. Shulman
March 8, 2011
Page 9
President Rob Collins previously was the chief of staff to House Majority Leader
Eric Cantor (R-VA), and worked for the National Republican Senatorial
Committee, the Republican National Committee ("RNC"), Sen. John Thune (R-
SD), and former Sen. Chuck Hagel (R-NE).
47
Board member Maria Cino previously was the president of the 2008 Republican
convention, RNC deputy chairman, and executive director of the National
Republican Congressional Committee.
48
Ms. Cino also recently ran for RNC
chair.
49
In fact, most of AAN's officers and directors are Republican party leaders, fundraisers,
former members of Congress, and/or former aides to Republican presidents or congressional
leaders.
50
These close ties to Republican leaders further support the need for the IRS to conduct
an investigation to confirm CREW's conclusion that AAN's primary purpose is political activity.
Conclusion
Based on the publicly available information, it appears AAN's activities during the 2010
election cycle were inconsistent with its tax exemption application and do no comport with its
status as a section 501(c)(4) organization. Therefore, the IRS should investigate AAN and,
should it find that AAN has violated its tax-exempt status, take appropriate action, which may
include revoking its section 501(c)(4) status, imposing any applicable excise taxes under section
4958 for excess benefit transactions, and treating AAN as a taxable corporation or as a section
527 organization.
Recently, CREW and others have filed complaints with the IRS against groups that have
engaged in impermissible political activity in violation of their tax exempt status.
51
It is
47
See http://americanactionnetwork.org/president?phpMyAdmin=yVaoFisOJaixGsCDQKevn%2
Cgw%2CQ9 (attached as Exhibit P).
48
See http://americanactionnetwork.org/maria-cino?phpMyAdmin=yVaoFisOJaixGsCDQ
Kevn%2Cgw%2CQ9 (attached as Exhibit Q).
49
See Jerry Zremski, Cino is Endorsed by House Speaker in her Race to Head GOP, Buffalo
News, January 13, 2011 (attached as Exhibit R).
50
See http://americanactionnetwork.org/content/about (attached as ExhibitS); see also Officers
and Directors (Exhibit B to AAN Form 1 024).
51
See, e.g., Letter from CREW to the IRS, February 1, 2011 (requesting investigation ofthe
American Future Fund, Inc. for violating its 501(c)(4) status); Letter from CREW to the IRS,
October 26,2010 (requesting investigation ofPray in Jesus Name Project for violating its
Douglas H. Shulman
Man.:h 8, 2011
Page 10
imperative that the IRS investigate likely tax law violators and institute enforcement actions prior
to the 2012 election season. Only vigorous enforcement by the IRS will deter other exempt
organizations from violating om nation's ta.x laws for political gain.
Thank you for your prompt attention to this matter.
Executive Director
Citizens for Responsibility and Ethics in Washington
Encls.
cc: IRS-EO Classification
501(c)(3) status); Letter from Campaign Legal Center and Democracy 21 to the IRS, October 5,
2010 (requesting investigation of Crossroads GPS for violating its 501(c)(4) status); Letter from
Americans United for Separation of Church and State to the IRS, September 30, 2010 (requesting
investigation of Cornerstone World Outreach for violating its 501(c)(3) status).
EXHIBIT G
Hon. Douglas H. Shulman
Commissioner
Internal Revenue Service
Room 3000 IR
1111 Constitution Avenue, N.W.
Washington, DC 20224
Lois Lerner
Director of the Exempt Organizations Division
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
September 28, 2011
Re: Request for IRS investigation into whether certain organizations
are ineligible for tax exempt status under section 501Cc)(4).
Dear Commissioner Shulman and Director Lerner:
Democracy 21 and the Campaign Legal Center call on the Internal Revenue Service
(IRS) to conduct an investigation into whether Crossroads GPS, Priorities USA, American
Action Network and Americans Elect, all of which claim to be tax exempt groups organized
under section 501(c)(4) ofthe Internal Revenue Code (IRC), 26 U.S.C. 501(c)(4), are ineligible
for the tax exempt status provided to section 501(c)(4) organizations.
1
Under the IRC, IRS regulations and court decisions interpreting the IRC, section
501(c)(4) organizations are required to primarily engage in the promotion of social welfare in
order to obtain tax exempt status. Court decisions have established that in order to meet this
requirement, section 501(c)(4) organizations cannot engage in more than an insubstantial amount
of any non-social welfare activity, such as directly or indirectly participating or intervening in
elections.
Thus, the claim made by some political operatives and their lawyers that section
501(c)(4) organizations can spend up to 49 percent of their total expenditures on campaign
activity and maintain their tax exempt status has no legal basis in the IRC and is contrary to court
decisions regarding eligibility for tax-exempt status under section 501(c)(4). An expenditure of
49 percent of a group's total spending on campaign activity is obviously far more than an
insubstantial amount of non-social welfare activity.
Last October, we asked for an investigation of Crossroads GPS on similar grounds. By this letter
we re-state and supplement our earlier request for an investigation of Crossroads GPS.
2
The IRS applies the "primarily engaged" test on the basis of the "facts and
circumstances" of an organization's formation and operations. Here, we believe, the "facts and
circumstances" show that each organization has engaged in far more than an insubstantial
amount of participation or intervention in elections and that the overriding purpose of each
organization is to influence elections.
Thus, under the IRC and court decisions interpreting the IRC, these organizations are not
eligible to receive section 50 I (c)( 4) tax exempt status.
In a 2008 Letter Ruling, the IRS stated that a group is not eligible for tax exempt status
under section 50l(c)(4) where the facts and circumstances show that the group's "first and
primary emphasis" is to get candidates elected to public office.
This standard is different than, and in conflict with, the standard applied by the courts.
But even under this standard, we believe the "facts and circumstances" relating to the formation
and activities of the four organizations discussed in this letter show that each group was
organized and is operated for the overriding purpose of participating or intervening in elections.
Therefore, none of the four groups meets the standard for tax exempt status under section
50 I (c)( 4) because they are not primarily engaged in "the promotion of social welfare."
By claiming tax-exempt status under section 501(c)(4), these groups allow their donors to
evade the public disclosure requirements that would apply if the organizations were registered
under section 527 as "political organizations." In fact, it appears that avoiding disclosure of their
donors is the basic reason that these groups organized under section 501(c)(4).
Absent timely and appropriate action by the IRS, widespread abuses of the tax code by
groups organized under section 50l(c)(4) are likely to become commonplace in the 2012
presidential and congressional races. These abuses will come at the expense of the integrity and
credibility of the tax laws and of the right of the American people to know the identity of the
donors providing money to influence elections.
