Laws and Enforcement Governing the Political Activities of Tax-Exempt Entities (S. Hrg. 117-423, May 4, 2022)
Summary
Senate Hearing 117-423 records the May 4, 2022 hearing of the Subcommittee on Taxation and IRS Oversight of the Committee on Finance on laws and enforcement governing the political activities of tax-exempt entities. Sheldon Whitehouse, chairman of the subcommittee, presided, with opening statements by John Thune and Debbie Stabenow. The witnesses were Philip Hackney of the University of Pittsburgh School of Law, Bradley A. Smith of the Institute for Free Speech, Ann Ravel, a former Chair of the Federal Election Commission, and Scott Walter of the Capital Research Center. Communications for the record came from groups including Arabella Advisors, Campaign Legal Center, Common Cause and OpenSecrets. The record closes with a Public Citizen submission for the Bright Lines Project.
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“Laws and Enforcement Governing the Political Activities of Tax-Exempt Entities (S. Hrg. 117-423, May 4, 2022).”
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[Senate Hearing 117-423]
[From the U.S. Government Publishing Office]
S. Hrg. 117-423
LAWS AND ENFORCEMENT GOVERNING
THE POLITICAL ACTIVITIES OF
TAX-EXEMPT ENTITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MAY 4, 2022
__________
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-356 PDF WASHINGTON : 2024
----------------------------------------------------------------------
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
______
Subcommittee on Taxation and IRS Oversight
SHELDON WHITEHOUSE, Rhode Island, Chairman
DEBBIE STABENOW, Michigan JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey CHUCK GRASSLEY, Iowa
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
SHERROD BROWN, Ohio RICHARD BURR, North Carolina
CATHERINE CORTEZ MASTO, Nevada ROB PORTMAN, Ohio
ELIZABETH WARREN, Massachusetts PATRICK J. TOOMEY, Pennsylvania
BEN SASSE, Nebraska
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Whitehouse, Hon. Sheldon, a U.S. Senator from Rhode Island,
chairman, Subcommittee on Taxation and IRS Oversight, Committee
on Finance..................................................... 1
Thune, Hon. John, a U.S. Senator from South Dakota............... 3
Stabenow, Hon. Debbie, a U.S. Senator from Michigan.............. 5
WITNESSES
Hackney, Philip, associate professor of law, University of
Pittsburgh School of Law, Pittsburgh, PA....................... 6
Smith, Bradley A., chairman, Institute for Free Speech,
Washington, DC................................................. 8
Ravel, Hon. Ann, former Chair, Federal Election Commission, Los
Gatos, CA...................................................... 10
Walter, Scott, president, Capital Research Center, Washington, DC 12
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Hackney, Philip:
Testimony.................................................... 6
Prepared statement........................................... 27
Responses to questions from subcommittee members............. 40
Ravel, Hon. Ann:
Testimony.................................................... 10
Prepared statement........................................... 41
Responses to questions from subcommittee members............. 44
Smith, Bradley A.:
Testimony.................................................... 8
Prepared statement........................................... 45
Responses to questions from subcommittee members............. 53
Stabenow, Hon. Debbie:
Opening statement............................................ 5
Thune, Hon. John:
Opening statement............................................ 3
Prepared statement........................................... 60
Walter, Scott:
Testimony.................................................... 12
Prepared statement........................................... 62
Responses to questions from subcommittee members............. 73
Whitehouse, Hon. Sheldon:
Opening statement............................................ 1
Prepared statement........................................... 80
Communications
Arabella Advisors................................................ 83
Campaign Legal Center............................................ 84
Common Cause..................................................... 86
Council on Foundations........................................... 87
End Citizens United/Let America Vote Action Fund................. 88
Independent Sector............................................... 89
National Taxpayers Union Foundation.............................. 91
OpenSecrets...................................................... 97
People United for Privacy........................................ 102
Public Citizen................................................... 106
LAWS AND ENFORCEMENT GOVERNING
THE POLITICAL ACTIVITIES OF
TAX-EXEMPT ENTITIES
----------
WEDNESDAY, MAY 4, 2022
U.S. Senate,
Subcommittee on Taxation and IRS Oversight,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:08 p.m.,
via Webex, in Room SD-215, Dirksen Senate Office Building, Hon.
Sheldon Whitehouse (chairman of the subcommittee) presiding.
Present: Senators Stabenow, Menendez, Cortez Masto, Warren,
and Thune.
Also present: Democratic staff: Dan Smith RuBoss, Senior
Economic Policy Advisor to Senator Whitehouse; and Claire Kim,
Counsel to Senator Whitehouse. Republican staff: James
Williams, Tax and Trade Advisor to Senator Thune; and Jason Van
Beek, General Counsel to Senator Thune.
OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR
FROM RHODE ISLAND, CHAIRMAN, SUBCOMMITTEE ON TAXATION AND IRS
OVERSIGHT, COMMITTEE ON FINANCE
Senator Whitehouse. Welcome, everyone. I will call the
hearing to order and express my gratitude to the witnesses for
being here, and to Senator Stabenow for being here. Ranking
Member Thune is on his way, and if somebody could do something
about my volume control--I have to whisper because, otherwise,
I will blow the doors off the room--that would be a big help.
We are here to consider what is going on with enforcement
of the political activities of tax-exempt organizations. And I
will make an opening statement and then, if Senator Thune is
here, I will invite him to make an opening statement. If no one
is here but Senator Stabenow, I will invite her to say a few
words, and then we will get on to the witness testimonies. And
I want to thank Ms. Ravel, who is here also, but
electronically, so she is not in the room with us.
Twelve years ago, the Supreme Court rested its decision in
Citizens United on the false predicate that effective
disclosure--their words--effective disclosure would let voters
know who was speaking to them. That was important, because it
was the means by which it would dispel corruption.
Well instead, a torrent of dark money, a ``tsunami of
slime,'' it has been called, washed into our politics. That
torrent washed into our politics from behind a veil of
organizations formed under section 501(c)4 of the Internal
Revenue Code.
Unlike most groups spending money in elections, 501(c)4
organizations are not required to disclose their donors. The
statute governing these organizations states they must be
operated exclusively for the promotion of social welfare, but
the IRS muddied those waters with a regulation that allowed
social welfare organizations to devote up to 49.9 percent of
their spending to political activities and still qualify for
501(c)4 status.
Predictably, these organizations became a conduit for the
secret political spending that Citizens United said was
``corrupting.'' In the decade preceding Citizens United,
501(c)4 organizations spent $103 million on political
expenditures. In the decade following it, they spent over $1
billion. It was a hell of a tsunami.
The dark money flowing through the 501(c)4s has gotten
darker. As soon as the IRS sought to review the explosion of
these political groups after Citizens United, dark money
interests whipped up a scandal, claiming the IRS was unfairly
targeting conservative groups for scrutiny.
Let's set the record straight. This is false. An exhaustive
2017 report from the Treasury Inspector General for Tax
Administration found no such unfair targeting of conservative
groups, as did a bipartisan investigation from this very
committee. And I ask unanimous consent that the Treasury
Inspector General report \1\ and the Committee on Finance, U.S.
Senate, report \2\ be put into the record here.
---------------------------------------------------------------------------
\1\ https://www.tigta.gov/sites/default/files/reports/2022-02/
201710054fr.pdf.
\2\ https://www.finance.senate.gov/imo/media/doc/CRPT-114srpt119-
pt1.pdf.
---------------------------------------------------------------------------
The damage was nevertheless done. The fake scandal cowed
the IRS, and an appropriations rider in place in 2015 blocked
the IRS from promulgating regulations to clarify political
rules for 501(c)4 organizations. This means groups flout limits
on political activity with little risk to their tax-exempt
anonymized status.
As early as 2012, a ProPublica investigation found that
roughly 3 in 10 of the 501(c)4 organizations they surveyed
reported to the FEC that they had spent money on
electioneering, but reported to the IRS that they had spent no
money to influence elections either directly or indirectly. It
is hard to see how both statements could be true.
A report out last week from the Citizens for Responsibility
and Ethics in Washington describes several recent examples of
this problem. \3\ One example is the NRA. And I ask unanimous
consent that the CREW report I am referring to be put into the
record, and without objection.
---------------------------------------------------------------------------
\3\https://www.citizensforethics.org/reports-investigations/crew-
reports/the-irs-is-not-enforcing-the-law-on-political-nonprofit-
disclosure-violations/.
---------------------------------------------------------------------------
CREW says, and I will quote them here: ``Between 2008 and
2013, the NRA reported to the FEC, the Federal Election
Commission, that it spent nearly $11 million in independent
expenditures out of its 501(c)4. In 2012, it reported making
$7,448,385 dollars in independent expenditures, more than half
of which were spent opposing Barak Obama or supporting Mitt
Romney in that year's presidential race.''
Remarkably, the NRA told the IRS, under penalty of perjury,
that it spent absolutely nothing on political campaign
activities between 2008 and 2013, nor did it file a Schedule C
disclosing details of its political spending.
Despite all this open and notorious predication for
investigating whether there were false statements made, there
is no sign that the IRS is doing much enforcement. A 2018
Treasury Inspector General for Tax Administration Report
estimated that over 1,000 cases of impermissible political
activity by 501(c)4s weren't even forwarded to the agency's
committee tasked with recommending audits, despite meeting the
IRS criteria.
According to a 2020 GAO review, the IRS between 2010 and
2017 conducted only 226 examinations involving impermissible
political campaign intervention. Of those, only 6 percent, a
total of 14--14 examinations--involved 501(c)4s. That is fewer
than two per year in the middle of that dark money tsunami.
We cannot tolerate a system that lets 501(c)4 groups
operate without oversight, not when they spend tens, even
hundreds of millions of dollars per election cycle without
disclosing their donors. Citizens are denied that most basic
right to know what is going on around them in their democracy.
First, we should free the IRS to promulgate clear rules for
501(c)4 organizations--all of them.
Second, the IRS should use the tools and resources it
already has to crack down on blatant abuse. Lax enforcement
sends a message that rules don't matter.
Third, referrals need to be made of likely false statements
so that the right officials in law enforcement, who prosecute
false statements as a matter of regular bread and butter, can
do their jobs and investigate. We are aware of no referrals at
all to DOJ despite years of CREW, ProPublica, and press
reporting of these flagrant discrepancies.
I hope my colleagues will join me in untying the IRS's
hands and providing them the tools and resources to enforce its
most basic rules. The premise of transparency in Citizens
United has been violated for far too long.
With that, let me recognize my distinguished ranking member
Senator Thune.
[The prepared statement of Senator Whitehouse appears in
the appendix.]
OPENING STATEMENT OF HON. JOHN THUNE,
A U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Chairman Whitehouse. It is a
pleasure to work with you on this subcommittee. The
Subcommittee on Taxation and IRS Oversight is uniquely
positioned to oversee the activities of the Internal Revenue
Service, the executive branch agency charged with tax matters.
It is my hope that we can use this hearing as a foundation
to conduct appropriate oversight of the IRS and ensure that
Americans' private tax-related information is protected.
Today we are here to discuss the laws and enforcement as
they apply to the political activities of tax-exempt entities
and, by extension, how those laws and any proposed reforms
impact Americans' freedom of speech, association rights, and
ability to privately give to caucuses that they care about.
Free speech is not just good in theory. It is a key driver
of a healthy democracy. And allowing Americans to privately
give to causes they care about is a fundamental component of
protecting free speech and the First Amendment.
Partisan legislation to force tax-exempt groups to choose
between spreading their message and protecting donors' privacy
runs a real and potentially corrosive risk of chilling speech.
A few words about the scope of 501(c) organizations and the
IRS.
Section 501(c) of the Internal Revenue Code describes 28
different categories of organizations that generally are exempt
from Federal income tax. And we are going to focus much of
today's discussion around four categories. These include
501(c)3 charitable organizations, 501(c)4 social welfare
organizations, 501(c)5 labor organizations, and 501(c)6 trade
associations and business leagues--in other words, a wide range
of entities that represent diverse constituencies and causes
across the country, and include churches, charities, nonprofit
foundations, advocacy groups, unions, and trade associations.
The chairman has a particular interest in 501(c)4
organizations and their impact on campaigns. And according to a
recent New York Times analysis, the impact is anything but
small, particularly for politicians on the left. The Times
stated that in the last election, the left raised and spent
more money from 501(c)4 donors than the right. The report
showed that 15 of the most politically active nonprofit
organizations that generally align with the Democratic Party
spent more than $1.5 billion in 2020, hundreds of millions of
dollars more than a comparable sample group aligned with the
Republican Party.
There was a deep bench of well-funded 501(c)4 organizations
aligned with the Democratic Party that expressly support
progressive policies and causes. Of course, there are plenty of
related organizations on the right as well.
The Senate Finance Committee has a long history of
oversight in the 501(c) tax-exempt entities and the IRS's
treatment of such organizations. Just a few years ago, the
committee conducted a 2-year bipartisan investigation into the
IRS's inappropriate targeting of 501(c)3 and 501(c)4
applications for tax-exempt status.
The investigation, which culminated in 2015, found that the
IRS grossly mismanaged applications filed by Tea Party and
other conservative organizations. The report showed that the
IRS improperly disclosed taxpayer information from numerous
conservative organizations, and that the agency systematically
selected conservative organizations for heightened scrutiny in
a manner wholly different from how it processed applications
from left-leaning organizations.
Indeed, the unifying factor for how Tea Party applicants
were handled at the IRS was not specific political activities,
but rather an underlying political philosophy.
Americans, regardless of political affiliation, deserve to
have an IRS that will administer the tax code with fairness and
integrity and safeguard their private taxpayer information.
Regrettably, recent history and current developments show the
agency is falling short.
Since last year's massive IRS leak or hack of taxpayer
information, which the left-leaning ProPublica obtained and
then used to publicize confidential taxpayer details, there has
been no meaningful follow-up from the agency or the
administration. Perhaps that is because the unauthorized
disclosure of private taxpayer data by ProPublica conveniently
advanced a preferred political narrative on tax policy.
More fundamentally, the apparent leak, or hack, of private
taxpayer information was a serious breach of trust between
Americans and their government. And it puts everyday citizens
at risk of intimidation or harassment by ideological foes.
Americans have a right to know that the personal information
they provide to the IRS remains confidential and will not be
used to target them or to advance partisan political agendas.
Americans are justifiably concerned about the IRS or, for
that matter, any regulatory agency collecting more sensitive
taxpayer and donor information than is necessary, and how that
collection could impact their lives and their freedom of
speech. Policymakers would be wise to heed their concerns.
We have an excellent panel before us today. Thank you all
for being here, and I look forward to hearing your testimony.
Thank you, Mr. Chairman.
[The prepared statement of Senator Thune appears in the
appendix.]
Senator Whitehouse. Thank you very much, Senator Thune.
I will also give Senator Stabenow a chance to say a few
opening words. The bombshell that dropped out of the Supreme
Court the night before last has put a lot of turbulence into
our lives and has caused a lot of unexpected meetings and
things to happen. So, Senator Stabenow is facing, as a member
of the Democratic leadership, a lot of activity, so I am
delighted that she is here and would like to have her have this
opportunity.
OPENING STATEMENT OF HON. DEBBIE STABENOW,
A U.S. SENATOR FROM MICHIGAN
Senator Stabenow. Thank you very much, Mr. Chairman and
Ranking Member. First, I would say I would hope that one of the
things that comes out of all of the work on this would be to
recommend that we pass the DISCLOSE Act, which would basically
get rid of dark money on either side by requiring 501(c)4
groups and super PACs and corporations spending substantial
sums in elections to report significant donors. And
transparency is what we really need.
I wanted to just take a moment in the opening to bring this
to something that, beyond elections and so on, really impacts
all of us, so many people in our daily lives, and just in one
area. And that is the cost of medicine, the cost of
prescription drugs, and the impact of the pharmaceutical and
health products industry right now.
We know that they spent $354 million in lobbying. That was
what happened last year, far more than any other industry,
doubling the spending of the second highest industry. They have
enough lobbyists--they have about 17 lobbyists for every member
of the United States Senate. We know this. But what we don't
know is what else is going on.
Imagine how much undisclosed money is being spent by the
pharmaceutical industry to defeat policies to drive down drug
prices and health-care costs. We know there is much of that
going on, but we don't know the numbers on that.
And there are well-funded dark money efforts that not only
influence, or attempt to influence members of Congress, but
also each of us in our daily lives. For example, well-funded
organizations with innocuous names like the American Chronic
Pain Association, Americans for Patient Access, shape the news
for doctors and patients when it comes to opioid medications,
for example. And there are many, many, many examples of this,
information going out by groups with these names, and we do not
know who they are. We do not know where the money is coming
from.
And we all know the tragic consequences in this particular
area. These groups were cited in a 2020 Grassley-Wyden report
in this committee on the opioid industry's use of tax-exempt
organizations.
So, Mr. Chairman, I just want to say ``thank you'' for
doing this really important hearing today. There are so many
ways that this impacts our lives directly and indirectly, and I
think it is important that we shine some sunshine on the groups
and the money so that we understand what is going on.
Senator Whitehouse. It is famously the best disinfectant.
Let me now introduce our witnesses. Our first will be
Philip Hackney, associate professor of law at the University of
Pittsburgh. His scholarship focuses on the tax laws that govern
the nonprofit tax-exempt sector, and he brings to us the
particular practical experience of having served at the IRS in
the Office of the Chief Counsel.
We will then hear from Bradley Smith, the chairman and
founder of the Institute for Free Speech. He is also the Josiah
H. Blackmore II/Shirley M. Nault professor of law at Capital
University, and previously served as a Commissioner and Chair
of the Federal Election Commission.
We will then hear from Ann Ravel. Ms. Ravel served as
Commissioner of the Federal Election Commission from 2013 to
2017, including time as Chair. And she formerly chaired the
California Fair Political Practices Commission. She is
currently a lecturer on ethics and campaign finance at Berkeley
Law School.
And our final witness will be Scott Walter, the president
of Capital Research Center, who previously served in the George
W. Bush administration as Special Assistant to the President
for Domestic Policy, and was vice president at the Philanthropy
Roundtable.
Mr. Hackney, your full statement will be put into the
record, and if you can give us your 5-minute summation, we
would appreciate it very much.
STATEMENT OF PHILIP HACKNEY, ASSOCIATE PROFESSOR OF LAW,
UNIVERSITY OF PITTSBURGH SCHOOL OF LAW, PITTSBURGH, PA
Mr. Hackney. Chair Whitehouse, Ranking Member Thune,
distinguished members of the subcommittee, thank you for
inviting me to speak with you about the tax laws and IRS
enforcement related to the political activities of tax-exempt
entities.
I am an associate professor of law at the University of
Pittsburgh. I specialize in the Federal tax treatment of
nonprofit organizations. From 2006 to 2011, I worked with the
IRS Chief Counsel in DC overseeing the tax-exempt sector. Today
this sector is my research focus.
Our overall legal structure for political activities of
nonprofits is imperfect but not bad; it is justifiable. Where
we fall down is enforcement. That failure is a combination of a
failed IRS budget, but also a failure for the IRS to pursue
clear violations.
These failures do not favor one party over the other, but
favor those interests with the means and the willingness to
abuse that legal structure. I want to focus on two fundamental
points.
First, the IRS budget is not sufficient to ensure the laws
are equally and fairly enforced. The 2022 budget improved
matters, but there is a hole to dig out from.
Second, enforcement. Though the IRS can definitely blame
the budget in part on its failure to enforce these laws, there
are simple things that it could do to enforce the law that it
is not doing.
The budget. Congress shrank the IRS budget over the past
decade. CBO reports the IRS budget fell by 20 percent in real
dollars between 2010 and 2018.
The IRS went from over 94,000 employees in 2010 to about
73,500 employees in 2019--the fewest employees IRS has had
since 1970. How has this impacted the exempt organizations
group? The workforce shrank from 889 employees in 2010 to
around 550 in 2019. As annual exempt organization applications
increased, annual rejections decreased. In 2019, with over
101,000 applications for exempt status, 66 rejections.
Comparatively in 2010, with over 65,000 applications, 517
rejections.
What about audits? In 2010, IRS data suggests about a .38-
percent examination rate. In 2019, TEGE accounted that rate at
.13 percent. While the IRS shrank, the tax-exempt sector grew.
In 2010, charitable organizations reported $2.9 trillion in
assets and $1.6 trillion in revenue. In 2017, charitable
organizations reported over $4.3 trillion in assets, and almost
$2.3 trillion in revenue. It continues to grow.
When compared to the size of the sector, the idea the IRS
might be able to use human resource-heavy examinations to
ensure compliance is laughable.
Enforcement. Efforts such as those recommended by GAO for
the IRS to make better use of data available are the only way
the IRS in this current environment can make headway against
tax abuse. Robust information reporting thus needs to be the
norm.
Is the IRS using information reporting in the exempt
organizations sphere dealing with political activities?
Unfortunately, it appears the answer to that question is
``no.'' First, the IRS recently chose less information, even
though it recognizes information reporting matters in stopping
tax abuse. The IRS ended the collection of substantial donor
information for dark money organizations. That information
matters for a range of tax laws, including those that govern
political activity.
Second, the IRS appears to not make use of relevant public
information. CREW documents many occasions where a social
welfare organization represents to the FEC that it made
independent expenditures but reports nothing to the IRS. This
situation cannot and should not abide.
Thank you for inviting me to speak. The tax laws are built
fairly well to prohibit the deduction of campaign expenditures,
to promote a strong nonprofit sector, and to not subsidize
politically related contributions. But the current anemic IRS
budget, the lack of enforcement action by the IRS, and the
failure to collect substantial donor information from dark
money organizations creates a crisis.
These factors undermine confidence in the tax system, the
equal enforcement of the law, and our ability to operate a fair
democratic system.
I urge Congress to increase the budget to allow the IRS the
ability to properly enforce the laws, but institutionally, I
believe the IRS needs to be pushed and given support to enforce
these laws. Additionally, I hope Congress considers ending the
prohibition on the IRS enacting sensible rules in this area. It
promotes transparency both in government and outside, and
allows folks to know when they are going to step over the line.
I believe the IRS can do that now, but these hindrances to
the IRS are significant and need to stop. Thank you.
[The prepared statement of Mr. Hackney appears in the
appendix.]
Senator Whitehouse. Thank you very much, Mr. Hackney.
Mr. Smith?
STATEMENT OF BRADLEY A. SMITH, CHAIRMAN,
INSTITUTE FOR FREE SPEECH, WASHINGTON, DC
Mr. Smith. Thank you, Mr. Chairman, Ranking Member Thune.
Under the Internal Revenue Code, a 527 organization exists
to influence elections. And under Supreme Court precedence, it
is only when that purpose of influencing elections is the major
purpose of an organization that it can be required to register
as a political action committee or PAC under the Federal
Election Campaign Act, with the full donor disclosure that that
entails.
A 501(c)3 organization, on the other hand, is precluded
from electoral activity as that term is defined by law. There
must then be some category for organizations that engage in
limited political activity--that is, organizations that do not
have a major purpose of influencing elections but may have a
lesser purpose of doing so. And these are primarily 501(c)4
organizations. (c)4 organizations are required by statute to be
operated exclusively for the promotion of social welfare. And
it has become common in recent years to criticize the IRS
because, despite this exclusive language, the agency's
regulations allow (c)4s to engage in political activities so
long as that is not their primary function. Anything more than
a de minimis exception, these people argue, violates the
statute.
But this argument overlooks the fact that the statute does
not define ``social welfare'' at all, leaving that entirely up
to the IRS. There is no serious reason I can think of why
social welfare should not include political activity.
You who have devoted much of your lives to electoral
politics and public service should know that as well as anyone,
and I wonder if anyone on the committee would wish to say here
today that members, their staffs, and their election campaigns
operate contrary to the social welfare of the American people.
The IRS regulations say that social welfare does not
include political activity but that groups can meet the
exclusive requirement if they engage in some political activity
as long as they primarily engage in other activities. That is
just a roundabout way of recognizing that political activity
has to be defined at some level as including a social welfare
function. Because otherwise, again, there is no spot for groups
in America that do not engage in primarily electoral activity
but want to engage in some electoral activity.
From the revenue standpoint, (c)3 charities cost the
government money because donors receive a tax deduction. Thus,
the government indirectly subsidizes these (c)3 organizations
and, for that reason, Congress has chosen to prohibit (c)3
organizations from engaging in electoral politics.
(c)4s, on the other hand, have no meaningful impact on
revenue, and in fact they generate tax revenue when they spend
money on political campaigns because their campaign spending is
then taxed to the lesser of those expenditures or their net
investment income. Otherwise, donations are from after-tax
dollars. Thus, whether a group is to classify as a political
committee under section 527 of the Code, or as a social welfare
group under 501(c)4, it has no meaningful effect on Federal
revenue, and thus there is no need for the IRS to be
investigating these organizations to deny or reclassify their
(c)4 status.
If they engage in too much political activity--i.e., it
becomes their primary focus--then they are subject to the
campaign finance laws and penalties under the Federal Election
Campaign Act, which is administered by the bipartisan,
independent Federal Election Commission. An FEC determination
would trigger an automatic reclassification of the group by the
IRS to a section 527 organization, but again, this would have
no effect on revenue, at least no meaningful effect.
This is what IRS's National Taxpayer Advocate recommended
in her report to Congress in 2013, that it, quote, ``may be
advisable to separate political determinations from the
function of revenue collection,'' and the IRS could rely on the
determination of political activity from the FEC.
Whether one believes the IRS in 2010 to 2012 was targeting
conservative groups, or really making a whole bunch of errors,
it was not a good thing. And when that happened, they were
removed from this process of trying to determine who was
engaged in political activity.
Why this ongoing effort to embroil the IRS in the
enforcement of political rules? The cynical reason is that some
actually want the potential for partisan abuse of the agency.
And though this is an inherently abusive power and almost
always harms the IRS's
revenue-collecting mission by sowing public distrust, a more
serious but still urgent reason is that this would be
unconstitutional if done directly under the Federal Election
Campaign Act, because Supreme Court decisions have limited
disclosure to organizations that have, again, the major purpose
of electing candidates, or to contributions to groups only if
those contributions are earmarked for elections.
So this attempted end-run of the constitution is bad policy
and, as indicated by the phrase ``end run,'' is probably
unconstitutional.
Let me conclude by noting that, in any case, the problem of
so-called ``dark money'' is probably much less than it seems.
Depending on how one defines it--and there is no legal
definition of the term, and people use different definitions--
you find that between 0.6 percent and 7.4 percent of all
political spending in the 2020 election cycle was so-called
dark money. This is down from approximately 15 percent back in
2000, long before Citizens United.
Furthermore, most so-called dark money groups, such as the
National Association of Realtors and related conservation
advocates, are well known to the public. Those that are less
well known are hardly unknowable. For example, Majority Forward
was the third largest dark money spender in 2020. In less than
10 seconds, a person can do a Google search and learn that
Majority Forward is a Democratic Party-aligned advocacy group
that campaigns against Republicans and conservative causes. It
is literally the first link, and you do not even have to click
through to read that description.
Finally, while the courts have recognized an informational
interest in disclosure, that interest is not about helping
people to evaluate the quality of an argument, let alone
holding people, quote, ``accountable'' for their speech. Its
sole purpose is to assist voters--and this is us describing
Buckley--in predicting the actions of elected officials.
Otherwise, this is a limited exception to the general rule that
it is not the government's business to investigate or track the
memberships' political views and affiliations of American
citizens.
Thank you very much for your time.
[The prepared statement of Mr. Smith appears in the
appendix.]
Senator Whitehouse. Thank you very much, Mr. Smith.
Now we turn, I hope, electronically to Ms. Ravel,
Commissioner Ravel.
STATEMENT OF HON. ANN RAVEL, FORMER CHAIR,
FEDERAL ELECTION COMMISSION, LOS GATOS, CA
Ms. Ravel. Thank you, Chairman Whitehouse, Ranking Member
Thune, and distinguished members of the subcommittee. I too am
honored to be here today to discuss the significance to our
democratic process of the issues that this subcommittee is
considering. Special tax benefits for nonprofit organizations
were enacted by Congress to encourage social welfare
organizations to operate exclusively for the promotion of the
common good and the general welfare of the community. And an
IRS decision subsequently was clear that if an organization is
primarily political, it cannot be a 501(c)4 or 501(c)6.
Federal tax law, enforced by the IRS, governs the extent to
which those organizations may engage in activities supporting
candidates without jeopardizing their tax-exempt status, and
deciding if such activity requires public disclosure or the
payment of tax.
On the Form 990, expenditures for political purposes must
be disclosed, and the IRS can and should remove tax-exempt
status for violators of the law.
Due to the Citizens United decision, lack of enforcement by
the IRS, and the new IRS rule eliminating donor reporting
requirements to the IRS, 501(c)4s are now a major source of
anonymous and very large political contributions. This
anonymity has exacerbated dark money, and it opens the avenue
to allow foreign donors to interfere illegally in the United
States' elections. And it has emboldened 501(c)4s to violate
the law with impunity.
In the Citizens United decision, eight members of the
Supreme Court insisted on the importance of disclosure of
political contributions, with Justice Kennedy going so far as
to say, quote, ``that citizens, with transparency, can see
whether elected officials are in the pocket of so-called `money
interests,' and also transparency enables the electorate to
give proper weight to different speakers and messages.''
Additionally and notably, both Citizens United and Buckley
v. Valeo said that a full Federal disclosure doesn't impose a
chill on speech or expression. Shockingly, and as was just
mentioned, according to the GAO report from February 3rd in
2020, the IRS doesn't even check nonprofit tax records for
signs of illegal foreign money in our elections.
And the CREW report also mentioned that for much of the
time since Citizens United, the IRS doesn't revoke section
501(c)4 groups' 501(c)4 status for violating the law's limits
on political spending, partly because they do not even review
the ethics of filings to assure that political efforts of
501(c)4s are consistent and truthful in their filings. CREW's
report also mentioned that groups which had disclosed political
spending to the FEC told the IRS, under penalty of perjury, in
their tax returns that they did not engage in any political
activity, or else they misrepresented the amount that they
spent.
The Federal agencies such as the FEC, the IRS, and DOJ that
have overlapping missions regarding political spending do not
work very often together. They do not consult--and I saw this
when I was on the FEC--or coordinate information regarding
violations of Federal law.
Congress should not accept this barrier to enforcing the
law that is violated by organizations that do receive special
tax benefits that were intended by Congress for social welfare
and not as conduits for political spending.
The IRS and the Treasury Department should update the
social welfare regulations to provide clarity around the
standards to determine if an organization has operated
exclusively for the promotion of social welfare. To do this,
Congress needs to repeal and stop including a rider in must-
pass appropriations that has prevented the IRS and Treasury
from taking this important step. This dark money rider has kept
voters in the dark as to who is behind political spending that
influences elections. And the regulations that were enacted
decades before Citizens United must be updated to preserve the
voter's right to know who is influencing elections.
Thank you.
[The prepared statement of Ms. Ravel appears in the
appendix.]
Senator Whitehouse. Thank you, Commissioner Ravel.
And our final witness is Mr. Walter.
STATEMENT OF SCOTT WALTER, PRESIDENT,
CAPITAL RESEARCH CENTER, WASHINGTON, DC
Mr. Walter. Chairman Whitehouse, Ranking Member Thune,
distinguished members of the subcommittee, thank you for the
honor of addressing you and for addressing this critical topic
of political activity by tax-exempt groups, which Capital
Research Center has studied for decades.
I have numerous agreements with the witnesses selected by
the chairman. For instance, I agree multiple types of exempt
groups must be considered, not just (c)4 dark money groups, and
the groups across the political spectrum, as Ms. Ravel
observed, that behave similarly. I second Professor Hackney's
concerns, stated elsewhere, about the dangers of elite donors
working against the common good. But we have significant
disagreements.
First, I agree with Professor Smith that donor disclosure
is no cure. This supposed remedy presumes that money to a (c)4,
like the chairman's friends at the League of Conservation
Voters, is bad if government doesn't coerce the donors into the
limelight. But I don't think the League's dark money has
captured the chairman. I think he receives it because he and
the League have shared views of what the social welfare
requires. So disclosure brings little help but often causes
great harm, especially when mobs threaten Americans across the
spectrum. That is why the leading constitutional case in this
area is one that protected the NAACP in Jim Crow Alabama. To
this day, the NAACP defends donor privacy, as does the ACLU,
and the Nation's largest LGBT advocacy group. This principle is
so important that those left-leaning groups joined with a major
Koch-funded group to oppose California's effort to abuse the
Schedule B donors' list then required on IRS forms.
Disclosure is a weapon, as even your witnesses, Mr.
Chairman, at the hearing last year where I had the honor to
testify, tacitly admitted. They said if I thought the left had
more dark money than conservatives, I should want disclosure.
Their logic? Donors in the groups they support are hurt by
disclosure, so I should seek it to hurt the left. But I do not
wish to harm donors and groups I disagree with, and I
respectfully urge you to end your campaign to harm donors and
groups you disagree with.
Another way I disagree with the witnesses today is the
excessive emphasis on (c)4 groups, misplaced for several
reasons.
First is the supposed threat of foreign intervention.
Professor Hackney spins out ingenious possibilities, but is
skimpy with actual examples. When I testified to the IRS in its
decision to drop Schedule B donor lists for (c)4s and other
groups, I observed how little evidence exists. I despise
foreign interference in our elections, but most likely that
rarely happens this way, because no rational villain abroad
would look at our political system and think (c)4s hold the
keys to the kingdom.
Look at the money. Statistics can be sliced many ways, but
let's take the largest dark money number I can find, the more
than $1 billion Ms. Ravel mentioned. She likely was citing a
report from the left-leaning OpenSecrets which estimated $1.05
billion in 2020. OpenSecrets also gave total election spending
as $14.4 billion. So dark money is about 7 percent. But this
ignores the even larger money in the (c)3 world raised by
groups active in political activity in its broadest sense, as
Professor Hackney helpfully puts it.
Capital Research Center doesn't have complete 2020 data,
but for the 2018 cycle we estimated public policy (c)3 money at
around $20 billion, compared to around $5 billion for hard
political dollars. Dark money is a distant third.
We should focus much more on (c)3s. I am a Catholic not a
Manichee, so I do not think the political spectrum divides all
good on one side, all evil on the other. But alas, abuses among
(c)3s have a strong partisan tilt, leftward toward the
Democratic Party.
Just this week, Capital Research Center found another
example of (c)3 abuse in a report from Vox, revealing emails
from a Democratic super PAC. Writing donors, the super PAC
describes the 2020 cycle's, quote, ``single most effective
tactic for ensuring Democratic victories, namely (c)3 voter
registration focused on underrepresented groups in the
electorate,'' close quote.
The super PAC even explains the tax advantages. Well-
designed (c)3 voter registration is, on a pre-tax basis, quote,
``two to five times more tax-effective at netting additional
Democratic votes than the tactics that campaigns will invest
in. Because 90 percent of the contributions we are recommending
for voter registration and get-out-the-vote efforts will go to
(c)3 organizations and hence are tax deductible,'' after taxes,
``such programs are closer to four to 10 times more cost-
effective. They are also eligible recipients of donations from
donor-advised funds and private foundations.''
I ask my fellow witnesses, do we want this in the (c)3
world? These schemes are the culmination of decades of left-
wing (c)3 voter registration abuse. Liberal reporter Sasha
Issenberg in his book The Victory Lab describes the Carnegie
Foundation's registration and turnout drives as, quote, ``a
backdoor approach to ginning up Democratic votes outside the
campaign finance laws that apply to candidates, parties, and
political action committees.''
Here let me apologize for a mistake in my written
testimony. I said Karl Rove had not used (c)3s to do
registration and get out the vote, only (c)4s, but I was wrong.
He only used 527 groups and party committees, never (c)3 or
(c)4 money.
Mr. Chairman, let me plead with you to find a way to have
the Ford Foundation and its (c)3 allies rise to the level of
Karl Rove's political morality and end their partisan
registration work.
[The prepared statement of Mr. Walter appears in the
appendix.]
Senator Whitehouse. Does that conclude your testimony?
Mr. Walter. Yes.
Senator Whitehouse. Thank you, Mr. Walter.
Mr. Hackney, in the wake of the original look at the IRS
into the 501(c)4 abuse, there was a battering that the agency
took, a storm of right-wing disapproval by politicians, media
outlets, dark money groups, charges to bring criminal referrals
against one employee, efforts to impeach the IRS Commissioner.
Did that storm of abuse have any effect, do you believe, on
enforcement motivation within the agency?
Mr. Hackney. I absolutely believe it did. It impacted the
way the employees of the IRS feel, the way the institution of
the IRS feels. It put both the employees at risk in operating
within that space, and it put the mission of the IRS at risk
within that space. And I don't think it was fairly done. I
agree with the bipartisan report.
Senator Whitehouse. Well, the reports afterwards appear to
have confirmed that it was not fair. But never mind. We talked
about the FEC reporting being inconsistent with the IRS
reporting. To your knowledge, has the IRS ever inquired into
that discrepancy, or asked the Department of Justice to look
into whether those discrepancies under oath amounted to false
statements?
Mr. Hackney. To my knowledge, from observing outside, I
have never seen that take place. I've never seen them move in
those ways.
Senator Whitehouse. And with respect to foreign use of
these dark money avenues, have you ever seen the IRS take any
investigative action to explore foreign use of dark money
influence channels?
Mr. Hackney. I have not, and I believe Commissioner Rettig
recently testified that he does not know of any of that order.
Senator Whitehouse. So, let's say that we start with the
49.9 percent, and just round it to 50 for the sake of doing the
math. If you give it to one--let's say you give $8 million. You
give it to organization one, and organization one can spend $4
million on politics, and then it can give the rest of its money
to organization two, which having received $4 million, can then
spend $2 million on politics and give the rest of its money to
organization three, which can then spend $1 million on politics
and give the remainder to organization four, which can spend
half a million dollars on politics and, at the end of the day,
93.75 percent of the money has been spent on politics because
of coordination among the groups.
And if you really wanted to play your cards right, you
could give, let's say, a million dollars to each of five groups
that coordinated to spend half and give half to the next one,
spend half, give half to the next one. You would have a closed
circle of spin-cycle donations. And at the end of the day, the
donor would have achieved the goal of getting 93.75 percent--
actually with five, it would be another cut, so it would be
more like 96 percent--of this money into politics,
notwithstanding the 50-percent restriction.
Setting aside the merits of the 50-percent restriction,
which I think is idiotic, has the IRS ever inquired into some
systematic attempts to get around that rule by these sort of
spin-cycle donations among coordinating entities?
Mr. Hackney. To my knowledge, they have not. I believe it
is something that could be attacked. But in this current
environment, I do not see it happening. I do not see them
having the information to take that kind of situation on.
Senator Whitehouse. Ms. Ravel, you have been in the Federal
Election Commission seat yourself. You are aware of the concern
of foreign money trying to influence our elections. In fact, we
have seen Facebook political advertisements paid for,
denominated in rubles, which apparently was something that the
geniuses at Facebook could not figure out was potentially a
problem.
What should we be doing? How big a risk is foreign money
coming through these avenues of influence? And what should we
be doing about it?
[Pause.]
Senator Whitehouse. You may still be on mute.
Ms. Ravel. Okay.
Senator Whitehouse. You're there.
Ms. Ravel. There is a really big risk of foreign money. And
I saw it when I was at the Federal Election Commission. We knew
that there was foreign money that was being spent in these
avenues. And despite what people have said about OpenSecrets,
while they are a data group, they are very good at analyzing
these issues. And they themselves have seen evidence of foreign
money coming into the United States' elections. And I think it
is a huge risk. We know it is illegal. We know that foreign
actors are not supposed to have influence on our electoral
process.
So it is a failure not to have better disclosure in this
situation that is really significant.
Senator Whitehouse. And what----
Ms. Ravel. And they----
Senator Whitehouse. Go ahead.
Ms. Ravel. I was going to go a little bit off script, if
that is okay, and refer to the issue that you asked Mr.
Harper----
Senator Whitehouse. Mr. Hackney, you mean?
Ms. Ravel. Yes.
As the Chair----
Senator Whitehouse. Talking about the coordination among
groups, and their limit?
Ms. Ravel. Yes.
Senator Whitehouse. Have you actually seen that happening?
Ms. Ravel. I had seen it happen when I was Chair of the
California Fair Practices Commission. We knew that there was a
group, the Center to Protect Patients' Rights, that was a Koch-
related organization. And a lot of their money went to
501(c)4s, and it was exactly what you described. And so the
amount of money that was ultimately spent to influence a ballot
measure election was in the millions of dollars--$16 million,
to be precise.
Senator Whitehouse. And to your knowledge, there has never
been a single ounce of effort expended by the IRS to inquire
into the problem of how a coordinated spin cycle of donations
can defeat the 50-percent exemption so that actually they all
end up spending way more than 50 percent, but just go through
the charade of giving each other the money.