Accordingly, we request that the IRS promptly investigate the groups discussed in this
letter and take appropriate enforcement action and impose appropriate penalties for any
violations of section 501(c)(4) that the agency may find.
I. Crossroads GPS
On October 5, 2010, Democracy 21 and the Campaign Legal Center filed a letter with the
IRS requesting an investigation into whether Crossroads GPS was operating in violation of the
requirements for obtaining tax-exempt status under section 50l(c)(4). Here, we supplement the
information set forth in that earlier Jetter and continue our request for an investigation.
Crossroads GPS was organized in June, 2010 under section 501(c)(4) ofthe IRC "as an
organization for the promotion of social welfare." ("GPS" stands for "Grassroots Policy
Strategies.")
3
Crossroads GPS is affiliated with American Crossroads, a non-profit political
organization registered under section 527 ofthe IRC. American Crossroads is registered with
the Federal Election Commission (FEC) as a political committee under the Federal Election
Campaign Act. As such, the major purpose of American Crossroads is to raise and spend money
to influence federal campaigns. As a registered political committee, American Crossroads must
report all of its contributions and expenditures to the FEC under federal campaign finance laws.
As a section 501(c)(4) organization, Crossroads GPS does not publicly disclose its donors.
An article in Politico, dated April29, 2011, notes that Crossroads GPS was "founded
under the guidance of GOP strategists [Karl] Rove and Ed Gillespie .... "and that it "accepts
unlimited contributions from donors whose identities can be kept secret."
2
The article notes:
In response to [the Citizens UnitedJ ruling, Rove and Gillespie helped form
American Crossroads, which did disclose donors, and Crossroads GPS, which
didn't. During last year's midterms, they raised a combined $70 million, of which
the donors of about $43 million are still secret. The vast majority of that money
was spent attacking Democratic candidates for the House and the Senate.
ld. According to another report:
Crossroads GPS took advantage of elements of the tax code to collect unlimited
donations from individuals and corporations to spend tens of millions of dollars
against Democratic candidates in the 2010 election.
3
Another report noted that Crossroads GPS was formed for the very purpose of
avoiding donor disclosure:
Meanwhile, section 501(c)(4) ofthe code, under which Crossroads GPS is
incorporated, allows groups to shield their donors' identities, but requires them to
spend a majority of their cash on apolitical purposes- an obligation Democratic
critics say Crossroads GPS and other right-leaning groups flaunted during the
campaign, when they bombarded Democratic candidates with bitingly critical ads.
"Disclosure was very important to us, which is why the 527 was created," Forti
said. "But some donors didn't want to be disclosed and, therefore, a (c)(4) was
created," Forti explained, referring to Crossroads GPS.
2
J. Cummings, "New Dem money group takes on GOP," Politico (April29, 2011) (emphasis
added).
3
M. O'Brien, "Obama alumni launch new outside group to boost reelection," The Hill (April 29,
20 II).
4
Forti's frank explanation differs from that previously offered by the Crossroads
team, which had asserted that they always intended to create a 501(c)(4) because
it was better suited to facilitate issue-based advocacy.
4
A report in The Wall Street Journal discussed the plans of Crossroads GPS (and
American Crossroads) to play a significant role in the 2012 elections:
Two conservative groups founded last year with the help of Republicans Karl
Rove and Ed Gillespie have set a goal of raising $120 million in the effort to
defeat President Barack Obama, win a GOP majority in the Senate and protect the
party's grip on the House in the 2012 election ....
If the conservative groups meet the target disclosed to The Wall Street Journal,
they would establish their organizations -American Crossroads and Crossroads
GPS - as possibly the largest force in the 2012 campaign, aside from the
presidential candidates themselves and the political parties.
5
According to another report," '2010 was only Crossroads' opening act,' Steven Law, the
group's president, told the Center for Public Integrity. These two groups hope to rake in $120
million for 2012 compared to $71 million last year."
6
In February, 2011, Crossroads GPS launched a radio ad campaign that was specifically
designed to counter ads run by the Democratic Congressional Campaign Committee. According
to one report:
Crossroads GPS, a 50l(c)(4) group associated with GOP heavyweights Karl Rove
and Ed Gillespie, is spending $90,000 on radio ads in 19 districts where the
Democratic Congressional Campaign Committee (DCCC) launched ads this
week.
The group launched the ads to hit back against the DCCC ads, which accused the
Republicans, many of whom are freshmen from swing districts, of wanting to
slash spending for education and research and investment.
7
4
K. Vogel, "SEIU, American Crossroads look back at 2010 spending," Politico (Dec. 13, 2010)
(emphasis added).
B. Mullins, "2012 Election Spending Race Heats Up," The Wall Street Journal (March 1, 2011)
(emphasis added).
6
P. Stone, "Democrats desperately seeking their own Rove," Center for Public Integrity -iWatch
News (March 14, 2011).
7
M. O'Brien, "Rove-backed group spends to bolster 19 targeted Republicans," The Hill (Feb. 3,
201 I).
5
Crossroads GPS also started to run ads attacking President Obama in key electoral
battleground states:
In an early sign of its financial strength, Crossroads GPS announced Friday that it
was launching a two-month, $20 million television ad blitz attacking Obama's
record on jobs, the deficit and the overall economy. The first ads will start June
27 and run in key battleground states such as Colorado, Florida, Missouri, Nevada
and Virginia.
8
A subsequent report stated that Crossroads GPS "is about midway through a two-month
advertising binge attacking President Barack Obama and congressional Democrats that is
expected to cost more than $20 million, alone."
9
President Obama announced his candidacy for re-election in the 2012 presidential race on
April 4, 20 11, well before the Crossroads GPS ads were run.
One report notes that Crossroads GPS is already spending money in Missouri as part of
an effort to defeat Senator Claire McCaskill, who is up for reelection in 2012:
With nearly a year and a half to go before Election Day 2012, conservative-
leaning national advocacy groups already have spent more than $500,000 on
advertising in Missouri in hopes of unseating incumbent Democratic Senator
Claire McCaskill ....
The conservative groups, American Crossroads political action committee and its
nonprofit affiliate, Crossroads GPS, already have hired southwest Missouri
political operative Paul Mouton to help research and manage their efforts against
McCaskill. Missouri is the only state with such an on-the-ground presence.
"As long as the race remains competitive, we will remain highly involved," said
Jonathan Collegia, communications director for both groups. "Having someone
on the ground in Missouri is a testament to how important we view this race."