Ms. Ravel. That's correct.
Senator Whitehouse. Thank you.
Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
Mr. Walter, I appreciate your candor in stating that, while
many of the (c)4 groups utilizing donations through the tax-
exempt process don't align with your political views, your
respect for confidentiality for everyday Americans holds more
value than your political leanings.
Could you elaborate on some of the left-aligned, Democrat-
aligned organizations that oppose increased donor disclosure
proposals, and what concerns those groups have raised?
Mr. Walter. Certainly, Senator. As I said, the three most
important left-wing groups which have happily worked in court
to fight Schedule B disclosure, for instance--which is the
donors' list on an IRS 990 form--are the NAACP, whose name is
enshrined in the leading constitutional case in the whole area;
the ACLU; and the Human Rights Campaign, which is the largest
LGBT group. And obviously they believe that their members and
their organizations need their donors' privacy respected.
And since, from the beginning of the republic we have had
anonymous speech, I think that is not unreasonable.
Senator Thune. Mr. Smith, you state in your prepared
testimony that the DISCLOSE Act is problematic as both a matter
of policy and constitutional law because it would, among other
things, focus attention on the individuals and donors
associated with sponsoring organizations rather than on the
communications message, exacerbating the politics of personal
destruction and further coarsening political discourse.
Could you explain a little more in depth what you mean when
you say that the DISCLOSE Act will ``exacerbate the politics of
personal destruction and further coarsen political discourse''?
Mr. Smith. One of the problems that has influenced American
politics in recent years I think is well known to everyone in
this room, which is the tendency to engage in ad hominem
attacks on individuals, overheated rhetoric, and so on. And I
think by placing an emphasis on disclosure--and this is even
aside from the constitutional issues, just as a policy matter--
this emphasis on who is speaking, who is really speaking, is
probably poisonous to our system.
I also reject the notion that if, for example, a 501(c)4
group, the Sierra Club, spends the money, or the National Rifle
Association spends the money or something, that somehow it is
not their money. They are the groups spending the money, and it
is their money. And unless the donations they have received are
earmarked for something, the person who gave them some money no
longer has any control over it.
So, this kind of essential focus on who is speaking, I
think is quite wrong, and it is one of the reasons why the
Supreme Court has long protected Americans in their
affiliations, in their memberships, and in their political
views. And it does not only go to joining groups. It has gone
to all the great cases from the Red Scare of the 1950s to the
Hollywood Seven. The effort was to not make it so that people
could not speak publicly lest they be blacklisted and
blackballed and harassed by people. That is not good for, not
healthy for our politics.
Senator Thune. Mr. Hackney, since last year's massive IRS
data leak, or hack, of private taxpayer information, with which
the left-leaning ProPublica went on to publicize confidential
taxpayer details, there has been no meaningful follow-up from
the administration.
My Republican colleagues and I on this committee have
repeatedly pressed the administration for accountability, and
the response has essentially been silence.
You are a former IRS employee. How do you think this
unauthorized disclosure of private taxpayer information and the
total lack of accountability from the administration impacts
trust between everyday Americans and the IRS?
Mr. Hackney. So, it is a troubling disclosure. We don't
know where it came from. I hope there is an investigation into
it. So I appreciate that that may take some time, and it is a
significant matter, and I hope the administration is giving it
great care.
Senator Thune. Mr. Walter, you write in your prepared
statement, and I quote, that ``no (c)3 entity should be allowed
to fund or execute voter registration and get-out-the-vote, or
GOTV,'' end quote. You further write that ``failing that, it
should be clearly permissible to all, and the uncertainty that
surrounds it leads reds to fear the next Lois Lerner if they
dare try it, while blues use fig leaves like civic
participation to cover their naked partisanship as they pursue
it with gusto.'' That is a quote.
Can you elaborate on that point, particularly as it relates
to political activity of foundations? And what other types of
political activities are the (c)3s engaged in?
Mr. Walter. Thank you, Senator.
Well, as I said, and I believe demonstrated rather
thoroughly, there is massive (c)3 voter registration funded by
(c)3 private foundations, conducted by (c)3 public charities.
Now the governing rule in the IRS world for this is that that
sort of thing is permissible only on a nonpartisan basis. And
the IRS further spells out that you can't just have the
intention not to be partisan in your voter registration and
get-out-the-vote. You have to have an effect that is
nonpartisan, that does not assist one candidate or party.
Well, that sadly is not remotely the case. I quoted for you
a Democratic super PAC that is gleeful about how this is better
than giving money to campaigns, they very clearly say--multiple
times better, more bang for the buck.
The most extreme example, I would say, is in the 2020
election when one billionaire, Mark Zuckerberg's family, took
money out of donor-advised funds at the Silicon Valley
Community Foundation, gave it to two (c)3s that were run by
(c)4 Democratic veterans, who then distributed that money to
over 2,000 government election offices in almost every State.
And as we have been very careful to document--and all our data
is publicly available; you can download it and crunch the
numbers yourself--that money went with great disproportion to
Democrat vote-rich areas, and in those areas made a tremendous
difference for the Democratic Party's presidential candidate.
So I think this was a serious scandal that needs to be
addressed, and I am certainly not aware of any activities by
the IRS to enforce these regulations.
Senator Thune. Thank you, Mr. Chairman.
Senator Whitehouse. I am informed that Senators Menendez
and Warren are trying to get here, so to give them a little bit
of time to do that, and with the ranking member's permission, I
will ask about the Trump administration's repeal of the
disclosure requirement to the IRS, and what the absence of that
information to the IRS does to the ease and fairness of
enforcement by the IRS, and particularly with regard to the
sort of coordinated network example that I gave. I will ask Mr.
Hackney that first, and then if Ms. Ravel wants to add
anything, I will invite her, and with any luck Senators Warren
or Menendez will be here by then. And if not, I will give
Senator Thune a chance for another question, just in the spirit
of fair play. And if none of that has happened, then we will
conclude the hearing.
Mr. Hackney. Thank you. Great question. So this is the
Schedule B to the Form 990 that folks file. And the IRS has
long requested this information. Since 1943 or 1942 it has
requested this information--since the form began--and received
it. And the IRS had kept that in place over 70-some odd years,
and then suddenly decided they no longer needed the
information.
I think they are wrong on that. I think it actually matters
to tax collection. I think it matters to ancillary laws. I
think it has an enormous impact.
One of the things I pointed out in a recent article is
there was a prosecution going on in Ohio, and one of the bits
of testimony was, ``Hey, by the way, you can get away with
bribery today because no one will know whether this thing is
happening.'' It is of significant concern.
IRS knows information reporting matters. It collects
information from all sorts of folks--from low-income, from
international transactions--but suddenly in this space it
thinks it is okay to turn off the information collection? I
think it is going to have a significant, problematic effect on
the collection of revenue, on the equal enforcement of the
laws, and people's belief that the laws are being equally
enforced. Because, as I stated in my opening statement, this
thing redounds to wealthy interests who are willing to skirt
the law. I think it is a problem. I hope that they reconsider.
Senator Whitehouse. In this space of entities that also
enjoy enormous anonymous political influence, it is kind of
interesting that that is the space that gets carved out.
Ms. Ravel, did you have anything to add?
Ms. Ravel. I think he said it very well. And what it really
impairs is an already somewhat dysfunctional process that the
IRS has in not identifying those people who are violating the
law. And it is impossible for them to increase the ability to
enforce the law, as was said previously, and I think that that
is their function. They were meant to do that under the IRS
regs, and so that is a really bad idea that unfortunately came
about recently to make it difficult for the IRS, even more
difficult than it has been, to enforce the law.
Senator Whitehouse. Thank you.
Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
Mr. Smith, in your prepared testimony you state that
perhaps the most important feature of the FEC's design is its
equal-sized blocs of Commissioners, three from each party. One
of the Democrats' key initiatives in S. 1, the so-called ``For
the People Act,'' was to change the structure of the FEC from a
six-member body to a five-member body, subject to, and designed
for, partisan control.
Could you explain to the committee why it would be a
mistake to restructure the FEC into an agency designed for
partisan control?
Mr. Smith. Sure. We need to understand that the FEC was
created in the wake of Watergate and abuses of the IRS by the
Nixon administration. And at the time, it was agreed by leaders
in both parties and Congress that it was vitally important to
avoid that type of executive branch control of an organization
that directly regulates political campaigns and political
speech.
You know, obviously any agency can have a sort of a
partisan bent to the policies it adopts, but they typically are
very indirect. We don't have that kind of thing where one
agency can just come in and say, no, you Democrats, you can't
do that, but you Republicans can. So this degree that the
agency had to be bipartisan, that was the fundamental point of
the agency, the fundamental issue on which all agreed in
setting up the agency.
And I note that, in the modern era, whenever the FEC is
attacked as partisan, the first response of others is to say
that it takes four votes. You have to have a majority that in
some degree is bipartisan. And I think that that is in fact
true, and I think it would very greatly damage the credibility
of the FEC to have a partisan majority, or a single director
appointed by the President.
Senator Thune. Do we still have people coming, Mr.
Chairman?
Senator Whitehouse. I can't guarantee it. We have a whole
array--we have 28 votes stacked up, and again we have the
repercussions of the Alito hand grenade. So, it is a very busy
day, and I cannot guarantee that anybody else will come.
So, we will leave the hearing open for 2 weeks. You may get
other questions that come in in that first week, and we would
be delighted if you would give us the favor of your responses
to those questions.
By way of a closing statement, I will say that we have now
entered a political era in which dark money groups funded by
powerful special interests now on occasion actually out-spend
the political campaigns of the actual candidates. And whatever
communication goes on behind the scenes between whoever is
behind the outside spending, whether it is a super PAC or
another group, and the candidates themselves, is completely
unregulated. But the notion that information doesn't travel in
politics is an idiotic notion, spectacularly disproved by
history.
So the idea that there really are firewalls is simply not
credible in practical reality. The result is advertisements
paid for by entities that do not really exist, and that hide
whoever it is that really exists who is behind them, because
there is not accountability for what they say; hence the
degeneration of American political speech and the arising of
the phrase ``tsunami of slime'' to describe political speech.
It was Citizens United itself, the decision that I have violent
disagreements with on many angles--but they did say that there
is a nexus between secrecy and corruption in politics. And they
specifically made that a predicate of the case in order to
allow the unlimited money in.
Then of course, that did not prove true, and they did not
have the chance to rebuild. So repeatedly, I have gone to the
Supreme Court to say, ``Hey, you were wrong.'' You were
factually wrong that there will be effective disclosure. I
think we are up to how many billions of dollars in dark money
spent--$6 billion since that decision, something like that. So
there is $6 billion of proof that the Supreme Court got it
wrong in its reliance on effective disclosure. And on several
occasions, I have gone to the court and said, ``You got it
wrong.''
On one case, I went in bipartisan fashion with Senator
McCain, who was a legendary advocate for honest elections, and
in our bipartisan brief we said, ``Hey, what you said was going
to happen is not happening. You were wrong. You need to
correct.''
And the fact that the Supreme Court never corrected, even
when the newspapers, the FEC filings, and bipartisan briefs
coming into it told them that they had been wrong, I think is a
blot on the Court.
So I intend to continue to work to try to clean up this
mess. And just to be clear, the efforts that I will undertake
to clean this up will apply to both sides. So the conversation
about whether Democrats do better, or Republicans do better,
whether Democrats are guilty or Republicans are guiltier, who
is playing fair, or who is not, it all needs to stop to restore
decency and accountability in American politics.
And I will note a recent decision in my United States Court
of Appeals for the First Circuit--Rhode Island is part of the
First Circuit--where a very distinguished Rhode Islander, Judge
Bruce Selya, recently just upheld a Rhode Island law requiring
disclosure, using these very arguments.
The Supreme Court declined to review it, and I think that
is the argument that makes the better case here. We are
citizens of the United States. And as citizens of the United
States, we have responsibilities. And in order to discharge
those responsibilities, we need information. And a very
important piece of the information that we require to be good
citizens of the United States is who the hell is behind the
megaphone that is blaring at us. Because you might very well
discover that you can discount the voice, once you know who it
is.
If somebody sets up Rhode Islanders for peace and puppies
and prosperity, and comes and smears me all over the place in
Rhode Island, that is one thing. If it is Marathon Petroleum,
or Exxon, that is a very different thing. And Rhode Island
voters will sort that information out very quickly. In fact, it
may be to my advantage to have negative ads run against me in
Rhode Island by Exxon Mobil. So they hide. And I do not think
that is a fair way to go.
Senator Menendez has arrived, and I would be delighted to
recognize him for a period of questioning.
Senator Menendez. Thank you, Mr. Chairman. And thank you
for holding the hearing, as well as keeping it going.
For 151 years, the National Rifle Association of America,
commonly known as the NRA, has operated as a tax-exempt social
welfare organization. In order to receive the privileges of
being a tax-exempt organization, namely not paying tax on its
revenues, the NRA must follow the same laws that apply to all
tax-exempt social welfare organizations.
One, the organization must be focused on its stated mission
or primary purpose.
Two, the organization's resources must be used to benefit
society, not for self-enrichment or private benefits.
And three, the organization must, under penalty of perjury,
file annual reports with the IRS showing that they are not
violating principles one and two.
Since at least 2008, the NRA has repeatedly and flagrantly
violated each of these three principles, a trifecta of bad
behavior. Their stated primary purpose is to, quote, ``protect
the Second Amendment, promote public safety, provide
marksmanship and gun safety training, promote competitive
shooting, and improve hunter safety.''
But in recent years, the organization has spent less than
10 percent of its budget on this mission. Instead, while mass
shootings have ravaged communities across the country, killing
2,500 children and teens each year, the organization became a
fear-mongering political media company promoting a lifestyle of
loving assault rifles equipped with high-capacity magazines,
and calling anyone who questioned it a socialist or just simply
trying to, quote, ``take them away.''
The pinnacle of the NRA's diversion from its stated purpose
was its launch of NRA TV in 2016, which had little to do with
upholding the Second Amendment. Instead, it pandered in culture
war tropes, including calling then-President Obama language
that I would not use here; blaming the Manchester Arena bombing
on multiculturalism, socialism, and gender bending; and
perpetuating former President Trump's deep state conspiracies.
The NRA itself, in its suit against its PR company that ran
NRA TV, later called this content, quote, ``a dystopian
cultural rant that veered into distasteful and racist
territory'' at a tune of $20 million a year.
So my question, with that preface, Professor Hackney, is,
would the NRA spending only 10 percent of its budget on its
primary purpose, and instead spending on items like NRA TV,
warrant close scrutiny, maybe even an investigation by the IRS?
Mr. Hackney. Well, pretty significantly about the NRA,
particularly as the judge was considering dissolving them, I
think the NRA is a great example of an organization that shows
why we need good regulation in this area.
The secrecy promotes corruption. The ability of their folks
to operate outside of the light has encouraged significant
problematic actions. And the folks who care about the NRA's
mission should care about that.
So, having a good IRS there to do that, I do believe there
should be a closer look at the NRA--and I have stated so in
news articles before--by the IRS.
Senator Menendez. Well, thank you. Now let me say, the
relationship between the NRA and its public relations firm,
Ackerman McQueen, that ran NRA TV, is also problematic.
The New Yorker, in its expose on the financial dealings of
the NRA, describes the relationship between the NRA and its PR
firm as, quote, ``so intertwined that it is difficult to tell
where one ends and the other begins.'' The article details
overall payments to the public relations firm of $40 million
each year, including payments of millions of dollars to
figureheads on NRA TV. It also claims that Oliver North, the
NRA's president, was paid through Ackerman McQueen.
Lastly, it says that, quote, ``Many NRA employees have long
suspected Ackerman of inflating the cost of services that it
provides.''
Professor Hackney, if these allegations are true and the
NRA has been paying inflated costs to its PR firm, would this
warrant an investigation or even close examination by the IRS?
What about the claims that the president of the NRA was paid
through an outside contractor?
Mr. Hackney. So I will focus in on the fact that, through
that arrangement, there has been a lot of taking of things from
the NRA. It is trying to carry out its actual mission, but much
money has moved outside of it to people who control the
organization and have found that it is not appropriate.
I believe there should be a closer look at that as a result
of those. That is, to protect the folks who care about this
mission from self-dealing and other acts by those who control
the organization.
Senator Menendez. And finally, if I may, over the past 5
years the Attorney General of New York, Letitia James, has
alleged that the NRA diverted millions of dollars from the NRA
to pay for its executives' rides on private planes; travel to
Africa, Lake Cuomo, the Bahamas, Budapest; designer suits
purchased on Rodeo Drive; gifts to friends; memberships at golf
clubs; and golden parachute arrangements, which included
million-dollar mansions and seven-figure salaries.
So, Professor, would the NRA's spending on these items
violate the organization's requirement to protect against
private inurements, and if true, would this warrant an
investigation or even a closer examination by the IRS?
Mr. Hackney. The Attorney General has put forth a
substantial allegation that should be taken very seriously.
There has been copious reporting in this regard. I think any
organization--Democrat, Republican, whatever interests--that
engaged in such transactions should have a closer look by the
IRS.
Senator Menendez. I appreciate your insights, and I yield
to my distinguished colleague from Massachusetts.
Senator Warren. Thank you very much, Senator Menendez. And
thank you all for being here.
So, giant companies and billionaires are drowning our
political system in cash, corrupting our democracy. And a big
way they do this is by funneling cash anonymously through so-
called dark money groups.
These tax-exempt groups do not disclose their donors, even
if they spend hundreds of millions of dollars to influence our
elections. As the tiniest of guard rails, these groups are
supposed to spend less than half of their money on politics.
But poor enforcement allows them to get away with a whole lot
more than that.
Professor Hackney, you not only study these issues as an
academic, you spent 5 years at the IRS working on them. So I
want to work through just a hypothetical here. Let's say there
is an anti-tax billionaire who wants to spend unlimited amounts
of cash on an anonymous political campaign to slash IRS
funding. An under-resourced IRS will struggle to catch him even
if he cheats on his taxes. And if his dark money groups
illegally spend over half their cash on political campaigns,
the under-resourced IRS is not likely to find it.
So, Professor Hackney, say one of the billionaires channels
millions through one group, and then has that group donate over
50 percent of the cash into another group, which then spends
all of it, 100 percent of it, lobbying against the IRS funding.
Does that kind of simple shell game, one-two, actually
trick the IRS into thinking that the first group is apolitical?
Mr. Hackney. Because there has been so little enforcement
in this area, I think the only answer is ``yes,'' they are not
seeing this, and they recently got rid of information reporting
regarding that. So I think the answer is ``yes.''
Senator Warren. Wow! It is just a huge gap in our
enforcement. So we have this billionaire who can use a simple
shell game to trick the IRS. But then the billionaire is also
supposed to report political spending to the Federal Election
Commission.
Ms. Ravel, I understand you are online with us. You were
Chair of the FEC, so let's say this billionaire's political
nonprofit reports over $15 million in election spending to the
FEC. If the same nonprofit told the IRS that it spent less than
$10 million on elections--the same amount of money, they just
give two different reports in two different places--would they
get away with it?
Ms. Ravel. Yes, they have been getting away with it. And we
had some conversation about the CREW report that spoke of a
number of situations where that has happened, including
relating to the NRA, by the way, that we were just talking
about. But one of their reports related to, in 2018, a Federal
PAC called Conservative Alliance, that ran ads and mailed
pieces, and they told the FEC about how much money--they did it
through Prosperity Alliance, a Virgina 501(c)4 that made
political contributions. And the FEC got that information, but
they told the IRS on their tax return, under penalty of
perjury, that they had not engaged in any political activity,
and they did not file a Schedule C report.
And then subsequently it happened again, and 78.4 percent
of the nonprofit's money was spent on political ads and the
like again, and they also then filed a report with the FEC and
failed to file a report on Schedule C with the IRS, and yet
said to the IRS that they also did not engage in political
activity.
And the IRS never did anything about that.
Senator Warren. So what I described as a hypothetical, you
are telling me has not only happened, but that it has happened
repeatedly, basically.
And, Mr. Hackney, I see you shaking your head as well.
There is a lot we need to do to fix the issue of big money
in politics. For one, Congress needs to give the IRS the
resources that it needs to go after tax-cheating dark money
groups and eliminate the appropriations riders that prevent the
IRS from clarifying the rules in this area.
But while we are working to try to pass some legislation
here in Congress, the IRS needs to think about what it can do
right now to start shining some light on this ocean of dark
money.
Professor Hackney, are there steps that the IRS can take
right now, without a change in the law, to stop illegal
political spending by nonprofits, such as looking at public FEC
data and reinstating high-dollar donor reporting requirements
for 501(c)4 organizations?
Mr. Hackney. I know of no reason that they could not use
such publicly readily available information that the taxpayers
themselves have reported. And absolutely I believe the IRS
needs to reinstate the requirements that 501(c)4 organizations
disclose their substantial donors. I think it makes a big
difference in tax collection, and it makes a big difference in
our belief that the laws are being equally enforced.
Senator Warren. So we need to change the law to give them
more tools. We need to fund them to give them more tools. But
the IRS needs to step up as well and make pretty basic
comparisons like this.
There is a lot we need to do to defend our democracy, but
the IRS can and should take these concrete steps to limit the
role of big money and try to get it out of politics, to ensure
that the government is working for everyone. These billionaires
and giant corporations, they think they can buy our elections,
and I think it is time to stand up and demand a government that
is truly a government of the people, by the people, and for the
people.
Thank you very much for being here. And I now recognize
Senator Cortez Masto, and virtually hand the gavel to you,
Senator Cortez Masto.
Senator Cortez Masto. Thank you, Senator Warren.
Let me follow up on this question by Senator Warren. And,
Ms. Ravel, let me talk with you about it. Recently--and this is
very disturbing to me as a former Attorney General--I read an
article in The New York Times, and it is titled ``Donations
Steered to Trump Super PAC by Canadian Are Found To Be
Illegal.'' And it describes how a Canadian billionaire helped
steer $1.75 million in donations to the America First Action
super PAC, and the FEC found this to be an illegal foreign
contribution. They fined this Canadian billionaire--and this is
$975,000 this billionaire was fined. It's the largest in the
history of the Commission, and yet despite it being illegal,
this billionaire may get that $1.75 million back because, as a
part of the settlement agreement with the FEC, they gave the
America First Action PAC the option to return the money to the
donor who committed the illegal donation, or to donate it to a
nonprofit, or redirect it to the U.S. Treasury.
So, this does not make sense to me. Does it make sense to
you that with a massive illegal donation made to a PAC by a
foreign donor somehow there is the ability to send that money
back to that donor instead of disgorging that to the U.S.
Treasury and holding them accountable and penalizing them for
the illegal activity?
Ms. Ravel. It does not make sense, but for the FEC this is
groundbreaking, that they were even able to find that there was
impropriety there, because it is so difficult to have four
votes.
It seems to me that the FEC, what they should have been
doing is potentially uniting with DOJ and utilizing the DOJ
Criminal Division that has the ability to look at issues like
this and potentially bring some kind of a criminal action. But
unfortunately, there is not a lot of connections and
conversations between the DOJ and the FEC either on these
issues.
Senator Cortez Masto. Well, let me ask you this, because it
seems to me, even in the statutory enforcement provisions that
the FEC has, just on the fines and disgorgement, they have the
ability to mandatorily ensure that that money did not get
returned back to that donor. And it should have been disgorged
to the U.S. Treasury as a penalty.
Does that require us to change, Congress to change the law
to make it mandatory so there is no such discretion to allow
this type of return of capital to somebody who violates the
laws here in the United States?
Ms. Ravel. It will take that action. And I think it is
important for it to happen. Because now that we know, in
particular because this was a foreign donor, it is illegal,
patently, and so it is something that needs to be looked at by
Congress to provide that ability to the FEC.
Senator Cortez Masto. Thank you. I could not agree more.
And I am looking at legislation. I just think it is so
outrageous that this foreign donor was able to get the funds
back, and we do have to hold people accountable and penalize
them for violating our laws, particularly when it comes to
civil fines like this.
We need more transparency and accountability in our
campaign finance laws at all levels. So, thank you.
I am going to yield the remainder of my time. I am not sure
if there are any other of my colleagues, either in person or in
the room, who would like to go next.
Hearing Clerk. Senator, there are no members in the hearing
room, so you are free to close the hearing. The record is open
for 2 weeks.
Senator Cortez Masto. All right; thank you.
So, thank you to the panelists, everybody who joined us
today. The record will be open for a 2-week period for any of
my colleagues who want to submit any additional questions to
the panelists.
And thank you so much for this incredible conversation and
hearing today, and this committee hearing is adjourned.
Thank you, everyone.
[Whereupon, at 3:32 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Philip Hackney, Associate Professor of Law,
University of Pittsburgh School of Law
Chair Whitehouse, Ranking Member Thune, members of the committee,
thank you for inviting me here today to speak with you about a matter
of great importance to the operation of the democratic order of the
United States. I understand you have asked me to speak to the issue of
Federal income tax laws and IRS enforcement related to the political
activity of tax-exempt entities.
I am an associate professor of law at the University of Pittsburgh
School of Law where I primarily teach tax law courses. I specialize in
the Federal tax treatment of nonprofit organizations. From 2006-2011, I
worked in the Office of the Chief Counsel of the IRS in Washington, DC
overseeing the tax-exempt sector. There I helped to oversee the
drafting of regulations, the overall program of auditing tax exempt
organizations, and IRS litigation on matters related to tax laws
applicable to nonprofits and government entities. That work necessarily
interacted in a robust way with politics. The IRS oversees dark money
organizations, section 527 political organizations, and charities that
engage in politics in its largest sense. Today, I write, research, and
speak about these organizations and the regulatory regime applicable to
them.\1\
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\1\ I note that in addition to my experience at the IRS, this
testimony is informed in significant part by articles I have written,
including Philip Hackney, ``Political Justice and Tax Policy: The
Social Welfare Organizations Case,'' 8 Tex. A&M L. Rev. 271 (2021)
[hereinafter ``Political Justice''] and Philip Hackney, ``Dark Money
Darker? IRS Shutters Collection of Donor Data,'' 25 Fla. Tax Rev. 140
(2021) [hereinafter ``Dark Money Darker'']. I also rely in small part
on testimony I provided to the Pennsylvania House Committee on
Oversight February 7, 2022.
I understand the committee is interested in whether the tax laws
and IRS enforcement are up to the task of overseeing the tax issues
associated with the political activities of tax-exempt organizations.
While from my writing you can see that I think the tax laws governing
the tax-exempt realm are wanting, our overall legal structure is not
bad. It is justifiable at least. Where we fall down as a Nation in this
space is in the enforcement. As I will discuss below, we do not
allocate enough resources to this arena, and we do not institutionally
offer the support necessary to enforce these laws. These failures do
not favor one party over the other but favor those interests in the
country with the means and the willingness to abuse that structure.
---------------------------------------------------------------------------
Primarily that redounds to certain wealthy interests.
Within the tax structure of politics in its broadest sense it is
worth noting that neither political campaign expenditures nor lobbying
expenditures are deductible under the Internal Revenue Code
(``Code'').\2\ In effect, Congress sees these as personal expenditures
that ought not receive a subsidy through the income tax. Indeed,
Congress forces the contributor of appreciated property, such as
corporate stock, to a section 527 political organization to recognize
gain on that transfer under the Code.\3\ This is distinctly different
from most contributions of property. Gifts of appreciated property in
general do not trigger an income tax gain.\4\
---------------------------------------------------------------------------
\2\ 26 U.S.C. Sec. 162(e). The U.S. Supreme Court upheld the
prohibition on deducting political campaign expenses in Cammarano v.
United States, 358 U. S. 498 (1959).
\3\ 26 U.S.C. Sec. 84.
\4\ See Boris I. Bittker and Lawrence Lokken, ``Federal Taxation of
Income, Estates and Gifts,'' 40.3 (2021, WG&L). I have argued
Congress ought to subject contributions of appreciated assets to social
welfare organizations to the income tax on the gain just as it does to
section 527 organizations under 26 U.S.C. Sec. 84. See ``Political
Justice,'' supra note 1, at 328.
In this testimony, first, I will describe the tax law that applies
to these organizations and then I will discuss the enforcement
environment including both a description of the resources available to
the IRS and a discussion of the institutional challenges faced by the
IRS. As you will see in part III, the IRS does not have the budget to
enforce the tax laws on the books, but also often fails to make use of
simple information to enforce these laws that matter both in collection
of the revenue and our democratic order.
i. tax-exempt organizations and politics introduction
The IRS tax-exempt division oversees a range of nonprofit entities
that engage in various types of political activity in its broadest
sense. Some of the activities of these organizations is also overseen
by the FEC. The entities I will focus upon include section 527
political organizations, section 501(c)(3) charitable organizations,
section 501(c)(4) social welfare organizations, and section 501(c)(6)
business leagues.\5\
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\5\ Section 501(c)(5) labor unions might be listed here as well,
but because of robust regulation and disclosure regarding their
activity via other regulatory bodies, the IRS role in oversight of
these organizations is much less significant. See, e.g., Labor-
Management Reporting and Disclosure Act, 29 U.S.C. Sec. Sec. 401-531
(2012). Extensive reports about the financial activities of many labor
unions are available on the Department of Labor website, at https://
www.dol.gov/agencies/olms/public-disclosure-room.
When I say political activity in its broadest sense, I am referring
to a combination of intervention in a political campaign, lobbying, and
---------------------------------------------------------------------------
activities close to both, sometimes referred to as issue advocacy.
In tax law, intervention in a political campaign has its most
salient meaning with respect to charitable organizations.\6\ This
political campaign intervention prohibition is colloquially referred to
as the ``Johnson Amendment.'' It means the exempt organization cannot
participate or intervene, ``directly or indirectly, in any political
campaign on behalf of or in opposition to any candidate for public
office.''\7\ In other words, in campaigns for public office (Federal,
State, and local) the charity itself cannot directly or indirectly
encourage the public to vote for or against candidates. I use that
definition when I refer to political campaign intervention.
---------------------------------------------------------------------------
\6\ 26 U.S.C. Sec. 501(c)(3).
\7\ Treas. Reg. Sec. 1.501(c)(3)-1(c)(3)(iii).
Lobbying refers to efforts to encourage members of a legislative
body to propose, support, or oppose legislation.\8\ Finally, there is
issue advocacy. In issue advocacy, an organization may educate the
public broadly about a political topic with the intention of swaying
the public toward a particular political solution. In its most specific
context, issue advocacy involves advocating about a political solution
while simultaneously identifying a candidate for office. Typically,
these communications let the reader or viewer draw their own conclusion
about whether to vote for or against that candidate. This sometimes
leads to political campaign intervention.
---------------------------------------------------------------------------
\8\ Treas. Reg. Sec. 1.501(c)(3)-1(c)(3)(ii).
---------------------------------------------------------------------------
ii. tax-exempt organizations and politics, the law
This part II will describe section 527 political organizations,
section 501(c)(3) charities, section 501(c)(4) social welfare
organizations, section 501(c)(6) business leagues, and then discuss
information return obligations of tax-exempt organizations.
a. Section 527 Political Organizations
Prior to the 1970s, the IRS mostly ignored the tax implications of
political committees or organizations.\9\ It saw the contributions to a
political committee as a gift and therefore non-taxable to the entity
or individual.\10\ Congress enacted section 527 of the Code in 1975 to
manage the taxable matters created by these political committees and
organizations.\11\ In 2000 and 2002, Congress amended the statute to
require disclosure of donors from section 527 organizations that did
not specifically come within the FEC's jurisdiction.\12\
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\9\ IRS, I. IRC 527--Political Organizations, Exempt Organizations
CPE Text (1989), https://www.irs.gov/pub/irs-tege/eotopici89.pdf.
\10\ See, e.g., Rev. Proc. 68-19, 1968-1 C.B. 810.
\11\ Act of January 3, 1975, Pub. L. No. 93-625, Sec. 10, 88 Stat.
2108, 2116-19 (codified as amended at Sec. 527); see also Congressional
Research Service, ``Political Organizations Under Section 527 of the
Internal Revenue Code'' (2008), https://crsreports.congress.gov/
product/pdf/RS/RS21716/4.
\12\ Pub. L. 106-230; Pub .L. 107-276; see also Congressional
Research Service, ``Political Organizations Under Section 527 of the
Internal Revenue Code'' (2008), https://crsreports.congress.
gov/product/pdf/RS/RS21716/4.
Political organizations are organized and operated primarily for
what is called an ``exempt function.'' An exempt function includes 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.''\13\ A section 527 organization still maintains a tax-
exempt status, but is subject to a complicated tax, primarily on its
investment income. A section 527 organization that anticipates
receiving gross receipts in excess of $25,000 a year generally must
give notice to the IRS within 24 hours of its establishment.\14\ Unlike
a social welfare organizations, a section 527 organization must
publicly disclose substantial information about its receipts of
contributions and expenditures.\15\ Congress considered extending these
same disclosure obligations to social welfare organizations as well,
but never has.\16\ The IRS has provided guidance as to when certain
activity is considered an exempt function activity under section 527
for social welfare organizations as well as business leagues and labor
unions.\17\ If a social welfare organization, business league or labor
union engages in activities categorized as exempt function activity,
the organization is subject to the tax under section 527(f). An
organization described in section 501(c) could alternatively create a
segregated fund to operate as a political organization under section
527.\18\
---------------------------------------------------------------------------
\13\ 26 U.S.C. Sec. 527.
\14\ They must file with the IRS a Form 8871 found here: https://
www.irs.gov/forms-pubs/about-form-8871.
\15\ 26 U.S.C. Sec. 527(j). Note that Political Committees that
already have the obligation to file with the FEC do not have to comply
with the section 527(j) disclosure requirements. See also Form 990,
Return for Organization Exempt from Income Tax, Schedule B Schedule of
Contributors Instructions; Form 8872, https://www.irs.gov/forms-pubs/
about-form-8872.
\16\ See, e.g., Donald Tobin, ``Campaign Disclosure and Tax-Exempt
Entities: A Quick Repair to the Regulatory Plumbing,'' 10 Election L.J.
427, 430 and FN 21 (2011) (citing H. Rep. No. 106-702, at 9-11 and H.
Rep. No. 106-702, at 40-41).
\17\ Rev. Rul. 2004-6, 2004-1 C.B. 328.
\18\ 26 U.S.C. Sec. 527(f)(3).
---------------------------------------------------------------------------
b. Charitable Organizations
Charitable organizations are exempt from tax under section 501(a)
of the Code as described in section 501(c)(3) of the Code.\19\ A
charitable organization must be organized and operated exclusively for
religious, charitable, scientific, or educational purposes, provided no
part of the organization's net earnings inures to the benefit of any
private shareholder or individual.\20\ A charitable organization may
not engage in more than an insubstantial amount of lobbying and is
completely prohibited from intervening in a political campaign.\21\
Finally, the organization cannot violate public policy.\22\
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\19\ 26 U.S.C. Sec. 501(a) and (c)(3).
\20\ 26 U.S.C. Sec. 501(c)(3).
\21\ Id.
\22\ Bob Jones Univ. v. U.S., 461 U.S. 574 (1983) (holding
organization not exempt from income tax as a charitable organization
because it violated public policy by racially discriminating against
students by restricting dating among students of different races).
An organization that qualifies as a charitable organization obtains
a number of important benefits. The first is that it is able to accept
tax-deductible contributions from its donors.\23\ Though generally only
relatively high-income donors are today able to make use of the
charitable contribution deduction,\24\ where a donor is able to take
advantage of the deduction, the government effectively makes a big part
of the contribution to the charity--equal to the top marginal tax rate
of the donor.\25\ In other words, if a donor had a 40 percent top
marginal tax rate and made a $1,000 contribution to a charitable
organization, the government contributes $400 to the organization and
the donor contributes $600. Contributions to charitable organizations
are also deductible from the trust, gift, and estate taxes.\26\
Additionally, a charitable organization generally owes no tax on its
earnings unless it operates an unrelated trade or business.\27\
Charities are allowed to issue tax-exempt bonds.\28\ There are many
other benefits that come with the charitable designation at the
Federal, State and local level including exemptions from property tax
and State and local income tax.
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\23\ 26 U.S.C. Sec. 170.
\24\ This is because Congress significantly raised the standard
deduction in the 2017 Tax Act, sec. 11021, Pub. L. 115-7 (December 22,
2017). The Tax Policy Center for instance estimates that it reduced the
number of households deducting their charitable contributions from 21
percent of households to about 9 percent of households, https://
www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-
charitable-giving.
\25\ See Joint Committee on Taxation, ``Present Law and Background
Relating to the Federal Tax Treatment of Charitable Contributions,''
JCX-2-22, 34 (March 17, 2022), https://www.jct.
gov/publications/2022/jcx-2-22/ (making this essential point: ``the
value of the tax deduction to the taxpayer is the amount of the
donation multiplied by the taxpayer's marginal tax rate'').
\26\ 26 U.S.C. Sec. Sec. 642, 2055, and 2522.
\27\ 26 U.S.C. Sec. 511.
\28\ 26 U.S.C. Sec. 145.
Though occasionally charitable organizations intervene in a
political campaign in a way that is clear,\29\ many charitable
organizations engage in political activity in its broadest sense. In
the political sphere, most charitable organizations rely upon either a
religious or educational purpose to support their claim to exemption.
Religious organizations will often assert that they are speaking from a
religious perspective to lobby, engage in issue advocacy, or sometimes
to advocate for a candidate in a political campaign. Educational
organizations rely upon the fact that charitable educational
organizations can educate ``the public on subjects useful to the
individual and beneficial to the community.''\30\ There are many think
tank advocacy groups that today qualify under section 501(c)(3) by
educating the populace about important ideas to our governance. For
instance, Heritage Foundation, the conservative think tank, is
recognized by the IRS as a charitable organization,\31\ as is Center
for American Progress, the progressive think tank.\32\ While I am not
arguing that either of these organizations engages in political
campaign intervention, they are examples of organizations involved in
the broad sense of political activity.
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\29\ See, e.g., Eugene Scott, ``Pastors Take to Pulpit to Protest
IRS Limits on Political Endorsements,'' CNN (October 1, 2016).
\30\ Treas. Reg. Sec. 1.501(c)(3)-1(d)(3).
\31\ Heritage Foundation, Form 990 (2019), https://
projects.propublica.org/nonprofits/display_990/237327730/
02_2021_prefixes_23-25%2F237327730_201912_990_2021021717708700.
\32\ Center for American Progress, Form 990 (2019), https://
projects.propublica.org/nonprofits/display_990/300126510/
02_2021_prefixes_27-31%2F300126510_201912_990_2021021917725620.
As noted above, a charitable organization that seeks to maintain
its exempt status may not intervene in a political campaign.\33\ This
means that the organization's representatives when speaking for the
charity may not directly or indirectly encourage the public to vote for
or against a candidate for political office. This definition is broader
than the election activity overseen by the FEC.\34\ Notably, if the
charity were able to intervene in a political campaign, donors would
have a means to deduct their political campaign activity. More
problematically, those in the highest tax brackets would be most
advantaged by such a system. In effect, this would mean the government
would support the political interests of the wealthy at 40 cents on the
dollar and most everyone else at 0 cents on the dollar. The IRS has
tools in the Code to apply a tax on a charity, and its management, when
the charity violates this limitation.\35\
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\33\ 26 U.S.C. Sec. 501(c)(3).
\34\ The best statement from the IRS of what it views as a
violation of this limitation is found in Rev. Rul. 2007-41, 2007-25
I.R.B. 1421.
\35\ 26 U.S.C. Sec. 4955. Additionally, in egregious situations,
the IRS can take immediate action under 26 U.S.C. Sec. Sec. 6852 and
7409.
Congress also limits the amount of lobbying in which a charity can
engage.\36\ The Code provides that ``no substantial part of the
activities'' can consist in ``carrying on propaganda, or otherwise
attempting, to influence legislation.''\37\ The regulations suggest
that lobbying involves ``contacting legislators or urging the public to
contact them to propose, support, or oppose legislation, or advocating
the adoption or rejection of legislation.''\38\ It is not clear how
much lobbying is too much to become a ``substantial part.''\39\ Part of
the challenge is determining how to think about activities. Similar to
political campaign intervention, should activities be measured in time,
expenditure, or something else? There is some guidance, as Congress has
implicitly set that amount at not greater than 20 percent of
expenditures when it enacted section 501(h) of the Code.\40\ This
allows charities to elect this regime such that the charity will know
beforehand whether or not it will be complying with the law. But
charities who have not elected the section 501(h) regime are still
governed by the ``substantial part'' of activities language.
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\36\ 26 U.S.C. Sec. 501(c)(3).
\37\ Id.
\38\ Treas. Reg. Sec. 1.501(c)(3)-1(c)(3). It also notes this
applies as well to an organization whose purpose can only be attained
via legislation.