When all is said and done, American Crossroads and Crossroads GPS expect to
spend far and away more in Missouri than they did in 20 1 0, when they spent
around $2.4 million opposing Democrat Robin Carnahan during her unsuccessful
campaign for the U.S. Senate.
10
P. Stone, "Obama groups raise $4-5 million in first two months," Center for Public Integrity-
iWatch News (June 24, 2011).
K. Vogel, "Both sides now in dash for anonymous cash," Politico (Aug. 9, 2011).
10
J. Hancock, "Both sides spending big to win Missouri Senate seat," St. Louis Post-Dispatch (Aug.
15,2011).
6
Jonathan Collegio, the spokesman for Crossroads GPS and American Crossroads, said
"Crossroads will continue to spend heavily in many competitive races through next
November."
11
According to this story, '"The Crossroads groups have stated that we'll be
involved heavily in 20I2. both in congressional races and the presidential side as well,' Collegio
said." !d. (emphasis added).
Karl Rove, one of the founders ofthe Crossroads groups, was recently quoted at an
appearance in Ohio as discussing their plans for campaign spending in Ohio in 2012:
Speaking with reporters before addressing an audience last night at Cedarville
University, Rove said American Crossroads and its sister group, Crossroads GPS,
view Ohio as the battleground where President Barack Obama must be stopped
and where it is crucial to defeat incumbent Democratic Sen. Sherrod Brown to
help Republicans take control of the Senate.
"Our objective is to be a strong presence in Ohio on the presidential contest, the
Senate contest and wherever we might be needed in the House," Rove said. "We
raised $72 million last time (in 20 I 0); our goal is to raise $250 million this
time."
12
Another report indicates that the Crossroads groups may be shifting to emphasize
spending through the section 50I(c)(4) arm, Crossroads GPS. According to this report,
"Crossroads Spokesman Jonathan Collegio said the group's nonprofit arm, registered as a
50I(c)(4) social-welfare organization by the IRS would be 'more active' than Crossroad's main
527 group."
13
This may reflect the fact that Crossroads has been more successful in its fundraising of
undisclosed contributions through the section 50I(c)(4) arm. According to one report, the
section 527 arm "has seen its fundraising lag behind its non-disclosing sister group. In the first
six months of20II, .. .it raised only $3.9 million."
14
The same report described the evolution of the Crossroads groups as moving toward
reliance on the section 50 I (c)( 4) arm as a way to shield donors from disclosure:
[B]ack when Crossroads started out last year, it, too, shunned secret donations and
extolled disclosure. Its chairman, Mike Duncan, described himself in May 20 I 0
II
D. Eggen, "Political groups, now free of limits, spending heavily ahead of 20 12," The
Washington Post (May 21, 2011).
12
J. Hallett, "Rove-affiliated PACs to spend big in Ohio," The Columbus Dispatch (Sept. 21, 2011).
13
J. Gillum, "Priorities USA Raises $5 Million to Counter Attack Ads From Karl Rove-Backed
Crossroads GPS," Associated Press (July 31, 2011).
14
K. Vogel, "Both sides now dash for anonymous cash," Politico (Aug. 9, 2011).
!d.
7
as "a proponent of lots of money in politics and full disclosure in politics," and
said Crossroads intended to "be ahead of the curve on" transparency.
Less than one month later, with American Crossroads struggling to raise money
from donors leery of having their names disclosed, operatives spun off Crossroads
GPS, and its fundraising team, led by Rove, began emphasizing to prospective
donors the ability to give anonymous contributions.
Fundraising took off, and together, the groups ended up raising more than $70 in
20 I 0, with the majority of it -- $43 million- going to Crossroads GPS.
On September 9, 20II, a published report stated that American Crossroads and
Crossroads GPS have set a new fundraising goal that is at least twice the $120 million announced
earlier this year.
15
According to the published report:
We see a pathway to at least doubling our earlier projected goal," Steven Law, the
president of Crossroads, told iWatch News. "Everyone is going to stretch as far as
they can here because we all feel this is the most important election we have ever
been involved with."
To help achieve its new goal, the two groups have been talking to some prominent
GOP figures, notably Mississippi Gov. Haley Barbour. The former Republican
National Committee chairman has agreed to lend his Midas like rolodex to the
Crossroads efforts.
"Gov. Barbour's involvement with us gives us the capacity to focus on the
presidential race, the Senate and the House at the same time," Law said.
I d. (emphasis added).
II. Priorities USA.
Priorities USA announced its formation as a social welfare organization under section
50I(c)(4) of the tax code by a memorandum distributed "to interested parties" on April29, 2011.
The memorandum makes clear that Priorities USA (and its companion section 527 political
organization, Priorities USA Action), are intended to work for the reelection of President Obama
by mimicking the structure and function of Crossroads GPS (and American Crossroads).
According to the Priorities USA memorandum:
Our groups were formed to answer the hundreds of millions of dollars Karl Rove
and the Koch brothers have dedicated to spending in the 20 I2 election. In 20 I 0,
Republicans spent millions distorting the debate on important issues and running
15
P. Stone, "Karl Rove-linked Crossroads has more than doubled its earlier fundraising goal of
$120 million," Center for Public Integrity- iWatch News (Sept. 8, 2011).
8
vicious, dishonest attack ads. This is an effort to level the playing field and not
allow right-wing activists to hijack the political system.
16
One published report described Priorities USA as follows:
A group of Democrats aligned with the Obama administration today announced
that they are starting an outside spending group similar to the conservative groups
that President Obama has decried.
The new group has two arms: Priorities USA and Priorities USA Action. While
one of the Priorities groups will disclose its donors, the other will not. The model
is similar to that used by American Crossroads and Crossroads GPS, the
conservative outside groups that raised more than $70 million in the midterm
election cycle to spend on behalf of candidates with a "conservative free-market
legislative agenda."
17
Another report noted:
A group of leading Democrats, including some with close connections to the
White House, have officially formed what are expected to be the major outside
groups to combat Republicans- and support President Obama- in the 2012
elections with help from huge donations from big money donors and corporations
who will have the legal ability to stay in the shadows that Mr. Obama has
previously so vocally criticized.
The groups are to be called Priorities USA and Priorities USA Action, and, as
such, are modeled after the Republican groups American Crossroads and
Crossroads GPS that were started with help from the strategist Karl Rove and
were credited with helping greatly in the party's takeover of the House of
Representatives this year- and, it happens, with facilitating a waterfall of
anonymous donations from moneyed interests in the November elections.