\39\ Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert.
denied, 419 U.S. 1107 (1975) (finding a range between 16.6 percent and
20.5 percent of total expenditures over 4 years to be a substantial
part).
\40\ 26 U.S.C. Sec. Sec. 501(h) and 4911(c)(2).
These limitations have passed constitutional muster. For instance,
the U.S. Supreme Court upheld the constitutionality of the limitation
on lobbying under the First Amendment and the Equal Protection clause
in Regan v. Taxation with Representation.\41\ In an opinion by Justice
Rehnquist, the Court stated: ``[w]e held that Congress is not required
by the First Amendment to subsidize lobbying. In these cases, as in
Cammarano, Congress has not infringed any First Amendment rights or
regulated any First Amendment activity. Congress has simply chosen not
to pay for TWR's lobbying.''\42\ The Court highlights that those who
run a charity have the option of also operating a section 501(c)(4)
social welfare organization in order to engage in substantial lobbying,
simply without the ability for donors to deduct their
contributions.\43\ In a footnote, the Court notes that the IRS allows
the same people who control the charity to also control the social
welfare organization, as long as the organizations scrupulously account
for the monies and ensure no monies intended for the charity are used
to support the social welfare organization's activity.\44\ This theme
of the flexibility of the tax exempt organization structure to
accomplish various purposes related to politics was relied upon by the
D.C. Circuit Court of Appeals to uphold the Constitutionality of the
prohibition on political campaign activity of a church in Branch
Ministries v. Rossotti.\45\
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\41\ Regan v. Taxation with Representation, 461 U.S. 540 (1983)
(citing Cammarano v. United States, 358 U.S. 498, 513 (1959)).
\42\ Id. at 546.
\43\ Id. at 544.
\44\ Id. at 544 FN 6.
\45\ Branch Ministries v. Rossotti, 211 F.3d 137, 143 (D.C. Circuit
Ct. of Apps. 2000) (noting that the section 501(c)(3) church leaders
could form a section 501(c)(4) organization, which in turn could form a
Political Action Committee to speak about a campaign).
In addition to the political aspects of charities, much of the
regulatory architecture found in section 501(c)(3) works simultaneously
to prevent fraud on charity and prohibit evasion of income tax. For
instance, Congress prohibits the inurement of the earnings of the
charity to a private shareholder or individual.\46\ This both protects
funds set aside for charitable purpose and ensures that the
organization is not operating a tax shelter for the individuals who
control the organization. The Code is designed to only provide the
benefits given to charitable organizations that are engaged in
benefitting the public and not avoiding the income tax.\47\ In addition
to the inurement prohibition, Treasury regulations require that
charities be operated for a public purpose and not a private one.\48\
This limits the amount of private benefit that a charity can
provide.\49\ For instance, a charity cannot be set up to dredge a
waterway where the primary beneficiaries are private homeowners rather
than the public at large.\50\ Again, generally this is designed to
prevent abuse of charities by directing them away from working to help
private individuals and businesses instead of and towards helping
charitable beneficiaries. One more provision is worth noting here,
Congress prevents certain charities from engaging in what are known as
excess benefit transactions.\51\ In general, this provision imposes a
tax upon an individual who has some control over a charity and uses
that control to take from that charity something of value to which they
are not entitled.\52\
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\46\ 26 U.S.C. Sec. 501(c)(3); Treas. Reg. Sec. Sec. 1.501(c)(3)-
1(c)(2) and 1.501(a)-1(c) (defining private shareholder or individual).
\47\ See Treas. Reg. Sec. 1.501(c)(3)-1(d)(1).
\48\ Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii).
\49\ Id; see also Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(iii)
examples.
\50\ See Ginsberg v. Commissioner, 46 T.C. 47 (1966).
\51\ 26 U.S.C. Sec. 4958. This provision applies to public
charities (not private foundations) and social welfare organizations.
Congress subjects private foundations to a more restrictive regime
including significant limitations on self-dealing under 26 U.S.C.
Sec. 4941.
\52\ Id.
In order to hold charities accountable for proving their exemption,
to ensure the proper collection of tax revenue, and to provide
important information to the public, charities must annually file a
Form 990 with the IRS.\53\ I discuss this more below in part II(d).
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\53\ 26 U.S.C. Sec. 6033.
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c. Dark Money Organizations
What are ``dark money organizations'' and how do they relate to tax
and political activities of tax-exempt organizations? Dark money
organizations refer to tax-
exempt organizations that engage in political advocacy that may rise to
the level of political campaign intervention. The moniker ``dark''
means that the public has little access to knowledge about who funds
these organizations because the organization typically does not
publicly disclose contributions received under campaign finance laws,
nor publicly disclose via the IRS as a section 527 political
organization. Social welfare organizations, described in section
501(c)(4), and business leagues, described in section 501(c)(6), are
the common tax-exempt organizations that fit in the dark money
category. Each of these organizations is exempt from the income tax
under section 501(a). Though the IRS used to require dark money
organizations to file information about substantial donors with the IRS
on Schedule B to the Form 990, in 2020, the IRS recently ended the
requirement.\54\
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\54\ 85 Fed. Reg. 31959 (May 28, 2020) (codified at 26 CFR 56) T.D.
9898. See also ``Dark Money Darker,'' supra note 1.
What is the benefit of being a tax-exempt social welfare
organization or business league? These organizations are unable to
accept charitable contributions deductible by the donors under section
170 of the Code. However, just like a charity, money earned in one of
these exempt organizations is not subject to the Federal income tax as
long as the activity is consistent with the organization's exempt
purpose.\55\ Those who contribute to a social welfare organization, or
a business league may be able to deduct contributions to the
organization if the expense qualifies as a business expense,\56\ as it
typically does in the case of business league dues, or if the expense
qualifies for some other deduction. Additionally, a donor can
contribute appreciated property like stock and not trigger gain for tax
purposes. Conversely, when such property is contributed to a section
527 political organization, gain is triggered to the donor.\57\ This
provides a way of obtaining a deduction of a sort and makes the dark
money organization a more desirable destination for such assets than a
political organization. Finally, Congress has clarified that the gift
tax does not apply to contributions to either a social welfare
organization or a business league.\58\
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\55\ 26 U.S.C. Sec. 501(a), (c)(4), (6). An exempt organization
that operates an unrelated business is subject to the unrelated
business income tax though under 26 U.S.C. Sec. 511.
\56\ 26 U.S.C. Sec. 162.
\57\ Cf. 26 U.S.C. Sec. 84 (donor who contributes appreciated
property to 26 U.S.C. Sec. 527 political organization owes income tax
on the gain associated with the appreciated property).
\58\ 26 U.S.C. Sec. 2501(a)(6).
One other commonality of these two organizations is that if either
engages in exempt function activity as that term is defined in section
527 then as noted above in part II(b), the exempt organization owes a
tax under section 527(f).\59\ The amount of that tax is set at the
lesser of net investment income or the expenditure on the exempt
function activity.\60\ If there is no discernible expense to point to,
there is no tax; similarly, if there is no net investment income in the
year there is no tax as well. In Revenue Ruling 2004-6 the IRS provided
guidance on when social welfare organizations, business leagues and
labor unions engage in too much exempt function activity and become
subject to the disclosure rules of section 527.\61\
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\59\ 26 U.S.C. Sec. 527.
\60\ 26 U.S.C. Sec. 527(f).
\61\ Rev. Rul. 2004-6, 2004-1 C.B. 328.
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i. Social welfare organizations
Social welfare organizations include ``[c]ivic leagues or
organizations not organized for profit but operated exclusively for the
promotion of social welfare . . . and no part of the net earnings of
such entity inures to the benefit of any private shareholder or
individual.''\62\ The regulations suggest a social welfare purpose is
furthered through ``bringing about civic betterments and social
improvements.''\63\ One court suggested that such a purpose is found in
``a community movement designed to accomplish community ends.''\64\
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\62\ Id.
\63\ Treas. Reg. Sec. 1.501(c)(4)-1(a)(2).
\64\ Erie Endowment v. United States, 316 F.2d 151, 156 (3d Cir.
1963).
Studies suggest political organizations in number make up a small
part of the social welfare sector.\65\ Social welfare organizations
also include health maintenance organizations, civic social clubs like
Kiwanis and Rotary clubs, homeowners' associations, and kid's sports
clubs.\66\ Still, social welfare organizations participate in political
activity in its broadest sense and inject substantial dollars into that
world. Some of that political work furthers a social welfare purpose.
For instance, lobbying can further a social welfare purpose.\67\
However, a social welfare organization does not further its purpose
when it intervenes in a political campaign.\68\
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\65\ Jeremy Khoulish, ``From Camps to Campaign Funds: The History,
Anatomy and Activity of 501(c)(4) Organizations,'' Urban Institute, 6
(2016).
\66\ Id.
\67\ Rev. Rul. 68-656, 1968-2 C.B. 216.
\68\ Treas. Reg. Sec. 1.501(c)(4)-1(a)(2)(ii).
Though the statute uses the term ``exclusively'' when describing
how much a social welfare organization must further its exempt purpose,
Treasury regulations state that a social welfare organization must
``primarily'' further a social welfare purpose.\69\ When the U.S.
Supreme Court interpreted similar ``exclusively'' language in the
context of a charitable organization and social security it stated:
``an organization must be devoted to [its exempt] purposes exclusively.
This plainly means that the presence of a single non-[exempt] purpose,
if substantial in nature, will destroy the exemption regardless of the
number or importance of truly [exempt] purposes.''\70\ The Second
Circuit Court of Appeals in a social welfare organization case,
Contracting Plumbers, explicitly rejected the idea that the regulation
by using the term ``primarily'' had liberalized the exclusively
standard for a social welfare organization.\71\ The court stated: ``we
adhere to the rule that the presence of a single substantial non-exempt
purpose precludes exempt status regardless of the number or importance
of the exempt purposes.''\72\ In fact, when the IRS rejects the
application of a charity or a social welfare organization and issues a
denial letter, it typically uses this formulation, i.e., ``you are
operated for a substantial non-exempt purpose.''\73\ How is the
statutory and regulatory language operationalized? In other words, what
does it mean to be exclusively operated for a social welfare purpose?
How do you measure that? Some attorneys have operated on the belief
that if an organization can maintain its exempt status if it makes sure
to engage in more than fifty percent of expenditures that further its
exempt purpose annually.\74\ A corollary to this would be that a social
welfare organization can spend 49 percent of its time and expenditures
on political campaign intervention, as long as the other 50 + .1
percent is focused on social welfare activity. This position seems to
cut against the language of the Court in Better Business Bureau: an
activity that makes up 49 percent of an organizations purpose would
seem to ``substantial in nature.''
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\69\ Id.
\70\ Better Business Bureau of Washington D.C. v. U.S., 326 U.S.
279, 283 (1945). This decision predates the implementation of the
unrelated business income tax. Ellen P. Aprill, ``The IRS's Tea Party
Tax Row: How `Exclusively' Became `Primarily,' '' Pac. Standard (June
7, 2013), http://www.psmag.com/politics/the-irss-tea-party-tax-row-how-
exclusively-became-primarily-59451/.
\71\ Contracting Plumbers Co-op. Restoration Corp. v. United
States, 488 F.2d 684, 686 (2d Cir. 1973).
\72\ Id.
\73\ See, e.g., Letter 202216018, https://www.irs.gov/pub/irs-wd/
202216018.pdf (emphasis added).
\74\ See Ellen P. Aprill, ``Examining the Landscape of Section
501(c)(4) Social Welfare Organizations,'' 21 N.Y.U. J. Legis. and Pub.
Pol'y 345, 346-47 (2018) (noting that some practitioners take this
position); see also James Fishman, Stephen Schwarz and Lloyd Mayer,
Nonprofit Organizations, 496 (5th Ed. 2015) (noting that the question
is a facts and circumstances test but that many practitioners take the
position that as long as the organization does less than 50 percent
non-social welfare purpose activity it should still qualify). The IRS
in 2013 after the Tea Party controversy created Letter 5228. In it, the
IRS adopted a safe harbor of a sort for a certain set of organizations
where it used a 60-percent threshold. The IRS would approve an
application of an organization that could represent it would spend 40
percent or less in time and expenditures on ``on direct or indirect
participation or intervention in any political campaign.'' IRS Letter
5228 (Rev. 9-2013), https://www.irs.gov/pub/irs-tege/letter5228.pdf.
It can be difficult for the IRS to make the call between activity
that might be considered issue advocacy and activity that crosses the
line into political campaign intervention.\75\ In 2013, the IRS issued
proposed regulations with the intent to make it clearer when such lines
are crossed in the social welfare organization context.\76\ But, in
Consolidated Appropriations Acts since 2016 Congress has blocked the
IRS from implementing rules to clarify this space. In the Consolidated
Appropriations Act of 2022, for example, Congress prohibited the IRS
and the Treasury Department from issuing rules about section 501(c)(4)
organizations.\77\ It fixes the status of the law regarding these
organizations with the ``standard and definitions as in effect on
January 1, 2010, which are used to make such determinations . . . for
purposes of determining status under section 501(c)(4) of such Code of
organizations created on, before, or after'' the Act.\78\
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\75\ The IRS consideration of the application for exemption of the
major political social welfare organization associated with Karl Rove,
Crossroads GPS, is a good example. Though the IRS initially proposed
denying social welfare status to the organization because many of the
ads it ran appeared to be political campaign intervention, the IRS
Appeals Office granted the organization status after Crossroads filed
an appeal with the IRS Appeals Office. See Robert Maguire, ``How
Crossroads GPS Beat the IRS and Became a Social Welfare Group,''
OpenSecrets (February 12, 2016) https://www.opensecrets.org/news/2016/
02/how-crossroads-gps-beat-the-irs-and-became-a-social-welfare-group/.
\76\ Guidance for Tax-Exempt Social Welfare Organizations on
Candidate-Related Political Activities, (REG-134417-13) 78 FR 71535-01,
2013-52 I.R.B. 856, (November 29, 2013).
\77\ H.R. 2471, Div E, title I, sec. 123 (2022) https://
rules.house.gov/sites/democrats.rules.
house.gov/files/BILLS-117HR2471SA-RCP-117-35.pdf.
\78\ Id.
Like charities, a social welfare organization cannot allow its
earnings to inure to the benefit of a private shareholder or
individual.\79\ Additionally, the private benefit limitation discussed
with regard to charities in part II(b), and the tax under section 4958
on excess benefit transactions applies to social welfare organizations
like described above with respect to charities.\80\
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\79\ 26 U.S.C. Sec. 501(c)(4).
\80\ 26 U.S.C. Sec. 4958(e) (applicable tax-exempt organization
includes ``any organization which . . . would be described in paragraph
(3), (4), or (29) of section 501(c) and exempt from tax under section
501(a)'').
After legislation in 2015, any organization that intends to operate
as a social welfare organization must provide notice to the IRS of its
intention within 60 days of its formation.\81\ The organization files a
Form 8976 to meet this notice requirement. Social welfare organizations
must file a Form 990 just like a charity.\82\ I will discuss this
requirement more below in part II(d).
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\81\ 26 U.S.C. Sec. 506.
\82\ 26 U.S.C. Sec. 6033.
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ii. Business leagues
Business leagues present many of the same issues as do social
welfare organizations. They are exempted from the income tax under
section 501(c)(6) and include ``[b]usiness leagues, chambers of
commerce, real-estate boards, boards of trade, or professional football
leagues.''\83\ A business league must promote a common business
interest and direct its activities towards the improvement of business
conditions in one or more lines of business as distinguished from the
performance of particular services for individual persons.\84\ These
organizations broadly support various industries or professions through
education, advertising, networking, lobbying.\85\ Similarly to social
welfare organizations, a business league is prohibited from allowing
its earnings to inure to a private shareholder or individual. Though
the term is not expressly used in the Treasury regulations or the Code,
it is understood that a business league must primarily operate for its
exempt purpose.\86\
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\83\ 26 U.S.C. 501(c)(6).
\84\ Treas. Reg. Sec. 1.501(c)(6)-1.
\85\ For a detailed discussion of the activities and types of
business leagues, see Philip Hackney, ``Taxing the Unheavenly Chorus:
Why Section 501(c)(6) Trade Associations Are Undeserving of Tax
Exemption,'' 92 Den. U. L. Rev. 265 (2015).
\86\ See, e.g., American Auto Ass'n v. Comm'r, 19 T.C. 1146, 1159
(1953) (``petitioner was primarily a service organization. Its
principal activities, as disclosed by our findings of fact, consisted
of performing particular services, and securing benefits of a
commercial nature for its members) (emphasis added); see also, John
Francis Reilly, Carter Hull, and Barbara Allen, IRC 501(c)(6)
Organizations, IRS EO CPE Text, K-20 (2003), https://www.irs.gov/pub/
irs-tege/eotopick03.pdf (``the activities of the organization cannot be
primarily directed to the performance of particular services for
individual persons'').
As with social welfare organizations, lobbying is a permissible
purpose of a business league.\87\ The Office of the Chief Counsel has
determined that political campaign intervention does not further a
business league purpose.\88\ The practical result of this regime is
that business leagues can do unlimited lobbying, assuming it furthers
the organization's purpose, and can under tax law intervene in a
political campaign as long as that is not the business league's primary
purpose.\89\
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\87\ Rev. Rul. 61-177, 1961-2 C.B. 117.
\88\ See IRS Gen. Couns. Mem. 34,233 (December 3, 1969). Campaign
finance law also significantly impacts the operation of business
leagues in the political campaign sphere. For instance, a business
league, as a corporation, is subject to the law that they use
``separate segregated funds'' as controlled political action committees
to make contributions to candidates for Federal political campaigns. 52
U.S.C. 30118; 11 CFR Sec. Sec. 114.1(a)(2)(iii) and 114.5.
\89\ Inspector Gen. for Tax Admin., Review of the Processing of
Referrals Alleging Impermissible Political Activity by Tax-Exempt
Organizations, Ref. Num. 2019-10-006, 3 (October 4, 2018).
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d. Information Reporting Requirements
Most organizations exempt from income tax under section 501(a) of
the Code must file an annual information return ``stating specifically
the items of gross income, receipts, and disbursements, and such other
information for the purpose of carrying out the internal revenue
laws.''\90\ This is the Form 990, the annual information return for IRS
tax purposes.\91\ The return both serves a means of ensuring the
organization complies with its tax status, by providing information
that could allow the IRS to detect if there is any avoidance of tax and
provides the public information to hold these organizations publicly
accountable.
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\90\ 26 U.S.C. Sec. 6033.
\91\ IRS, Form 990, Return of Exempt Organization Exempt From
Income Tax, https://www.irs.gov/pub/irs-pdf/f990.pdf. The IRS and the
Treasury Department enacted a regulation in 1942 requiring tax-exempt
organizations to file a Form 990 for tax years beginning in 1941. T.D.
5125 (IRS TD), 1942-1 C.B. 101, 1942. Congress followed that regulation
up in 1944 with a requirement for a tax information return for certain
tax-exempt organizations. The Revenue Act of 1943, Pub. L. No. 78-235,
58 Stat. 28 implementing then Sec. 54.
The Form 990 in generally available to the public pursuant to the
Code,\92\ and has been publicly accessible since 1950.\93\ The public
disclosure of the returns arguably brings ``some measure of
organizational accountability to various constituencies, including
current and prospective donors, organization employees and patrons,
other exempt entities, and the citizenry at large.''\94\ The Joint
Committee on Taxation has suggested ``[d]isclosure of information
regarding tax-exempt organizations also allows the public to determine
whether the organizations should be supported--either through continued
tax benefits and contributions of donors--and whether changes in the
laws regarding such organizations are needed.''\95\ The Independent
Sector suggests the unique role of nonprofits in our society as
voluntary organizations requires more public disclosure.\96\
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\92\ 26 U.S.C. Sec. 6104(b).
\93\ Revenue Act of 1950, H.R. 8920, 81st Cong. Sec. 341 (1950).
\94\ Caroline K. Craig, ``The Internet Brings `Cyber-
Accountability' to the Nonprofit Sector,'' 13 J. Tax'n Ex. Org. 82
(2001).
\95\ Staff of the Joint Comm. on Taxation, 106th Cong., Study of
Disclosure Provisions Relating to Tax-Exempt Organizations, at 5
(2000); see also Lloyd Hitoshi Mayer, ``The Promises and Perils of
Using Big Data to Regulate Nonprofits,'' 94 Wash. L. Rev. 1281, 1297-98
(2019).
\96\ Evelyn Brody, ``Sunshine and Shadows on Charity Governance:
Public Disclosure as a Regulatory Tool,'' 12 Fla. Tax Rev. 183, 212
(2012).
Up until recently, most exempt organizations were required to
disclose to the IRS, but not the public, the substantial donors to the
organization during the taxable year.\97\ That requirement to disclose
substantial donors was required in the first Form 990 for the 1941 tax
year.\98\ Congress later statutorily required this donor information
from charitable organizations in the 1969 Tax Act.\99\ Today, the
information is collected on Schedule B to the Form 990 and requires the
disclosure of substantial donors generally meaning those who donated
the greater of $5,000 or 2 percent of total donations to the nonprofit
during the year.\100\ Congress prohibits the public disclosure of the
names and addresses of contributors of all but private foundations and
political organizations.\101\ Though the Treasury Department and IRS
long required other exempt organizations to disclose this information
via regulation and the Form 990, in 2020, the Treasury Department and
the IRS finalized regulations ending that requirement for all but
charitable organizations.\102\
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\97\ IRS, Form 990, Return of Organization Exempt from Tax, https:/
/www.irs.gov/pub/irs-pdf/f990.pdf.
\98\ See Form 990 EO CPE text describing how the 1941 Form 990
required disclosure of substantial donors (those donating $4,000 or
more) on Form 990. Done initially in 1943 to develop the information
needed to determine whether the organizations at hand ought to be
exempt from taxation. See Senate Finance Committee Report in the
Revenue Bill of 1943, p. 21, https://www.finance.senate.gov/imo/media/
doc/SRpt78-627.pdf. The Revenue Act of 1943 was not enacted until
February 1944 because of a Presidential veto, https://www.loc.gov/law/
help/statutes-at-large/78th-congress/session-2/c78s2ch63.pdf. Pub. L.
No. 235, 78th Cong., 2d Sess. (February 25, 1944).
\99\ Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 487.
\100\ Schedule B, Form 990, https://www.irs.gov/pub/irs-pdf/
f990ezb.pdf.
\101\ 26 U.S.C. Sec. 6104(b).
\102\ Guidance Under section 6033 Regarding the Reporting
Requirements of Exempt Organizations, 85 Fed. Reg. 31959 (May 28, 2020)
(codified at 26 CFR 56) T.D. 9898.
The ending of the collection of this information was a mistake on
the part of the IRS. The IRS needs the information regarding
substantial donors from not just charitable organizations, but also the
dark money organizations in order to protect the revenue and as a means
to deter tax avoidance. The ending of the collection of that
information also likely impacts the integrity of the campaign finance
system as individuals can contribute to social welfare organizations
with the knowledge that there is no information going to any part of
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the government regarding these contributions.
To police the inurement provision, the IRS needs to know
substantial contributors because these are individuals who can control
the organization.\103\ The IRS has no reliable way to know this
information without the exempt organization directly disclosing it to
the IRS. Substantial donors are not public facing in the way officers
and directors of a nonprofit corporation are public facing. The same
goes for enforcing the excess benefit transaction tax imposed for
charities and social welfare organizations. The IRS needs to know the
individuals who control the organization and substantial contributors
fall into this category.\104\ The IRS cannot truly enforce this tax
Congress imposed without the information. Substantial contributor
information can aid the IRS in enforcing the private benefit limitation
as well. Finally, if the IRS wants to keep track of related dark money
organizations that might try to avoid the primarily test by working in
tandem to maximize the amount of money they can use to engage in
political campaign intervention, Schedule B can provide essential
information to see such relationships.\105\
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\103\ The Supreme Court recently struck down as facially
unconstitutional under the First Amendment a State law in California
requiring charities soliciting donations in the State of California to
disclose substantial donors identified on Schedule B to the IRS Form
990. Americans for Prosperity Foundation v. Bonta, 141 S.Ct. 2373
(2021). I submitted an amicus brief in Americans for Prosperity along
with 11 other nonprofit scholars supporting the State of California in
its effort to protect its ability to require this donor information
from charities. Brief of Amici Curiae Scholars of the Law of Non-Profit
Organizations in Support of Respondent, Americans for Prosperity
Foundation v. Bonta, 141 S.Ct. 2373 (2021) (Nos. 19-251 and 19-255).
The Court was careful to note that its opinion applied to neither
campaign finance nor to tax law. Id. at 2389.
\104\ 26 U.S.C. Sec. 4958(c)(3)(B)(i) (including ``substantial
contributor'' in the group of individuals who can violate the excess
benefit transaction tax).
\105\ The idea here is a donor could contribute $1 million to a
social welfare organization. That first social welfare organization
could spend 49 percent on political campaign intervention and send 50
percent of the money to another social welfare organization. That
second organization does the same thing. Via this strategy, the
organization theoretically is accomplishing social welfare organization
purposes through contributing to another social welfare organization
but is indeed almost exclusively accomplishing political campaign
activity. It is hard to see how such a scheme could be considered to
qualify under section 501(c)(4), but without the donor information on
Schedule B it should be much more difficult for the IRS to detect such
transactions. Schedule I to the Form 990 helps in part but the Schedule
B combined with the Schedule I would enable the IRS to see such
transactions quicker and more reliably.
Requiring disclosure to the IRS acts as a deterrent to tax
avoidance as well.\106\ The Treasury Department notes that tax
noncompliance is highest where there is no third-party reporting.\107\
The Treasury Department highlights the need to ``strengthen reporting
requirements,''\108\ and notes that enforcement activity itself is not
a driver of reducing the tax gap.\109\ In its 2001 study, the IRS found
that about 45 percent of compliance has to do with information
reporting.\110\ Given the significant lack of enforcement of the tax
laws from the IRS as discussed below in part III, ending this
requirement to disclose substantial donors becomes even more damaging.
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\106\ See ``Dark Money Darker,'' supra note 1, at 170-75.
\107\ See Office of Tax Policy, U.S. Dep't of Treasury, ``A
Comprehensive Strategy for Reducing the Tax Gap,'' 8 (2006), available
at https://www.irs.gov/pub/irs-news/comprehensive_strategy.
pdf.
\108\ Id. at 9.
\109\ Id. at 13.
\110\ See IRS, ``Tax Year 2001 Tax Gap Update,'' 2 (2007); see also
Leandra Lederman, ``Essay: Reducing Information Gaps to Reduce the Tax
Gap: When Is Information Reporting Warranted?'', 78 Fordham L. Rev.
1733, 1738 (2010).
The tax law in the exempt organization space works in part as a
back-up to campaign finance law. In addition to tax law, Congress
regulates many nonprofit organizations to the extent they are engaged
in campaign finance.\111\ Nonprofits have long been involved in the
electoral system,\112\ and the United States has tried to regulate the
campaign finance of corporate entities since 1907 when Congress enacted
the Tillman Act under President Theodore Roosevelt.\113\ This system of
law focuses on expenditure limits, contribution limits, and disclosure.
Though a series of cases over the years has struck down certain parts
of the system enacted by Congress, it remains in force today.\114\
Knowledge of donors to nonprofits is relevant to the enforcement of
that law. For instance, the system prohibits foreign actors from
contributing to campaigns for public office or making expenditures for
political campaigns.\115\ To the extent a social welfare organization
takes money from foreign operators to influence a campaign, the FEC
cares. Some argue indeed that the lack of public disclosure of
substantial donors to social welfare organizations is making nonprofits
a disclosure shelter, and thereby undermining the nonprofit sector's
credibility.\116\
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\111\ Federal Election Campaign Act of 1971, Pub. L. No. 92-225, 86
Stat. 3 (codified as amended at 2 U.S.C. Sec. Sec. 431-455).
\112\ Lloyd Hitoshi Mayer, ``When Soft Law Meets Hard Politics:
Taming the Wild West of Nonprofit Political Involvement,'' 45 J. Legis.
194, 196 (2019).
\113\ Ch. 420, 34 Stat. 864 (1907). See Federal Election Commission
v. Beaumont, 539 U.S. 146 (2003) (holding that the corporate political
contribution ban applied to nonprofit corporations).
\114\ Citizens United v. FEC, 558 U.S. 310 (2010); SpeechNow.org v.
FEC, 599 F.3d 686 (D.C. Cir. 2010) (en banc), cert. denied, 562 U.S.
1003 (2010).
\115\ 52 U.S.C. Sec. 30121; 11 CFR Sec. 110.20. See Norman I.
Silber, ``Foreign Corruption of the Political Process through Social
Welfare Organizations,'' 114 NW. U. L. Rev. Online 104 (2019).
\116\ Roger Colinvaux, ``Social Welfare and Political
Organizations: Ending the Plague of Inconsistency,'' 21 N.Y.U. J.
Legis. and Pup. Pol'y 481 (2018).
The IRS in its final regulations eliminating the disclosure
requirement suggested that neither campaign finance nor State nonprofit
law was part of its mission. It argued, thus, that it need not consider
comments suggesting that it was important for the IRS to maintain the
requirement to help States enforce nonprofit law and campaign finance
laws. I have argued that the IRS was wrong that it need not take other
law into consideration. Congress has designed the tax law to work in
tandem with other enforcement agencies both Federal and State and
local.\117\
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\117\ For example, Congress enhanced 26 U.S.C. Sec. 527 in 2000 to
augment the FEC's roll in overseeing campaign finance by creating an
IRS reporting regime for those political organizations that did not
need to file reports with the FEC. Congress directs the IRS to work
with State agencies as they revoke exemption from charitable
organizations in 26 U.S.C. Sec. 6104. As a practical matter the IRS
works regularly with other agencies such as the Federal Bureau of
Investigation, the Department of Justice, the Federal Communications
Commission, and the Department of Labor to ensure that the Federal laws
are enforced.
What penalties does the IRS have at hand to manage failures to file
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Form 990s or false information on Form 990s?
Section 6652 penalizes either a failure to file an information
return or to file a complete return.\118\ The penalty on the
organization is $20 a day with a maximum for smaller organizations of
$10,000 and of larger organizations at $50,000.\119\ The IRS has stated
that a return that leaves out material information is an incomplete
return that can be penalized.\120\ The IRS has suggested that
``materiality depends upon what the Service requires to administer the
tax laws.''\121\ Additionally there are criminal penalties, such
section 7206 which applies when someone ``[w]illfully makes and
subscribes any return, statement, or other document, which contains or
is verified by a written declaration that it is made under the
penalties of perjury, and which he does not believe to be true and
correct as to every material matter.''\122\ These criminal charges
require a high burden of proof and are not often used by the IRS except
typically in egregious cases.
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\118\ 26 U.S.C. Sec. 6652(c).
\119\ Id.
\120\ IRS Office of Chief Counsel, PMTA 01357, Memorandum from
James Brokaw to David Fish, November 2, 2007, https://www.irs.gov/pub/
lanoa/pmta01357_7359.pdf. Rev. Rul. 77-162.
\121\ Id.
\122\ 26 U.S.C. 7206.
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iii. irs enforcement
What resources does the IRS have at its disposal to ensure
taxpayers are complying with the law? A review of the trend over the
past 10 years suggests the IRS does not have the resources, human or
capital, needed to enforce the current tax law.\123\ Furthermore, the
IRS places low budget priority on the exempt organization sector likely
because it delivers little in tax revenue.\124\
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\123\ See, e.g., Paul Keil and Jesse Eisinger, ``How the IRS Was
Gutted,'' ProPublica (December 11, 2018). See also Leandra Lederman,
``The IRS, Politics, and Income Inequality,'' Tax Notes, 1329 (March
14, 2016).
\124\ Much of this part II(d) comes from ``Dark Money Darker,''
supra note 1, at 175-79.
While the economy grew, Congress shrunk the IRS budget over the
past decade. The Congressional Budget Office (``CBO'') reports that the
IRS budget fell by 20 percent in real (inflation-adjusted) dollars
between 2010 and 2018.\125\ This resulted in a 22-percent decrease in
employees working at the agency, and a 30-percent decline in
enforcement employees.\126\ IRS Data Books show the IRS went from over
94,000 full time equivalent (``FTEs'') employees in FY 2010 to 73,554
FTEs in FY 2019.\127\ Furthermore, some of the most specialized
employees in the enforcement sphere saw declines of 35 percent for
revenue agents and 48 percent for revenue officers.\128\ Individual
examinations fell by 46 percent in that period with only 0.6 percent of
individuals facing an examination by the end of that period.\129\ While
high income individuals were generally audited at a rate higher than
other individuals, the audits of high-income individuals fell at a
greater rate than all other individuals.\130\ Corporate examinations
fell by 37 percent.\131\
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\125\ Congressional Budget Office, ``Trends in the Internal Revenue
Service's Funding and Enforcement,'' 1 (2020).
\126\ Id.
\127\ Internal Revenue Service, Data Book, 74 Table 31 (2019);
Internal Revenue Service, Data Book, 66 Table 29 (2010).
\128\ Id.
\129\ Id. at 2.
\130\ Id.
\131\ Id.
What happened to the IRS in its tax-exempt organization group? The
Government Accountability Office (``GAO'') in 2014 recognized that the
budget cuts at the IRS led to less enforcement in the tax-exempt
sector.\132\ The IRS workforce on exempt organization matters shrank
about 5 percent from 2010 (889 FTEs) to 2013 (842 FTEs).\133\ That
workforce then shrank significantly to around 550 FTEs by FY 2019.\134\
There was a change in the exempt organizations group at the IRS after
the Tea Party controversy of 2013 \135\ where many employees of exempt
organizations moved over to the Chief Counsel to manage guidance
projects from that office. In 2014, it was reported that around 45
employees from the IRS were being moved over to the Office of Chief
Counsel of the IRS in a realignment.\136\ However, even if 45 moved
over, that does not explain the precipitous drop.
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\132\ GAO, ``Better Compliance Indicators and Data, and More
Collaboration with State Regulators Would Strengthen Oversight of
Charitable Organizations,'' 19 (2014).
\133\ Id.
\134\ IRS, TEGE, Fiscal Year 2019 Accomplishments, Pub. 5329
(2020).
\135\ For more on this matter see Philip T. Hackney, ``Should the
IRS Never `Target' Taxpayers? A Consideration of the IRS Tea Party
Affair,'' 49 Val. L. Rev. 453 (2015). The Treasury Inspector General
for Tax Administration (TIGTA) later concluded that the IRS treated
both conservative and liberal groups in the same way in the IRS
determination process. Inspector Gen. for Tax Admin., Review of
Selected Criteria Used to Identify Tax-Exempt Applications for Review,
Ref. Num. 2017-10-054 (September 28, 2017), https://www.treasury.gov/
tigta/auditreports/2017reports/201710054fr.pdf. The Senate Finance
Committee's Bipartisan Investigative Report concluded similarly in
2015. Senate Finance Committee, The IRS's Processing of 501(c)(3) and
501(c)(4) Applications for Tax-Exempt Status Submitted by ``Political
Advocacy'' Organizations from 2010-2013, Sen. Rep. 114-119 (August 5,
2015), https://www.congress.gov/congressional-report/114th-congress/
senate-report/119/1.
\136\ Diane Freda, ``Move of 45 IRS TE/GE Employees to Chief
Counsel's Office Slated for FY 2015,'' Bloomberg Law News (May 14,
2014). Some of those 45 came from employee plans. One article from the
time suggests it was only 22 employees from the exempt organizations
group that moved over. Lauren Simpson, ``IRS Controversy and
Restructuring,'' Nonprofit Law Blog (May 29, 2014), https://
www.pbwt.com/exempt-org-resource-blog/nonprofit-law-blogirs-
controversy-changes-tege.
The main functions of the exempt organizations group are running an
application system called the determinations process, and an
examination program. In determinations, as annual applications have
increased annual rejections from the IRS have significantly
decreased.\137\ In FY 2019, the IRS reviewed over 101,000 applications
for exempt status, it rejected only 66 of those applications.\138\
Comparatively, in FY 2010, the IRS reviewed over 65,000 of such
applications and rejected 517.\139\ Admittedly, a large number of
applicants withdraw their applications before denial and this statistic
has the potential to be misleading. When looking at examinations, it is
impossible to have a perfect figure given the way the data is reported
in the IRS Data Book, but of all the returns filed and all the returns
examined in 2010, which likely includes some double counting of
organizations (and includes sizable employment tax returns), the IRS
had about a .38 percent examination rate.\140\ In 2019, comparatively,
even with the double counting problem, the examination rate shrinks to
0.15 percent at best.\141\ TIGTA counted the rate in 2019 at 0.13
percent.\142\
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\137\ Philip Hackney, ``The Real IRS Scandal Has More to do with
Budget Cuts than Bias,'' The Conversation (April 15, 2018).
\138\ IRS, Data Book, 27, Table 12 (2019).
\139\ IRS, Data Book, 56, Table 24 (2010).
\140\ IRS, Data Book, 4, Table 2, 33, Table 13 (2010).
\141\ IRS, Data Book, 4, Table 2, and 54 Table 21 (2019).
\142\ Inspector Gen. for Tax Admin., Obstacles Exist in Detecting
Noncompliance of Tax-Exempt Organizations, Ref. No. 2921-10-013, 6
(2021).
This erosion of the IRS workforce and enforcement happened while
the tax-
exempt sector grew. Though a comparison of IRS data between 2010 and
2019 seems to suggest that total tax-exempt organizations shrunk,\143\
the sector has grown in size of assets. It is difficult to get good
current statistics on nonprofits. There are many problems with the data
from the IRS including the fact that not all organizations file
returns\144\ or do not file returns that provide any significant
data,\145\ and we have no reason to believe all organizations file
their returns accurately. Nevertheless, a look at IRS data from Forms
990 suggests assets and revenue have increased quite a bit in the
sector over the decade.\146\ In 2010, with a little over 186,000
charitable organization Form 990s filed, the charitable sector held
over $2.9 trillion in assets and almost $1.6 trillion in revenue.\147\
In comparison, in 2017 over 217,000 charitable organizations filed Form
990s reporting over $4.3 trillion in assets and almost $2.3 trillion in
revenue.\148\ Using that same data, again from reporting on Forms 990,
for exempt organizations including 501(c)(4)-(9) in 2010 there were
approximately $547 billion in assets and $360 billion in revenue.\149\
In 2017, those amounts grew to approximately $767 billion in assets and
$387 billion in revenue.\150\
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\143\ IRS, Data Book, 56, Table 25 (2010); IRS, Data Book, 30 Table
14 (2019).
\144\ After Congress added 26 U.S.C. Sec. 6033(h) to the Code in
2006, and the IRS implemented what it calls the Form 990-N (e-
Postcard), churches are likely far and away the largest group of
charities that file no IRS return.
\145\ Form 990-N provides little in the way of information
regarding the organization.
\146\ IRS, SOI Tax Stats--Charities and Other Tax-Exempt
Organization Tax Statistics, Form 990--Balance Sheet and Income
Statement Items.
\147\ Id. 2010.
\148\ Id. 2017.
\149\ Id.
\150\ Id.
Thus, the enforcement environment for the IRS is poor both at the
IRS in general and at the division that oversees tax-exempt
organizations in particular. When compared to the size of the sector
the IRS is reviewing, the idea that the IRS might be able to use human
resource heavy examinations to ensure compliance is laughable. It is
not going to work. Though I will not go into this here, State
enforcement is even more anemic. Efforts, such as those recommended by
GAO, for the IRS to make better use of data available is going to be
the only way the IRS in this current environment can make headway
against tax abuse. Robust information reporting thus needs to be the
---------------------------------------------------------------------------
norm.
As noted above, the IRS often has given short shrift to the tax-
exempt organization enforcement side of its house. This is likely in
part because the sector simply does not generate revenue, and it comes
with enforcement that has potential political danger if not handled
with care. Nevertheless, it seems possible and important for the IRS to
do more in this space with publicly available campaign spending reports
filed with the FEC. Many cases noted by Citizens for Responsibility and
Ethics in Washington where social welfare organizations represent one
thing to the FEC regarding making independent expenditures and then
reporting nothing to the IRS on the Form 990 are troubling. Such cases
seem to present prima facie cases of substantial political campaign
intervention that at the least ought to be investigated. They also
present questionable statements on Form 990s.
iv. conclusion
Thank you for inviting me to speak about the laws and enforcement
governing the political activities of tax-exempt organizations. The tax
laws are built fairly well to prohibit the deduction of campaign
expenditures and to promote a strong nonprofit sector. There are
problems with that architecture. For instance, Congress could consider
requiring donors to recognize gain on the contribution of appreciated
assets to a dark money organization. This would end an indirect means
of deducting political activity. Additionally, it would help if the IRS
were permitted to issue rules clarifying the boundaries of political
campaign activity for social welfare organizations. However, the legal
architecture works reasonably well in theory to ensure the government
is not subsidizing campaign-related contributions through the Code and
to ensure a well-ordered nonprofit sector. That said, the current
anemic IRS budget, the lack of enforcement action by the IRS, and the
failure to collect substantial donor information from dark money
organizations creates a crisis. There is good reason to believe that
taxpayers are able to take advantage, and indeed are taking advantage,
of this system. These factors undermine confidence in the tax system,
the equal enforcement of the law, and our ability to operate a fair
democratic system. Therefore, I urge Congress to increase the IRS
budget to a level that allows the IRS the ability to properly enforce
the tax laws. But, institutionally, I believe the IRS needs to be
pushed and given support to enforce these laws that help work toward a
more fair democratic order.
______
Questions Submitted for the Record to Philip Hackney
Questions Submitted by Hon. John Thune
Question. How does the IRS determine whether voter registration and
related activities that are funded by 501(c)(3) private foundations, or
executed by 501(c)(3) public charities, violate the legal requirement
of nonpartisanship? If violations occur, how is the IRS supposed to
respond?
Answer. Though nonpartisanship plays a role in this particular
question, the legal issue the IRS must consider is the prohibition on
intervening in a political campaign, often colloquially called the
Johnson Amendment. Under section 501(c)(3) a charity may not
``participate in, or intervene in (including the publishing or
distributing of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office.'' As I noted in my
testimony, this means that the organization's representatives when
speaking for the charity may not directly or indirectly encourage the
public to vote for or against a candidate for political office. The
most direct guidance the IRS provides on this question is found in
Revenue Ruling 2007-41. Notably, a charity can further its charitable
purposes through voter education activity and through get out the vote
work if ``conducted in a non-partisan manner.'' As Rev. Rul. 2007-41
states: ``voter education or registration activities conducted in a
biased manner that favors (or opposes) one or more candidates is
prohibited.'' In the two examples the IRS provides in that revenue
ruling, the key factor that seems to come out is that the IRS needs to
assess whether the organization is taking actions in conducting this
work that biases voters toward or away from one candidate or another.
As long as an organization is registering everyone, and not pushing a
particular position that is well identified with particular candidates
running, then most of this type of work will satisfy the requirements
Congress set forth in the Code. Technically, there is no amount of
intervention in a political campaign that is allowed. However, the IRS
has taken an approach that education of nonprofits is an important
value. Congress implicitly accepts that the IRS can take this more
lenient approach to the issue as it has provided tools to the IRS to
apply excise taxes under section 4955 in lieu of or in addition to
revocation. It thus typically will assess the egregiousness of the
violation and enter into agreements with charities that violate the
norm to not engage in such conduct again and to adopt procedures that
will help prevent such violations in the future. In egregious
situations the IRS can also take immediate action under 26 U.S.C.
Sec. Sec. 6852 and 7409.
Question. The 2015 Senate Finance Committee bipartisan
investigation into the targeting of taxpayers resulted in a number of
findings. One of the findings was that a contributing factor to the
IRS's management problems was the decentralization of its employees,
including some who worked from home as often as 4 days per week, and
managers who remotely supervised employees 2,000 miles away. This was
several years before COVID.
Do you think such a decentralized organizational structure has
inhibited IRS performance for taxpayers, or for that matter, increased
the likelihood of data leaks or hacks of private taxpayer information?
Answer. As I said in my testimony, I believe that the number one
thing that has negatively impacted IRS performance is a deficient
budget. I believe the deficient budget is more likely to cause such
challenges than a move to modern work styles.
Question. TIGTA recently reported that the IRS destroyed tens of
millions of unprocessed returns in 2021.
While the IRS has since stated there were ``no negative taxpayer
consequences as a result of this action,'' how do you think the IRS's
decision to destroy taxpayer information impacts trust between
taxpayers and the agency, particularly for taxpayers who meet their
filing obligations only to see the agency selectively destroy filed
documents?
Answer. Anytime the IRS is considering how to deal with taxpayer
information, it needs to bring the utmost care to the issue. The
deficient budget the IRS faces and the deficient information technology
system at its disposal make these problems likely to occur and cause
the trust issues you suggest.
Question. Is it correct that Lois Lerner was exonerated in the
later investigations of the targeting controversy?
Answer. No one has brought charges in the matter. An exhaustive
review I conducted of the matter showed no laws prohibited the actions
taken by the IRS in these initial determinations of tax-exempt status.
Indeed, I have argued and still contend that the choice to centralize
review of these organizations made good sense. It allowed the IRS to
get the right decision on all of these cases and apply the law with as
little bias as possible. This committee's own report, and a later TIGTA
report, indeed showed that the IRS did not act in a biased manner. Many
organizations both conservative and liberal were treated to similar
procedures. The matter could have been managed by that office much
better than it was. Some of the questioning of applying organizations
was poorly designed and the IRS took much too long to come to a
decision. But, I don't believe you need exoneration from poor
management.
______
Prepared Statement of Hon. Ann Ravel, Former Chair,
Federal Election Commission
Chairman Whitehouse, Ranking Member Thune, and distinguished
members of the subcommittee:
Special tax benefits for non-profit organizations, including
501(c)(4)s and 501(c)(6)s, were intended by Congress to encourage
organizations promoting and operating exclusively as social welfare
organziations or business leagues and other associations not organized
for profit. Since 1959, the IRS regulations provided that an
organization is operated exclusively for the promotion of social
welfare if it's engaged in promoting in some way the common good and
general welfare of the community. And an IRS decision held that if an
organization is primarily political, it cannot be a 501(c)(4) or a
501(c)(6) trade association.
Because Federal tax law governs the extent to which tax-exempt
organizations may engage in activities to support candidates without
jeopardizing the organization's tax exempt status and whether such
activity requires public disclosure or payment of tax, political
expenditures and activities must be reported on the Form 990.
Due to the Citizens United v. FEC decision, a lack of enforcement,
and a new IRS rule enacted in 2020 which eliminated donor reporting
requirements to the IRS for 501(c)(4) organizations, organizations that
have tax-exempt status are a major source of anonymous large political
contributions, because donors are not required to identify themselves
either to the IRS or to the public. As a consequence of these factors,
some groups that receive tax benefits for ``social welfare work'' have
been emboldened to engage in excessive political spending.
The lack of disclosure requirements has undermined some of the
basis tenets of the law relating to campaign contributions and
expenditures and the importance of full disclosure of the money in
politics. In the Citizens United Supreme Court decision, Justice
Kennedy upheld disclosure requirements in campaign finance, stating
that disclosure ``provides the electorate with information'' to ensure
``that voters are fully informed about the person or group who is
speaking,'' and also ensures that ``people are able to evaluate the
arguments to which they are being subjected.'' Notably, Justice
Kennedy, supported by seven other Justices, held that ``the
transparency enables the electorate to give proper weight to different
speakers and messages,'' and ``citizens can see whether elected
officials arein the pocket of so-called moneyed interests.'' (Citizens
United v. Federal Election Commission, 130 S. Ct. 876, 916 (2010).)
After the Citizens United decision, there was a surge in the
formation of politically focused organizations seeking to obtain IRS
approval as (c)4s. In 2012, at least $250 million passed through the
(c)4s into efforts to elect candidates, an 80-fold increase from 8
years prior. (Maya Miller, ``How the IRS Gave Up Fighting Political
Dark Money Groups,'' ProPublica, April 18, 2019.)
Since the IRS rule enacted in 2020 eliminated donor reporting
requirements to the IRS, the problem of political dark money has been
exacerbated.
While the flood of money began and continued after Citizens United,
more than $1 billion in dark money flooded the 2020 elections. The lack
of disclosure to the IRS of 501(c)(4)donors has also had a significant
impact on the rise of political dark money. Because donors are aware
that there will be no IRS enforcement of the law relating to political
money, they know that they have free rein to violate the law. This
dramatic increase in spending by financiers whose identities remain
hidden from the very public they are paying to influence poses a
serious threat to America's autonomy and the public's right to know who
is influencing our elections and the policy decisions that come along
afterwards.
In 2021, based on what has been reported to the FEC, there has
already been $115,817,584 million spent by 501(c)s in outside political
spending, according to Anna Massoglia at OpenSecrets. This figure does
not include information from the recent FEC deadline.
And, more likely will be spent soon, according to a recent article
in Axios. Axios reported that The Common Sense Leadership Fund, a
501(c)(4) which does not disclose donors, has already ``steered half a
million dollars'' to its new political action committee, the Eighteen
Fifty-Four Fund, anticipating that its new group will spend in excess
of $10 million--and potentially much more--on midterm contests.''\1\
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\1\ Lachlan Markay, ``First Look: New GOP Group's `Eight Figure'
Midterm Blitz,'' Axios, April 20, 2022, https://www.axios.com/gop-
group-midterm-blitz-b939b84e-25d5-4f90-ae9a-0f45cee072
62.html.
In 2015, the political director, Carl Forti, of American
Crossroads, which is the ``sister Super PAC'' to Crossroads GPS,
admitted the reason for the establishment of Crossroads GPS, a
501(c)(4). He was quoted on a panel at the Annenberg Public Policy
Center of the University of Pennsylvania remarking that ``disclosure
was very important for us, which is why the 527 [American Crossroads]
was created. But some donors didn't want to be disclosed, and
therefore, a (c)(4) [Crossroads GPS] was created.''\2\
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\2\ Peter Overby, ``Group Behind Election Ads Weighs in on Tax
Deal,'' NPR, December 14, 2010, https://www.npr.org/2010/12/14/
132060878/Conservative-Group-Wades-Into-Tax-Debate.
Similarly, the biggest donor to Future Forward USA was its own
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501(c)(4) nonprofit group which doesn't disclose its donors.
The IRS rule eliminating donor reporting requirements has not only
encouraged dark money, but the clear prohibition of foreign money
influencing United States' elections will also be circumvented by
foreign donors contributing to 501(c)(4)s, knowing that the IRS will
make it easier for them to expend unlimited sums of money to influence
our elections with no consequence. The regulation has provided an easy
opportunity for foreign actors to secretly funnel money to elections
through such 501(c)s. This is happening at a time when our democracy is
at risk, and when we know that there are ongoing campaigns by foreign
actors to undermine public confidence in our democratic institutions.
A report from the Government Accountability Office, dated February
3, 2020, ``Campaign Finance: Federal Framework, Agency Rules and
Responsibilities, and Perspectives,'' found that the IRS doesn't even
check nonprofit tax records for signs of illegal foreign money in
United States elections. The government oversight office was told by
IRS officials that ``examiners do not review the national origin of
sources of donations'' in non-profit annual tax returns, claiming that
the IRS ``plays no role in enforcing'' campaign finance rules governing
foreign money in elections.\3\
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\3\ See also, OpenSecrets, `` `Dark money' groups steering millions
to support elections,'' Anna Massoglia, February 7, 2020, https://
opensecrets.org/news/2020/02/dark-money-steers-millions-to-super-pacs-
2020/.
The money spent on campaigns from undisclosed sources is an
increasingly significant problem in the United States' civic life. Dark
money from anonymous sources has seeped into all levels of government
and political processes, from Federal and State elections, to spending
to support politicians' agendas, judicial nomination processes,
---------------------------------------------------------------------------
redistricting, voting rights and other issues impacting America.
According to a new report by Matt Corley and Adam Rappaport at
CREW, entitled ``The IRS Is Not Enforcing the Law on Political
Nonprofit Disclosure Violation,''\4\ their investigation found that for
much of the time since Citizens United, ``the IRS didn't revoke any
section 501(c)(4) group's tax-exempt status for violating the law's
limits on their political spending.''
---------------------------------------------------------------------------
\4\ Matt Corley and Adam Rappaport, ``The IRS Is Not Enforcing the
Law on Political Nonprofit Disclosure Violations,'' April 28, 2022,
https://www.citizensforethics.org/reports-investigations/crew-reports/
the-irs-is-not-enforcing-the-law-on-political-nonprofit-disclosure-
violations/.
The CREW report concluded that: ``The IRS appears to have been
notably lenient in enforcing the basic rules on disclosure and
transparency by section 501(c)(4) groups engaged in politics. CREW and
others have identified dozens of these kinds of violations, many of
which were brought directly to the IRS's attention through complaint
letters to the agency. Some section 501(c)(4) groups, for example,
disclosed their political spending to the Federal Election Commission
(FEC) and other government agencies, but told the IRS under penalty of
perjury in their tax returns that they did not engage in any political
activity or misrepresented the amount they spent. Others simply failed
to file their tax returns or filed them only after complaints were
---------------------------------------------------------------------------
filed against them.''
The CREW report made clear that the IRS has shirked its duty to
review the FEC filings to assure that the filings of politically active
501(c)(4s) are consistent and truthful. There should be greater
coordination between the IRS, the FEC, and also the DOJ, to assure that
the law they each agency has responsibility to enforce is not being
evaded. As the Chair and Commissioner of the Federal Election
Commission from 2013-2017, I was concerned that Federal agencies that
have overlapping missions such as the FEC, IRS and DOJ did not consult
or coordinate on information regarding violations of Federal law. This
unwillingness to work together to enforce the law continues to today,
and the resulting negligence is detrimental to the American people.
It is wrong for the IRS to allow partisan political operatives to
establish phony social welfare organizations that to not have to pay
their fair share of tax and instead collectively expend hundreds of
millions of dollars from secret sources into our elections. Rather than
carry out their election spending through section 527, which was
enacted for this purpose, but requires donor disclosure, political
groups are masquerading as 501(c)(4)s solely to keep political spenders
anonymous.
Congress never intended that social welfare organizations should
exist as conduits for secret political spending. In exchange for the
tax exemption, the law requires these non-profits to engage exclusively
in the promotion of social welfare.\5\ The IRS has said that social
welfare activities do not include political campaign intervention.\6\
---------------------------------------------------------------------------
\5\ 26 U.S.C. section 501(c)(4).
\6\ 26 CFR 1.501(c)(4)-(1)(a)(2)(ii).
No bright line IRS standard exists as to how much and by what
measure the IRS should evaluate a social welfare organization's
furtherance of its primary purpose. Together with a lack of
enforcement, this circumstance has provided the path for political
organizations on the right and the left to pose as social welfare
organizations and to spend enormous amounts of money from undisclosed
sources on elections. The lack of a bright line standard, however, is
not a justification for not enforcing the law. The IRS can and should
enforce the law where there is clear and substantial information (such
as from the FEC disclosures) to find a violation. To entirely abstain
---------------------------------------------------------------------------
from enforcement is not acceptable.
Americans of both parties have consistently agreed that there is
too much money in politics--and that much of that money comes from a
tiny, highly unrepresenative segment of the population that purchases
outsized influence over government decisions. And, there is an
increasing distrust in government.
This is why we should expect the IRS to do its job and enforce the
law. Impartial and consistent enforcement of the law governing
nonprofit political spending is squarely within the IRS's mandate and
authority. The IRS should hold political groups on all sides
accountable if they misappropriate the privileges of the social welfare
organization's structure.
Furthermore, donor disclosure should be reinstated on the Form 990,
both for (c)(4)s, but also for (c)(6)s.
Some have observed that (c)(3) money has been granted to (c)(4)s
for ``general support'' but is actually ultimately used for electoral
activity. Consequently, there should be better oversight over how funds
from 501(c)(3) organizations are ultimately used by recipients.
Finally, the IRS and Treasury Department should update the social
welfare regulations to provide clarity around the standard to determine
whether an organization is operated exclusively for the promotion of
social welfare. To do this, Congress would need to repeal and stop
including a rider in must-pass appropriations that has prevented the
IRS and Treasury Department from taking this step. This dark money
rider has kept voters in the dark as to who is behind political
spending that influences elections. The regulations that need to be
updated were written decades before the Supreme Court decided Citizens
United and changed how corporations, including nonprofit corporations
can spend money in political campaigns, including by contributing to
super PACs. These social welfare organizations were never intended to
operate as de facto political committtees, and the regulations need to
be updated to preserve voters right to know who is influencing
elections.
Most critics of the IRS acknowledge that the task can be nuanced
and difficult. But it is important for the IRS to do its job and
provide oversight.
______
Questions Submitted for the Record to Hon. Ann Ravel
Questions Submitted by Hon. John Thune
Question. Since last year's massive IRS leak or hack of private
taxpayer information, in which the left-leaning ProPublica went on to
publicize confidential taxpayer details, there has been no meaningful
follow-up from the Biden administration.
How do you think this unauthorized disclosure of private taxpayer
information--and the lack of accountability from the administration--
impacts trust between taxpayers and the IRS?
Answer. The unauthorized disclosure of private taxpayer information
is the subject of an investigation by the IRS and DOJ. This
investigation, as I understand it, remains underway. Consequently,
before commenting on the impact on trust between taxpayers and the IRS,
it is necessary to have a better understanding from the investigation
of the facts of the ProPublica matter.
Question. How would you compare the concerns over political
activity engaged by 501(c)(3) organizations to 501(c)(4) organizations?
Answer. Political activity by 501(c)(3)s and (c)(4)s raise concerns
over the same underlying issues--social welfare groups or charitable
nonprofits which are engaging in activity for political purposes,
including supporting or opposing a candidate for public office, and
directly or indirectly participating or intervening in any political
campaign on behalf of or in opposition to any candidate for elective
public office, while receiving tax benefits. Since the large amount of
undisclosed money that is spent on these direct or indirect political
activities through the mechanism of (c)(4)s is greater than with
(c)(3)s, this activity creates a lack of trust in the integrity of our
electoral process. While some are concerned with (c)(3)s engaging in
voter education activity, and actively encourage people to participate
in the electoral process by voter registration and get out the vote,
such activity is not prohibited if it is conducted in a nonpartisan
manner, because 501(c)(3)s have an important role in helping to educate
the public.
Question. What do you find to be the greatest dangers of donor
disclosure for 501(c)(3) and 501(c)(4) organizations and their donors?
What historical examples of harm do you find most disturbing?
Answer. The greatest issue with donor disclosure for these
organizations and their donors is the concern that disclosure of their
contributions will lead to threats, harassment, or reprisals. The
concerns about this are only meritorious when the threats, harassment,
or reprisals could lead to violence. As Justice Scalia wrote in Doe v.
Reed, ``Requiring people to stand up in public for their political acts
fosters civic courage, without which democracy is doomed.'' Most of
these concerns have been found by the courts to be unfounded, and some
organizations are primarily concerned that such disclosure will deter
contributions, which is hardly a danger.
Historically, in the case of NAACP v. Alabama (1958), the State
Government in Alabama demanded that the NAACP turn over the names of
the rank and file members of the organization. The NAACP refused to do
so because, as one of the only active civil rights organizations in the
South, the members of the organization were exposed to violent attacks.
For years there had been a history of physical attacks and violence
inflicted on Black civil rights groups in the South, so their concerns
about such violence were not solely an assumption, and there was an
acute threat of harm if they were required to turn over such
information to the State. For that reason, the Supreme Court determined
that they did not have to disclose the information about their members.
______
Prepared Statement of Bradley A. Smith, Chairman,
Institute for Free Speech
Chairman Whitehouse, Ranking Member Thune, and members of the
subcommittee, on behalf of the Institute for Free Speech, thank you for
inviting me to testify at this hearing on ``Laws and Enforcement
Governing the Political Activities of Tax-Exempt Entities.''
The Institute for Free Speech is a nonpartisan, nonprofit 501(c)(3)
organization focused on promoting and protecting the First Amendment's
political rights of speech, press, assembly, and petition. I founded
the Institute in 2005, after completing my term as Commissioner at the
Federal Election Commission (FEC), because it had become clear to me,
both as an academic and then in my time as a Commissioner, that the
public is greatly misinformed about laws regulating political speech,
including the extent and content of such laws, their real-world
effects, and their enforcement. The Institute has worked tirelessly to
bring an honest, nonpartisan approach to these issues.
i. introduction
For many reasons, the enforcement of campaign finance and other
laws regulating political speech is a highly complex issue. Most
importantly, such laws must be carefully crafted in order to avoid
infringing on First Amendment rights. Unfortunately, too often these
laws have not been carefully written, and when such laws are combined
with criminal penalties, they provide a breathtakingly powerful tool
for elected officials and government employees to use to try to silence
or hinder political opposition.
Ironically, the last time I was asked to testify at a hearing
dedicated to political activity by tax-exempt organizations was in 2013
before the Senate Judiciary Committee's Subcommittee on Crime and
Terrorism, then chaired by Senator Whitehouse. At that hearing, a
witness called by the majority Democrats noted that he was
``optimistic'' about the ability of the Internal Revenue Service to
regulate political speech, praising the agency as ``scrupulously fair
and nonpartisan'' and singling out the then-Director of the Exempt
Organization Division, Lois Lerner, for particular praise. (Committee
on the Judiciary, Subcommittee on Crime and Terrorism, 113th Cong.,
April 9, 2013, p. 70-71 (Supplemental Statement of Gregory L. Colvin).)
One month later, Ms. Lerner ``told a stunned audience of tax attorneys
in Washington that the IRS had delayed and obstructed the tax exemption
applications from conservative-sounding organizations,'' and later that
month, the U.S. Treasury Inspector General made public a report
confirming and detailing the nature of the targeting. (Michael Wyland,
``Whatever Happened to the IRS Tax Exemption Scandal?'', Nonprofit
Quarterly, August 22, 2017.) Now here we are again, with another
Democratic Senate majority facing fierce political headwinds, and it
appears that a small group of Senators is looking to respond by trying
to further involve the IRS in regulating political speech.
The temptation to use regulation and enforcement for political
advantage is bipartisan. Let's begin by considering the very first
prosecution brought under the Federal Election Campaign Act of 1971: A
suit against the National Committee for Impeachment, brought by the
Justice Department under then-President Richard Nixon.
On May 31, 1972, a 2-page ad appeared in The New York Times that
featured the headline ``A Resolution to Impeach Richard Nixon as
President of the United States.'' The ad, which cost $17,850, was paid
for by a group consisting of several lawyers, at least one law
professor, a former United States Senator, and several other citizens
of modest prominence, calling themselves the National Committee for
Impeachment. In addition to criticizing President Richard Nixon, the ad
recognized an ``honor roll'' of several Congressmen who had introduced
a resolution that called for the President's impeachment. In response,
the United States Department of Justice moved swiftly, getting a
Federal district court to enjoin the National Committee for Impeachment
and its officers from engaging in further political activity. Even
though the ad did not discuss the upcoming election or urge anyone to
vote in any particular manner, the government argued that the Committee
was violating the Federal Election Campaign Act of 1971 because its
efforts had the potential to ``affect'' the 1972 presidential election,
and the Committee had not properly registered with the government to
engage in such political activity.
Ira Glasser, who was an executive director of the American Civil
Liberties Union, noted that the government ``wrote a letter to The
Times threatening them with criminal prosecution if they published such
an ad again. . . . Soon after, the ACLU itself sought to purchase space
in The Times in order to publish an open letter to President Nixon,
criticizing him for his position on school desegregation. The letter
made no mention of the election and indeed, until many decades later,
the ACLU never supported or opposed any candidate for elective office.
Fearful of government reprisal based on the government's threatening
letter from the previous case, The Times refused to publish the ad.''
In both cases, these groups' First Amendment rights were eventually
vindicated. However, during the time it took to win these cases, much
speech about elected officials and public affairs was thwarted.
Further, fighting the prosecutions came at great expense and much
anxiety for those who simply sought to speak out about their
government.
The history of criminal and tax enforcement of campaign finance law
had largely been one of political prosecutions that should serve as a
warning to this body. The first case in which the U.S. Supreme Court
clearly accepted the idea that regulation of political speech could be
constitutional--which it did over the vigorous dissents of Justices
William O. Douglas and Earl Warren--was United States v. Auto Workers,
352 U.S. 567 (1957). That case, as legal historian Allison Hayward has
shown, was brought by the Eisenhower administration to seek to quash
union political power after the merger of the AFL and the CIO.
Fortunately, though the Supreme Court refused to quash the prosecution
before trial as unconstitutional, the government was unable to get a
conviction. See Allison R. Hayward, ``Revisiting the Fable of Reform,
45 Harv. J. Legis. 421 (2008).
The Eisenhower administration was merely following its predecessor,
the Truman administration, which had engaged in a series of political
prosecutions aimed at auto dealers in Michigan in the late 1940s. In
those cases, the U.S. Attorney prosecuted only reluctantly, viewing the
violations as minor (in the case of some defendants) to non-existent
(in the case of others), and as raising serious constitutional issues.
But politicians in Washington insisted--apparently, like today, for
political reasons--on ``aggressive enforcement.'' Like today, the major
news columnists of the day, most notably Drew Pearson, were enlisted to
whip up public fervor, with Pearson presumably benefiting from a stream
of leaks from the Attorney General's office in Washington.
Nevertheless, perhaps foreshadowing such prosecutions as that of John
Edwards, ``once in court, prosecutors could not win a conviction, and
jurors expressed distaste for enforcing this criminal statute against
this kind of activity.'' Indeed, the entire series of prosecutions was
based on the belief of large-scale violations ``that, as it turned out,
did not exist.'' But the prosecutions were directed from Washington
because ``chilling auto dealers and other corporate managers from
making contributions to Republicans served the administration's
political agenda.'' See Allison R. Hayward, ``The Michigan Auto Dealers
Prosecution: Exploring the Department of Justice's Mid-Century Posture
Toward Campaign Finance Violations,'' 9 Election L. J. 177 (2010).
The IRS has frequently been the tool of choice to harass political
opposition. President Franklin Roosevelt used it to harass newspaper
publishers, including William Randolph Hearst and Moses Annenberg
(publisher of The Philadelphia Inquirer). He also used the IRS
investigations to harass political rivals including Huey Long and
Father Coughlin, and prominent Republicans including former Treasury
Secretary Andrew Mellon.
In the 1960s, President Kennedy's IRS Commissioner Mortimer Caplin,
who later founded the law firm of Caplin and Drysdale, established the
``Ideological Organizations Audit Project'' for the express purpose of
auditing and harassing conservative opponents of the President. In a
letter to Treasury Secretary Henry Fowler, Caplin noted, ``We
recognized the sensitivity of just going after [the] right wing, so we
wanted to add both left- and right-wing groups for balance.''
Illustrating the bipartisan nature of partisan abuse of the IRS, Caplin
noted that adding left-wing groups was dicey because many, ``had
already been given a difficult time during the Eisenhower years.'' The
agency also requested investigations of corporate backers of various
nonprofits involved in civic discussion.
Under the Nixon administration, the IRS was given a list of Nixon's
``enemies'' and thousands of groups were targeted. It was because of
this long chain of abuses that Congress finally made it illegal to use
the IRS for political intelligence gathering and gain in the 1970s. See
John A. Andrew, The Power to Destroy: Political Uses of the IRS From
Kennedy to Nixon (Ivan R. Dee 2002); John A. Andrew, The Other Side of
the Sixties (Rutgers Univ. Press 1997); David Burnham, A Law Unto
Itself: The IRS and the Abuse of Power (Random House 1990).
Given this history, and additional structural problems discussed
below, the Institute for Free Speech believes that the IRS should not
be engaged in the minutiae of regulating political or politically
related speech at all.
If an entity with a social welfare purpose is deemed a political
committee (``PAC'') under Federal or State law, it ought to be
regulated by the IRS as a 26 U.S.C. (``IRC'') Sec. 527 organization. If
it is not a political committee, its election campaign speech would not
be its primary purpose and thus such a social welfare group would fall
under 26 U.S.C. Sec. 501(c)(4). This straightforward approach would
harmonize the IRS's rules with those of the Federal Election
Commission, the body entrusted by Congress with ``exclusive
jurisdiction'' for civil enforcement of the nation's campaign finance
laws. 52 U.S.C. Sec. 30106(b)(l).
This approach would also recognize that in a democracy, political
education and the discussion of public affairs not only should but must
fall within the definition of ``social welfare'' and ``educational''
activities that constitute exempt activities under Sec. 501(c)(4).
Nothing in the statute requires exclusion of these functions from the
definition of social welfare. Finally, and most importantly, this
straightforward approach offers real clarity without dragging the IRS
further into the thicket of political speech regulation, a tangle from
which it--and the Service's reputation for the neutral, nonpartisan
collection of revenue--might never recover.
In a 2013 special report to Congress following the IRS targeting
scandal, then-National Taxpayer Advocate Nina Olson feared that the
scandal came about because ``[t]he IRS, a tax agency, is assigned to
make an inherently controversial determination about political activity
that another agency may be more qualified to make.'' See Nina Olson,
Special Report to Congress: Political Activity and the Rights of
Applicants for Tax-Exempt Status (2013). As she wrote in her report:
It may be advisable to separate political determinations from
the function of revenue collection. Under several existing
provisions that require non-tax expertise, the IRS relies on
substantive determinations from an agency with programmatic
knowledge.
Potentially, legislation could authorize the IRS to rely on a
determination of political activity from the Federal Election
Commission (FEC) or other programmatic agency. Specifically,
the FEC would have to determine that proposed activity would
not or does not constitute excessive political campaign
activity.
In fact, no legislation is needed. The IRS could today rely on FEC
determinations. The FEC is more qualified to make such determinations
not only because of its expertise but also because of its structure,
which poses less of a risk of partisan enforcement.
ii. the nature of the fec versus the irs
Understanding the FEC and its design is important to understanding
the problems of using another agency designed for one thing--say, the
smooth functioning of securities markets, regulation of broadcasting,
or tax collection--for another purpose, such as regulation of campaign
spending and speech about politics and public affairs.
Perhaps the most important feature of the FEC's design is its
bipartisan makeup. Most Federal independent agencies are directed by a
board or commission with some guaranteed level of bipartisan makeup.
Only the FEC and the U.S. International Trade Commission have equal
size blocks of commissioners, with 3 from each major party, and only
the FEC requires four votes of out six commissioners for most actions.
The reason for the FEC's unique design should be obvious. If some
measure of guaranteed bipartisanship is viewed as a valuable thing in
most independent agencies, this bipartisanship would seem essential for
an agency whose core mission is to regulate political speech in ways
that can determine who wins and who loses elections. This is a question
both of preventing actual abuse of the agency for partisan gain and
preventing the appearance that the agency's decisions are motivated for
partisan gain. In short, there is a strong argument for why the FEC is
structured as it is, which is to prevent one party from changing the
regulatory regime or using the enforcement process for partisan gain.
The FEC also has an enforcement process that aims to resolve
matters through conciliation rather than fines or litigation. This,
too, has drawn much criticism from those seeking ``stronger''
enforcement. But this process also exists for a reason. The
overwhelming number of complaints submitted to and violations found by
the FEC are not due to corruption but inadvertent violations of the
law. Many are nothing more than administrative violations against the
state.
The cost to a political candidate of having been found to have
``violated the law,'' however, can be great; the rewards to a zealous
prosecutor or even FEC Commissioner or General Counsel who is seen to
be crusading for ``clean elections'' are perhaps even greater in the
other direction. Therefore structuring the system around voluntary
conciliation agreements is an intentional means to depoliticize the
complaint process. Again, placing primary enforcement responsibility
with the Justice Department, the IRS, or another agency whose process
is geared to leveling direct sanctions dramatically alters the balance
in the direction of partisan enforcement, and does so in a way that may
reward overly aggressive prosecution by government officials in this
sensitive First Amendment area.
Thus, while it is true that almost all government agencies have
structural features to insulate them from politics, the FEC has more
political safeguards than most agencies, and it has them for very
compelling reasons.
The IRS faces far fewer situations regarding election speech in its
everyday business than does the FEC. Its culture and expertise are
therefore quite different from that of the FEC, which regularly faces
these issues. Indeed, one reason for the frustration some express with
the FEC has been the critics' unwillingness to accept the
constitutional restraints under which the FEC operates. Those who seek
to push regulation onto other agencies often do so precisely because
they seek to bypass such constitutional sensitivities that are, and
ought to be, a hallmark of the FEC--the agency charged by Congress with
``exclusive civil enforcement'' of campaign finance laws.
iii. problems of enforcement
Vague election laws combined with criminal penalties are a recipe
for abusive political prosecutions. It is a threat both to the First
Amendment and to honest government. In the case of the Michigan auto
dealers, which I discuss above, prosecutors were unable to gain
convictions in cases that went to trial; but the threat of prison time
convinced many defendants to plead no contest and pay fines.
Similarly, as the unsuccessful prosecution of John Edwards proved,
much of campaign finance law is vague, complicated, or both. Because of
the potential infringement on civil liberties, Congress should avoid
adding criminal penalties to existing or new campaign finance laws.
Arguably, there are already too many provisions that provide for
criminal penalties. The Bipartisan Campaign Reform Act of 2002 extended
the statute of limitations for many criminal violations of campaign
finance laws, made more provisions of the law subject to criminal
sanctions, and required the United States Sentencing Commission to
issue guidelines for campaign finance law violations. Other recent
high-profile political prosecutions for vague allegations of campaign
finance laws have similarly come apart at the seams, as in the
prosecution of Ted Stevens. Unfortunately, far too often the damage is
done by the time the law catches up to the hysteria. Stevens was
convicted just days before the election, which he lost by less than 1
percent of the vote, and only vindicated posthumously after a plane
crash.
The message we should send to the American people is that political
participation is a good thing, not a bad thing. For half a century, the
message of those who advocate for stricter campaign finance laws has
been that political participation is bad, that people who donate are
only out for themselves, and that political speech is, quite literally,
dangerous. It is no wonder that the confidence in democratic
institutions has declined.
The Need for Campaign Finance Law Simplification
The Federal election laws and regulations now contain over 376,000
words. But this just scratches the surface of election law. There are
over 1,900 advisory opinions and 7,900 enforcement actions that provide
guidance on what these vague laws might mean. As the Supreme Court
noted in Citizens United, ``Campaign finance regulations now impose
`unique and complex rules' on `71 distinct entities.' These entities
are subject to separate rules for 33 different types of political
speech. The FEC has adopted 568 pages of regulations, 1,278 pages of
explanations and justifications for those regulations.'' (Citing brief
for seven former Chairmen of FEC.)
Congress's vague laws often can't even be interpreted by the FEC.
For example, in August 2012, the FEC considered an Advisory Opinion
Request for the National Defense Committee, filed by our organization
asking whether seven proposed ads would trigger FEC regulation. The FEC
said three of the ads would not trigger FEC regulation, but it could
not render an opinion on the other four ads, and could not decide on
whether the group had to register with the FEC. Last year, the FEC
considered 13 Advisory Opinion Requests but failed to provide an
opinion in three of those requests. In one Advisory Opinion rendered by
the agency, it agreed the proposed activity was allowed by the law but
could ``not agree on a rationale for this conclusion.'' And yet most
practitioners will tell you--correctly, in my view--that the FEC
regulations are clearer than the regulations that the IRS already
applies when examining political activity by nonprofit organizations.
The problem is not the FEC; it is the law.
The most pressing need for Congress is to make campaign finance law
a lot simpler. How can we expect the FEC or Justice Department to
fairly enforce laws no one can understand? It is literally impossible
to navigate campaign finance laws without a lawyer, and even then, your
lawyer might not be able to give you a straight yes or no answer.
Worse, many lawyers without campaign finance expertise will give
incorrect answers.
As a result, well-meaning citizens often stumble into breaking
these laws, in part because the thresholds on regulated speech are
absurdly low. For example, current law requires reporting of all
independent expenditures over just $250.
iv. constitutional considerations
In Buckley v. Valeo, the Supreme Court noted that ``a major purpose
of . . . [the First] Amendment was to protect the free discussion of
governmental affairs, . . . of course includ[ing] discussions of
candidates.'' (Buckley v. Valeo, 424 U.S. 1, 14 (1976) (quoting Mills
v. Alabama, 384 U.S. 214, 218 (1966)).)
The Federal Election Campaign Act (FECA) and its subsequent
amendments sought to regulate such First Amendment activity. In an
effort to clarify First Amendment boundaries of regulable political
activity, Buckley set the standard for regulation of political speech
and association. Consequently, Buckley's examination of FECA provides
an essential guide.
In Buckley, the Court expressed concern about the effects vague
laws have upon the freedom of speech. Not only may a vague law be
applied inconsistently or arbitrarily, but such a law might also
``operate to inhibit protected expression by inducing citizens to steer
far wider of the unlawful zone.'' (Id at 41 n. 8.) Thus, a speaker may
``hedge and trim'' before speaking. (Id. at 43.) The First Amendment
needs ``breathing space to survive, [and so] government may regulate in
the area only with narrow specificity.'' (Id. (quoting NAACP v. Button,
371 U.S. 415, 433 (1963)).) In the political arena, the specificity
requirement is particularly important, because discussion of public
policy issues frequently overlaps with discussion of political
candidates:
For the distinction between discussion of issues and candidates
and advocacy of election or defeat of candidates may often
dissolve in practical application. Candidates, especially
incumbents, are intimately tied to public issues involving
legislative proposals and governmental actions. Not only do
candidates campaign on the basis of their positions on various
public issues, but campaigns themselves generate issues of
public interest. (Id. at 42.)
Of course, FECA attempted to divine this difficult distinction, but
the Buckley court found that it failed to avoid the vagueness problem.
FECA originally attempted to impose an expenditure cap: ``[n]o
person may make any expenditure . . . relative to a clearly identified
candidate during a calendar year which . . . exceeds $1,000.'' (Id. at
39.) In addition to constitutional problems with the $1,000 cap, the
Court found that the phrase ``relative to a clearly identified
candidate'' was vague. (Id at 44.)
The Court crafted an elegant solution. Because the phrase
``relative to a clearly identified candidate'' left speakers with no
opportunity to know in advance whether their conduct was regulated
political speech or unregulated issue speech, the Court was compelled
to narrow the interpretation of the phrase. To avoid vagueness, FECA
had to ``be construed to apply only to expenditures for communications
that in express terms advocate the election or defeat of a clearly
identified candidate for federal office.'' (Id.) To provide clarity to
this phrase, the Court included the highly influential footnote 52,
which limited regulable speech to ``express words of advocacy of
election or defeat, such as `vote for,' `elect,' `support, `cast your
ballot for,' `Smith for Congress,' `vote against,' `defeat,' [and]
`reject.' '' (Id. at 44 n. 52.)
The key, then, is recognizing that the line between discussion of
issues and discussion of candidates is, at best, blurry. The harm of
vague regulation is its potential to cause a would-be speaker to keep
silent due to uncertainty about how the law will be applied. Thus, to
remain within the bounds of the Buckley decision, regulation should err
on the side of avoiding such chill, by providing objective rules that
can be uniformly applied and providing clarity in a manner that
maximizes the free exchange of ideas guaranteed by the First Amendment.
As Chief Justice Roberts has noted, in such cases ``the tie goes to the
speaker, not the censor.'' (FEC v. Wis. Right to Life, Inc., 551 U.S.
449, 474 (2007) (``WRTL II'') (Roberts, C.J., concurring).)
In addition to drawing a line between issue speech and political
speech, the Supreme Court has recognized the need to protect freedom of
association from undue and excessive disclosure, most recently in
Americans for Prosperity Foundation v. Bonta. 594 U.S. __, 141 S.Ct.
2373 (2021); see also, e.g., Gibson v. Florida Legislative Comm., 372
U.S. 539 (1963); Shelton v. Tucker, 364 U.S. 479 (1960); Bates v.
Little Rock, 361 U.S. 516 (1960); NAACP v. Ala. ex rel. Patterson, 357
U.S. 449 (1958).
Indeed, Buckley also has much to say about protecting the freedom
of association in the campaign finance context. Disclosure of
information about individuals who seek to involve themselves with a
group--or even with a politician--implicates the freedom of association
protected by the First Amendment. (Buckley, 424 U.S. at 75.)
The iteration of FECA considered by the Buckley Court required
regular reporting and disclosure by ``political committees''--
organizations that made ``contributions'' and ``expenditures.'' (Id. at
79.) The definition of ``expenditures,'' however, was vague and
implicated the confluence of spending money on issues and spending
money to support candidates. (Id.) Fortunately, Buckley had already
carefully crafted an interpretation of FECA to ensure that issue speech
was not unnecessarily entangled with the regulation of political
speech. (Id. at 44.)
To prevent the disclosure requirement from reaching groups that
merely mentioned candidates in the context of issue speech, the Buckley
court construed the relevant provisions to apply only to
``organizations that are under the control of a candidate or the major
purpose of which is the nomination or election of a candidate.'' (Id at
79.) Expenditures by groups under the control of a candidate or with
``the major purpose'' of supporting or opposing a candidate ``are, by
definition, campaign related.'' (Id.) This language, now known as ``the
major purpose test,'' narrowed the reach of FECA's disclosure
provisions to protect the associational freedoms of individuals.