18
As another report noted:
16
Bill Burton and Sean Sweeney, two recently departed officials from the Obama
White House, are forming Priorities USA, an organization that will seek to raise
as much as $100 million in the 2012 cycle. The group will consist of two
branches: a 501 (c)( 4) nonprofit and a 527 political action committee. The
B. Smith, "In memo, Priorities USA defends secret-money shift," Politico (April29, 2011).
17
B. Montopoli, "Democrats launch outside spending group; conservatives charge hypocrisy," CBS
News (April29, 2011).
18
J. Rutenberg, "Democrats Form Fund-Raising Groups," New York Times (April29, 2011).
9
structure will allow the organization to keep some of its donors secret, a practice
that Democrats previously deplored when it was used by Republicans.
19
The money raised by Priorities USA and its sister organization, Priorities USA Action, is
described as intended to assist President Obama's reelection:
Two Democratic groups seeking big bucks to boost President Obama's re-election
have tapped several high-powered fundraisers to help rope in $4 million to $5
million in the first two months. They've also snagged pledges for two to three
times those sums towards their joint goal of raising at least $1 00 million.
The two groups, Priorities USA Action and Priorities USA, are benefiting from
the help of leading Democratic fundraisers and donors ....
Priorities USA Action is a 527 Super PAC which must disclose its donors and file
quarterly reports, but Priorities USA. is a 501(c)(4) group that doesn't have to
reveal its donors or file regular reports. Both groups can accept unlimited checks
and under law must operate separately from the Obama campaign?
0
In discussing the spending plans of the Priorities USA organizations, Burton is quoted as
emphasizing the impact on the election that the groups seek to have:
In response to "Rove's negative ads on the economy," Burton said, "we choose to
invest in only swing states and, within those states, the most efficient television
markets. Dollar for dollar, our spendiny is having a much greater impact on the
voters who will decide the 2012 race."
2
Another article about Priorities USA highlighted the fact that the group is expressly
intended to counter the campaign activities of the Crossroads groups:
To fight his rivals, Burton has chosen to emulate them. His groups may take
unlimited amounts, often from anonymous donors and will solicit money from
political action committees, corporations and lobbyists that Obama's official
election committee disavowed in 2008 and still shuns in the name of good
government. ...
19
A. Kornblut, "Democrats gear up to match GOP fundraising effort," The Washington Post (April
29, 2011).
20
P. Stone, "Obama groups raise $4-5 million in first two months," Center for Public Integrity-
iWatch News (June 24, 2011) (emphasis added).
21
J. Gillum, "Priorities USA Raises $5 Million to Counter Attack Ads From Karl Rove-Backed
Crossroads GPS," Associated Press (July 31, 2011 ).
10
"The pool of money available to Karl Rove and the Koch brothers is bottomless
and limitless," said Paul Begala, a Democratic strategist who is advising Burton.
[Pollster Geoff] Garin said Priorities USA "represents a way to level the playing
field against Karl Rove and the Koch brothers" ....
Priorities USA and Priorities USA Action will focus on pointing to the
weaknesses ofObama's opponents, Burton said. The first advertisement
criticized former Massachusetts Governor Mitt Romney, the Republican
frontrunner in early polling, for supporting a Republican plan to convert Medicare
into a system of vouchers to buy health insurance.
22
The same article makes clear that Priorities USA is part of a larger, coordinated campaign
operation to support Democrats in the 2012 election:
The Priorities USA organizations, which will focus on the presidential race, will
coordinate with three other newly formed Democratic groups: House Majority
PAC will focus on House races, Majority PAC will concentrate on the Senate, and
American Bridge 21st Century, will conduct opposition research on Republican
candidates that other groups can use in advertising or direct mail literature.
!d. Press reports also indicate that the use of section 501 (c)( 4) organizations for spending is
because ofthe anonymity offered to donors:
The three main anonymously funded Democratic outside groups - Priorities USA,
American Bridge 21st Century Foundation and Patriot Majority- collected at least
$3.7 million in untraceable contributions, and probably much more, in the first
half of the year, according to voluntary disclosures and anecdotal information on
ad buys.
While that's not as much as the $5.8 million in fundraising reported in that same
period by the sister organizations of those groups, which do disclose donors -
Priorities USA Action, American Bridge 21st Century and Majority PAC -the
feeling among some in Democratic fundraising circles is that the balance will
likely tilt towards undisclosed donations as the groups seek to expand their donor
bases ....
Many such donors "feel more comfortable donating to groups that don't disclose,"
[a strategist] said, because some are publicity adverse and also because "as soon
as their name appears in the paper as having contributed, their phone number goes
on the speed dial of every congressman, committee and party that wants to raise
money."
23
22
A Fitzgerald, "Rove Tops President Obama as Drawing Card in Democrat Burton's Fundraising,"
Bloomberg News (June 29, 2011).
23
K. Vogel, "Both sides now in dash for anonymous cash," Politico (Aug. 9, 2011).
11
III. American Action Network.
American Action Network (AAN) was founded in 2010 by Fred Malek, a leading
national Republican fundraiser, and is chaired by former Republican Senator Norm Coleman.
According to published reports, AAN shares offices with Crossroads GPS and other related
groups.Z
4
AAN made numerous independent expenditures in the 2010 elections. For instance,
according to one report:
[A] so-called Section 50l(c)(4) group called American Action Network filed an
independent expenditure report with the FEC Aug. 5 [20 I 0] indicating that it is
spending nearly $435,000 for cable television and radio ads in the New
Hampshire campaign for an open U.S. Senate seat. ...
The new ad campaign attacks the Democratic Senate candidate, Rep. Paul Hodes
(D-N.H.), and supports Republican Senate candidate Kelly Ayotte, New
Hampshire's former attorney general.
The American Action Network has indicated on its website that it also sponsored
ad campaigns focused on Senate races in Washington state and Florida; however,
it filed no reports with the FEC on its spending in those states. The group
indicated in press releases that it considered its efforts in these races to be "issue
advocacy" not subject to any FEC reporting rules.
The ads that the American Action Network sponsored in Washington included an
image oftennis shoes purportedly worn by Sen. Patty Murray (D-Wash.) stepping
on the backs of business owners, taxpayers and children. The ad ends by telling
Murray that "it's time you got off our backs."
25
Another report states:
While the group was intended to serve largely as a policy shop to rival the liberal
Center for American Progress, it has mainly just been cutting ads attacking
Democrats (including Feingold) who are currently engaged in tight races.
In addition to infusing hundreds of thousands of dollars in outside cash into
Feingold's Wisconsin race, Coleman's group has also spent $750,000 targeting
Sen. Patty Murray (D-Wash.) in her tight contest against Republican Dino Rossi
and $450,000 attacking Senate candidate Rep. Paul Hodes (D) in New Hampshire.