As applied to individuals and groups that did not have ``the major
purpose'' of political activity, the Buckley court narrowed the
definition of ``expenditures'' in the same way--``to reach only funds
used for communications that expressly advocate the election or defeat
of a clearly identified candidate.'' (Id. at 80.) To describe the term
``expressly advocate,'' the Court simply incorporated the examples
already listed in footnote 52. (Id. at 80 n. 108 (incorporating Id. at
44 n. 52).)
v. involving the irs in policing speech may threaten tax compliance
It is particularly important that the IRS not be converted into a
campaign finance enforcement agency. The IRS is responsible for the tax
code, and the history of presidential abuse of the IRS and the tax
code--discussed above--to target political opposition, through both
Democratic and Republican administrations, make it important that
Congress not look to the IRS to address perceived issues in campaign
finance.
The collection of trillions of dollars in taxes each year is based
on what the IRS calls the self-assessment feature of the tax laws,
where citizens and businesses calculate and pay their taxes. If the
agency develops a reputation as a partisan lapdog of the party in
power, that could lead to more citizens cheating on their taxes, or
simply failing to file, with potentially disastrous implications for
the budget deficit. If the level of compliance with individual income
tax laws alone were to drop just one percentage point due to a decline
in the Service's reputation for fairness, that could cost the
government over $250 billion in tax collections over a 10-year period.
Contributions to 501(c)(4) organizations are not tax deductible,
and the tax liability of existing 501(c)(4)s wouldn't significantly
change if they were reclassified as political committees. Since the
IRS's regulation of these groups has essentially nothing to do with tax
collection, efforts to increase IRS regulation of political speech make
little sense and are unrelated to the Service's mission of impartial
revenue collection.
This dual regulatory scheme between the FEC and IRS has created
confusion among nonprofit groups and the public. It would be a mistake
to continue to ask the IRS to play any role--let alone an even greater
role--in the enforcement of campaign finance laws.
vi. the nature and extent of the supposed ``dark money'' issue
The decisions of the United States Supreme Court in Citizens United
v. Federal Election Commission, 558 U.S. 310 (2010) (allowing
corporations and unions to make independent expenditures in political
campaigns from general treasury funds) and of the United States Court
of Appeals in SpeechNow.org v. Federal Election Commission, 599 F.3d
686 (en banc, 2010) (allowing independent expenditures to be made from
pooled funds not subject to PAC contribution limits) have brought a
renewed focus to the issue of disclosure of political spending. The
claim has largely been that the public lacks information on the sources
of vast amounts of political independent spending. This concern, while
serious if true, has been artificially ramped up by many mistaken
comments in the media about ``secret'' contributions to campaigns, as
well as a widely held but mistaken belief that under Citizens United,
corporations and unions may now contribute directly to candidate
campaigns. In any case, information about political donors, it is
believed, can help guard against officeholders becoming too compliant
with the wishes of large spenders, and provide information that might
be valuable to voters in deciding for whom to vote and how to evaluate
political messages.
There have been concerns that nonprofit organizations formed under
section 501(c)(4) of the Internal Revenue Code have been engaging in
extensive political campaigns using ``secret money.'' This issue,
however, is not new. Express advocacy in favor of or against candidates
was allowed for certain types of 501(c)(4) organizations even before
Citizens United, as a result of the Supreme Court's ruling in Federal
Election Commission v. Massachusetts Citizens For Life (``MCFL''), 479
U.S. 238 (1986). That decision allowed qualified nonprofit corporations
to conduct express advocacy through independent expenditures. These
groups were significant and growing before the Citizens United decision
and included groups such as the League of Conservation Voters and
NARAL. In addition, even groups that did not qualify for the exemption
pursuant to MCFL could and did run hard-hitting issue campaigns against
candidates.
For example, in 2000, the NAACP Voter Action Fund, a nonprofit
social welfare group organized under section 501(c)(4) of the tax code,
ran the following ad:
Renee Mullins (voice over): I'm Renee Mullins, James Byrd's
daughter. On June 7, 1998 in Texas my father was killed. He was
beaten, chained, and then dragged 3 miles to his death, all
because he was black. So when Governor George W. Bush refused
to support hate-crime legislation, it was like my father was
killed all over again. Call Governor George W. Bush and tell
him to support hate-crime legislation. We won't be dragged away
from our future.
This 30-second TV spot, featuring graphic reenactment footage,
began running on October 25, 2000, just a few days before the 2000
presidential election. See Bradley A. Smith, ``Disclosure in a Post-
Citizens United Real World,'' 6 U. St. Thomas J.L. and Pub. Pol'y 257
(2012).
This ad was perfectly legal to run at any time before 2003, with no
donor disclosure and remained legal to run under current disclosure
laws more than 30 days before a primary or 60 days before a general
election between 2003 and 2007. It probably also could have been run,
with no donor disclosure, at any time after the Supreme Court's 2007
decision in Wisconsin Right to Life v. Federal Election Commission, 551
U.S. 449 (2007).
It should also be noted that neither the Citizens United nor
SpeechNow.org decisions struck down any disclosure laws; nor has
Congress or the FEC loosened any disclosure rules in place at the time
those two decisions were issued in the spring of 2010. There has been
no change in the laws governing disclosure of political spenders and
contributors.
Despite the focus on ``dark money,'' ``secret money,'' and
``undisclosed spending,'' in fact, the United States currently has more
political disclosure than at any time in its history. Candidates,
political parties, PACs, and Super PACs disclose all their donors
beyond the most de minimis amounts. This disclosure includes the name
of the group, individual, or other entity that is contributing, the
date on which it occurred, and the amount given. Indeed, these entities
also report all their expenditures.
Current law also requires reporting of all independent expenditures
over $250, and of ``electioneering communications'' under 2 U.S.C.
Sec. 30104(f). 501(c)(4) social welfare organizations must disclose
donors who give money earmarked for political activity. All this
information is freely available on the FEC's website.
All broadcast political ads (like, in fact, all broadcast ads,
political or not) must include, within the ad, the name of the person
or organization paying for the ad. Thus, it is something of a misnomer
to speak of ``undisclosed spending.'' Rather, more precisely, some ads
are run with less information about the spender, and contributors to
the spender, than some might think desirable. This recognition is
important to understanding the scope of the issue and the importance of
measures that seek to require more disclosure.
Furthermore, despite record campaign spending, 2020 saw less ``dark
money'' than any election since Citizens United. After peaking in 2012
with an all-time high of $312.5 million (still under 5 percent of that
year's total spending on Federal campaigns), ``dark money'' has
dwindled, bottoming out in the 2020 cycle at roughly $102 million. That
equals merely 0.73 percent of the election campaign's estimated $14
billion price tag. It equates to less than 4 percent of independent
spending in the 2020 cycle.
vii. certain nonprofits properly engage in limited political speech
Under Buckley, an organization becomes a political committee only
if its ``major purpose'' is the election or defeat of candidates, as
indicated by expenditures expressly advocating the election or defeat
of a candidate. These political committees operate under section 527 of
the Internal Revenue Code. Meanwhile, 501(c)(3) organizations are
restricted from any candidate advocacy.
There must be, therefore, some other category for organizations
that do some candidate advocacy, but for which it is not the group's
``major purpose.'' These are, indeed, 501(c)(4), (c)(5), and (c)(6)
organizations--specifically, social welfare organizations, unions, and
trade associations. To attempt to regulate such organizations as
political committees, or to prohibit them from all candidate advocacy,
would be unconstitutional, forcing advocacy groups to either have
political advocacy as their major purpose or to engage in none at all.
viii. the disclose act would chill first amendment-protected activity
and violate the privacy of nonprofit organizations and their supporters
Since 2010, members of Congress have introduced various iterations
of the DISCLOSE Act, advertised as a solution to the alleged ``flood''
of ``dark money'' unleashed by Citizens United. The bill has failed in
every session of Congress for the past decade largely because groups
across the ideological spectrum consistently speak out against its
constitutional infirmities. Yet, the latest version the bill would
burden freedom of speech and association more broadly than most of the
previous, failed versions.
The bill would greatly increase the already onerous legal and
administrative compliance costs, liability risk, and costs to donor and
associational privacy for civic groups that speak about policy issues
and politicians. Organizations and their supporters will be further
deterred from speaking or be forced to divert additional resources away
from their advocacy activities to pay for compliance staff and lawyers.
Some groups will not be able to afford these costs or will violate the
law unwittingly. Less speech by private citizens and organizations
means politicians will be able to act with less accountability to
public opinion and criticism. Consequently, citizens who would have
otherwise heard their speech will have less information about their
government.
The DISCLOSE Act would unconstitutionally regulate speech that
mentions a Federal candidate at any time under a vague, subjective, and
dangerously broad standard that asks whether the speech ``promotes,''
``attacks,'' ``opposes,'' or ``supports'' (``PASO'') a candidate. This
standard is impossible to understand and would likely regulate any
mention of an elected official who hasn't announced their retirement.
Notably, the PASO standard comes from a provision in the 2002
Bipartisan Campaign Reform Act (a.k.a. ``McCain-Feingold'') that
regulates the funds State and local party committees may use to pay for
communications that PASO Federal candidates. The Supreme Court upheld
the PASO standard against a challenge that it is unconstitutionally
vague on the basis that it ``clearly set[s] forth the confines within
which potential party speakers must act'' because ``actions taken by
the political parties are presumed to be in connection with election
campaigns'' (emphasis added). Thus the DISCLOSE Act would apply a
standard written to apply to party communications to most nonprofits
despite the fact that the presumption that expenditures are for
election campaigns is inapplicable to communications by nonprofit
groups.
Numerous other components of the DISCLOSE Act are problematic, as
both a matter of policy and constitutional law. Specifically, these
provisions would:
Compel groups to declare on new, publicly filed ``campaign-
related disbursement'' reports that their ads are either ``in support
of or in opposition'' to the elected official mentioned, even if their
ads are neither. This form of compulsory speech forces organizations to
declare their allegiance or opposition to public officials, provides
false information to the public, and is unconstitutional.
Force groups to file burdensome and likely duplicative reports
with the FEC if they sponsor ads that are deemed to PASO the President
or members of Congress (except those who are not running for Federal
office again) in an attempt to persuade those officials on policy
issues.
Force groups to publicly identify certain donors on reports
for issue ads and on the face of the ads themselves. In many instances,
the donors being identified will have provided no funding for the ads.
Faced with the prospect of being inaccurately associated with what, by
law, would be considered (unjustifiably, in many or most instances)
``campaign'' ads in FEC reports and disclaimers, many donors will stop
giving to nonprofits and many of these groups will self-censor.
Focus public attention on the individuals and donors
associated with the sponsoring organizations rather than on the
communications' message, exacerbating the politics of personal
destruction and further coarsening political discourse.
Force organizations that make grants to file their own reports
and publicly identify their own donors if an organization is deemed to
have ``reason to know'' that a donee entity has made or will make
``campaign-related disbursements.'' This vague and subjective standard
will greatly increase the legal costs of vetting grants and many groups
will simply end grant programs.
Conclusion
Tax-exempt organizations operating under sections 501(c)(4), (5),
and (6) of the Internal Revenue Code have a statutorily and
constitutionally valid role to play in the discussion of both electoral
politics and, more broadly, public affairs. Experience has shown that
the Internal Revenue Service is not an appropriate vehicle to attempt
to regulate the political activity of these organizations, and that
efforts to involve the IRS in the enforcement of regulations of
political speech has led to abuse and scandal--from the administration
of Franklin Roosevelt through the IRS targeting scandals of this past
decade.
______
Questions Submitted for the Record to Bradley A. Smith
Questions Submitted by Hon. John Thune
Question. What do you find to be the greatest dangers of donor
disclosure for 501(c)(3) and 501(c)(4) organizations and their donors?
What historical examples of harm do you find most disturbing?
Answer. To take the second part of the question first, the story of
the harms of donor disclosure in the modern era must highlight
harassment of the NAACP. In the 1950s, Alabama attempted to force the
NAACP to provide State authorities with a list of the names and home
addresses of all of the group's members in the State. The NAACP was
highly controversial at the time and seen by southern State governments
as the enemy. If its individual members were identified to State
officials at the height of Jim Crow, the risk of harassment and
intimidation--or worse--was self-evident.
The State's demand for donor information was clearly meant to
intimidate supporters of the organization. By exposing large supporters
to the NAACP, Alabama could then use the other levers of regulatory
power at its disposal to inflict economic harm as reprisal for
supporting the NAACP, or count on private action--including possibly
illegal actions--to accomplish the same. Had the State succeeded in
obtaining a list of NAACP supporters, efforts to secure civil rights in
Alabama and all across America would have faced yet another huge
hurdle.
But in its 1958 decision in NAACP v. Alabama,\1\ the Supreme Court
saved the Nation from that fate. Recognizing the inextricable link
between privacy, freedom of association, and free speech, the Court
unanimously ruled that the government could not force groups to
surrender their member lists. Such ``exposure,'' as the high court
termed it, would greatly damage organizations' ability to fulfill their
missions. In the words of the Court, Alabama's demand restricted free
association rights because it ``may induce members to withdraw from the
Association and dissuade others from joining it because of fear of
exposure of their beliefs. . . .''
---------------------------------------------------------------------------
\1\ NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958).
The harms that the segregationist South could inflict on an
organization like the NAACP represent the most severe danger that can
come from disclosure laws. But it is neither the only risk, nor the
only time that courts have recognized that disclosure laws cause harm.
In the campaign finance context, the court recognized in 1976's Buckley
---------------------------------------------------------------------------
v. Valeo that:
compelled disclosure, in itself, can seriously infringe on
privacy of association and belief guaranteed by the First
Amendment . . . significant encroachments on First Amendment
rights or the sort that compelled disclosure imposes cannot be
justified by a mere showing of some legitimate governmental
interest.\2\
---------------------------------------------------------------------------
\2\ Buckley v. Valeo, 424 U.S. 1, 48 (1976).
The Court has ruled that the harm of disclosure laws outweighed the
benefit in other contexts, too. Brown v. Socialist Workers '74 Campaign
Committee \3\ upheld the rights of an unpopular minority party to keep
the names of its members, donors, and vendees private in order to avoid
both ``governmental and private hostility.'' In McIntyre v. Ohio
Elections Commission,\4\ the Court struck down an Ohio statute
requiring political handbills advocating the passage or defeat of a
school tax to list the names of those ``responsible therefor.'' We
should note that in both of these instances, the speech at issue was
directly related to campaigns, elections and politics, and yet, even in
such circumstances, the Court saw the harms of disclosure as too high.
---------------------------------------------------------------------------
\3\ Brown v. Socialist Workers '74 Campaign Comm. (Ohio), 459 U.S.
87 (1982).
\4\ McIntyre v. Ohio Elections Comm'n, 514 U.S. 334 (1995).
Just last year, in Americans for Prosperity Foundation v. Bonta,\5\
the Court ruled that 501(c)3 charities have the right to keep their
major supporters private from State Governments. The Court ruled that
California's attempt to mandate donor reporting was not narrowly
tailored to an important government interest for the State. It also
found that the threats of reprisal and harassment presented at trial
against AFPF were real.
---------------------------------------------------------------------------
\5\ Americans for Prosperity Foundation v. Bonta 141 S. Ct. 2373
(2021).
There are, of course, other cases where disclosure rules have been
upheld, typically relating to public reporting of large donations to
candidates, political parties, and groups with a major purpose of
supporting or opposing candidates in elections. But the Court has
deeply scrutinized efforts to expand disclosure laws beyond their
current bounds and has long recognized that any disclosure rule brings
---------------------------------------------------------------------------
with it real harms to First Amendment rights.
Critics respond that we are not living in 1950s Alabama anymore, so
why worry? Perhaps the best way to see the threat is to look at
specific examples of harm caused by (a) legally allowable disclosures,
or (b) illegal disclosures of donations to nonprofit organizations
(through either outside hacking or government malfeasance.) Any law
that extends disclosure rules would increase the likelihood of events
like these.
In 2022, Tammy Giuliani made a lawful $250 donation to the Canadian
trucker's convoy, the movement that briefly paralyzed Canada's capital
and garnered international attention for its protest against COVID-19
mandates.\6\ Hackers leaked information about her donation and
thousands of others, leading to widespread threats and harassment
against the donors. The threats forced the cafe to close.
---------------------------------------------------------------------------
\6\ Blair Crawford, ``Threats close Stella Luna Gelato Cafe after
owner's name appears in GiveSendGo data leak,'' Ottawa Citizen.
February 17, 2022. Available at: https://ottawacitizen.com/news/local-
news/threats-close-stella-luna-gelato-cafe-after-owners-name-appears-
in-givesendgo-data-leak.
In 2021, Sgt. William Kelly, a police officer in Virginia, and
Craig Shepherd, a paramedic in Utah, made lawful $25 and $10 donations,
respectively, to the legal defense fund of Kyle Rittenhouse, who was on
trial for homicide after fatally shooting two men and wounding another
during a night of riots and unrest in Kenosha, WI. Both Kelly and
Shepherd became targets for harassment after hackers exposed donations
to Rittenhouse's legal fund and additional details were published in
The Guardian.\7\ Kelly was fired from his job as a Virginia police
officer. An ABC News reporter showed up at Shepherd's house with a
camera in tow to harass him in the name of ``reporting.'' In both
cases, the donors had done nothing illegal and were targeted simply for
exercising their First Amendment rights.
---------------------------------------------------------------------------
\7\ Jason Wilson, ``US police and public officials donated to Kyle
Rittenhouse, data breach reveals,'' The Guardian. April 16, 2021.
Available at: https://www.theguardian.com/us-news/2021/apr/16/us-
police-officers-public-officials-crowdfunding-website-data-breach.
In 2021, Cara Dumaplin, a registered neonatal nurse, created a
successful Internet business helping parents of newborns with parenting
and child-rearing advice. A business competitor shared screen shots of
Dumaplin's political contributions showing that she had made donations
to the reelection campaign of Donald Trump. Dumaplin made 36 donations
between $25 and $35 to the Trump campaign--not exactly huge money.\8\
The screen shots of the Federal Election Commission report were widely
shared across social media platforms. Given the vast unpopularity of
Dumaplin's political association among her clientele, the result was no
surprise: boycotts of her website, merchandise, and consulting services
ensued.
---------------------------------------------------------------------------
\8\ Rebecca Jennings, ``What happened when a beloved mom influencer
donated to Trump,'' Vox. January 27, 2021. Available at: https://
www.vox.com/the-goods/22252360/taking-cara-babies-trump-instagram-
donation-drama.
In 2019, Congressman Joaquin Castro tweeted out the names of 44 of
his constituents in San Antonio who made lawful contributions to Donald
Trump's reelection, accusing them of ``fueling a campaign of hate.''\9\
Donors immediately began receiving threatening phone calls, boycotts of
the businesses where they worked, and a pressure campaign to ostracize
them for donating to a candidate their congressman disagreed with. A
similar story occurred in New York, where Congressman Tom Suozzi
threatened to name and shame donors who gave to candidates that had a
position different from his own on the SALT tax deduction.\10\
---------------------------------------------------------------------------
\9\ Caitlin Oprysko, ``Joaquin Castro doubles down amid backlash
over tweeting names of Trump donors,'' Politico. August 6, 2019.
Available at: https://www.politico.com/story/2019/08/06/joaquin-castro-
trump-donors-1450672.
\10\ Tiffany Donnelly, ``All I Want for Christmas Is Lawmakers to
Respect Privacy,'' Institute for Free Speech. December 16, 2020.
Available at: https://www.ifs.org/blog/christmas-lawmakers-respect-
privacy-suozzi-disclosure/.
Stories like this are too numerous to catalogue. Yet many never
come to light because the harassment is carried out privately and has
its desired effect: the person stops supporting or associating with the
group and stops speaking out about the issue. Given the ease of finding
and spreading donor information on the Internet, disclosure-fueled
harassment is likely to become more, not less, common over time. If
politicians are ready to threaten donors over differences in tax
policy, and if people are organizing boycotts and threatening
individuals and businesses over $25 donations to candidates they don't
like, then imagine the harms inflicted if every Planned Parenthood
donor, every National Rifle Association member, and every Black Lives
Matter supporter were forcibly published on a government website. That
---------------------------------------------------------------------------
is the danger of creating new, more expansive disclosure laws.
Question. The Biden administration recently announced that it is
setting up a ``Disinformation Governance Board'' within the Department
of Homeland Security.
As an expert on free speech, do you think the Federal Government
establishing a ``Disinformation Governance Board'' is consistent with
the principles of the First Amendment?
Answer. No. It is a terrible idea that would do tremendous harm to
public trust and is wildly inconsistent with both the First Amendment
and the spirit of free inquiry that the amendment is meant to protect.
It is fortunate that, after significant backlash, the Department halted
the program. I fear, however, that the administration has made its
intentions clear, and the Disinformation Governance Board's work may
already be continuing through other means, both inside the Department
and in other Federal agencies. On June 16th, less than a month after
the Board was paused, the White House announced a new Internet policy
task force led by Vice President Kamala Harris that aims, among other
things, to protect ``public and political figures, government and civic
leaders, activists, and journalists'' from ``disinformation.''
It seems that while the administration got the message that
something called a ``Disinformation Governance Board'' housed inside
DHS was both controversial and unpopular, they have failed to
understand the reason why: it is not the job of the government to
police the truth.
The Supreme Court has consistently ruled that false speech, even
deliberate lying, is generally protected by the Constitution. It has
done so not because it thinks that purposeful misinformation is good,
but because the enforcement of laws against such speech are far worse.
As Justice Kennedy put it:
Permitting the government to decree [deliberate false
statements] to be a criminal offense, whether shouted from the
rooftops or made in a barely audible whisper, would endorse
government authority to compile a list of subjects about which
false statements are punishable. That governmental power has no
clear limiting principle. Our constitutional tradition stands
against the idea that we need Oceania's Ministry of Truth.\11\
---------------------------------------------------------------------------
\11\ United States v. Alvarez, 567 U.S. 709 (2012).
Of course, there are some narrow exceptions where lying is not
constitutionally protected speech--in cases of fraud and perjury, for
example. But all such exceptions have clear limits. They all have
immediate and definable harms and they are all deeply rooted in both
our constitutional and common law traditions. A general warrant by the
Federal Government to police speech it has deemed ``disinformation'' is
---------------------------------------------------------------------------
quite the opposite.
This is not a new problem. From the antebellum south fearing the
``misinformation'' of abolitionist literature to calls to restrict
communist speech for fears it contained false kompromat from the Soviet
Union, there have always been some who thought the threat of divisive
or untrue speech was worth compromising our First Amendment principles.
And there have always been others who seek to capitalize on such fears
in order to gain the power to punish their critics and political
opponents. Yet even when government efforts to police truth start off
well-intentioned, they carry a tremendous risk of abuse, bias, and
simple error. Tolerating some false speech is the price we pay as a
society for maintaining the free and robust exchange of ideas that is
essential to our democracy. Luckily, throughout our history, the
people's speech rights have eventually prevailed over attempts at
restriction.
To those members of the committee who think that the government
does have a role to play in ``fighting disinformation,'' whether
through this ill-thought-out program in the Department of Homeland
Security or in legislation passed by this body, I would remind them
that any such program or law will eventually be controlled or enforced
by your fiercest political opponents. It would be extremely
shortsighted for any administration or political party to embrace
policies in the name of fighting ``disinformation'' that could one day
transform into government censorship of political speech.
And it is worth remembering that much speech that was very recently
widely considered disinformation is now widely considered to be true.
Look only at the recent pandemic for myriad examples. It was
disinformation to say that the new coronavirus was airborne;\12\
disinformation to suggest that it was the result of a lab leak in
China;\13\ disinformation to promote masks as an effective barrier to
transmission;\14\ and disinformation to believe that a vaccine would be
developed in less than a year.\15\ Now, all of these are widely
believed by ``experts.'' In the years to come, it may be the case that
some of these facts are once again upended and will once again be
considered false. That's okay; such is the nature of free discourse.
Knowledge is evaluated and challenged and reevaluated again.
---------------------------------------------------------------------------
\12\ Dyani Lewis, ``Why the WHO took 2 years to say COVID is
airborne,'' Nature. April 6, 2022. Available at: https://
www.nature.com/articles/d41586-022-00925-7.
\13\ ``WHO `open' to probing `new evidence' of COVID-19 lab leak
origin theory, accepts `key pieces of data' still missing,'' CBS News.
June 10, 2022. Available at: https://www.cbsnews.
com/news/covid-19-origin-who-china-lab-leak-theory-open-to-new-
evidence/.
\14\ John Bacon, `` `Seriously people--STOP BUYING MASKS!': Surgeon
general says they won't protect from coronavirus,'' Florida Times-
Union. March 2, 2020. Available at: https://www.jacksonville.com/story/
news/healthcare/2020/03/02/seriously-people---stop-buying-masks-
surgeon-general-says-they-wont-protect-from-coronavirus/112244966/.
\15\ Jane C. Time, ``Fact check: Coronavirus vaccine could come
this year, Trump says. Experts say he needs a `miracle' to be right,''
NBC News. May 15, 2020. Available at: https://www.nbcnews.com/politics/
donald-trump/fact-check-coronavirus-vaccine-could-come-year-trump-says-
experts-n1207411.
When you add in explicitly partisan and political ``facts,'' such
as the debacle surrounding the private censorship of the Hunter Biden
laptop story as ``false,'' it becomes quickly apparent that government
enforcement of ``disinformation'' carries far greater risk of harm than
---------------------------------------------------------------------------
of potential benefit.
Clearly the government, and its officials, have a right to express
their own views. But the idea of a government board making
pronouncements on the truth or falsity of disputed issues, and
pressuring private entities to censor disfavored speech is
unconstitutional and rife for abuse.
Question. Is it correct that Lois Lerner was exonerated in the
later investigations of the targeting controversy?
Answer. No, that is incorrect.
Final investigations by the Treasury Inspector General for Tax
Administration (TIGTA) \16\ and the Senate Finance Committee \17\ both
concluded that the initial assessments of political targeting by the
IRS were, in fact, correct. The IRS under Lois Lerner targeted
conservative and Tea Party groups specifically because they were
conservative and Tea Party groups.
---------------------------------------------------------------------------
\16\ ``Inappropriate Criteria Were Used to Identify Tax-Exempt
Applications for Review,'' Treasury Inspector General for Tax
Administration. May 14, 2013. Available at: http://www.treasury.gov/
tigta/auditreports/2013reports/201310053fr.pdf .
\17\ ``Bipartisan Investigative Report as Submitted by Chairman
Hatch and Ranking Member Wyden,'' United States Senate Committee on
Finance. August 5, 2015. Available at: https://www.finance.senate.gov/
imo/media/doc/CRPT-114srpt119-pt1.pdf.
A counter-narrative has emerged that downplays the IRS scandal by
claiming that because a few progressive groups also had their
applications for tax-exempt status flagged and delayed, it is wrong to
say the IRS was targeting based on the political speech of the groups.
This narrative ignores the evidence about both the scale and the
severity of the targeting against groups on the right as opposed to
---------------------------------------------------------------------------
groups the left.
First, this counter-narrative relies on a 2017 TIGTA audit report
\18\ that indicated IRS review of applications for tax exemption
included other types of suspected political activity besides
conservative. But that report covered a time period that began in 2004,
6 years before the 2010 inception of the ``tea party cases'' activity
by the IRS. The Treasury press release accompanying the 2017 report
noted numerous problems associated with attempting to compare the 2017
TIGTA audit report with the seminal 2013 TIGTA audit report. Citing
this report to argue that the IRS did not disproportionately target
conservative groups starting in 2010 is a bit like arguing that the
United States was not a major world power after World War II because
its economy was in a depression in the 1930s.
---------------------------------------------------------------------------
\18\ ``Review of Selected Criteria Used to Identify Tax-Exempt
Applications for Review,'' Treasury Inspector General for Tax
Administration. September 28, 2017. Available at: https://
www.treasury.gov/tigta/auditreports/2017reports/201710054fr.pdf.
The numbers for the actual period of the scandal are what count--
not the numbers for the period before the IRS began targeting
conservative groups. And what are those numbers? The IRS itself found
---------------------------------------------------------------------------
that among those groups targeted by the IRS starting in 2010:
Of the 84 (c)(3) cases, slightly over half appear to be
conservative-leaning groups based solely on the name. The
remainder do not obviously lean to either side of the political
spectrum. Of the 199(c)(4) cases, approximately \3/4\ appear to
be conservative-leaning, while fewer than 10 appear to be
liberal/progressive-leaning groups based solely on the
name.\19\
---------------------------------------------------------------------------
\19\ Id. at Appendix IV.
Thus, while it is true that IRS screening to detect political
activity (including the infamous BOLO list) did occasionally capture
non-conservative groups, the large majority--and clear purpose--of the
program was the targeting of conservatives. Hundreds of right-leaning
groups were affected compared to fewer than 10 left-
---------------------------------------------------------------------------
leaning groups.
That alone should settle the debate, and yet it still does not
capture the full extent of the IRS's mistreatment of conservative
groups. The initial targeting, after all, was only the first step. The
real damage done was in the lengthy delays in approving groups' tax-
exempt status. Here, too, the IRS found that liberally-coded groups and
conservative-coded groups received vastly different treatment. The 2017
TIGTA report found that most groups on the left who were ``targeted''
still had their tax-exempt status approved within 2 years, and the
majority were approved in the first year. The opposite was true for
groups on the right: the overwhelming majority were not approved in 2
years, according to the 2013 TIGTA report.
As the Sixth Circuit Court of Appeals put it, ``the IRS used
political criteria to round up applications for tax-exempt status filed
by so-called tea-party groups; . . . the IRS often took four times as
long to process tea-party applications as other applications; . . . the
IRS served tea-party applicants with crushing demands for what the
Inspector General called `unnecessary information.' ''\20\
---------------------------------------------------------------------------
\20\ U.S. v. NorCal Tea Party Patriots (In re United States), 817
F.3d 953 (6th Cir. 2016).
Lois Lerner herself admitted the IRS's behavior was inappropriate,
both in the question she planted at a public tax forum in an attempt to
get ahead of the IRS audit, and in her statement to Congress before
invoking her Fifth Amendment right against self-incrimination. Lerner,
of course, was found guilty of contempt of Congress. While the
Department of Justice declined to prosecute Ms. Lerner in 2015, the
evidence is overwhelming that the IRS Exempt Organizations Unit
purposefully discriminated against conservative groups while she was
---------------------------------------------------------------------------
director.
______
Questions Submitted by Hon. Elizabeth Warren
Question. Your organization--the Institute for Free Speech,
formerly known as the Center for Competitive Politics--has criticized
proposals that would require companies to disclose their political
spending to shareholders and the public.\21\ In your testimony before
this subcommittee, you reiterated those views.\22\
---------------------------------------------------------------------------
\21\ The Center for Competitive Politics, ``Silencing Business: How
Activists Are Trying to Hijack the Public Policy Debate,'' June 2014,
https://web.archive.org/web/20140821011018/http://www.proxyfacts.org/
wp-content/uploads/2014/06/CCP-White-Paper-6.2.pdf.
\22\ Testimony of Bradley Smith before the Senate Finance
Committee, Subcommittee on Taxation and IRS Oversight, May 4, 2022,
https://www.finance.senate.gov/imo/media/doc/2022-05-
04_Smith%20Testimony_US%20Senate.pdf.
How is free speech best served by withholding this information from
the public? Do you believe shareholders in public companies should be
denied information that allows them to make informed investment
---------------------------------------------------------------------------
decisions?
Answer. It's important when considering any question of disclosure
to take a holistic view. Every disclosure law violates one group's
right to privacy and free association in exchange for a hoped for
informational benefit to the public. But the calculus for whether the
informational benefit outweighs the violation cannot be done in a
vacuum, because the more information already publicly available, the
less valuable each additional disclosure becomes.
So what disclosure laws do public companies already face for their
``political'' spending? First, public companies may form a political
committee (PAC), which can both donate directly to candidates and other
committees and also make expenditures directly advocating for the
election or defeat of Federal candidates. All contributions to that
committee come from employees of the company, not the company itself,
and all (over a de minimis amount) are publicly disclosed. All
contributions from that PAC to other committees are publicly disclosed.
All expenditures (above a de minimis amount) by that committee are
publicly disclosed. These include contributions to candidates,
political parties, and super PACs--and in all cases, expenditures made
by those candidates or super PACs are also publicly disclosed.
Expenditure disclosures for all of these entities include independent
expenditures (any ad that expressly argues for the election or defeat
of a candidate) and electioneering communications (any broadcast,
cable, or satellite ad that merely mentions a candidate close to an
election.) If a corporation donates directly to a nonprofit and directs
the nonprofit to engage in independent expenditures or electioneering
communications, that too is publicly disclosed.
Corporations are prohibited from giving directly to candidates at
the Federal level, but in every State where such contributions are
permitted, those contributions are also disclosed. If a corporation
engages in lobbying, that too is disclosed through an equally rigorous
and extensive set of lobbying regulations.
The additional disclosures that some wish to impose on companies
beyond this regime concern things that, until relatively recently, were
not considered political at all: things like trade association dues,
support for think tanks, research organizations, and other charities.
To the extent these activities can influence politics, they do so
indirectly, and the connection between the two is often tenuous. Yet
the threat of harassment and reprisals against donors whose identities
are publicly exposed can deter support for worthy causes. It's worth
noting at this point that mandatory disclosure laws reaching beyond
traditional forms of political activity have often been ruled
unconstitutional by the Supreme Court. A line of cases dating back to
the Court's landmark holding in NAACP v. Alabama, where Alabama sought
to force the NAACP to expose its members, makes clear that Americans
have a First Amendment right to support social causes privately.\23\
Just last year, in Americans for Prosperity Foundation v. Bonta, the
Court held that a State's uniform demand for donor lists from charities
was a burden on free association.\24\ The Court was unconvinced that
the donor information was necessary for the State to ferret out fraud--
a more substantial concern than any small informational benefit to
shareholders of proposed new disclosure requirements.
---------------------------------------------------------------------------
\23\ NAACP v. Alabama ex rel. Patterson, 357 U.S. 449, 462-463
(1958).
\24\ Americans for Prosperity Foundation v. Bonta, 141 S. Ct. 2373
(2021).
Setting aside how the Court may view hypothetical new compelled
disclosure laws affecting corporate donations to nonprofits, there is
already so much disclosure regarding how corporations involve
themselves in the political process as to make additional disclosure
immaterial from an investment standpoint. Simply put, anyone who wants
to invest in a company already has the capacity to learn how that
company engages in politics. More importantly, the amounts involved are
small enough so as to have little impact on--that is, they are
``immaterial'' to--investment decisions. For an investor who wants to
make a profit, new laws would be like adding an additional pixel to a
photograph that is already high-resolution--the human eye couldn't tell
the difference. Perhaps this is why investors have regularly voted down
proposals for added disclosures of spending related to public affairs
and politics, usually by very large margins.\25\
---------------------------------------------------------------------------
\25\ See Proxy Monitor at https://www.proxymonitor.org/
ScoreCard2022.aspx (showing 27 of 29 proposals for more disclosure of
``lobbying'' or ``political'' activity were defeated by shareholders so
far in 2022, with an average pro-disclosure vote of just 31.6 percent).
In fact, new disclosure laws may be harmful to shareholder value,
and thus to prospective investors. A 2019 paper in Business and
Politics found that firms in the United Kingdom did not benefit from
the adoption of new corporate shareholder disclosure laws but instead
``suffered a decline in value in the months and years that followed.''
Noting that their study's results upended the conventional wisdom, the
authors concluded that ``greater oversight of corporate political
behavior appears to hurt rather than help shareholders by increasing
stock volatility, especially for
higher-risk firms, and we find some evidence that it also reduces firm
value.''\26\
---------------------------------------------------------------------------
\26\ Saumya Prabhat and David M. Primo, ``Risky business: Do
disclosure and shareholder approval of corporate political
contributions affect firm performance?'', 21 Bus. and Politics 205
(2019) (Professor Primo is an Academic Advisor to the Institute for
Free Speech, but this paper was not written for or in conjunction with
the Institute).
So, what's really going on here? Given that so much corporate
political activity is already disclosed, and additional disclosures are
unlikely to help and may even hurt investors, why do some continue to
push for more? The answer is twofold. One, claiming there is some
secret cabal of public corporations hindering or halting one's
political agenda is an easier excuse than admitting that one's policies
are unpopular or that one's strategies were ineffective. Two,
politicians, particularly Senators, can use their bully pulpit to
pressure companies with threats of boycotts, protests, or other abuses
into backing their preferred agenda or, failing that, to stay out of
---------------------------------------------------------------------------
the policy debate altogether.
Examples of this type of behavior are frankly too numerous to
detail in full, but here are just a few examples of the not-so-subtle
threats against corporations who exercise their speech rights. Last
year, Senator Cruz suggested that corporations who oppose election
reform bills in the States ``need to be called out, singled out, and
cut off.''\27\ He has also sought information on corporate donations to
the Black Lives Matter movement.\28\
---------------------------------------------------------------------------
\27\ Senator Ted Cruz, ``Your Woke Money Is No Good Here,'' Wall
Street Journal. April 28 2021. Available at: https://www.wsj.com/
articles/your-woke-money-is-no-good-here-
11619649421?mod=opinion_lead_pos5.
\28\ ``Ted Cruz slams `Black Lives Matter' organization,'' The Hill
TV. August 4, 2020. Available at: https://www.youtube.com/
watch?v=FGoEF1CYS9s.
Some of the most prominent attempts to silence disfavored corporate
speech have come from Senator Whitehouse, who has attempted to pressure
large investment firms into divesting from corporations that donated to
what he termed ``climate denier groups''--think tanks and charities
that disagree with the Senator on climate science and/or policy.\29\ He
also, with some regularity, threatens the Chamber of Commerce over
policy disagreements. During one recent effort, Senator Whitehouse
called for an investigation into the Chamber because, in his view,
their efforts ``to defeat passage of the Build Back Better plan''\30\
were not adequately disclosed.
---------------------------------------------------------------------------
\29\ Press Release from the Office of Senator Sheldon Whitehouse,
``Whitehouse Calls on Major Investment Funds to Pay Attention to
Companies' Funding of Climate Denier Group,'' July 11, 2019. Available
at: https://www.whitehouse.senate.gov/news/release/whitehouse-calls-on-
major-investment-funds-to-pay-attention-to-companies-funding-of-
climate-denier-group.
\30\ Press Release from the Office of Senator Sheldon Whitehouse,
``Whitehouse and Warren Call for Investigation Into U.S. Chamber of
Commerce for Lobbying Disclosure Failures Amid Build Back Better
Lobbying Blitz,'' November 17, 2021. Available at: https://www.white
house.senate.gov/news/release/whitehouse-and-warren-call-for-
investigation-into-us-chamber-of-commerce-for-lobbying-disclosure-
failures-amid-build-back-better-lobbying-blitz.
Senator Warren herself is not immune to the use of her station to
punish speakers with whom she disagrees. In addition to joining Senator
Whitehouse's call for an investigation into the Chamber of Commerce for
not supporting Democratic proposals, Senator Warren has also used donor
information from the Brookings Institute to disparage a report from one
of their senior fellows, ultimately leading to the scholar's
resignation because there was ``discomfort with Warren's letter'' at
the liberal think tank.\31\ And just one day after her preferred
policies were criticized in a prominent editorial by a moderate think
tank,\32\ Senator Warren responded not to the substance of the
critique, but by calling on banks to disclose all contributions to
think tanks.\33\ The message to corporations was clear: support an
organization that criticizes me or my policies, face the consequences.
---------------------------------------------------------------------------
\31\ Philip Hamburger, ``How Elizabeth Warren picked a fight with
Brookings--and won,'' Washington Post. September 29, 2015. Available
at: https://www.washingtonpost.com/politics/how-elizabeth-warren-
picked-a-fight-with-brookings--and-won/2015/09/29/bfe45276-66c7-11e5-
9ef3-fde182507eac_story.html.
\32\ Jon Cowan and Tim Kessler, ``How Elizabeth Warren picked a
fight with Brookings--and won,'' Wall Street Journal. December 2, 2013.
Available at: https://www.wsj.com/articles/
SB10001424052702304337404579213923151169790.
\33\ Jonathan Chait, ``Elizabeth Warren and Centrist Democrats Are
Already at War,'' New York Magazine. December 5, 2013. Available at:
https://nymag.com/intelligencer/2013/12/warren-and-centrist-democrats-
are-already-at-war.html.
In such an environment, it would be irresponsible of corporations
to publicly expose contributions to charities, nonprofits, and trade
associations. Shareholders and the general public would glean little
information from such disclosures, while politicians are anxious to use
them to make enemies lists and punish companies that oppose their
agendas. These efforts to drive voices out of the arena threaten
corporate profitability and the investments of millions of small
shareholders, and would reduce the flow of information available to the
public on important political issues. Preventing politicians from
retaliating against those who don't support their ideas is one of the
---------------------------------------------------------------------------
fundamental purposes of the First Amendment.