And because it is incorporated as a 50l(c)(4) "social welfare" nonprofit, the D.C.-
24
H. Bailey, "A guide to the shadow GOP": the groups that may define the 2010 and 2012
elections," Yahoo News-The Uphot (August 5, 201 0).
25
K. Doyle, "Campaign Spending Reports Filed with FEC," BNA Money in Politics Report (Aug.
12, 2010).
12
based AAN does not publicly disclose its donors and has not listed any
contributors on the independent expenditure forms it is obliged to file with the
FEC?
6
In addition to spending on Senate races, in 201 0, American Action Network also spent on
"really tight" House races:
The [Wall Street] Journal reported that American Action Network will air $1.7
million in ads boosting the cash-strapped bids of Republicans Ryan Frazier, who
is taking on Democratic Rep. Ed Perlmutter (D-Colo), and Jackie Walorski, who
is challenging Democratic Rep. Joe Donnelly (D-Ind.) ....
"The American Action Network has carefully calibrated really tight house races
where there are candidates who strongly support our views of limited government
and reduced deficits or on the other side candidates who really o ~ p o s e our views,"
said the group's chairman, veteran GOP fundraiser Fred Malek?
American Action Network shares space with American Crossroads and Crossroads GPS,
and according to press reports, the groups coordinate their political activities:
Sometimes that coordination is as easy as walking across the hall. Sharing office
space with American Crossroads is the American Action Network (AAN), a
group led by former Minnesota Senator Norm Coleman, a Republican, which may
spend up to $25 million this year. Originally billed as a conservative think tank,
the AAN has increasingly turned to raw politics, having spent more than $1
million on ad buys targeting Democrats such as Senators Patty Murray in
Washington and Russ Feingold in Wisconsin. ("We definitely can't afford him,"
an AAN ad says of Feingold and his alleged free-spending record)?
8
The coordinated focus that American Action Network had on influencing the 2010
elections is illustrated by this quote from Rob Collins, the president of the organization, shortly
before the 2010 election:
Many of the conservative groups say they have been trading information through
weekly strategy sessions and regular conference calls. They have divided up
races to avoid duplication, the groups say, and to ensure that their money is spread
around to put Democrats on the defensive in as many districts and states as
possible- and more important, lock in whatever grains they have delivered for the
Republicans so far.
26
J. Zwick, "Coleman's American Action Network Infuses Cash into Close Senate Races,"
Washington Independent (Oct. 4, 20 I 0).
27
K. Vogel, "Rove: Obama's attacks are helping," Politico (Oct. 13, 2010).
28
M. Crowley, "The New GOP Monday Stampede," Time (Sept. 16, 2010).
13
"We carpet-bombed for two months in 82 races, now it's sniper time," said Rob
Collins, president of American Action Network, which is one of the leading
Republican groups this campaign season and whose chief executive is Norm
Coleman, the former Senator from Minnesota. "You're looking at the battle field
and 'Where can we marginally push - where can we close a few places
out?"'
9
According to one report published after the 2010 election, American Action Network
"ended up with Republican victories in about 56 percent of the contests it invested in."
30
As one report notes, "Republican political operatives bestow immense credit for their
party's competitiveness in 2010 on organizations such as Crossroads GPS and the American
Action Network, both 501 (c)( 4) organizations. These groups can accept large donations that
they do not have to disclose .... "
31
American Action Network, like Crossroads GPS, also spent to influence a special
congressional election in May, 2011. According to a published report, American Action
Network spent $94,694 on an election in the New York 26
1
h congressional district.
32
In other spending in 2011, American Action Network has undertaken a $1 million direct
mail and newspaper that "charges Democrats with attempting to 'balance the budget
on the backs of seniors' ... "
3
The mail campaign "will reach 22 congressional districts in 14
states, all of them represented in Congress by Republicans .... Most of the 22 are freshmen first
elected in November 2010." !d. According to another news report, the group subsequently
"added 10 vulnerable freshmen House Republicans to its advocacy campaign defending
Republicans on Medicare."
34
According to this report, the mailing sent to one Florida
congressional district reads, "Florida seniors can count on Congressman Allen West to stand up
against the Obama Medicare plan." !d.
29
J. Rutenberg, "Pro-Republican Groups Prepare Big Push at End of Races," New York Times (Oct.
25, 2010).
30
M. Luo and G. Palmer, "Who Got the Most Bang for their Bucks?" New York Times (Nov. 4,
2010).
31
A. Becker and D. Drucker, "Members Weigh In on Draft Disclosure Order," Roll Call (May 24,
20 II).
32
P. Overby, "Outside Groups Spend Big in N.Y. Special Election," NPR (May 25, 2011).
33
A. Bums, "Ads to back GOPers on Medicare," Politico (July 27, 2011).
34
C. Joseph, "Conservative group defending 10 more House Republicans on Medicare," The Hill
(Aug. 3, 2011).
14
IV. Americans Elect
Americans Elect was initially organized as a "political organization" under section 527 of
the tax code, but in October, 201 0 c h a n ~ e d its designation to a "social welfare" organization
under section 501(c)(4) ofthe tax code.
5
It is seeking to gain a place on the 2012 ballot in all
50 states for a presidential candidate it intends to nominate.
According to one article, "Its mission is to upend the traditional party primary process by
selecting an alternate presidential ticket through an online, open nominating convention." !d.
This report also notes that the manner in which the group is pursuing its aims:
... is highly unorthodox. Although it is attempting to qualify as a new party in
California and other states, the group's legal designation is that of a nonpolitical,
tax exempt social welfare organization.
Under that designation, Americans Elect has been able to keep private its
financiers, raising questions about what forces are driving the massive
undertaking. The group has labored largely under the radar for the last 16
months, raising $20 million while successfully gaining ballot access in Arizona,
Alaska, Kansas and Nevada. It is seeking certification in Michigan, Hawaii,
Missouri and Florida besides California, with an additional 18 states in the
pipeline before the end of the year.
/d. According to the same article, Americans Elect has raised $20 million, with no contribution
exceeding $5 million. The report noted, "Elliot Ackerman said Americans Elect does not take
any money from special interests or political action committees, adding that it is up to donors to
determine whether they want to be identified." /d.
The same article notes that the organization plans to nominate a candidate for president:
Americans Elect now plans to hold an online convention in June 2012 that will be
open to any registered voters who sign up. They will select a presidential ticket
from a slate of candidates, all of whom will have been required to pick a running
mate from a different political party.