______
Prepared Statement of Hon. John Thune,
a U.S. Senator From South Dakota
Thank you, Chairman Whitehouse. It is a pleasure to work with you
on this subcommittee.
The Subcommittee on Taxation and IRS Oversight is uniquely
positioned to oversee the activities of the Internal Revenue Service,
the executive branch agency charged with tax matters. And it is my hope
we can use this hearing as a foundation to conduct appropriate
oversight of the IRS and ensure that Americans' private tax-related
information is protected.
Today, we are here to discuss the laws and enforcement as they
apply to the political activities of tax-exempt entities and, by
extension, how those laws--and any proposed reforms--impact Americans'
freedom of speech, association rights, and ability to privately give to
causes they care about.
Free speech is not just good in theory; it is a key driver of a
healthy democracy. And allowing Americans to privately give to causes
they care about is a fundamental component of protecting free speech
and the First Amendment. Partisan legislation to force tax-exempt
groups to choose between spreading their message and protecting donors'
privacy runs a real, and potentially corrosive, risk of chilling
speech.
A few words about scope, 501(c) organizations, and the IRS. Section
501(c) of the Internal Revenue Code describes 28 different categories
of organizations that generally are exempt from Federal income tax. We
will focus much of today's discussion around four categories. These
include 501(c)(3) charitable organizations, 501(c)(4) social welfare
organizations, 501(c)(5) labor organizations, and 501(c)(6) trade
associations and business leagues--in other words, a wide range of
entities that represent diverse constituencies and causes across the
country and include churches, charities, nonprofits, foundations,
advocacy groups, unions, and trade associations.
The chairman has a particular interest in 501(c)(4) organizations
and their impact on campaigns. And according to a recent New York Times
analysis, the impact is anything but small--particularly for
politicians on the left. The Times stated that in the last election,
the left raised and spent more money from 501(c)(4) donors than the
right.
The report showed that 15 of the most politically active nonprofit
organizations that generally align with the Democratic Party spent more
than $1.5 billion in 2020--hundreds of millions of dollars more than a
comparable sample group aligned with the Republican Party. There is a
deep bench of well-funded 501(c)(4) organizations aligned with the
Democratic Party that expressly support progressive policies and
causes.
Of course, there are plenty of related organizations on the right
as well.
The Senate Finance Committee has a long history of oversight into
501(c) tax-
exempt entities and the IRS's treatment of such organizations. Just a
few years ago, the committee conducted a 2-year bipartisan
investigation into the IRS's inappropriate targeting of 501(c)(3) and
501(c)(4) applications for tax-exempt status. The investigation, which
culminated in 2015, found that the IRS grossly mismanaged applications
filed by Tea Party and other conservative organizations.
The report showed that the IRS improperly disclosed taxpayer
information from numerous conservative organizations, and that the
agency systematically selected conservative organizations for
heightened scrutiny in a manner wholly different from how it processed
applications from left-leaning organizations. Indeed, the unifying
factor for how Tea Party applicants were handled at the IRS was not
specific political activities, but rather an underlying political
philosophy.
Americans--regardless of political affiliation--deserve to have an
IRS that will administer the tax code with fairness and integrity, and
safeguard their private taxpayer information. Regrettably, recent
history and current developments show the agency has fallen short.
Since last year's massive IRS leak or hack of taxpayer information,
which the left-leaning ProPublica obtained and then used to publicize
confidential taxpayer details, there has been no meaningful follow-up
from the agency or the administration. Perhaps that is because the
unauthorized disclosure of private taxpayer data by ProPublica
conveniently advanced a preferred political narrative on tax policy.
More fundamentally, the apparent leak or hack of private taxpayer
information is a serious breach of trust between Americans and their
government. And it puts everyday citizens at risk of intimidation and
harassment by ideological foes.
Americans have a right to know that the personal information they
provide to the IRS remains confidential and will not be used to target
them or to advance partisan political agendas.
Americans are justifiably concerned about the IRS--or, for that
matter, any regulatory agency--collecting more sensitive taxpayer and
donor information than is necessary, and how that collection could
impact their lives and freedom of speech. Policymakers would be wise to
heed their concerns.
We have an excellent panel before us today. Thank you all for being
here, and I look forward to hearing your testimony.
______
Prepared Statement of Scott Walter, President, Capital Research Center
Chairman Whitehouse, Ranking Member Thune, and distinguished
members of the subcommittee, thank you for the honor of testifying,
especially on problems connected to the intersection of politics and
tax-exempt entities--something we at Capital Research Center have
studied for decades. When I first heard the hearing's title, I assumed
it referred to current scandals raging in both the tax-exempt sector--
such as so-called ``Zuck Bucks''--and also in the IRS itself--such as
the illegal leaking of confidential tax returns to ProPublica.
Just in the last few months, many more scandals have erupted. For
instance, the political activities of billionaire Hansjorg Wyss, a non-
U.S. citizen, has caused a watchdog group to launch an FEC lawsuit. As
The Hill summarizes the suit, Wyss allegedly ``used two nonprofit
organizations, the Wyss Foundation [a 501(c)(3) private foundation] and
the Berger Action Fund [a 501(c)(4) group], to contribute millions of
dollars to the Sixteen Thirty Fund and the New Venture Fund, two so-
called dark money groups that fund liberal causes through operations
like The Hub Project and Demand Justice.''\1\
---------------------------------------------------------------------------
\1\ Brett Samuels, ``Watchdog group sues FEC over citizenship of
liberal donor,'' The Hill, April 25, 2022, https://thehill.com/news/
campaign/3461903-watchdog-group-sues-fec-over-citizenship-of-liberal-
donor/.
The Hub Project funded by this foreign billionaire was started, The
New York Times reports, ``in 2015 by one of Mr. Wyss's charitable
organizations, the Wyss Foundation, partly to shape media coverage to
help Democratic causes.''\2\ The New York Times report adds ``that The
Hub Project is part of an opaque network managed by a Washington
consulting firm, Arabella Advisors, that has funneled hundreds of
millions of dollars through a daisy chain of groups supporting
Democrats and progressive causes. The system of political financing,
which often obscures the identities of donors, is known as dark money,
and Arabella's network is a leading vehicle for it on the left.''\3\
---------------------------------------------------------------------------
\2\ Kenneth P. Vogel and Katie Robertson, ``Top Bidder for Tribune
Newspapers Is an Influential Liberal Donor,'' New York Times, April 13,
2021, https://www.nytimes.com/2021/04/13/business/media/wyss-tribune-
company-buyer.html.
\3\ Ibid.
Another recent controversy, exposed by Capital Research Center,
involves the Arabella network's support for two secretive groups,
Governing for Impact and Governing for Impact Action Fund, which are
fiscally sponsored projects under, respectively, a 501(c)(3) and a
501(c)(4) nonprofit managed by Arabella. The groups have
surreptitiously worked with Biden administration officials to reshape
dozens of controversial regulations, with $13 million of funding from
one of billionaire George Soros's foundations.\4\
---------------------------------------------------------------------------
\4\ See Joe Schoffstall, ``Secretive Soros-funded group works
behind the scenes with Biden admin on policy, documents show,'' Fox
News, April 26, 2022, https://www.foxnews.com/politics/secretive-soros-
funded-group-works-behind-scenes-biden-admin-policy-documents and
``Governing for Impact--Influence Watch,'' Influence Watch, accessed
April 29, 2022, https://www.influence
watch.org/non-profit/governing-for-impact/.
Other recent exempt-organization scandals include the exposure of
ostensible news networks designed to appear as local news outlets but
actually efforts supported by mega-donors like Kathryn Murdoch and Reid
Hoffman that are designed to influence the public's political views. As
the left-leaning website OpenSecrets reports, `` `Dark money' networks
hide political agendas behind fake news sites.'' OpenSecrets reports
that ``ACRONYM, a liberal [501(c)(4)] dark money group with an
affiliated super PAC called PACRONYM,'' is ``behind Courier Newsroom, a
network of websites emulating progressive local news outlets. Courier
has faced scrutiny for exploiting the collapse of local journalism to
spread `hyperlocal partisan propaganda.' ''\5\ I note that an
accompanying OpenSecrets chart describing this political influence
operation lists three of Arabella Advisors' umbrella nonprofits, the
501(c)(3) New Venture Fund and Hopewell Fund, and the 501(c)(4) Sixteen
Thirty Fund:
---------------------------------------------------------------------------
\5\ Anna Massoglia, `` `Dark money' networks high political agendas
behind fake news sites,'' OpenSecrets, May 22, 2020, https://
www.opensecrets.org/news/2020/05/dark-money-networks-fake-news-sites/.
See also Scott Walters, ``Democratic Donors' Disinformation Ops--
UPDATED,'' Capital Research Center, June 22, 2021, https://
capitalresearch.org/article/democratic-donors-disinformation-ops/.
[GRAPHIC] [TIFF OMITTED] T0422.001
.epsThese kinds of political operations by exempt organizations
disturb many Americans. Across the political spectrum, people see
exempt organizations enjoying elite power and wealth, and employing it
in anti-democratic ways. This concern has even led a Democrat-invited
witness today, professor Philip Hackney, to call for abolishing private
foundations entirely, an admittedly extreme reaction, but perhaps one
that will grow if Congress continues to dig into the true history of
the sector--something that could happen whichever party has control of
Senate and House next year.\6\ I can document, mostly from left-leaning
sources, that both the problems with the sector, and also the IRS's
dangerous tendency to selectively enforce its rules, go back decades.
---------------------------------------------------------------------------
\6\ ``I think we ought to eliminate tax benefits for the private
foundation form.'' Philip Hackney, ``The 1969 Tax Reform Act and
Charities: Fifty Years Later,'' Pittsburgh Tax Review Volume 17 (2020):
246, https://doi.org/10.5195/taxreview.2020.116.
I especially want to show how (c)(3) private foundations and (c)(3)
public charities violate limits on their political activities. Let me
begin with the Ford Foundation, because soon after I criticized it
before Chairman Whitehouse at a Judiciary subcommittee hearing he held
last year,\7\ he told a legal podcast that the Ford Foundation is ``an
amazingly well-established public interest foundation that doesn't seem
to have much in the way of a political motive or purpose.''\8\
---------------------------------------------------------------------------
\7\ Scott Walter, ``Scott Walter Testifies to a Senate Judiciary
Subcommittee on `Dark Money,' '' Capital Research Center, March 11,
2021, https://capitalresearch.org/article/scott-walters-testimony-
before-the-u-s-senate-subcommittee/.
\8\ Sheldon Whitehouse, ``Tsunami of Slime,'' transcript April 12,
2021 from Strict Scrutiny podcast, https://strictscrutinypodcast.com/
wp-content/uploads/2021/04/Tsunami-of-Slime.pdf.
Those words are jarring in this room, where many recognize that the
Ford Foundation's half-century of left-wing activism has significantly
shaped the laws governing political activities of tax-exempt entities.
Ford's grants for partisan voter registration in 1967 so outraged
Congress, both of whose houses were under Democratic control, that it
passed the landmark Tax Reform Act of 1969, whose restrictions still
largely shape what's legally permissible for private foundations and
---------------------------------------------------------------------------
public charities.
As professor Karen Ferguson explains in a book-length history of
Ford, the so-called ``McGeorge Bundy amendments''--named for the
antagonism the foundation's president directed toward the House Ways
and Means Committee--``put strict new controls on philanthropies'
political involvement.'' Another legal scholar adds, ``The concerns of
Congress at which the law struck had roots reaching back for more than
2 decades. . . .'' The Democratic staff of the Joint Committee on
Internal Revenue Taxation, in their ``General Explanation of the Tax
Reform Act of 1969,'' stated at the time: ``In several instances called
to Congress' attention, funds were spent in a way clearly designed to
favor certain candidates. In some cases, this was done by financing
registration campaigns in certain areas. . . .''\9\ As we shall see,
these abuses, especially involving voter registration with partisan
results, continue through our day.
---------------------------------------------------------------------------
\9\ Michael E. Hartmann, ``The Ford Foundation, the 1967 Cleveland
mayoral election, and the 1969 Tax Reform Act,'' The Giving Review,
February 3, 2021, https://www.philanthropy
daily.com/the-ford-foundation-the-1967-cleveland-mayoral-election-and-
the-1969-tax-reform-act/.
How to respond to these serious problems? First, of course,
Congress and the relevant executive branch authorities should
investigate the details much more thoroughly, so that members and
Americans at large have a richer understanding of the facts. Beyond
---------------------------------------------------------------------------
that, I urge you, first, not to go down several wrong roads.
Don't focus on 501(c)(4)s, for several reasons. Actual law-breaking
by (c)(4)s should, of course, be punished appropriately, but (c)(4)s
are not very significant in American politics, especially in terms of
money. In the 2018 election cycle, contributions to political parties,
candidates, and other FEC-reporting groups that OpenSecrets did not
classify as ``dark money'' amounted to around $5 billion,\10\ whereas
OpenSecrets-classified ``dark money'' spending was only $123 million--a
rounding error.\11\ And more importantly both those rivers of cash
combined are dwarfed by money flowing to 501(c)(3) ``charities'' that
are active in public policy (think tanks, media watchdogs, advocacy
groups). We at Capital Research Center calculated that river of money
at approximately $20 billion for the 2018 cycle, with a left-wing
dominance of almost four to one.\12\
---------------------------------------------------------------------------
\10\ See OpenSecrets.org, ``Most expensive midterm ever: Cost of
2018 election surpasses $5.7 billion,'' OpenSecrets, February 6, 2019,
https://www.opensecrets.org/news/2019/02/cost-of-2018-election-
5pnt7bil/. Note the $5 billion includes contributions to party
committees and outside groups that OpenSecrets classifies as FEC
reporting, not ``pure'' pre-BCRA ``hard money.''
\11\ See ``2018 Outside Spending, by Group,'' OpenSecrets, accessed
April 28, 2020, https://www.opensecrets.org/outsidespending/
summ.php?cycle=2018&chrt=V&disp=O&type=U. The total is for the two-
party split (``other viewpoint'' groups excluded) for ``non-disclosing
groups,'' which OpenSecrets explains are ``501(c) nonprofits that are
not required to disclose their donors. Others are committees that do
disclose their donors to the FEC, but receive nearly all their money
from non-disclosing entities. The groups are spending money on
independent expenditures and electioneering communications by using
funds from their undisclosed donors.''
\12\ Shane Devine and Michael Watson, ``Political and Policy-
Oriented Giving After Citizens United: An Update to CRC's 2017
Analysis,'' December 17, 2020; https://capitalresearch.org/article/
political-and-policy-oriented-giving-after-citizens-united-an-update-
to-crcs-2017-analysis.
If someone still insists (c)(4)s are a major plague, I can only
reply that the problem comes mostly from the blue side of the spectrum,
since in the 2018 cycle, OpenSecrets calculated blue ``dark money'' was
$81 million versus $42 million for red money (around two to one),\13\
while in the 2020 cycle, blue dominance grew to $85 million versus $21
million (four to one).\14\ The New York Times agrees with this
conclusion; see its recent report subtitled, ``A New York Times
analysis reveals how the left outdid the right at raising and spending
millions from undisclosed donors to defeat Donald Trump and win power
in Washington.''\15\ The Times added, ``While the Kochs pioneered the
use of centralized hubs to disseminate dark money to a broader network,
the left has in some ways improved on the tactic--reducing redundancy,
increasing synergy, and making it even harder to trace spending back to
donors.''
---------------------------------------------------------------------------
\13\ https://www.opensecrets.org/outsidespending/
summ.php?cycle=2018&chrt=V&disp=O&type
=U.
\14\ Ibid.
\15\ Kenneth P. Vogel and Shane Goldmacher, ``Democrats Decried
Dark Money. Then They Won With It in 2020,'' New York Times, January
29, 2022, https://www.nytimes.com/2022/01/29/us/politics/democrats-
dark-money-donors.html.
Every year, one of the loudest complaints about 501(c)(4) activity
is the annual ``Captured Courts'' report that's closely identified with
this subcommittee's chair and Senator Stabenow. This year's edition at
least does not claim, as last year's did with no evidence whatsoever,
that ``dark money'' was ``originally a Republican political
device.''\16\ But this year's edition continues the refusal to
acknowledge the existence of a left-wing network that more honest
observers, such as the just-cited New York Times report, have
highlighted, namely, the Arabella network that fiscally sponsored the
groups that lead the left's battles to shape the courts.\17\ This
omission is even more bizarre, given that this year's ``Captured
Courts'' devotes itself almost entirely to criticizing the legal
structure of a conservative network of nonprofits, without mentioning
that the founders of this network--in an Axios news story ``Captured
Courts'' itself cites--have explicitly stated that they patterned their
network's structure after that of Arabella.\18\
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\16\ Senator Debbie Stabenow, Senator Chuck Schumer, and Senator
Sheldon Whitehouse, ``Captured Courts: The GOP's Big Money Assault on
the Constitution, Our Independent Judiciary, and the Rule of Law,''
Senate Democrats, May 2020, p. 20, https://www.democrats.senate.gov/
imo/media/doc/Courts%20Report%20-%20FINAL.pdf.
\17\ Those groups active in judicial battles are the (c)(4) Demand
Justice and the (c)(3) Fix the Court. After years as fiscally sponsored
projects of Arabella's umbrella nonprofits, in 2021 the groups spun off
as independent exempt organizations. See ``Demand Justice--Influence
Watch,'' Influence Watch, accessed April 29, 2022, https://
www.influencewatch.org/non-profit/demand-justice/ and ``Fix the Court--
Influence Watch,'' Influence Watch, accessed April 28, 2022, https://
www.influencewatch.org/non-profit/fix-the-court/.
\18\ Jonathan Swan, Alayna Treene, ``Leonard Leo to shape new
conservative network,'' Axios, January 7, 2020, https://www.axios.com/
leonard-leo-crc-advisors-federalist-society-50d4d844-19a3-4eab-af2b-
7b74f1617d1c.html, cited in note 35 of the 2022 ``Captured Courts.''
Of course, one understands why ``Captured Courts'' prefers to keep
Arabella in the dark: if tax-exempt ``dark money'' is all bad, Arabella
is much worse than the conservatives being targeted. ``Captured
Courts'' laments $400 million raised by the conservative network from
2014-2018, but hides the fact that Arabella's network raised $2.16
billion in the same years. ``Captured Courts'' also complains that the
conservative network's groups ``move money back and forth,''\19\ but in
just 1 year, Arabella's network shuffled among its groups a sum equal
to almost half the conservative network's entire revenues for 4 years.
---------------------------------------------------------------------------
\19\ Senator Chuck Schumer, Senator Sheldon Whitehouse, and Senator
Debbie Stabenow, et al., ``Captured Courts: The Impact of the Judicial
Crisis Network's Dark-Money Scheme on Our Courts,'' Senate Democrats,
April 2022, p. 6, https://www.democrats.senate.gov/imo/media/doc/
Captured%20Courts%20Report%204-5-22.pdf.
[GRAPHIC] [TIFF OMITTED] T0422.002
.epsWhile conservatives have criticized Arabella, non-conservatives
have especially critiqued the network's (c)(4) components. Politico,
for example, called the (c)(4) Sixteen Thirty Fund a ``massive `dark
money' network,''\20\ and The Washington Post editorial page, after
reading Politico's report, was outraged that Sixteen Thirty's top
donors anonymously gave $51.7 million, $26.7 million, and $10 million.
The Post judged that Sixteen Thirty caters to ``big campaign donors who
want to have impact but hide their identity.''\21\ Last November, an
Atlantic interview with Arabella's then-president carried the headline,
``The Massive Progressive Dark-Money Group You've Never Heard Of: Over
the past half decade, Democrats have quietly pulled ahead of
Republicans in untraceable political spending. One group helped make it
happen.''\22\ The Atlantic asked Arabella's president, ``Do you feel
good that you're the left's equivalent of the Koch brothers?'' The
president replied, ``Yeah.''
---------------------------------------------------------------------------
\20\ Scott Bland and Maggie Severns, ``Documents reveal massive
`dark-money' group boosted Democrats in 2018: A little-known nonprofit
called The Sixteen Thirty Fund pumped $140 million into Democratic and
left-leaning causes,'' Politico, November 19, 2019, https://www.
politico.com/news/2019/11/19/dark-money-democrats-midterm-071725.
\21\ Editorial Board, ``Big campaign donors have exploited a
loophole. Congress must change the law.'' The Washington Post, November
21, 2019, https://www.washingtonpost.com/opinions/big-campaign-donors-
have-exploited-a-loophole-congress-must-change-the-law/2019/11/21/
ab31cf3a-0bd6-11ea-bd9d-c628fd48b3a0_story.html.
\22\ Emma Green, ``The Massive Progressive Dark-Money Group You've
Never Heard Of,'' The Atlantic, November 2, 2021, https://
www.theatlantic.com/politics/archive/2021/11/arabella-advisors-money-
democrats/620553/.
Don't think beefed-up IRS enforcement will cure the ills. Another
wrong road to fixing the tax-exempt sector would be to imagine that
more IRS enforcement of rules will eliminate all the problems. While
some routinely broken rules do need more enforcement, that must be
balanced against the terrible temptations the IRS places before
administrations of both parties. From FDR through Nixon, the IRS
repeatedly used selective enforcement as a political weapon, and entire
books have been needed to chronicle this ugly abuse of governmental
power.\23\
---------------------------------------------------------------------------
\23\ For instance, David Burnham, A Law Unto Itself: Power,
Politics, and the IRS (Oregon: Book News, Inc., 1990).
One would think this subcommittee's chair would be especially alive
to this danger. After all, he chaired a hearing similar to this one in
April 2013, the culmination of more than a year's efforts by him and
leaders of his party to repeatedly demand heightened IRS enforcement of
political abuses by exempt groups.\24\ At that April 2013 hearing,
these demands were highlighted yet again, with Chairman Whitehouse
complaining the IRS ``rarely challenges a group's 501(c)(4) designation
based on political activity.''\25\ After the hearing, the chairman's
staff sent the Justice Department examples of conservative groups he
had in mind for prosecution.\26\ But the very next month, the scandal
surrounding IRS exempt organizations' then-head Lois Lerner erupted,
after she had a question planted at a Bar Association meeting \27\ that
allowed her to apologize for improperly targeting conservative groups
seeking IRS recognition. She did this just ahead of the appearance of a
damning report by the Treasury Inspector General for Tax
Administration,\28\ which in turn caused Chairman Whitehouse to address
the Senate on ``the scandal that the IRS appears to have targeted
organizations for inquiry based on Tea Party affiliation. Obviously,
that's wrong.''\29\
---------------------------------------------------------------------------
\24\ See, for example, their February 2012 letter, https://
www.bennet.senate.gov/public/index.
cfm/2012/2/senators-call-for-irs-investigations-into-potential-abuse-
of-tax-exempt-status-by-groups-engaged-in-campaign-activity; their
March 2012 letter, https://dailycaller.com/2013/05/17/flashback-
schumer-franken-urged-irs-to-target-tea-party-in- 2012/.
\25\ https://www.judiciary.senate.gov/download/hearing-transcript_-
current-issues-in-campaign-finance-law-enforcement, p. 12.
\26\ Paul Caron, ``The IRS Scandal, Day 1241,'' TaxProf Blog,
October 1, 2016, https://taxprof.typepad.com/taxprof--blog/2016/10/the-
irs-scandal-day-1241.html.
\27\ Abby D. Phillip, ``IRS Planted Question About Tax Exempt
Groups,'' ABC News Network, May 17, 2013, https://abcnews.go.com/blogs/
politics/2013/05/irs-planted-question-about-tax-exempt-groups/.
\28\ Treasury Inspector General for Tax Administration,
``Inappropriate Criteria Were Used to Identify Tax-Exempt Applications
for Review,'' Treasury.gov, May 14, 2013, http://www.
treasury.gov/tigta/auditreports/2013reports/201310053fr.pdf.
\29\ https://www.whitehouse.senate.gov/news/press-releases/the-two-
scandals-at-the-irs. Sheldon Whitehouse, ``The Two Scandals at the IRS:
As Prepared for Delivery on the Senate Floor,'' Whitehouse.Senate.gov,
https://www.whitehouse.senate.gov/news/press-releases/the-two-scandals-
at-the-irs. After this brief concession, the Senator went on at much
greater length about the ``other scandal,'' i.e., ``allowing big
shadowy forces to meddle in elections anonymously.''
This wrongness may have had a considerable political effect: a
study by academics from Harvard's Kennedy School, Stockholm University,
and AEI compared voter turnout in the 2010 election, when Tea Party
groups did not face IRS suppression, with turnout in the 2012 election,
after the IRS's scandalous obstruction blunted such groups' ability to
organize. The study observed that the 2010 success largely occurred
because of ``grassroots activities'' involving 501(c)(4)s, and it
estimated that similar functioning in 2012 ``would have brought the
Republican Party as many as 5-8.5 million votes compared to Obama's
victory margin of 5 million.''\30\
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\30\ Stan Veuger, ``Yes, IRS Harassment Blunted the Tea Party
Ground Game,'' RealClearMarkets, June 20, 2013, https://
www.realclearmarkets.com/articles/2013/06/20/
yes_irs_harassment_blunted_the_tea_party_ground_game_100412.html.
``Obama's margin of victory in some of the key swing States was fairly
small: a mere 75,000 votes separated the two contenders in Florida, for
example. That is less than 25% of our estimate of what the Tea Party's
impact in Florida was in 2010.''
Alas, despite the scandal, Lois Lerner received little
accountability for her actions, including for being held in contempt by
the U.S. House of Representatives, and she continues to succeed at
keeping a lengthy deposition of her in a major lawsuit under court
seal.\31\ In a more recent IRS misconduct scandal there is also little
accountability; namely, the publishing by ProPublica of private tax
information possessed by the IRS, and then either leaked by IRS
employees or illegally accessed by persons outside the IRS.\32\ This
follows other scandals of leaked information, used as a political
weapon, such as a case in which the IRS admitted it illegally disclosed
the Schedule B donor list of the National Organization for
Marriage.\33\ It is especially disturbing to see the Chairman of the
Finance Committee recently sit with ProPublica for an interview and
never raise the issue of that media outlet's use of confidential tax
information that they almost certainly possess only because someone
committed a crime.\34\
---------------------------------------------------------------------------
\31\ On Petition for Writ of Mandamus, Norcal Tea Party Patriots,
et al. v. Lois Lerner, et al. (Case No. 22-3357, 6th Cir.), filed April
19, 2022.
\32\ See https://www.finance.senate.gov/ranking-members-news/crapo-
brady-demand-update-on-criminal-breach-of-taxpayer-data, accessed April
28, 2022.
\33\ Editorials, ``IRS Admits to a Smidgeon of a Felony,''
Investor's Business Daily, June 27, 2014, https://www.investors.com/
politics/editorials/irs-admits-guilt-pays-settlement-to-national-
organization-for-marriage/
#::text=The%20National%20Organization%20for%20Marriage%20has
%20been%20awarded,to%20the%20pro-
gay%20marriage%20group%20Human%20Rights%20Cam
paign.
\34\ Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, ``When
Billionaires Don't Pay Taxes, People `Lose Faith in Democracy,' ''
ProPublica, February 28, https://www.propublica.org/article/when-
billionaires-dont-pay-taxes-people-lose-faith-in-democracy.
There are more reasons to think increased IRS enforcement won't
solve all the tax-exempt sector's issues: first, as Brad Smith and the
lawyer Gregory Colvin argued at the 2013 version of this hearing, the
IRS is not well-designed for understanding and regulating political
activities.\35\ That explains why the Service has never been able to
give guidance on the topic that is even remotely clear. Demanding more
from the IRS will only further confuse matters and deserve to be
called, ``The DC Election Lawyers Full Employment Act.'' As Mr. Colvin
stated, ``the fundamental problem affecting enforcement on 501(c)(4)
nonprofits'' is that ``the tax rules are vague, unpredictable, and
unevenly applied.''\36\ That was a decade ago and is likely to be true
a decade hence.
---------------------------------------------------------------------------
\35\ See https://www.judiciary.senate.gov/download/hearing-
transcript_-current-issues-in-campaign-finance-law-enforcement.
\36\ Ibid, p. 20.
Heightened disclosure is another false path. Brad Smith at the 2013
hearing and today is perhaps America's most eloquent explainer of the
grave limitations on donor disclosure's ability to improve the
---------------------------------------------------------------------------
political activities of private groups.
Coerced donor disclosure is now clearly seen as a weapon by many in
politics, as was made clear when I testified last year to the Judiciary
Subcommittee on the Federal Courts. After the hearing, I received a
personal letter from Chairman Whitehouse, asking me to disclose Capital
Research Center's donors. I replied that in our day, in addition to the
traditional moral reasons for respecting anonymous giving, ``The
practical reason for opposing disclosure arises from the very real
threats, felt across the political spectrum, of mob harassment and
worse. And Mr. Chairman, just as your side has more groups, active for
more years, and possessed of far more `dark money,' so does your side
have more mobs.'' I prefer to ``stand with the NAACP of Bull Connor's
Alabama, and with the NAACP of today, and with the ACLU and the Human
Rights Campaign, in opposition to government schemes to force private
citizens to disclose their donations.''\37\
---------------------------------------------------------------------------
\37\ Joe Schoffstall, ``Conservative Group Defends Donor Privacy as
Sheldon Whitehouse Demands Disclosures,'' Free Beacon, April 1, 2021,
https://freebeacon.com/democrats/conservative-group-defends-donor-
privacy-as-sheldon-whitehouse-demands-disclosures/.
Later, in questions for the record, I was asked why, if I claim the
left has more ``dark money,'' I object to all sides having their donors
disclosed equally? I replied that this question fit with the testimony
given by the head of People for the American Way (incidentally, a
501(c)(4) incubated by the Tides Foundation),\38\ who said, ``The
hypocrisy that you see from the right is, they claim that there's more
dark money on the left, and yet they refuse to be transparent. Well, it
would seem that if the first were true, then the second would be a no-
brainer.'' The logic behind this argument is clear: forced donor
disclosure harms both the donors and the groups forced to disclose;
therefore conservatives should support laws that will harm their
opponents more than themselves.
---------------------------------------------------------------------------
\38\ ``People for the American Way--Influence Watch,'' Influence
Watch, accessed April 28, 2022, https://www.influencewatch.org/non-
profit/people-for-the-american-way/.
As I replied then, this question reveals the central disagreement
between the party of forced government disclosure, and the party of
citizens' privacy: ``I do not wish to harm donors and groups I disagree
with, and I respectfully urge you to end your campaign to harm donors
and groups you disagree with.''\39\
---------------------------------------------------------------------------
\39\ Scott Walter, ``Highlights from Scott Walter's Answers to
Questions for the Record from Senator Whitehouse,'' Capital Research
Center, April 14, 2021, https://capitalresearch.org/article/highlights-
from-scott-walters-answers-to-questions-for-the-record-from-sen-
whitehouse/.
Rather than take these wrong roads to improving the exempt sector,
we should recognize that the biggest reason politicized money is
pouring into tax-exempt groups of all varieties is because of what is
wrongly called campaign finance ``reform.'' I sympathize with those
across the spectrum who do not like dollars going into politics because
they do not trust politicians, and who do not like to see exempt
dollars playing a big political role. But would there be nearly so many
dollars going to exempt groups if campaign finance ``reform'' hadn't
squeezed money out of parties and candidates? In The Blueprint, a book
that reports with sympathy on the Democratic takeover of Colorado's
politics in the years after the Bipartisan Campaign Reform Act of 2002
(BCRA), the authors explain how big donors became more important than
the traditional party apparatus: ``campaign finance reform had
completely changed the rules of the game. By limiting the amount of
money candidates and political parties could raise and spend, the new
law had seriously weakened candidates--and all but killed political
parties.''\40\
---------------------------------------------------------------------------
\40\ Rob Witwer and Adam Schrager. The Blueprint: How the Democrats
Won Colorado (and Why Republicans Everywhere Should Care) (Colorado:
Fulcrum Publishing, 2010), 72.
Similarly, the liberal journalist Sasha Issenberg in his 2012 book,
The Victory Lab: The Secret Science of Winning Campaigns, reports how
private foundations like Carnegie escape the campaign finance
strictures that throttle political actors under FEC rather than IRS
regulation: ``because the tax code allowed nonprofit organizations to
run registration and turnout drives as long as they did not push a
particular candidate, organizing `historically disenfranchised'
communities (as Carnegie described them) became a backdoor approach to
ginning up Democratic votes outside the campaign finance laws that
applied to candidates, parties, and political action committees.''\41\
---------------------------------------------------------------------------
\41\ Sasha Issenberg. The Victory Lab (New York: Crown Publishing,
2013), 86. Emphasis added.
It should be no surprise that a billionaire foundation like
Carnegie reveled in escaping BCRA, because billionaire foundations
pushed the Act through, weakening other political actors and greatly
strengthening their own political roles. In ``Astroturf politics: How
liberal foundations fooled Congress into passing McCain-
Feingold,'' John Fund reported in 2005 that a study by Political
MoneyLine ``found that of the $140 million spent to directly promote
liberal campaign reform in the last decade, a full $123 million came
from just eight liberal foundations,'' including Carnegie, Ford, and
Soros's Open Society.\42\ Fund quotes a talk given by a former
executive of Pew Charitable Trusts, the biggest donor among the
foundations at $40 million, who confessed after the bill passed that
the target of those millions was ``535 people'' in Congress, in whose
minds the foundations hoped ``to create an impression that a mass
movement was afoot.''
---------------------------------------------------------------------------
\42\ John Fund, ``Astroturf politics: How liberal foundations
fooled Congress into passing McCain-Feingold,'' The Wall Street
Journal, March 21, 2005, https://www.wsj.com/articles/
SB122512338741472357.
Pew's strategist is clear that he aimed to fool you members of
Congress: if, he confesses, you ``thought this was a Pew effort, it'd
be worthless.'' So the conspiracy had ``to convey the impression that
this was something coming naturally from beyond the Beltway.'' Fund
concludes there was never a grassroots drive for campaign finance
reform. And Pew knew it: 2 months before the bill passed, Pew Research
Center polled Americans, asking them to rank 22 issues in order of
importance: campaign finance reform came in dead last.\43\
---------------------------------------------------------------------------
\43\ Scott Walter, ``Pew and the Gang Ride Again,'' Foundation
Watch, April 2011, https://capitalresearch.org/article/pew-and-the-
gang-ride-again-citizens-free-speech-still-in-danger/.
So, policymakers' aim should be to reverse this harmful trend that
currently moves money out of the FEC realm--where, I note, disclosure
is much less controversial--and into the IRS realm of exempt groups.
This should be done not only because the IRS is not the proper
regulator of political activity, but also because the 501(c)(3) realm
of charity is a critical pillar of civil society, strengthening all of
us when it nobly allows us to help each other outside politics.
Government, and the politics that surround it, are supposed to serve
civil society, not take over this private realm which charity requires
---------------------------------------------------------------------------
to flourish.
The two best levers policymakers have to move politically motivated
money back to the FEC's world and out of the IRS exempt world are,
first, much higher limits--or none at all--on ``hard'' dollar
donations. Second, no (c)(3) entity--private foundation or public
charity--should be allowed to fund or execute voter registration and
get-out-the-vote (GOTV). Those activities are only legal now if (c)(3)s
carry them out in nonpartisan fashion, but in this age of
microtargeting, there is far too high a risk that they will not be
carried out in such a fashion. Some years back, a panelist at a think
tank talkfest urged that these voter turnout activities continue to be
legal. When I asked her if she could name a single (c)(3) in America
that actually conducts them on a nonpartisan basis, the room full of
(c)(3) leaders, mostly left-leaning, laughed knowingly, while another
panelist, Democratic pollster Celinda Lake, nodded. Even the woman I
asked grinned for a moment before delivering a non-
answer.\44\
---------------------------------------------------------------------------
\44\ Scott Walter, ``Lies, damned lies, and polls,'' Philanthropy
Daily, October 7, 2014, https://www.philanthropydaily.com/lies-damned-
lies-and-polls/.
In the interest of full disclosure, I admit that (c)(3) voter
turnout work is an unusual instance in the political world where the
two sides don't use the same weapons. While (c)(3) voter turnout
operations are common among the blues, they are rare among the reds. I
recently asked Karl Rove about this. He has done more red registration
and GOTV than any person alive, much of it through 501(c)(4)s that
Chairman Whitehouse urged the IRS to prosecute a decade ago. But asked
if he had ever used (c)(3) foundation money to fund, or (c)(3) public
charities to execute, registration and GOTV, Rove said he never had,
---------------------------------------------------------------------------
and seemed shocked at the thought.
I would prefer this practice be forbidden to (c)(3)s, but failing
that, it should be declared clearly permissible to all. Currently, the
uncertainty that surrounds it leads reds to fear the next Lois Lerner
if they dare try it, while blues use fig leaves like ``civic
participation'' to cover their naked partisanship as they pursue it
with gusto.
other exempt organization problems
I must add brief sketches of some of the many problems raised by
exempt groups that we at Capital Research Center have documented.
The Page Gardner empire. Ms. Gardner, a former Senator Ted Kennedy
staffer, has launched multiple interlocking groups, including the
(c)(3) Voter Participation Center and (c)(4) Center for Voter
Information. The left-leaning groups' work has drawn criticism from The
Washington Post (for confusing voters and not being nonpartisan),\45\
National Public Radio (for allegedly illegal automated calls that
seemed aimed to suppress African-American votes for Barack Obama in a
primary against Hillary Clinton),\46\ and ProPublica, whose headline
explains, ``A Nonprofit With Ties to Democrats Is Sending Out Millions
of Ballot Applications. Election Officials [in both parties] Wish It
Would Stop.''\47\ That ``nonprofit with ties to Democrats'' is the
(c)(3) Voter Participation Center, whose partisanship is confirmed by
Victory Lab's liberal author: ``Even though the group was officially
nonpartisan, for tax purposes, there was no secret that the goal of all
its efforts was to generate new votes for Democrats.''\48\
---------------------------------------------------------------------------
\45\ Antonio Olivo, ``Mail-in ballot applications in Virginia tap
into worries about fraud with faulty instructions,'' Washington Post,
August 6, 2020. https://www.washingtonpost.com/local/virginia-politics/
virginia-absentee-ballot-mixup/2020/08/06/5(c)(4)029ee-d764-11ea-930e-
d8851
8c57dcc_story.html.
\46\ ``Group with Clinton Ties Behind Dubious Robocalls,'' NPR,
2008. Accessed June 19, 2017, http://www.npr.org/templates/story/
story.php?storyId=90114863.
\47\ Rosenthal, Lauren, Joshua Eaton, and Thy Anh Vo, ``A Nonprofit
With Ties to Democrats Is Sending Out Millions of Ballot Applications.
Election Officials Wish It Would Stop,'' October 23, 2020, https://
www.propublica.org/article/a-nonprofit-with-ties-to-democrats-is-
sending-out-millions-of-ballot-applications-election-officials-wish-it-
would-stop.
\48\ Sasha Issenberg, The Victory Lab (New York: Crown Publishing,
2013), 305.
The Voter Registration Project. This (c)(3), co-located with the
for-profit, Democratic-aligned consulting firm Grassroots Solutions,
oversaw a secretive, multiyear, $100+-million plan to use (c)(3)s and
(c)(4)s to turn out millions of Democratic voters in battleground
States. The project began in 2015, when a Democratic for-profit
consultant sent a draft plan to a Democratic-aligned PAC (EMILY's
List), who bounced it to Hillary Clinton's campaign manager, John
Podesta. The scheme fermented with help from the president of the
(c)(3) Wyss Foundation, who also sent Podesta a plan version in an
email with the subject line, ``new (c)(3) version.'' That email's
Microsoft Word attachment has tracked changes that revealed how the
original, partisan plan, which would only be legal for ``hard dollar''
entities to execute, had been reworded lightly into something (c)(3)
foundations could fund and (c)(3) ``charities'' could conceivably get
away with. A sample editing change: an ``enormous'' difference in
``potential political outcomes'' in the original version became an
enormous difference in ``potential voter participation outcomes'' in
the ``new (c)(3) version.''\49\
---------------------------------------------------------------------------
\49\ See Parker Thayer, ``The Left Weaponizes Charitable Cash to
Win Political Battles,'' Capital Research, October 2021, pp. 13-19,
https://capitalresearch.org/publication/capital-research-october-2021/.
The Podesta emails were, unfortunately, likely hacked by Russian
intelligence agents, but the same is true of the hack of the Bradley
Foundation, whose contents are used frequently by Senator Whitehouse
and the Center for Media and Democracy.