!d. Another article described Americans Elect as follows:
35
Funded with at least $20 million, the majority from large, mostly unnamed
donors, Americans Elect is vying to become the most serious third-party
insurgency since industrialist H. Ross Perot nearly upended the 1992 presidential
campaign.
36
M. Gold, "Americans Elect seeks to upend primary system," Los Angeles Times (July 28, 2011).
36
P. Jonsson, "Americans Elect launches centrist third-party bid amid Washington dysfunction,"
Christian Science Monitor (July 29, 2011).
15
In an opinion piece published by Politico, Elliot Ackerman, the group's chief operating
officer, described the group's purposes as follows:
We have set up a non-partisan nominating process for the presidency. We plan to
hold a secure online convention in June 2012, where any registered voter can
participate as a delegate. At this national convention, party functions will become
delegate functions. The delegates will draft candidates; develop a platform of
questions the candidates must answer, and discuss and debate the convention
rules.
We are on our way, with our ballot access initiative, to ensure that our presidential
ticket can be on the ballot in all 50 states ....
The Americans Elect nominating convention will be the first time that American
voters have gained direct access to the ballot to nominate and elect a presidential
candidate.
37
According to The Arizona Daily Star on July 30, 2011, "Americans Elect was recognized
last week as a new political party by the state of Arizona and is eligible to have its presidential
nominee on the ballot in the 2012 elections."
38
According to The Detroit Free Press on September 9, 2011, "Bureau of Elections
spokesman Fred Woodhams said American Elect submitted nearly 68,000 petition signatures in
May, more than double the 32,261 needed to qualify for the Michigan ballot as a minor party."
39
According to The Oregonian on September 19, 2011, Americans Elect "has already
qualified for the ballot in six states and appears to have turned in enough signatures -- more than
1.6 million-- to make the 2012 ballot in Califomia."
40
As these examples show, American Elect is not only devoted to intervening in the 2012
elections, it is actually qualifying itself as a political party for purposes of state ballot access
laws. A political party is not eligible to qualify as a section 501(c)(4) tax exempt organization.
37
E. Ackerman, "An online political convention," Politico (Aug. 10, 2011).
38
M. Casey, "Americans Elect party to appear on' 12 ballot," Arizona Daily Star (July 30, 2011).
38
D. Bell, "State to vote on certifying new group with 2012 presidential hopes," The Detroit Free
Press (Sept. 9, 2011) (emphasis added).
40
J Mapes, "New effort to establish centrist presidential campaign seeks to qualify for Oregon
ballot," The Oregonian (September 19, 2011)
16
V. The IRS Should Investigate Whether Each Organization Is Ineligible for Section
50l(c)(4) Tax Status Because Each Is Engaged In More Than An Insubstantial
Amount of Campaign Activity.
A. General rule.
Section 50l(c)(4) of the Internal Revenue Code establishes tax-exempt status for "[c]ivic
leagues or organizations not organized for profit but operated exclusively for the promotion of
social welfare .... " 26 U.S.C. 501(c)(4) (emphasis added).
According to IRS regulations, "An organization is operated exclusively for the promotion
of social welfare if it is primarily engaged in promoting in some way the common good and
general welfare of the people of the community." 26 C.F .R. 1.501 (c)( 4)-1 (a)(2)(i) (emphasis
added).
Political activity- spending to influence campaigns- does not constitute promoting
social welfare. Section 1.50l(c)(4)-l(a)(2)(ii) of the regulations provides that political campaign
activities do not promote social welfare as defined in section 501(c)(4). The regulation states,
"The promotion of social welfare does not include direct or indirect participation or intervention
in political campaigns on behalf of or in opposition to any candidate for public office." 26
C.F.R. 1.501(c)(4)-l(a)(2)(ii) (emphasis added).
Although the promotion of social welfare does not include political campaign activities,
IRS regulations do not impose a complete ban on such activities for section 50l{c)(4)
organizations. Thus, "an organization may carry on lawful political activities and remain exempt
under section 50l{c)(4) as long as it is primarily engaged in activities that promote social
welfare." Rev. Rul. 81-95, 1981-1 C.B. 332 (emphasis added).
B. Section 50l(c)(4), as construed by the courts, does not permit a "social
welfare" organization to engage in more than an insubstantial amount of
campaign activity.
Section 501(c)(4), as construed by the courts, does not permit a group organized under
that section to engage in more than an insubstantial amount of campaign activity and still qualify
for tax exempt status.
According to court decisions, the statutory requirement for a section 501(c)(4)
organization to be "operated exclusively" for "the promotion of social welfare" means that the
organization cannot engage in more than an insubstantial amount of activity that is not in
furtherance of its social welfare function. This means that section 50l(c)(4) organizations cannot
engage in more than an insubstantial amount of campaign activities.
The "insubstantial" standard established by the courts certainly does not allow a section
501 (c)( 4) organization to spend up to 49 percent of its total expenditures in a tax year to
participate or intervene in elections and still maintain its tax-exempt status, as some practitioners
believe.
17
Under the statutory language of section 501(c)(4), a social welfare organization must be
"operated exclusively" for social welfare purposes. The courts have interpreted this "operated
exclusively" standard the same way they have interpreted a parallel provision of section
50l(c)(3) that requires an organization that is tax exempt under that provision to be "organized
and operated exclusively" for charitable, education or similar purposes.
In Better Business Bureau v. U.S., 326 U.S. 279, 283 (1945), the Supreme Court
construed a requirement that a non-profit organization be "organized and operated exclusively"
for educational purposes to mean that "the presence of a single non-educational purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance oftruly
educational purposes." (emphasis added).
Based on the Better Business Bureau decision, the courts have concluded that the word
"exclusively" in the context of sections 501(c)(3) and 501(c)(4) is "a term of art" that does not
mean "exclusive" as that term is normally understood and used.
The courts instead have said that, in the context of section 501 (c)( 4) of the IRC, this term
means "that the presence of a single substantial non-exempt purpose precludes tax-exempt status
regardless of the number or importance of the exempt purposes." Contracting Plumbers Coop.
Restor. Corp. v. U.S., 488 F.2d 684,686 (2d. Cir. 1973) (section 501(c)(4)); American Ass'n of
Christian Sch. Vol. Emp. v. U.S., 850 F.2d 1510, 1516 (11th Cir. 1988) ("the presence of a
substantial non-exempt purpose precludes exemption under Section 501(c)(4)"); Mutual Aid
Association v. United States, 759 F.2d 792, 796 (lOth Cir. 1985) (same; section 501(c)(4)).