The plan was executed, with the help of numerous (c)(3)s and
(c)(4)s, including the Civic Participation Action Fund, America Votes,
States Voices, Center for Popular Democracy,\50\ and the Tides
Foundation. Despite all the millions of dollars--and votes--and dozens
of nonprofits involved, no mainstream media story on this project has
ever appeared, nor as far as we know, any IRS investigation.
---------------------------------------------------------------------------
\50\ CPD is best known for the time one of its leaders, protesting
the Brett Kavanaugh nomination, blocked the elevator doors for Senator
Jeff Flake. Elise Viebeck, ``Ana Maria Archila reflects on confronting
Jeff Flake over Kavanaugh nomination,'' Washington Post, September 28,
2018, https://www.washingtonpost.com/politics/i-was-demanding-a-
connection-ana-maria-archila-reflects-on-confronting-jeff-flake-over-
kavanaugh-nomination/2018/09/28/7593b4fe-(c)(3)81-11e8-97a5-
ab1e46bb3bc7_story.html.
``Zuck Bucks.'' This term is used to describe the roughly $400
million that one billionaire family, Mark Zuckerberg and Priscilla
Chan, used to ``help'' government election officials in nearly every
State conduct the 2020 election. The funds originated from donor-
advised funds at the Silicon Valley Community Foundation and were sent
to two (c)(3)s, the Center for Tech and Civic Life and the Center for
Election Innovation and Research, which in turn sent them to
Secretaries of State and local election offices. (Let me note an
additional $25 million was contributed by an Arabella-managed (c)(3).)
The two centers were founded and still run by persons with strong
Democratic and left-wing ties. CEIR's founder/leader was hired as an
election attorney at the Justice Department in the Clinton
administration and left in 2005 under an ethics complaint cloud. He
later worked at the Pew Charitable Trusts and the (c)(4) People for the
American Way, which inaugurated our modern political battles for
Supreme Court nominees with its famous, multimillion-dollar smear
campaign of Robert Bork's nomination in 1987.\51\ CTCL's founders/
leaders came from a now-defunct (c)(4) so politically powerful that The
Washington Post dubbed it, ``the Democratic Party's Hogwarts for
digital wizardry.''\52\
---------------------------------------------------------------------------
\51\ ``Center for Election Innovation and Research (CEIR)--
Influence Watch,'' Influence Watch, accessed April 29, 2022, https://
www.influencewatch.org/non-profit/center-for-election-innovation-
research/.
\52\ Fung, Brian, ``Inside the Democratic Party's Hogwarts for
Digital Wizardry,'' April 24, 2019, https://www.washingtonpost.com/
news/the-switch/wp/2014/07/08/inside-the-democratic-partys-hogwarts-
for-digital-wizardry/.
These partisans, operating in (c)(3) garments in 2020, distributed
in effect the largest political donation in American history. Their
grants went to over 2,000 government offices in nearly all States. In
many States, most of the offices receiving grants were in local
jurisdictions won by the Republican presidential candidate. Yet with
minimal analysis of the money flows, a clear pattern of Democratic
partisanship appears. Capital Research Center has detailed State-level
analysis for all of the battleground States, with all of our data
publicly posted.\53\ Even a few data points reveal the partisanship:
---------------------------------------------------------------------------
\53\ Hayden Ludwig and Parker Thayer, ``Shining a Light on Zuck
Bucks in the 2020 Battleground States,'' Capital Research Center,
January 18, 2022, https://capitalresearch.org/article/shining-a-light-
on-zuck-bucks-in-key-states/.
In Pennsylvania, the highest per capita funding of a Biden
county (Philadelphia) was $6.56, while the highest per capita funding
---------------------------------------------------------------------------
of a Trump county (Berks) was $1.10.
In Arizona, the unfunded parts of the State saw Republican
presidential turnout increase even higher than Democratic presidential
turnout (46 percent to 40 percent). But where Zuck Bucks flowed, that
pattern completely reversed, with Democrats increasing turnout 81
percent to Republicans' 66 percent.
In my home State of Virginia, average per capita funding for
Democratic counties was about double the funding for Republican
counties, and 90 percent of funding went to Democratic counties.
In short, the funding went disproportionately to the most vote-rich
areas for Democrats, and the margins in the funded parts of the
battleground States were always larger, often far larger, than the
margin for the State as a whole. In Pennsylvania, Zuck Buck localities
went for the Democratic presidential candidate by 692,000 votes,
compared to the State's margin of 81,000; in Georgia, the difference
was 604,000 to 12,000. Zuck Bucks, as one wit put it, were ``the real
Kraken.''\54\
---------------------------------------------------------------------------
\54\ J. Christian Adams, ``The Real Kraken: What Really Happened to
Donald Trump in the 2020 Election,'' PJ Media, December 22, 2020,
https://pjmedia.com/jchristianadams/2020/12/02/the-real-kraken-what-
really-happened-to-donald-trump-in-the-2020-election-n1185494. Other
useful statistical analyses have been made by the Caesar Rodney at
https://www.
rodneyinstitute.org/ and the Foundation for Government Accountability
at https://thefga.org/election-integrity/.
The simple way to understand Zuck Bucks is to imagine the reaction
if the partisanship were reversed: picture the response to the news
that Charles Koch had sent nearly a half-billion dollars to a (c)(3)
staffed by alumni of a (c)(4) Karl Rove group like Crossroads GPS. The
New York Times and CNN would report every unsavory detail with outrage,
and Chairman Whitehouse would make an impassioned speech on the Senate
floor to decry this abuse--and I would cheer him on. Because as I have
testified to State legislatures, this kind of nonprofit abuse is a
threat to both parties.\55\ And it opens the door to foreign election
interference, because if Zuck Bucks are legitimate, then there's
nothing to stop a Russian oligarch, or a Communist Chinese princeling,
or an oil sheik from donating the same way, because (c)(3)s have no
restrictions on foreign donations, nor any campaign finance limits.\56\
Surely all Americans can agree that letting billionaires privatize our
elections using charitable organizations is wrong. No wonder 18 States
have enacted restrictions on such funding. And if you doubt that
funding's partisanship, consider that six gubernatorial vetoes have
been issued on similar bills in other States, all by Democratic
Governors.\57\
---------------------------------------------------------------------------
\55\ For instance, my testimony before the Virginia Senate
Committee on Privileges and Elections, January 25, 2022: https://
capitalresearch.org/app/uploads/Scott-Walter-Written-Testimony-to-VA-
Senate-Jan-25-2022.pdf.
\56\ Parker Thayer, ``Zuckerberg's Election Meddling Could Be
Emulated by Foreign Interests,'' Capital Research Center, November 23,
2022, https://capitalresearch.org/article/zuckerbergs-election-
meddling-could-be-emulated-by-foreign-interests/.
\57\ Sarah Lee and Hayden Ludwig, ``States Banning or Restricting
`Zuck Bucks'--UPDATED 4/28/22,'' Capital Research Center, April 28,
2022, https://capitalresearch.org/article/states-banning-zuck-bucks/.
The growth of (c)(3) foundation grants to (c)(4) groups. While it
is not in all cases illegal for a private foundation to give to a
(c)(4) group, the high legal hurdles are serious enough that for many
years, very little foundation money was risked in this way. This is
certainly a more dubious type of grant than the more often discussed
grants from foundations to donor-advised funds, and anyone who seeks
less politicization of exempt organizations should resist this
practice. The Atlantic Philanthropies, based in Bermuda, has spent
itself out, but before the end it created politically active (c)(4)s
like the Atlantic Advocacy Fund \58\ and the Civic Participation Action
Fund,\59\ and it strongly encouraged other foundations to up their
giving to (c)(4)s.
---------------------------------------------------------------------------
\58\ See ``Atlantic Advocacy Fund--Influence Watch,'' Influence
Watch, accessed April 29, 2022, https://www.influencewatch.org/non-
profit/atlantic-advocacy-fund/.
\59\ See ``Civil Participation Action Fund--Influence Watch,''
Influence Watch, accessed April 29, 2022, https://
www.influencewatch.org/non-profit/civic-participation-action-fund/.
Atlantic's own (c)(4) giving was utterly unrestrained, because its
offshore base meant it never had to disclose its giving, nor was it
bound by any U.S. restrictions on giving. And so it gave millions to
Democratic-aligned PACs like Color of Change PAC and Immigrant Voters
Win PAC, as well as super PACs like the League of Conservation Voters
Victory Fund. Above all, Atlantic was the driving monetary force behind
Health Care for America Now (HCAN), the (c)(4) umbrella group created
to pass Obamacare. Atlantic supplied $27 million of HCAN's $60 million
campaign, leading Atlantic's then-leader Gara LaMarche to brag that the
bill's passage was ``the culmination of a campaign'' by Atlantic and
its allies.\60\ Oddly, the usual opponents of ``dark money'' never seem
to have complained about a ``dark money'' group funded largely by an
offshore donor that did not have to file standard disclosures.
---------------------------------------------------------------------------
\60\ Gara LaMarche, ``A Big Bet on Advocacy Helps to Make History
on Health Care,'' The Atlantic Philanthropies, March 22, 2010, https://
www.atlanticphilanthropies.org/news/big-bet-advocacy-helps-make-
history-health-care.
A related item: sometimes (c)(3) public charities make grants to
(c)(4) ``dark money'' groups, which again is not simply illegal but
should receive scrutiny. One fascinating recent example involves one of
the chairman's favorite public charities, the Center for Media and
Democracy (CMD) that supplies much of the material for his famous
charts. In recent years, CMD was one of the largest donors to American
Family Voices, a 501(c)(4) whose director, Lauren Windsor, helped the
Lincoln Project fan the flames of racism and deceive voters in
Virginia's 2021 gubernatorial contest, as I noted in The Wall Street
Journal.\61\
---------------------------------------------------------------------------
\61\ Scott Walter. ``Virginia's Dirty Trick, Dark Money and Senator
Whitehouse: The senator should investigate his friends' dark financial
ties to race-baiting election interference,'' Wall Street Journal,
November 7, 2021, https://www.wsj.com/articles/virginia-dirty-trick-
lincoln-project-youngkin-tiki-torch-whitehouse-dark-money-
11636144990?page=1. See also https://www.
influencewatch.org/non-profit/american-family-voices/.
Open Society funding in elections abroad. Leaked internal documents
from the Open Society Foundations, headquartered in New York City,
appear to show an intention from the top to deliberately alter election
outcomes in other countries, particularly in the 2014 elections for the
European Parliament and some national parliaments in Europe.\62\ In the
early 2010s, OSF became increasingly worried that trends in Europe were
creating a hostile environment for OSF. To counter and even reverse
these trends, OSF adopted ``a two-level strategy to reduce the number
of opponents of the open society who get elected.'' Open Society
Initiative for Europe (OSIFE) distributed $5.7 million to organizations
to ``to turn out the vote'' in sympathetic constituencies. Open Society
European Policy Institute (OSEPI) was assigned to ``engage pan-European
parties to influence their manifestos and campaigning tactics.''\63\
These efforts to achieve particular election outcomes appear hard to
reconcile with U.S. tax law on nonprofits.
---------------------------------------------------------------------------
\62\ Edited by Jon Rodeback, ``Mapping Soros's `Philanthropy' at
Home and Abroad,'' Capital Research Center, November 2020, https://
capitalresearch.org/app/uploads/Mapping-Soros-Philanthropy.pdf.
\63\ https://capitalresearch.org/app/uploads/OSEPI-strategy-2014-
2017-EU-advocacy.pdf.
Possible Democracy Alliance ``coordination'' between types of
groups not allowed to coordinate. The Committee on States is a partner
organization to the Democracy Alliance, which is a collective of
wealthy Democratic and left-wing individual and institutional donors.
In a slide presentation at a 2014 Alliance meeting that The Free Beacon
obtained, the committee staff ``noted that there is a `legal firewall'
between, on the one side, nonpartisan 501(c)(3) groups and independent
expenditure political groups, and, on the other, State political action
committees, political parties, and campaign committees.'' But, The
---------------------------------------------------------------------------
Beacon report continues,
Subsequent slides explain how that firewall can be
circumvented, illustrated by arrows traversing the visual
``firewall.'' Political ``investors'' can give to all
categories of groups, one slide notes. Another slide details
committee donors' roles as coordination, strategy, targeting,
and accountability. Political vendors operating as for-profit
corporations that focus on ``data, analytics, and research''
can also work with all categories of groups, another slide
explains. A State Democratic Party cannot share information
with a super PAC operating there, for example, but a private
corporation that controls extensive voter data can work with
both. One such group, Catalist, is among the Democracy
Alliance's core network of supported groups. The company, a
limited liability corporation, is the data hub of the
Democratic Party, providing extensive voter information to
political groups, parties, and candidates, some of which are
legally prohibited from coordinating their efforts.\64\
---------------------------------------------------------------------------
\64\ Lachlan Markay, ``Democracy Alliance State Spending Plans
Revealed,'' Washington Free Beacon, November 12, 2014, https://
freebeacon.com/politics/democracy-alliance-state-spending-plans-
revealed/. Emphasis added.
The slides indicating all these connections or ``coordination''
made by donor-
investors plus a Catalist-type LLC should generate considerable
scrutiny. Surely a congressional committee interested in examining the
political activities of tax-
---------------------------------------------------------------------------
exempt groups would want to learn more about these arrangements.
Open Society coordination of voter registration/GOTV with other
foundations. A January 2011 memo appeared in the DCLeaks archive that
was addressed to George Soros; Sherilynn Ifill, the incoming head of
his main (c)(3) foundation; and the rest of its board. The authors were
Andy Stern, then-head of the politically powerful Service Employees
International Union and the most frequent outside visitor to Barack
Obama's West Wing, and Deepak Bhargava, head of the (c)(3) Center for
Community Change.\65\ Entitled, ``New Thinking on 2012 Election and
Beyond,'' and written at the very beginning of that election cycle, the
memo stresses voter registration in ``OSF's priority constituencies,''
and ``focusing resources in cities and States where OSF issue
priorities . . . will be on the ballot or featured prominently in
public discourse.'' Another priority includes ``experimenting with more
collaborative models for campaign communications.'' The memo urges $3.5
million in funding to ``Win Pre-Determined Substantive Changes in Open
Society Priorities that will be Resolved in 2012 City and State
Elections,'' with a narrow focus on ``key places such as California,
Maryland, Ohio, and Wisconsin.''
---------------------------------------------------------------------------
\65\ For more on the Center, see ``Center for Community Change--
Influence Watch,'' Influence Watch, accessed April 29, 2022, https://
www.influencewatch.org/non-profit/center-for-community-change/.
If anyone wonders whether Open Society and similar left-of-center
funders collaborate on this kind of electoral work, the memo has a
budget, ``Currently Projected Voter Engagement Funder Budgets for
2012,'' which lists Ford at the most generous, with a hoped-for $20
million; Open Society next at $16.3 million; Wellspring Advisors, $10
million; Carnegie, $5.6 million; and nine more sources for a total
desired budget of $84.4 million.\66\ Recall the Victory Lab observation
in 2012 that Carnegie aimed at ``ginning up Democratic votes outside
the campaign finance laws that applied to candidates, parties, and
political action committees,''\67\ and consider whether this Open
Society memo does not also deserve the interest of a committee
concerned about political activities of exempt groups.
---------------------------------------------------------------------------
\66\ For more on the memo, see Ken Braun, ``Big Left Foundations
Fund Biased Barely-Legal Voter Programs,'' Capital Research Center,
June 3, 2021, https://capitalresearch.org/article/big-left-foundations-
fund-biased-barely-legal-voter-programs/.
\67\ Sasha Issenberg, The Victory Lab (New York: Crown Publishing,
2013), 86. Emphasis added.
---------------------------------------------------------------------------
conclusion
Political participation by Americans is a wonderful gift and to be
encouraged, but it is best pursued in the traditional political avenues
of campaigns, candidates, and parties, not the exempt sector, and
especially not the charitable (c)(3) world. I urge you to protect
America's civil society by protecting the charitable space under your
oversight. Like Professor Philip Hackney, ``I believe deeply in the
power of a fiercely independent and courageous civil society that
empowers the voices of all in our communities.''\68\
---------------------------------------------------------------------------
\68\ Philip Hackney, ``The 1969 Tax Reform Act and Charities: Fifty
Years Later,'' Pittsburgh Tax Review, Volume 17 (2020): 245, https://
doi.org/10.5195/taxreview.2020.116.
One way to do that is to refrain, on the political or FEC side of
giving, from using campaign finance ``reform'' to throttle support for
groups or interests. I heartily agree with Chairman Whitehouse in his
2013 hearing when he praised a point made by Ranking Member Cruz and
declared, ``I want the record of the hearing to reflect that I think we
have agreement amongst everyone that it is never the government's
position or proper role to determine based on the amount of influence
that a political group or interest or individual has that they have too
much. That is a role, I think, for the voters to determine.''\69\
---------------------------------------------------------------------------
\69\ Transcript citation used above; p. 16.
______
Questions Submitted for the Record to Scott Walter
Questions Submitted by Hon. John Thune
Question. Can you explain your claim that 501(c)(4) organizations
are not the most significant concern in regard to the political
activity of tax-exempt organizations?
Answer. Groups exempt under 501(c)(4) of the tax code, also known
as ``social welfare'' organizations, receive attention from many
politicians that is grossly disproportionate to their significance in
American politics. These groups, many of which are well known to
Americans, such as Planned Parenthood and the National Rifle
Association, receive far less funding than is given either directly to
political parties and campaigns--so-called ``hard'' dollar giving--or
to 501(c)(3) groups that actively engage public policy. My colleagues
at the Capital Research Center examined giving to all three of these
``rivers'' of money influencing our politics in the 2018 election
cycle. The 501(c)(4) river was more of a creek at roughly $123 million,
compared to about $5 billion taken in by ``hard'' dollar political
groups and about $20 billion raised by 501(c)(3) groups that engage
political issues (think tanks, advocacy groups, and the like).\1\ This
relative importance becomes even clearer when these numbers are
represented graphically:
---------------------------------------------------------------------------
\1\ Shane Devine and Michael Watson, ``Political and Policy-
Oriented Giving After Citizens United: An Update to CRC's 2017
Analysis,'' December 17, 2020; https://capitalresearch.org/article/
political-and-policy-oriented-giving-after-citizens-united-an-update-
to-crcs-2017-analysis. Please note that our number for 501(c)(3)
revenues covers only a fraction of the entire 501(c)(3) world, which
also encompasses religious groups, the Salvation Army, Goodwill, etc.
[GRAPHIC] [TIFF OMITTED] T0422.003
.epsIn addition to the very limited wealth of 501(c)(4) groups,
there is also the fact that Americans have no trouble understanding
many of those groups' political slant, whether it is support for
abortion, or for Second Amendment rights, and so on. But few Americans
have any idea of the extent of 501(c)(3) groups' subtle, often hidden
work to influence who actually votes in elections. While some Senators
known as ``dark money hawks'' complain that (c)(4) groups criticize
them and their allies, the same politicians never mention how left-wing
(c)(3) private foundations such as Ford and Open Society fund--and
left-wing (c)(3) public charities such as the Voter Participation
Center execute--voter registration and get-out-the-vote campaigns that
actually drive election results, apparently flouting strict IRS rules
that require (c)(3) groups never to intend, or even to ``have the
effect'' of favoring a candidate or group of candidates.\2\
---------------------------------------------------------------------------
\2\ https://www.irs.gov/charities-non-profits/charitable-
organizations/the-restriction-of-political-campaign-intervention-by-
section-501c3-tax-exempt-organizations.
Compare the IRS's direct legal prohibition with this language, from
a Democratic-aligned super PAC, which in 2020 wrote left-wing donors
that in the 2020 election cycle, the ``single most effective tactic for
ensuring Democratic victories--[is] 501(c)(3) voter registration
focused on underrepresented groups in the electorate.'' The super PAC
even explains the tax advantages: ``Well-designed'' (c)(3) voter
registration is, on a pre-tax basis, ``2 to 5 times more cost-effective
at netting additional Democratic votes than the tactics that campaigns
will invest in. . . . Because 90 percent of the contributions we are
recommending for voter registration and GOTV efforts will go to
501(c)(3) organizations and hence are tax-deductible,'' after taxes,
``such programs are closer to 4 to 10 times more cost-effective. . . .
They are also eligible recipients of donations from donor-advised funds
and private foundations.''\3\
---------------------------------------------------------------------------
\3\ https://www.vox.com/recode/2020/1/7/21055340/mind-the-gap-
silicon-valley-donors-democrats-2020-plan-140-million.
The 501(c)(3) group Voter Participation Center was one of this
memo's three recommended recipients of dollars aimed at ``ensuring
Democratic victories,'' which is no surprise, given that liberal
reporter Sasha Issenberg in his well-received book The Victory Lab: The
Secret Science of Winning Campaigns had already said the group (then
operating under a different name) was a partisan operation despite
legal prohibitions: ``Even though the group was officially nonpartisan,
for tax purposes, there was no secret that the goal of all its efforts
was to generate new votes for Democrats.''\4\
---------------------------------------------------------------------------
\4\ Sasha Issenberg, The Victory Lab (New York: Crown Publishing,
2013), 305.
The same super PAC memo also urges mega-donors to direct cash to
``Everybody Votes,'' which is an even larger 501(c)(3) operation that
works to microtarget registration and get-out-the-vote aimed at
``ensuring Democratic victories.'' Everybody Votes is a multiyear,
$100+-million project, designed originally by Democratic party
operatives and conducted via the almost-unknown 501(c)(3) Voter
Registration Project. As the super PAC's secret memo explains to
donors, ``Everybody Votes is a national organization that funds and
trains a consortium of 50+ local community groups across the country
that do the actual registration work,'' which means that dozens of
other charities are involved in this scheme and deserve investigation
for possible illegal partisanship.\5\
---------------------------------------------------------------------------
\5\ For the details of Everybody Votes/Voter Registration Project,
see https://www.influence
watch.org/non-profit/voter-registration-project/.
Of course, even these brazen efforts to use (c)(3) groups to
influence elections pale in comparison to the so-called Zuck Bucks
operation in 2020. That involved the family of Facebook/Meta
billionaire Mark Zuckerberg, as well as the ``dark money'' empire
connected to Arabella Advisors, passing hundreds of millions of dollars
through two 501(c)(3) groups and into actual government election
offices at the State and local levels. Capital Research Center has
conducted extensive investigations into the way that this money had a
disproportionately partisan effect in every battleground State. That
partisan effect was to be expected, given that the leaders of those two
(c)(3) groups have partisan backgrounds. One group's founder worked at
People for the American Way, a 501(c)(4) notorious for creating the
multimillion-dollar political battles over Supreme Court nominations in
1987, when it spent millions on ads that smeared the Republican nominee
Judge Robert Bork.\6\ The other group was founded by alumni from a
501(c)(4) group described by The Washington Post as, ``The Democratic
Party's Hogwarts for Digital Wizardry.''\7\
---------------------------------------------------------------------------
\6\ See https://www.influencewatch.org/non-profit/center-for-
election-innovation-research/.
\7\ https://www.washingtonpost.com/news/the-switch/wp/2014/07/08/
inside-the-democratic-partys-hogwarts-for-digital-wizardry/. For more
information, see https://www.influencewatch.
org/non-profit/center-for-tech-and-civic-life/.
The abuses involved in Zuck Bucks have led 20 States, at this
writing, to restrict such private funding of their election offices.
Anyone who doubts the partisan nature of this problem can consider how
another half-dozen States' legislatures have passed such restrictions,
only to have them vetoed by governors--every one of whom is a member of
one political party.\8\
---------------------------------------------------------------------------
\8\ https://capitalresearch.org/article/states-banning-zuck-bucks/.
In sum, the biggest offenses are committed by 501(c)(3) groups, not
501(c)(4)s. I am honored to have appeared before this subcommittee, and
I look forward to coming back whenever this much more critical concern
---------------------------------------------------------------------------
is addressed.
Question. You write in your prepared statement that Lois Lerner, a
former IRS official that inappropriately targeted conservative Tea
Party organizations for tax-exempt status, has received little
accountability for her actions. She was held in contempt of Congress
but never prosecuted by the Justice Department. There continues to be a
deposition of Lerner in a lawsuit.
Could you provide more detail about this lawsuit? What additional
oversight and accountability should the U.S. Congress consider with
respect to government employees that politically target taxpayers?
Answer. The lawsuit I mentioned in my testimony involved multiple
Tea Party groups suing IRS officials Lois Lerner and Holly Paz in the
U.S. District Court for the Southern District of Ohio. As part of that
lawsuit, Ms. Lerner was deposed by the groups' lawyer, Edward Greim, in
2015. Lerner asked the court to keep her deposition sealed and secret.
Greim and his clients have continued to ask that her deposition not be
sealed, but for over 3 years the district court has refused even to
rule on this request, so this April, Greim and his clients filed a
petition for Writ of Mandamus with the Sixth Circuit Court of Appeals,
in hopes of having their request ruled upon.\9\
---------------------------------------------------------------------------
\9\ On Petition for Writ of Mandamus, Norcal Tea Party Patriots, et
al. v. Lois Lerner, et al. (Case No. 22-3357, 6th Cir.), filed April
19, 2022.
The best answer to how to think about additional oversight and
accountability Congress should consider with respect to government
employees that politically target taxpayer comes in the testimony Mr.
Greim gave to the Senate Judiciary Committee's Subcommittee on
Oversight in 2015.\10\ A few highlights sketch the greatest dangers and
promising avenues for improvement:
---------------------------------------------------------------------------
\10\ https://www.judiciary.senate.gov/download/07-29-15-greim-
testimony.
``The IRS evidences a built-in distrust of conservative-
leaning organizations. Two key players, Lois Lerner and Stephen Seok,
who was the third Tea Party Coordinator for the Cincinnati
Determinations Unit, were explicit in their distrust of conservative
groups.''
``The Service views itself as under attack, and a vicious
cycle is developing in which the Service fails to cooperate in making
key disclosures. When [the Treasury Department's Inspector General]
began its audit, [IRS officials] Lois Lerner, Holly Paz, Judith
Kindell, and others engaged in a concerted effort to shape the
narrative and rewrite history.''
``We need to ensure that future targeting is discovered much
earlier. Any centralization of tax exempt organization review, and any
grouping of three or more cases for review or audit, should be reported
to the targeted groups, the Commissioner, and to the House and Senate
tax-writing committees. . . . The Service's report should include the
criteria being used to group entities for review, the number of groups
being targeted, and the reason for centralization.''
``Congress should make it crystal clear that Federal courts
must be open to provide remedies to taxpayers who are harmed by any
sort of viewpoint-based targeting. . . . If Congress is convinced that
viewpoint-based targeting is wrong, it should define the wrongful
conduct and provide a clear remedy, removing the task of policymaking
from the judicial branch.''
``Section 6103 should explicitly allow for disclosure of
return information in civil cases in ways that will allow for easier
private enforcement of the statute. Where the return information, or
any information about targeting, is directly relevant to an issue in
the case, it should be disclosed.''
Of course, as Mr. Greim concedes, his proposals are only the
beginning of what is needed to address the IRS's conduct in the Tea
Party case and several others--which would certainly include the more
recent disclosure of private tax information to ProPublica.
Question. According to an April 25, 2022 article in The Hill
(``Watchdog group sues FEC over citizenship of liberal donor''), there
is a pending lawsuit at the FEC regarding potential foreign
interference in the tax-exempt sector.
Could you provide more details about the lawsuit and the concerns
raised?
Answer. Our friends at Americans for Public Trust are the ones who
filed the FEC lawsuit at issue. As they explain, in May 2021, the
nonpartisan, nonprofit group Americans for Public Trust filed an FEC
complaint alleging that Swiss-born foreign national billionaire Hansjg
Wyss and the nonprofits he controls were directing money into U.S.
elections via the Arabella Advisors network of nonprofits.
More specifically, Mr. Wyss's contributions were being funneled by
the Arabella network into a 501(c)(3) nonprofit that controlled a super
PAC called Change Now, which funds political advertising against
Republicans.\11\ Through his nonprofits--the Wyss Foundation, a
501(c)(3), and the Berger Acton Fund, a 501(c)(4)--Mr. Wyss has
contributed huge sums to the Arabella-managed nonprofits New Venture
Fund and Sixteen Thirty Fund, which have then distributed these funds
to left-wing political groups across the country. Simply stated, Mr.
Wyss quite possibly has pumped hundreds of millions of dollars of
foreign money into our elections via the Arabella network.
---------------------------------------------------------------------------
\11\ https://www.influencewatch.org/political-party/change-now-
inc/.
The Americans for Public Trust's complaint specifically requested
an investigation by the FEC into violations of the prohibition against
foreign nationals directly or indirectly making contributions or
expenditures for the purpose of influencing Federal elections.
Additionally, the complaint asked the FEC to investigate failures by
the Wyss- and Arabella-connected nonprofits to register and file
disclosures required for those making political expenditures in Federal
---------------------------------------------------------------------------
elections.
Additionally, since the time of the May 4th hearing, APT was able
to attain information which further bolstered the FEC complaint;
mainly, additional confirmation by Mr. Wyss's sister in a biography
written about him that he is not in fact a U.S. citizen--something The
New York Times and other media outlets have tried to have him confirm
or deny, without success. As RealClearPolitics reported, ``. . .
despite the hundreds of millions Wyss has spent bankrolling progressive
advocacy groups and despite the undeniable heft Wyss throws around in
the Democratic Party and its causes, one question has remained
unanswered in the American press. Despite being a power player in U.S.
politics for decades, it was unclear whether or not Wyss is a permanent
resident in the United States or an American citizen . . . [a]ccording
to a biography of Wyss, written by his sister Hedi Wyss, and reported
first by RealClearPolitics, the answer is no.''\12\
---------------------------------------------------------------------------
\12\ https://www.realclearpolitics.com/articles/2022/05/17/
swiss_billionaires_mega-influence_on_us_politics__147610.html.
The sophisticated use of his nonprofits to circumvent U.S. laws
prohibiting foreign nationals from directly or indirectly influencing
our elections makes it all the more important for the FEC to initiate
an investigation into Mr. Wyss's nonprofits, particularly in light of
his sister's assertions that ``behind the scenes a Swiss plays an
important part in American politics,'' and that ``[w]hat was important
for him [Wyss] was to find out that he could exert influence through
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his foundations.''
If the FEC fails to take substantive action on an administrative
complaint within 120 days, the complainant may seek to compel the FEC
to take action by filing a lawsuit in Federal court. The FEC's failure
to take action on Americans for Public Trust's complaint within 120
days explains why the organization has filed this lawsuit against the
agency. If successful, the lawsuit would compel the FEC to conduct a
full and thorough investigation into the extent that Mr. Wyss and the
Arabella network of nonprofits have willfully engaged in the illegal
foreign interference of U.S. elections via this liberal ``dark money''
machine.
______
Questions Submitted by Hon. Elizabeth Warren
Question. Your organization--the Capital Research Center (CRC)--has
criticized the role of dark money on the left and opposed any and all
IRS reporting requirements which would eliminate this problem.\13\ In
your testimony before this subcommittee, you reiterated those
views.\14\
---------------------------------------------------------------------------
\13\ Capital Research Center, ``Senate to Consider Partisan Anti-
Speech Resolution,'' Michael Watson, December 12, 2018, https://
capitalresearch.org/article/senate-to-consider-partisan-anti-speech-
resolution/.
\14\ Testimony of Scott Walter before the Senate Finance Committee,
Subcommittee on Taxation and IRS Oversight, May 4, 2022, https://
www.finance.senate.gov/imo/media/doc/2022-05-
04_Smith%20Testimony_US%20Senate.pdf.
Is Capital Research Center a recipient of any dark money? If so,
please provide information on the identity of your dark money donors,
and the amount they have contributed in each of the last 5 calendar
---------------------------------------------------------------------------
years.
Answer. With all due respect, Senator Warren, your question is
problematic for several reasons. You say my group ``has criticized the
role of dark money on the left,'' but that criticism appears in neither
of the two citations you give. The first citation is to an article of
ours that opposes IRS reporting requirements for ``dark money'' groups,
but the article does not criticize such giving by any part of the
political spectrum. Your second citation is not to my own testimony but
to Brad Smith's written testimony at this hearing, in which he does not
criticize left-wing ``dark money.'' As for my testimony, written and
oral, I defy you to quote a single instance of my criticizing ``the
role of dark money on the left.'' Instead, I make several quite
different points about ``dark money'':
1. I insist that 501(c)(4) groups--the nonprofit type most often
called ``dark money''--are not very important or dangerous on either
side (see also my response, above, to Senator Thune's first question in
these questions for the record).
2. I note that numerous left-leaning outlets have criticized the
role of ``dark money'' on the left, including OpenSecrets,\15\ The New
York Times,\16\ Politico,\17\ The Washington Post,\18\ and The
Atlantic,\19\ to name but a few. (I could have added the OpenSecrets
report, ``Pro-Warren super PAC tops outside spenders--and Super Tuesday
voters don't know its donors.''\20\)
---------------------------------------------------------------------------
\15\ Anna Massoglia, `` `Dark money' networks high political
agendas behind fake news sites,'' OpenSecrets, May 22, 2020, https://
www.opensecrets.org/news/2020/05/dark-money-networks-fake-news-sites/.
\16\ https://www.nytimes.com/2021/04/13/business/media/wyss-
tribune-company-buyer.html and https://www.nytimes.com/2022/01/29/us/
politics/democrats-dark-money-donors.html.
\17\ https://www.politico.com/news/2019/11/19/dark-money-democrats-
midterm071725.
\18\ Editorial Board, ``Big campaign donors have exploited a
loophole. Congress must change the law,'' Washington Post, November 21,
2019, https://www.washingtonpost.com/opinions/big-campaign-donors-have-
exploited-a-loophole-congress-must-change-the-law/2019/11/21/ab31cf3a-
0bd6-11ea-bd9d-c628fd48b3a0_story.html.
\19\ Emma Green, ``The Massive Progressive Dark-Money Group You've
Never Heard Of,'' The Atlantic, November 2, 2021, https://
www.theatlantic.com/politics/archive/2021/11/arabella-advisors-money-
democrats/620553/.
\20\ https://www.opensecrets.org/news/2020/03/warren-super-pac-st/.
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3. While mocking the idea that 501(c)(4) funding is a serious
problem, I observe that there is far more ``dark money'' on the left, a
fact so obvious even The New York Times felt obliged to acknowledge it
in a news report entitled, ``Democrats Decried Dark Money. Then They
Won With It in 2020.''\21\ I defy you to cite any source that claims
the left has had less ``dark money'' than the right in the 2018, 2020,
and 2022 election cycles, and I ask why, if you truly believe this
money harms America, you aren't demanding your party stop taking it at
three-and-a-half times the rate of the other side?\22\
---------------------------------------------------------------------------
\21\ Kenneth P. Vogel and Shane Goldmacher, ``Democrats Decried
Dark Money. Then They Won With It in 2020,'' New York Times, January
29, 2022, https://www.nytimes.com/2022/01/29/us/politics/democrats-
dark-money-donors.html.
\22\ The multiple comes from OpenSecrets' calculation for the 2020
election cycle. See https://www.opensecrets.org/outsidespending/
summ.php?cycle=2020&disp=O&type=U&chrt=P.
---------------------------------------------------------------------------
4. I defended Chairman Whitehouse by insisting that, although he,
like yourself, is a recipient of considerable ``dark money'' funding,
``I don't think'' a penny of it has ``captured'' him.\23\
---------------------------------------------------------------------------
\23\ Oral testimony, available at https://capitalresearch.org/
article/scott-walter-testifies-to-a-senate-finance-subcommittee-on-the-
political-activities-of-tax-exempt-entities/.
Your question also displays one of the largest challenges posed by
the phrase ``dark money,'' namely, that there is no clear definition of
it. Because of the way politicians like you and Chairman Whitehouse use
the term, with no legal precision but only as an insult, I testified to
Senator Whitehouse last year in the Judiciary Committee that perhaps
the best definition is, ``support for speech the left wants to
silence.''\24\
---------------------------------------------------------------------------
\24\ https://www.judiciary.senate.gov/download/scott-walter-
testimony.
In the same testimony, I noted that Chairman Whitehouse and some
colleagues had just published a report, ``Captured Courts,'' that had
no fewer than 18 uses of this term, yet never gave a legal definition
of it. Is it money in 501(c)(3) nonprofits? in (c)(4) nonprofits?
(c)(6)s? in donor-advised funds? All these and more meet the report's
sole criterion of ``funding for organizations and political activities
that cannot be traced to actual donors.''\25\
---------------------------------------------------------------------------
\25\ Senators Stabenow, Schumer, and Whitehouse, ``Captured Courts:
The GOP's Big Money Assault on the Constitution, Our Independent
Judiciary, and the Rule of Law'' (Washington: Democratic Policy and
Communications Committee, 2020).
In this current hearing, held in the subcommittee responsible for
oversight of the IRS, one would expect you and Chairman Whitehouse to
give a clear definition of ``dark money'' with references to the
relevant sections of the tax code--if, in fact, you were raising the
issue in good faith, rather than invoking it as a vague insult that
drives attention away from the substance of public policy debates like,
---------------------------------------------------------------------------
say, the proper judicial philosophy for a judge.
As for the question you raise on efforts to have government force
the disclosure of nonprofit donors, you are correct that the Capital
Research Center has criticized those efforts, and I would add that the
U.S. Supreme Court has recently affirmed in Americans for Prosperity v.
Bonta that California's donor disclosure requirement burdened donors'
First Amendment rights without being narrowly tailored to an important
government interest.\26\ As your fellow advocates for such disclosure
have made clear,\27\ they believe donor disclosure will harm both the
donors and the grantees forced to disclose--a fact that reveals the
central disagreement over forced government disclosure: As a defender
of citizens' privacy, I do not wish to harm donors and groups I
disagree with, and I respectfully urge you and Chairman Whitehouse to
end your campaign to harm donors and groups you disagree with.
---------------------------------------------------------------------------
\26\ https://www.supremecourt.gov/opinions/20pdf/19-251_p86b.pdf.
\27\ See Scott Walter, Testimony before the U.S. Senate Finance
Committee Subcommittee on Taxation and IRS Oversight, Hearing on ``Laws
and Enforcement Governing the Political Activities of Tax Exempt
Entities,'' May 4, 2022,'' p. 11; available at https://
capitalresearch.org/app/uploads/2022-May-4-Testimony-Finance-Subcom-
IRS.pdf.
This problem--your and others' desire to squelch speech and
intimidate donors--brings us to your final questions: whether Capital
Research Center has received any ``dark money'' and if so, from whom
and in what amounts. In addition to the issue that you have failed to
define your central term, there is also the fact that Capital Research
Center will not violate our donors' privacy. This, too, was made clear
in my written testimony to you and the committee: ``The practical
reason for opposing disclosure arises from the very real threats, felt
across the political spectrum, of mob harassment and worse. And, Mr.
Chairman, just as your side has more groups, active for more years, and
possessed of far more `dark money,' so does your side have more mobs.''
I prefer to ``stand with the NAACP of Bull Connor's Alabama, and with
the NAACP of today, and with the ACLU and the Human Rights Campaign, in
opposition to government schemes to force private citizens to disclose
their donations.''\28\
---------------------------------------------------------------------------
\28\ Ibid., pp. 11-12.
But let me thank you, Senator Warren, for honoring me with two
questions. I was disappointed that neither you, nor Chairman
Whitehouse, nor any other member of your party asked me a single
question at the hearing itself, where we could have had a respectful
public dialogue. The failure to engage in such dialogue is but another
reason to conclude that you invoke the bogeyman of ``dark money'' to
prevent substantive exchanges in public. I note that the ranking
---------------------------------------------------------------------------
member, by contrast, asked questions of both parties' witnesses.
Question. CRC has denied the existence of climate change and
praised the oil industry as one of ``American's most generous
industries.''\29\
---------------------------------------------------------------------------
\29\ Capital Research Center, ``Your own lyin' eyes,'' Steven J.
Allen, December 8, 2014, https://web.archive.org/web/20150206074928/
http:/capitalresearch.org/2014/12/your-own-lyin-eyes/; Capital Research
Service, ``No Philanthropy without Capitalism,'' Dan Popeo, December
14, 2011.
Has CRC received funding from any fossil fuel company in any of the
last 5 years? If so, please provide the name of the company, the amount
---------------------------------------------------------------------------
provided to CRC, and the terms and conditions of these contributions.
Answer. Respectfully, the footnote you provided to assert your
first claim is perplexing. The first of the two articles it cites is an
article by Dr. Steven Allen involving deception in politics and policy
that barely references climate issues, and the second, incomplete
citation is to something called ``Capital Research Service'' by an
author who died a decade ago.
If you care to read an article by Dr. Allen that deals extensively
with the science of climate issues, there are many better ones to
choose from.\30\ We also have articles that document the connections
between strains of environmentalism and eugenics, which were supported
by philanthropies funded by Rockefellers, Carnegies, Kelloggs, and
others.\31\ But while our researchers express their opinions on many
matters, including climate science, Capital Research Center as an
organization takes no position on climate change.