The courts have similarly held, in the context of section 501 ( c )(3) organizations, that the
"operated exclusively" test means that "not more than an insubstantial part of an organization's
activities are in furtherance of a non-exempt purpose." Easter House v. United States, 12 Ct. Cl.
476,483 (1987) (group not organized exclusively for a tax exempt purpose under section
501(c)(3)); New Dynamics Foundation v. United States; 70 Fed. Cl. 782, 799 (Fed. Cl. Ct. 2006)
(same); Nonprofits Ins. Alliance of California v. U.S., 32 Fed. Cl. 277, 282 (Fed. Cl. Ct. 1994)
(same).
Under these court rulings, a section 501(c)(4) organization cannot engage in more than
an insubstantial amount of campaign activity and remain in compliance with the statutory
requirements for tax-exempt status under section 501(c)(4). Any "substantial, non-exempt
purpose" (such as campaign activity) will defeat an organization's tax-exempt status under
section 501(c)(4). Christian Sch. Vol. Emp., supra at 1516.
There is nothing, furthermore, in these rulings, in IRS regulations or in other IRS actions
to support the proposition that spending 49 percent of total expenditures on campaign activities
constitutes an insubstantial amount of non-exempt activity.
41
40
On July 27, 2011, Democracy 21 and the Campaign Legal Center filed a petition for rulemaking
with the IRS which seeks revisions in the regulations implementing section 501(c)(4). In particular, the
petition contends that the "primarily engaged" standard in section 1.501(c)(4)-1(a)(2)(i) does not correctly
18
C. Political campaign activity not limited to "express advocacy"
communications under the Internal Revenue Code.
IRS regulations make clear that "direct or indirect participation or intervention in political
campaigns on behalf of or in opposition to any candidate for public office" is not limited to
activities or communications which contain express advocacy or the functional equivalent of
express advocacy. Thus, so-called "issue ads" that promote, attack, support or oppose a
candidate fall with the meaning of direct or indirect participation or intervention in political
campaigns.
Section 527(e)(2) ofthe Internal Revenue Code describes what constitutes political
campaign (i.e., "exempt function") activity for purposes of the tax code:
The term "exempt function" means the function of influencing or attempting to
influence the selection, nomination, election, or appointment of any individual to
any Federal, State, or local public office or office in a political organization, or
the election of Presidential or Vice Presidential electors, whether or not such
individual or electors are selected, nominated, elected or appointed.
26 U.S.C. 527(e)(2).
Revenue Ruling 2004-6, 2004-41.R.B. 328, provides a detailed explanation of what
constitutes "exempt function" political campaign activity-illuminating the line between
political activities and activities to promote social welfare. The IRS Revenue Ruling states:
Section 1.527-2(c)(l) provides that the term "exempt function" includes all
activities that are directly related to and support the process of influencing or
attempting to influence the selection, nomination, election, or appointment of any
individual to public office or office in a political organization. Whether an
expenditure is for an exempt function depends on all the facts and circumstances.
!d. (emphasis added)
Revenue Ruling 2004-6 explains that, because section 501(c)(4) public policy advocacy
"may involve discussion of the positions of public officials who are candidates for public office,
a public policy advocacy communication may constitute an exempt function (a political activity)
within the meaning of 527(e)(2)." Rev. Rul. 2004-6 at 1. The Ruling states:
All the facts and circumstances must be considered to determine whether an
expenditure for an advocacy communication relating to a public policy issue is for
an exempt function under 527(e)(2). When an advocacy communication
explicitly advocates the election or defeat of an individual to public office, the
expenditure clearly is for an exempt function under 527(e)(2). However, when
an advocacy communication relating to a public policy issue does not explicitly
implement the statutory "operated exclusively" standard in section 50l(c)(4) of the IRC, as interpreted by
the courts.
19
advocate the election or defeat of a candidate, all the facts and circumstances need
to be considered to determine whether the expenditure is for an exempt function
under 527(e)(2).
!d. (emphasis added)
Thus, even if an ad discussing an issue does not express advocacy, it may nonetheless be
treated as "exempt function" electioneering activity under IRS regulations, depending on the
"facts and circumstances." Therefore, even where an ad discusses an "issue," and where the ad
does not contain express advocacy or the functional equivalent of express advocacy, it can still
be treated as "direct or indirect participation or intervention in political campaigns" under IRS
standards for purposes of determining whether a 501 (c)( 4) organization is "primarily engaged" in
the promotion of social welfare.
Rev. Rul. 2004-6 lists six factors that "tend to show" that an advertisement is "exempt
function" political campaign activity, and five competing factors that "tend to show" that an
advertisement is not. Rev. Rul. 2004-6 at 3-4. These factors are not in themselves dispositive. In
the end, the regulations require a determination to be made based on "the facts and
circumstances" of each advertisement.
The "factors that tend to show that an advocacy communication on a public policy issue
is for an exempt function (political activity) under 527(e)(2)" include the following:
a) The communication identifies a candidate for public office;
b) The timing of the communication coincides with an electoral campaign;
c) The communication targets voters in a particular election;
d) The communication identifies that candidate's position on the public policy
issue that is the subject of the communication;
e) The position ofthe candidate on the public policy issue has been raised as
distinguishing the candidate from others in the campaign, either in the
communication itself or in other public communications; and
f) The communication is not part of an ongoing series of substantially similar
advocacy communications by the organization on the same issue.
Rev. Rul. 2004-6 at 3.
The "factors that tend to show that an advocacy communication on a public policy issue
is not for an exempt function under 527(e)(2)" include the following:
a) The absence of any one or more ofthe factors listed in a) through f) above;
Jd
20
b) The communication identifies specific legislation, or a specific event outside
the control of the organization, that the organization hopes to influence;
c) The timing of the communication coincides with a specific event outside the
control of the organization that the organization hopes to influence, such as a
legislative vote or other major legislative action (for example, a hearing before
a legislative committee on the issue that is the subject of the communication);
d) The communication identifies the candidate solely as a government official
who is in a position to act on the public policy issue in connection with the
specific event (such as a legislator who is eligible to vote on the legislation);
and
e) The communication identifies the candidate solely in the list of key or
principal sponsors ofthe legislation that is the subject of the communication.
Under this "facts and circumstances" test, each of the organizations discussed in the letter
is engaged more than an insubstantial amount of campaign activity and, in fact, is primarily
engaged in activities for the purpose of participating and intervening in political campaigns.
In the case of Crossroads GPS and American Action Network, both organizations were
created just months before the 2010 congressional elections, and were conceived, organized and
staffed by leading political party strategists and operatives. Both organizations defined their
activities as spending money to influence the 2010 House and Senate races, and both were
closely affiliated with other organizations similarly spending large sums to influence the 2010
elections.
The activities of both groups were targeted to battleground states involving key
congressional races, and to supporting Republican candidates or opposing Democratic candidates
in those elections.
The ads run by both organizations identified candidates by name, discussed their position
on issues in the midst of a campaign, and did so in ways that supported those candidates or
criticized their opponents.
Finally, the timing of the groups' activities did not correspond with external events
outside the control of the groups, such as a legislative vote on an issue, but rather corresponded
with congressional election campaigns.
With regard to Priorities USA, statements by the founders of the organization make clear
that it is modeled on Crossroads GPS, and is to play a similar function with the overriding
purpose of conducting campaign activities to support the re-election of President Obama.
Finally, with regard to Americans Elect, the sole thrust ofthe organization is to obtain
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ballot access to use to nominate candidates for president and vice president. The organization is
qualifying on ballots as a political party. These activities are per se campaign activities in
connection with an election.
Accordingly, each of the section 501(c)(4) organizations discussed above has engaged in
more than an insubstantial amount of campaign activity, has a "substantial, non-exempt purpose"
of participating or intervening in elections and is not entitled to tax-exempt status under section
501(c)(4).
VI. The IRS Also Should Investigate Whether Each Organization Is Ineligible for
Section 501(c)(4) Tax Status Because the Organization Is "Primarily Engaged" in
Campaign Activity
In a 2008 Letter Ruling, the IRS applied the "primarily engaged" standard to mean that a
section 501(c)(4) organization's primary activities cannot constitute direct or indirect political
intervention.
This interpretation of the statutory standard is in conflict with the court rulings
interpreting section 501(c)(4), discussed above, that require an exempt organization to engage in
no more than an insubstantial amount of campaign activity.
Nevertheless, the organizations discussed in this letter also fail to comply with the
standard set forth in this Revenue Ruling. In the 2008 Ruling, the IRS found an organization did
not qualify for tax exempt status under section 501(c)(4) because it was not primarily engaged in
promoting "social welfare." The IRS said:
Whether an organization is "primarily engaged" in promoting social welfare is a
facts and circumstances determination. Relevant factors include the manner in
which the organization's activities are conducted; resources used in conducting
such activities, such as buildings and equipment; the time devoted to activities (by
volunteers as well as employees); the purposes furthered by various activities; and
the amount of funds received from and devoted to particular activities.
2008 TNT 160-33 (May 20, 2008) (emphasis added). The Letter Ruling continued:
In Rev. Rul. 81-95, 1981-1 C.B. 332, we concluded that "an organization may
carry on lawful political activities and remain exempt under section 501(c)(4) of
the Code as long as it is primarily engaged in activities that promote social
welfare." The corollary to this is that if an organization's primary activities do not
promote social welfare but are direct or indirect political intervention, the
organization is not exempt under section 501(c)(4). The key is to determine the
character ofthe organization's primary activities by looking at all ofthe facts and
circumstances.
!d. (emphasis added).
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In the Letter Ruling, the IRS considered the organization's claim that it was primarily
engaged in lobbying, not campaign intervention. The Letter Ruling states:
A facts and circumstances test is to be used in determining whether an
organization's activities primarily constitute political intervention or whether
those activities constitute lobbying or educational activities. After reviewing all of
the facts and circumstances presented in the administrative file as discussed
above, we have concluded that your primary emphasis and primary activities
constituted direct and indirect political intervention. While you engage in
extensive lobbying activities, they are by no means your primary activity. Your
first and primary emphasis is on getting people elected to public office.
ld. The IRS thus concluded:
The emphasis throughout your materials is on electing to office * * * people in
order to impact legislation and policy as insiders. The overwhelming majority of
the evidence in the administrative record, and thus the facts and circumstances in
this case, denotes an organization that is intent upon intervening in political
campaigns .... While lobbying is usually mentioned, and we recognize that
lobbying activities are being pursued, those activities are not your primary
activity. An analysis of all of the facts and circumstances contained in the
administrative file leads us to the conclusion that your primary activity constitutes
political intervention.
!d. (emphasis added).
!d.
Therefore, the organization did not qualify for tax exemption under section 501(c)(4):
Based upon the materials submitted in connection with your application, we have
concluded that your activities primarily constitute direct and indirect participation
or intervention in political campaigns on behalf of or in opposition to candidates
for public office. Therefore, you are not primarily engaged in activities that
promote social welfare and do not qualify for recognition of exemption under
section 501(c)(4) ofthe Code.
Here, we believe that an IRS investigation will show that the "first and primary
emphasis" of each of the four organizations discussed above is "on getting people elected to
public office." In particular, the IRS should investigate whether the "facts and circumstances"
show that each of the organizations discussed in the letter is primarily engaged in activities
which constitute direct or indirect participation or intervention in political campaigns under IRS
regulations. For reasons discussed above, we believe each organization has overriding purpose
to engage in campaign activities, and thus is operating contrary to the requirements of section
501(c)(4).
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VII. Conclusion.
In the 2010 congressional races, section 50l(c) organizations spent more than $135
million on campaign activities that were financed by secret contributions. The bulk of these
expenditures were made by section 50 I (c)( 4) organizations. The amount of secret contributions
funding campaign expenditures by section 50l(c)(4) organizations is expected to grow
dramatically in the 2012 presidential and congressional races.
Crossroads GPS, Priorities USA, American Action Network and Americans Elect are
each organized under section 501(c)(4) of the Internal Revenue Code. Based on the information
about each organization set forth above, the IRS should conduct an investigation of whether each
such organization has engaged in more than an insubstantial amount of non-exempt activity by
participating or intervening in political campaigns and accordingly is not primarily engaged in
the promotion of social welfare. The IRS should also conduct an investigation of whether each
organization's primary activity is campaign activity and is accordingly not primarily engaged in
the promotion of social welfare.
If the IRS investigation determines that the facts and circumstances show that the
organizations discussed above are not primarily engaged in "the promotion of social welfare,"
because they have engaged in more than an insubstantial amount of campaign activity or because
the organization's primary activity is campaign activity, the organizations should be denied or
should lose tax-exempt status. In addition, appropriate penalties should be imposed by the IRS
for violations the agency finds. The penalties should take into account the need for strong
deterrence to stop similar violations from occurring in the future.
Sincerely,
Is/ Gerald Hebert
J. Gerald Hebert
Executive Director
Campaign Legal Center
Is/ Fred Wertheimer
Fred Wertheimer
President
Democracy 21