---------------------------------------------------------------------------
\30\ For example, this one on the abuse of graphs (https://
capitalresearch.org/article/scales-over-our-eyes-using-graphs-to-
frighten-people-about-global-warming/) and another cataloguing the
predictions in The New York Times, Harper's, and other outlets of
climate apocalypses, both warming and cooling, in the 1890s, the 1930s,
the 1950s, the 1970s, and more recently (https://capitalresearch.org/
article/in-1895-climate-alarmists-warned-about-global-freezing-they-
havent-stopped-scaring-people-since/).
\31\ https://capitalresearch.org/article/a-darker-shade-of-green-
environmentalisms-origins-in-eugenics/.
As for your question on whether ``fossil fuel'' companies have
supported us in the last 5 years, we will not, of course, as explained
in the previous question, violate our donors' privacy, guaranteed by
NAACP v. Alabama. But knowing that you, Chairman Whitehouse, and others
often use a group's donors to dismiss your responsibility to address
the substance of your opponents' views, I had our development staff
analyze our donations in recent years. They found donations from
corporations made up only a few percent of our revenues, and the
---------------------------------------------------------------------------
corporations represented were small to medium-sized.
In addition, while we do not violate our donors' privacy, those
donors have the right to choose to disclose their donations publicly.
One major corporation, ExxonMobil, did so in 2008 at the behest of its
CEO, Rex Tillerson, the future Secretary of Energy under President
Donald Trump.\32\ At that point, a decade and a half ago, ExxonMobil
announced it would no longer fund Capital Research Center. Please note
that this funding change made no difference whatsoever in our research
or views.
\32\ https://www.csmonitor.com/Environment/Bright-Green/2008/0529/
exxonmobil-cuts-off-funding-to-some-climate-deniers.
Addditional links:
https://docs.google.com/
viewer?url=https%3A%2F%2Fcapitalresearch.org%2Fapp
%2Fuploads%2FWalter-S-Testimony-for-IRS-Hearing-on-Schedule-B-
Disclosure.pdf.
https://capitalresearch.org/article/the-lefts-secret-science-part-
1/.
______
Prepared Statement of Hon. Sheldon Whitehouse,
a U.S. Senator From Rhode Island
Twelve years ago, the Supreme Court rested its decision in Citizens
United on the false predicate that ``effective disclosure'' would let
voters know who was speaking to them, and dispel corruption. Instead, a
torrent of dark money--a ``tsunami of slime''--washed into our
politics. Special interests began to rig our elections from behind a
veil of organizations formed under section 501(c)(4) of the Internal
Revenue Code. Unlike most groups spending money in elections, 501(c)(4)
organizations aren't required to disclose their donors.
The statute governing these organizations states they must be
``operated exclusively for the promotion of social welfare.'' But the
IRS muddied the waters with a regulation that allowed social welfare
organizations to devote up to 49.9 percent of their spending to
political activities and still qualify for 501(c)(4) status.
Predictably, these organizations became conduits for secret political
spending. In the decade preceding Citizens United, 501(c)(4)
organizations spent $103 million on political expenditures; in the
decade following it, they spent over $1 billion. It was a hell of a
tsunami.
The dark money flowing through 501(c)(4)s got darker over the
years. As soon as the IRS sought to review the explosion of these
political groups after Citizens United, dark-money interests whipped up
a scandal claiming the IRS was unfairly targeting conservative groups
for scrutiny. Let me set the record straight--this is false. An
exhaustive 2017 report from the Treasury Inspector General for Tax
Administration, or TIGTA, found no such unfair targeting of
conservative groups, as did a bipartisan investigation from this very
committee.
Still, the damage was done. The fake scandal cowed the IRS, and an
appropriations rider in place since 2015 has blocked the IRS from
promulgating regulations to clarify political rules for 501(c)(4)
organizations. This means groups flout limits on political activity
with little risk to their tax-exempt, anonymized status.
As early as 2012, a ProPublica investigation found that roughly 3
in 10 of the 501(c)(4) organizations surveyed reported to the FEC that
they had spent money on electioneering, but reported to the IRS they
spent no money to influence elections either directly or indirectly.
It's hard to see how both statements could be true.
A report out last week from the Citizens for Responsibility and
Ethics in Washington describes several recent examples of this problem.
Take the NRA. Per CREW:
Between 2008 and 2013, the NRA reported to the FEC that it
spent nearly $11 million in independent expenditures [from its
501(c)(4)]. In 2012, it reported making $7,448,385 in
independent expenditures, more than half of which were spent
opposing Barack Obama or supporting Mitt Romney in that year's
presidential race. . . .
Remarkably, the NRA told the IRS under penalty of perjury that
it spent absolutely nothing on political campaign activities
between 2008 and 2013. Nor did it file a Schedule C disclosing
details of its political spending.
Despite this open and notorious predication for investigation into
whether there were false statements made, there's no sign that the IRS
is doing much to enforce its existing rules. A 2018 TIGTA report
estimated that over 1,000 cases of impermissible political activity by
501(c)(4)s weren't even forwarded to the agency's committee tasked with
recommending audits, despite meeting the IRS's own criteria. According
to a 2020 GAO review, the IRS between 2010 and 2017 conducted only 226
examinations involving impermissible political campaign intervention.
Of those, only 6 percent--a total of 14 examinations--involved
501(c)(4)s. That's fewer than two per year, in the middle of the dark-
money tsunami.
We can't tolerate a system that lets 501(c)(4) groups operate
without oversight--not when they spend tens, even hundreds, of millions
of dollars per election cycle without disclosing their donors. Citizens
are denied that most basic right to know what is going on around them
in their democracy.
First, we should free the IRS to promulgate clear rules for
501(c)(4) organizations. Second, the IRS should use the tools and
resources it already has to crack down on blatant abuse. Lax
enforcement sends a message that the rules don't matter. Third,
referrals need to be made of likely false statements, so that the right
officials in law enforcement can investigate. We are aware of no
referrals at all to DOJ, despite years of CREW, ProPublica, and press
reporting.
I hope my colleagues will join me in untying the IRS's hands and
providing it the tools and resources to enforce its most basic rules.
The premise of transparency in Citizens United has been violated for
far too long.
______
Communications
----------
Arabella Advisors
May 17, 2022
The Honorable Sheldon Whitehouse
Chair
U.S. Senate
Subcommittee on Taxation and IRS Oversight
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
The Honorable John Thune
Ranking Member
U.S. Senate
Subcommittee on Taxation and IRS Oversight
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Senators Whitehouse and Thune,
In recent months, a select group of partisans have sought to
mischaracterize my firm's work in an attempt to score political points
at our expense. This happened during the Senate Judiciary Committee's
hearings to consider Justice Ketanji Brown Jackson's nomination to the
Supreme Court of the United States, and it happened again last week
when a witness in front of your Subcommittee frequently disparaged our
firm in his opening remarks that were submitted for the record. I write
today to once again clear up misconceptions about Arabella Advisors
with the hopes that the subcommittee will enter this letter into the
record to prevent false information from standing uncontested.
Arabella Advisors is a business dedicated to making philanthropic work
more efficient, effective, and equitable. Along with our clients, we
are working to build a better future--one with healthy air, water, and
food for all, with strong democracies and engaged citizens, with
flourishing communities, expanded opportunity and enhanced equity, and
without racism. As we noted in our 2020 impact report, we help our
clients by sharing our expertise and experience, which includes
providing outsourced operational support to nonprofit organizations.
We are proud to be a certified B Corporation, a Great Place to Work, a
member of the Inc. 5000, and a two-time winner of Entrepreneur
Magazine's ``Best Entrepreneurial Companies'' award. We are not a
political organization. We are, however, a company that aims to live
our values, which include a commitment to strengthening our
communities, working toward a more equitable future, protecting our
planet, and more. We accept that, in the highly polarized world in
which we currently live, others may see these values as inherently
partisan. They are nevertheless our values, and we therefore put them
first.
After more than 16 years, we have become experts in the nuts and bolts
of philanthropic work. From providing operations, human resources,
legal, and compliance advice to nonprofits to helping individuals,
families, and companies understand their impact investing options,
effective philanthropy is what we do.
We are proud to count a variety of nonprofit organizations that provide
fiscal sponsorship among our clients. Crucially, Arabella works for
these fiscal-sponsor clients, not the other way around. These nonprofit
organizations are independent of us, have their own leadership, and
make their own decisions on their strategies and programmatic work. We
provide operational and administrative support and help ensure that
philanthropic efforts comply with IRS regulations and that grant
dollars are used appropriately and well in pursuit of impact goals.
Unfortunately, many people have been led to fundamentally misunderstand
who we are and what we do. We are not a ``dark money'' organization,
rather we are a company that works for a variety of clients including
foundations and nonprofit organizations. The phrase ``dark money''
generally refers to a class of nonprofits that engage in certain types
of programmatic activities and how these nonprofits are (and are not)
required to disclose their donors. Arabella Advisors is not a
nonprofit; to suggest that we are is inaccurate and demonstrates a lack
of understanding of the work we do.
We do not work with Demand Justice, a nonprofit focused on federal
courts. Arabella Advisors has never donated to any candidates for
federal office; as a corporation, that would be illegal. We have also
never lobbied Congress on legislation. And lastly, we do not control a
network of organizations as one of your witnesses repeatedly suggested.
As we have stated repeatedly, publicly, and previously in this letter,
we work for our clients, not the other way around. We are a firm that
acts as a service provider to clients. To suggest otherwise is simply
false. These facts are indisputable, which is why one partisan group
mischaracterizing our work was forced to change the content of one of
their attacks. Our opponents understand this to be true as well. But
despite that, select partisans continue to make false statements about
our firm and our work.
We are immensely proud of the work we do to support our clients and, as
a company, to live our values. But we also recognize that as a private
company, we have a responsibility to protect our brand, our clients,
and our employees from misleading attacks that stem from partisan
motives. That means correcting the record with facts about our firm and
our work, and we will continue to do so. We hope that this letter will
help us achieve that goal.
Sincerely,
Rick Cruz
President
______
Campaign Legal Center
1101 14th St., NW, Suite 400
Washington, DC 20005
campaignlegal.org
Dear Chair Whitehouse, Ranking Member Thune, Chair Wyden, and Ranking
Member Crapo:
Thank you for the opportunity to submit this statement to the Senate
Finance Subcommittee on Taxation and IRS Oversight regarding the
crucial importance of transparency about who is spending money to
influence our elections. The Subcommittee's hearing on ``Laws and
Enforcement Governing the Political Activities of Tax-Exempt Entities''
is crucial and timely.
Campaign Legal Center (``CLC'') is a nonpartisan, nonprofit
organization dedicated to defending and strengthening American
democracy through law. CLC's Federal Reform team works to uncover
campaign finance violations, file complaints seeking administrative
enforcement, and advocate for reforms to strengthen and ensure the
consistent and robust enforcement of campaign finance laws.
Voters have a fundamental right to know who is spending money to
influence our elections. Indeed, transparency about the true sources of
election spending is essential to the right of self-government and
necessary to hold officeholders accountable to the public, both of
which are core First Amendment values. Untraced political spending
undermines these values. Voters' right to meaningfully participate in
the democratic process is impeded without information about who
financially supports which candidates and positions. Disclosure of the
true sources of election spending is also essential to securing
elections against corruption and foreign interference.
For years, the Federal Election Commission (``FEC'')--the federal
agency responsible for enforcing federal campaign finance laws and
ensuring that voters are informed about the true sources of election
spending--has been failing to protect voters' fundamental right to
transparent campaigns. The Internal Revenue Service's (``IRS'') total
failure to police the abuse of federal nonprofit rules is exacerbating
the problem.
Specifically, these federal regulators routinely permit groups engaged
in extraordinary levels of political campaign activity to operate as
501(c)(4) ``social welfare'' nonprofits and withhold basic information
about the donors financing their political campaign activity. Congress
should enact legislative reforms to stop this unaccountable and
untraceable political campaign spending.
Organizations that are exempt from taxation under Section 501(c)(4) of
the federal tax code are not required to disclose their donors, even if
they engage in campaign activity, including spending on communications
that explicitly urge voters to support or oppose a specific candidate.
These groups may also give millions of dollars to support the
activities of independent-expenditure-only committees--commonly
referred to as ``super PACs''--which can receive unlimited
contributions, including funds from corporations and wealthy special
interests, to buy communications expressly advocating for or against
candidates, so long as their activities are not coordinated with any
candidate or political party.
While super PACs--like all political committees--must identify their
contributors in publicly available disclosure reports, 501(c)(4) groups
do not have a similar legal obligation, making them an ideal conduit
for political spending by corporations and wealthy special interests
who seek to keep their identities concealed. As such, these nonprofit
groups have become an increasingly common front for secret political
spending, or what commentators often refer to as ``dark money.''
Guidance from the IRS indicates that political campaign activity cannot
be a 501(c)(4) organization's ``primary activity,'' but the agency does
not enforce that restriction. After careful review, we could find no
example in recent memory of a 501(c)(4) organization losing its federal
tax-exempt status based on its political campaign activity, despite
ample evidence of such activity. Consequently, these groups are able to
benefit from 501(c)(4) tax-exempt status while engaging in massive
amounts of political campaign activity with impunity, secure in the
knowledge that their tax-exempt status will not be challenged and their
undisclosed donors will remain secret.
At the same time, the FEC, whose sole mission is interpreting and
enforcing federal campaign finance laws, has consistently failed to
enforce the rules requiring groups whose ``major purpose'' is
nominating or electing federal candidates to register and report as
political committees, or ``PACs.'' Under the Federal Election Campaign
Act (``FECA'') and the U.S. Supreme Court's 1976 decision in Buckley v.
Valeo, any group that raises or spends more than $1,000 on elections in
a calendar year and has the ``major purpose'' of nominating or electing
federal candidates must register with the FEC as a political committee,
maintain records, and file periodic disclosure reports detailing their
receipts and disbursements.
The FEC, however, has virtually ceased enforcing these legal
requirements. As has been well documented, the FEC is deeply hampered
by ideological division and the agency routinely deadlocks when faced
with allegations that a 501(c)(4) group is breaking the law by failing
to register and report as a political committee, regardless of how many
millions of dollars that group may have spent to influence elections.
The upshot of these administrative failures is an extraordinary and
unrelenting increase in secret spending on our elections. Because
501(c)(4) organizations do not disclose their donors--a fact well known
to wealthy special interests seeking to conceal their identities--the
increase in 501(c)(4) political activity has routinely deprived voters
of the essential information needed ``to make informed decisions and
give proper weight to different speakers and messages,'' as Justice
Kennedy wrote for the U.S. Supreme Court in Citizens United v. FEC. In
fact, the Court's support for political disclosure has been strong
across the ideological spectrum, and it has repeatedly rejected First
Amendment challenges to laws requiring disclosure of the sources of
election-related spending.
Yet the problem persists, and a few examples help illustrate the
situation. The 501(c)(4) organization One Nation disclosed that in 2020
alone, it had raised $172 million and spent $195 million. An enormous
amount of its spending was on political campaign activity--e.g., it
contributed more than $77 million to Senate Leadership Fund, a super
PAC also run by One Nation's president. Likewise, Majority Forward is a
501(c)(4) organization that has spent tens of millions of dollars in
every recent election. It shares staff, including its president, with
Senate Majority PAC, a super PAC to which Majority Forward contributed
$14.6 million in 2021. These are not isolated examples. Numerous
501(c)(4) groups have similarly directed vast amounts on election
spending while evading oversight and accountability.
CLC has not stood idly by. We have filed numerous FEC complaints on
this issue, and when the FEC fails to act, we have sought federal court
orders requiring the FEC to enforce the law or authorizing us to
directly pursue enforcement against the violators. Most recently, CLC
filed suit against 45Committee, a 501(c)(4) organization that hid its
donors while spending as much as $38 million in 2016 to help elect
former President Donald Trump. CLC's suit alleges that 45Committee
failed to register as a political committee as required by federal law,
thereby avoiding disclosure of its donors and spending. By enforcing
campaign finance law against this secret money group, CLC seeks to
ensure that the public has the critical information it needs to
evaluate who is influencing elections. However, voters should not need
to rely on lawsuits from organizations like CLC to fill the void of
inaction left by the FEC and IRS.
Congress can improve the dire current state of affairs by addressing
loopholes that allow 501(c)(4) groups to spend millions on elections
without disclosing the true sources of that money, and by removing the
appropriations rider that curtails the IRS's ability to issue
meaningful guidance on, and enforce, the rules governing nonprofit
political campaign activity.
Dark money funneled into our elections through 501(c)(4) groups poses a
serious and ongoing threat to the bedrock principle of electoral
transparency. We urge Congress to respond accordingly by taking the
necessary steps to end secret spending in our elections.
Respectfully submitted,
--Adav Noti
Vice President and Legal Director
______
Common Cause
805 Fifteenth Street, NW, Suite 800
Washington, DC 20005
202-833-1200
www.commoncause.org
Statement of Beth Rotman, Director of Money in Politics and Ethics
Chairman Whitehouse and distinguished members of the Committee, thank
you for the opportunity to submit written testimony. Prior to joining
Common Cause, I served the public in leadership roles at nonpartisan
governmental oversight agencies--one at the state level and one at the
municipal level. I was the Director of the Citizens' Election Program
for the State Elections Enforcement Commission in Connecticut, and the
Deputy General Counsel of the New York City Campaign Finance Board.
Common Cause is a nonpartisan, nonprofit citizen lobby that works to
improve the way government operates for all of us. Common Cause has
more than 1.5 million members around the country who are committed to
open and accountable government that serves the public. Common Cause
advocates at the federal, state and local level for meaningful
disclosure and real transparency in our elections as key means to
increased government accountability and reducing the undue influence of
ultra-wealthy special interests in our politics.
Americans deserve to know who is trying to influence their voices and
their votes. Disclosure allows voters to evaluate the strength, content
and agenda of political messages, and is a crucial tool for holding
people accountable to the voters. In Citizens United v. FEC, the
Supreme Court reaffirmed the importance of disclosure of political
spending, ruling 8-1 that transparency in political spending empowers
the electorate with the tools needed to make informed decisions about
speakers and messages.\1\
---------------------------------------------------------------------------
\1\ 558 U.S. 310, 371 (2010).
Nonetheless, the system is not transparent due to outdated disclosure
laws in the wake of Citizens United (and the Republican filibusters of
the DISCLOSE Act), and the failure of both the Federal Election
Commission and the Internal Revenue Service to enforce existing laws,
however incomplete, against apparent bad actors. Secret money spending
by outside groups since Citizens United has exceeded $1 billion dollars
in federal elections and the spending race continues. Unfortunately for
the American public, a lot has had to go wrong to make it possible for
---------------------------------------------------------------------------
them to be so completely in the dark about so much political spending.
First, one of the basic statutory principles of campaign finance law
found in the federal statute and mirrored in almost every state
requires the formation of a ``political committee'' once any
organization receives contributions or makes expenditures in excess of
$1,000 in a year and whose major purpose is to influence the covered
election. 52 U.S.C. Sec. 30101. The FEC has failed to enforce this
basic tenet of campaign finance law due to deadlocked votes engineered
by some of its commissioners' ideological opposition to the law, which
has allowed these organizations to spend huge sums without registering
and complying with this fundamental rule applicable to political
actors.
This deadlock could be partially ameliorated by strict enforcement by
the IRS fulfilling its own mandate and enforcing the laws governing
nonprofit political spending. Congress never intended for social
welfare organizations to exist as conduits for secret political
spending. In exchange for a tax exemption, these nonprofits are
required to engage exclusively for social welfare, which the IRS has
said does not include political campaign intervention.\2\ The IRS
regulations muddied the waters with a primary purpose analysis that is
inconsistent with the exclusivity requirement of the Internal Revenue
Code.\3\
---------------------------------------------------------------------------
\2\ 26 U.S.C. Sec. 501 (c)(4); Treas. Reg. Sec. 1.501(c)(4)-
(1)(a)(2)(ii).
\3\ Treas. Reg. Sec. 1.501(c)(4)-(1)(a)(2)(i).
The use of 501(c)(4) social welfare organization status by
organizations spending unlimited money in secret should face aggressive
enforcement by the IRS. This is not happening. Because it is well known
that this is not and has not been happening, partisan political
operatives on the right and the left have excelled at establishing
phony social welfare organizations that collectively pump hundreds of
millions of dollars from secret sources into our elections. Rather than
carry out their election-related spending through tax-exempt
organizations which requires donor disclosure pursuant to Section 527,
major political groups continue to masquerade as social welfare
nonprofits under Section 501(c)(4) because they want to keep their
---------------------------------------------------------------------------
donors anonymous.
This long-running scandal is no secret and it is time for the IRS to
rethink its priorities to stop the continued misuse of social welfare
organizations. This includes updating its outdated regulations that
were written long before the Supreme Court changed campaign finance
jurisprudence in Citizens United and subsequent decisions. It is true
that Congress, through appropriations riders in recent years, has
prevented the Treasury Department and IRS from setting clearer
definitions and updating its regulations.
But it still falls squarely within the IRS's authority to enforce the
existing laws governing nonprofit political spending. Should the IRS
continue to fail to enforce against these bad actors, they are enabling
tax fraud by some of the biggest political spenders meanwhile allowing
them to remain anonymous to the public as to their funding sources. The
IRS must stop looking the other way and require the overtly political
groups masquerading as social welfare nonprofits under Section
501(c)(4) to carry out their election related spending through tax-
exempt organizations in accordance with Section 527.
Political operatives should not be able to circumvent the
constitutionally sound bedrock policy of disclosure by circumventing
inconsistent enforcement and vague regulations governing organizations
that Congress never intended would engage in
election-related spending. This ongoing scandal threatens the integrity
of our elections and undermines confidence in our democracy.
______
Council on Foundations
1255 23rd Street, NW, Suite 200
Washington, DC 20037
202-991-2225
https://cof.org/
Chairman Whitehouse, Ranking Member Thune, and members of the
Subcommittee, thank you for the opportunity to provide a statement for
the record.
The Council on Foundations is a nonprofit leadership organization of
more than 800 grantmaking foundations and corporations. We work to
build trust in philanthropy, expand pathways to giving, engage broader
perspectives, and help create solutions that will lead to a better
future for all.
The philanthropic and nonprofit sectors are an essential component of
American society: charitable giving reached a record $471 billion in
2020,\1\ and the United States is consistently named \2\ the most
charitable country in the world. Each year, philanthropy invests tens
of billions of dollars in community organizations throughout the US and
around the world to advance the greater good.
---------------------------------------------------------------------------
\1\ https://philanthropynetwork.org/news/giving-usa-2021-year-
unprecedented-events-and-challenges-charitable-giving-reached-record-
47144.
\2\ https://www.cafonline.org/docs/default-source/about-us-
publications/caf_wgi_10th_edition_
report_2712a_web_101019.pdf.
Foundation leaders from across the country have long supported efforts
to expand civic engagement. This commitment to our democracy has
ensured nonprofits working in communities, including marginalized or
underrepresented communities, have the resources they need to improve
voter education, promote voter engagement, and increase voter
---------------------------------------------------------------------------
participation.
Federal law already prohibits 501(c)(3) organizations from engaging in
any political campaign activity, including endorsing specific
candidates or political parties. Known as the Johnson Amendment, this
protection ensures that philanthropy can support the critical programs,
services, infrastructure, and other investments communities need to
ensure a healthy democracy without having any involvement with partisan
electioneering. The Council strongly supports the Johnson Amendment and
urges this Committee to maintain this critical protection for the
charitable sector.
While many foundations and other nonprofits are leading nonpartisan
voter engagement efforts in the communities they serve, fear and
confusion within the sector have caused some organizations to refuse to
take part in any civic engagement. This is unfortunate particularly
because nonprofit voter engagement can increase voter participation, an
essential activity at a time when there is relatively low voter turnout
in the US compared to other developed countries. At the Council, we
work to educate our members and the broader philanthropic sector
regarding the activities foundations and nonprofits can legally
support. We also welcome the opportunity to collaborate with the
Committee and Administration officials to provide additional clarity to
the sector on this critical topic.
In addition, the Council shares the concern expressed by some of the
witnesses regarding insufficient Internal Revenue Service (IRS)
staffing and resources. A healthy and trusted charitable sector depends
on appropriate oversight by the relevant federal agencies. While the
Council supports the increase in funding for the IRS as provided in the
most recent appropriations measure, the agency still needs additional
funding to ensure it has the capacity to identify bad actors and
respond to questions from the sector in a timely manner.
Thank you again for this opportunity to submit comments for the record.
We appreciate this committee's leadership and look forward to working
with you to ensure the charitable sector can continue to meet the needs
of our communities today and into the future.
Respectfully submitted,
David Kass
Vice President
Government Affairs and Legal Resources
______
End Citizens United/Let America Vote Action Fund
100 M Street E, Suite 1050
Washington, DC 20003
Statement of Tiffany Muller, President
Since the Supreme Court's disastrous Citizens United v. FEC decision
over 12 years ago, we've seen an explosion of political spending by
``dark money'' groups that don't have to disclose their donors. In
fact, there has been a more than ten-fold rise in undisclosed campaign
spending since the decision, increasing from roughly $6 million in
2006, to more than $1 billion in 2020.\1\
---------------------------------------------------------------------------
\1\ Center for Responsive Politics, `` `Dark money' topped $1
billion in 2020, largely boosting Democrats'' (March 17, 2021).
Available online: https://www.opensecrets.org/news/2021/03/one-billion-
dark-money-2020-electioncycle/.
These groups, many organized as 501(c)4 tax-exempt social welfare
organizations, have grown to rival party committees and candidate
campaigns in their size and influence in our elections, but face no
requirements to disclose who is behind them. Right now, the public
knows the occupation of every donor who gives $200 to a campaign but
almost nothing about wealthy individuals or corporations who give $2
million to political advocacy organizations trying to elect their
politicians or secure judicial confirmations in hopes of securing their
---------------------------------------------------------------------------
preferred policy outcome.
Unfortunately, due to legislative maneuvering and disingenuous attacks
on the Internal Revenue Service and its mission during this same time
period, the regulations governing these groups have not been modernized
to reflect the changing nature of how these organizations are used to
influence our elections. This lack of clarity has led to confusion in
the nonprofit sector, opened the door to corruption, and reduced the
public's faith in our elections.
There are several commonsense policies that can be implemented to
address these issues.
The IRS should institute rulemaking to develop clear definitions
for political activity by these organizations and create clear bright
lines for what constitutes political campaign intervention.
Congress must permanently remove ``riders'' from appropriations
bills that prevent the IRS from finalizing, issuing, or implementing
such rulemaking.
The House and Senate must also take up and pass the DISCLOSE Act
(S. 443, H.R. 1334), legislation that would require groups that spend
money to influence elections and judicial nominations to disclose their
largest donors. Specifically, the DISCLOSE Act would require an
organization that spends $10,000 or more on campaign expenditures to
file a disclosure report with the Federal Election Commission within 24
hours of purchasing the expenditures. The DISCLOSE Act also addresses
serious vulnerabilities in the system that currently allow foreign
actors to meddle in our elections.
As the United States Supreme Court has found time and time again,
transparency of political spending is a key bulwark to prevent
corruption in government. Americans deserve to know who is trying to
influence their vote and more transparency is critical to creating a
democracy that is open and accountable to the people.
______
Independent Sector
1602 L St., NW, Suite 900
Washington, DC 20036
202-467-6100
https://independentsector.org/
Statement of Daniel J. Cardinali, President and CEO
Chairman Whitehouse, Ranking Member Thune, and members of the
Subcommittee, thank you for convening this hearing and for your focus
on the nonprofit sector. Independent Sector is a national membership
organization founded in 1980 made up of nonprofits, foundations, and
corporate giving programs nationwide. Working together, our
approximately 500 member organizations and their networks reach every
state and district and touch the life of every American in one or many
ways. They range from some of the largest charities in the world to
all-volunteer organizations, and from major philanthropic institutions
to small foundations, academic centers, community-based organizations,
and more. Independent Sector's core aim is to support these
organizations and all civil society, working toward a healthy and
equitable nonprofit sector to ensure all people living in the United
States thrive.
Three Components of Effective Governance
Independent Sector has, from its beginnings, been committed to working
with policymakers, sector leaders, and regulators to achieve a system
of effective governance because we believe that is what is required to
keep our sector healthy and delivering on its broad mission. As the
title of today's hearing correctly notes, laws and enforcement are
essential to proper oversight of the nonprofit sector. However, we hold
strongly that a third component is equally essential for this system to
function: committed self-regulation.
In 2004, Independent Sector worked in close partnership with Congress,
and specifically the Senate Finance Committee's then-Chairman Grassley
and then-Ranking Member Baucus, to convene the Panel on the Nonprofit
Sector (the Panel). In 2005, the Panel delivered its recommendations to
Congress, suggesting concrete actions that the Congress, the Internal
Revenue Service, and sector organizations themselves should undertake
to enhance sector oversight and governance. Many of those
recommendations were enacted into law through the Pension Protection
Act of 2006 and, in 2007, the Panel released Principles for Good
Governance and Ethical Practice to help nonprofits self-regulate at
even higher standards of public transparency and accountability than
required by law.\1\ These principles were later updated in 2015 and
remain deeply relevant today, as evidenced by their ranking as one of
the most accessed resources on the Independent Sector website.
---------------------------------------------------------------------------
\1\ Accessible at https://independentsector.org/programs/
principles-for-good-governance-and-ethical-practice/.
---------------------------------------------------------------------------
Unclear Rules Provide the Worst of Both Worlds
According to the Internal Revenue Code, political activity is defined
as directly or indirectly participating in, or intervening in, any
political campaign on behalf of (or in opposition to) any candidate for
elective public office. 501(c)(3) nonprofit organizations may perform
limited lobbying, but are absolutely prohibited from participating in
partisan political activity by the Johnson Amendment, a critical
firewall that must be preserved for the integrity of both charities and
our democratic system. 501(c)(4) nonprofit organizations are allowed to
engage in unlimited lobbying and political activity within some
parameters.
Unfortunately, there is widespread uncertainty in the nonprofit sector
about what truly constitutes political activity. Nonprofit
organizations need clearer, consistent definitions--like those proposed
in the Bright Lines Project by a committee of nonpartisan nonprofit
lawyers. Independent Sector is pleased to see some recognition of this
problem, with bipartisan legislation recently introduced calling on the
Government Accountability Office to consider opportunities to clarify
what constitutes ``political campaign intervention.''\2\ Until then,
unclear rules will provide the worst of both worlds: cautious good
actors may remain on the sidelines, while bad actors operate in gray
areas.
---------------------------------------------------------------------------
\2\ H.R. 7587, Nonprofit Sector Strength and Partnership Act,
section 10.
Most nonprofits, but particularly small community organizations, do not
have dedicated policy staff with deep knowledge about nonpartisan
advocacy rules during election years. When they are faced with
uncertainty around whether an activity is allowed, they may not have
the resources or connections to figure out the right path forward.
Instead, they opt out of the policy process, silencing frontline
experts often in charge of implementing critical services on behalf of
government and the communities nonprofits represent. Amidst crises and
uncertainty in 2020, Independent Sector heard from even large
nonprofits with highly professional policy teams that were not speaking
up about certain policy proposals that impacted their operations,
---------------------------------------------------------------------------
because they did not want to enter a political activity gray area.
When nonprofits step aside from their appropriate role in nonpartisan
civic engagement, they miss vital opportunities to advance their own
missions, and American democracy suffers as well. According to a recent
study, voters who were contacted by a nonprofit organization were 11%
more likely to vote.\3\ This impact is even stronger for lower
propensity voters.
---------------------------------------------------------------------------
\3\ Engaging New Voters, Nonprofit Vote, 2021.
On the other hand, the legal gray areas around nonprofit political
activity embolden bad actors to exploit the hard-earned trust of
nonprofits for private or partisan benefit. More specifically, private
interests use nonprofits designated with special benefits, like donor
privacy, to deceive the public and avoid regulation. As a result, the
public could come to see more nonprofits as extensions of private or
partisan agendas.
Trust: A Critical Nonprofit Asset
Public perception of nonprofit trustworthiness is the currency that
drives the nonprofit sector. According to research conducted by
Independent Sector in partnership with Edelman Intelligence, nonprofits
are among the most trusted organizations in their communities, but they
are not rated as highly as they were in 2020, despite increased
visibility for the work they are doing.\4\
---------------------------------------------------------------------------
\4\ Trust in Civil Society, Independent Sector, July 2021. Also
forthcoming research May 2022.
Trust plays a critical role in the extent individuals choose to donate,
volunteer, or advocate with nonprofits. Individuals reporting low trust
in nonprofits and philanthropy cite scandals, abuse, and perceived
partisan motives as reasons for their skepticism. Conversely,
individuals reporting high trust in the sector note their trust is
built, in part, upon a faith that government regulations ensure
nonprofits are serving their communities.
The IRS Has Inadequate Capacity
In addition to hurting the work of nonprofits, the lack of clarity in
these rules also overburdens and compromises the IRS. The widespread
use of private letter rulings by nonprofits in this area requires time-
consuming analysis and response from IRS staff. As such, clearer rules
could free up additional staff capacity to be directed toward the
Service's core mission.
The need for this additional capacity is clear. From 2000-2013, the
number of 501(c)(3) charitable organizations increased by more than 28
percent, while the number of full-time equivalent staff in the IRS
Exempt Organizations Division (EO) increased by less than 6 percent. A
2020 Congressional Budget Office report \5\ found IRS appropriations
had fallen by 20% in inflation-adjusted dollars since 2010, resulting
in the elimination of 22% of its staff. The amount of funding allocated
to oversight had declined by about 30% since 2010. The agency is
struggling to keep pace with an exponentially growing and rapidly
changing nonprofit sector. Independent Sector has been disappointed by
this long-term decline in IRS appropriations and applauds the recently
enacted increase for Fiscal Year 2022.
---------------------------------------------------------------------------
\5\ Trends in the Internal Revenue Service's Funding and
Enforcement, CBO, July 2020.
In addition to its direct impact on nonprofit sector oversight,
inadequate IRS capacity has incentivized other shortcuts with damaging
consequences. When the IRS created a streamlined Form 1023-EZ,
nonprofit leaders expressed concern that such a simplified application
approval process may open the door to incorrect determinations or
increased abuse. Unfortunately, the IRS' own Taxpayer Advocate has
repeatedly concurred, finding that more than one-third of ineligible
1023-EZ applicants were approved in recent years. Independent Sector
believes that this error rate is simply unacceptable and we applaud
recently introduced bipartisan legislation \6\ that would revoke form
1023-EZ and replace it after consultation with the nonprofit sector and
other experts.
---------------------------------------------------------------------------
\6\ H.R. 7587, Nonprofit Sector Strength and Partnership Act,
section 9.
---------------------------------------------------------------------------
Conclusion
Once again, thank you for convening this hearing and for focusing
Congress' attention on the vital work of the nonprofit sector. Clear,
objective rules for nonprofit political activity--balanced between
laws, enforcement, and self-regulation--would allow more organizations
to participate in their democracy and bolster public trust in the
nonprofit sector. We appreciate your interest and look forward to
working with you.
______
National Taxpayers Union Foundation
122 C Street, NW, Suite 650
Washington, DC 20001
P: (703) 683-5700
F: (703) 683-5722
https://www.ntu.org/foundation
May 4, 2022
U.S. Senate
Committee on Finance
Subcommittee on Taxation and IRS Oversight
219 Dirksen Senate Office Building
Washington, DC 20510
RE: Hearing on Laws and Enforcement Governing the Political Activities
of Tax-Exempt Entities
Dear Chair Whitehouse, Ranking Member Thune, and Members of the
Subcommittee:
On behalf of National Taxpayers Union Foundation (``NTUF''), I
submit these written comments to the Subcommittee on Taxation and IRS
Oversight for your hearing titled ``Laws and Enforcement Governing the
Political Activities of Tax-
Exempt Entities.''\1\ As a nonprofit organization that regularly works
with, studies, and litigates in matters involving tax agencies, we can
offer a perspective focused both on tax and First Amendment law for the
Subcommittee's consideration. As you may know, NTUF has historically
maintained an abiding interest not only in tax policy, but also tax
administration--the mechanics of how the tax law and the agency charged
with its implementation can function most efficiently and effectively
for the taxpayers it serves. We have published issue briefs, policy
papers, and friend of the court briefs on a variety of matters in this
realm, ranging from telephone customer service challenges at the IRS to
the practical considerations surrounding the recent introduction of the
Form 1099-K.\2\
---------------------------------------------------------------------------
\1\ Founded in 1973, the National Taxpayers Union Foundation (NTUF)
is a non-partisan research and educational organization dedicated to
showing Americans how taxes, government spending, and regulations
affect everyday life. NTUF's Taxpayer Defense Center advocates for
taxpayers in the courts--upholding taxpayers' rights, challenging
administrative overreach by tax authorities, and guarding against
unconstitutional burdens on interstate commerce. NTUF staff have
testified and written extensively on the issues of this hearing before
the Subcommittee.
\2\ See, e.g., Andrew Wilford and Andrew Moylan, Congress Needs to
Act to Provide Relief to Taxpayers (and the IRS) From Burdensome 1099-K
Requirement, National Taxpayers Union Foundation (March 8, 2022)
available at: https://www.ntu.org/library/doclib/2022/03/Congress-
Needs-to-Act-to-Provide-Relief-to-Taxpayers-and-the-IRS-From-
Burdensome-1099-K-Requirement-1-.pdf; Demian Brady, Increasing
Complexity Brings Back Bigger Compliance Burdens, National Taxpayers
Union Foundation (April 18, 2022) available at: https://www.ntu.org/
library/doclib/2022/04/2022-tax-complexity.pdf; Andrew Wilford,
``Taxpayers Expecting a Big Refund Could Be in for a Nasty Surprise,''
Real Clear Markets (January 10, 2022) available at: https://
www.realclearmarkets.com/articles/2022/01/10/
taxpayers_expecting_a_big_refund_could_be_in
_for_a_nasty_surprise_811087.html; Brief of Amici Curiae, National
Taxpayers Union Foundation and National Federation of Independent
Business Small Business Legal Center in Support of Petitioner,
Boechler, P.C. v. Comm'r of Internal Rev., U.S. No. 20-1472 (November
22, 2021) available at: http://www.supremecourt.gov/DocketPDF/20/20-
1472/200934/202111221445293
16_20-1472%20National%20Taxpayers%20Union%20Foundation.pdf.
The problem before the Subcommittee in today's hearing combines
several of our concerns over tax administration. Chief among them is a
combination of workload and expertise: the Internal Revenue Service
(``IRS'' or ``Service'') finds itself overburdened in trying to police
political activity. One standout solution is for the IRS to look to
another expert agency, the Federal Election Commission (``FEC''), for
guidance, since the FEC has the lived experience of litigating
questions of regulation of speech and politics for decades. This
recommendation notwithstanding, any modification of the laws must
recognize the First Amendment's robust protections for privacy of
association.
I. The Problem: Complex IRS Definitions of ``Political Activity'' Lead
to Arbitrary and Subjective Enforcement
For tax-exempt organizations, what constitutes ``political
activity'' is vitally important. But the Internal Revenue Code
(``IRC'') does not define the term. Worse, the Treasury Regulations
employ an eleven-factor test to try to figure out what is and is not
``political activity.'' This complex test chills core First Amendment
activity by exempt organizations and is unworkable for the IRS to apply
in practice.
How to define ``political activity'' for nonprofit organizations is
essential to applying the tax code but troublesome to do in the real
world. The scope of a nonprofit's permissible ventures turns on the
extent to which the IRS will consider them ``political activity.''
Section 501(c)(3) groups cannot support or oppose a candidate.\3\ By
contrast, Sec. 501(c)(4) organizations are ``operated exclusively for
the promotion of social welfare,''\4\ which the IRS has defined as
being ``primarily engaged in promoting in some way the common good and
general welfare of the people of the community.''\5\ Activity in
support of or opposition to a candidate is not ``promotion of social
welfare,'' but is permissible so long as it does not become the
organization's primary purpose.\6\ Just as with Sec. 501(c)(4) status,
the question of Sec. 527 status is one of primary activity.\7\ That is,
a Sec. 527 organization need not engage solely in ``political
activity,'' and may undertake other projects such as educational
workshops or social activities,\8\ but its main function must be
political advocacy if it is to maintain its tax status.
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\3\ 26 U.S.C. Sec. 501(c)(3) (banning ``participat[ion] in, or
interven[tion] in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to)
any candidate for public office'').
\4\ 26 U.S.C. Sec. 501(c)(4)(A).
\5\ 26 CFR Sec. 1.501(c)(4)-1(a)(2)(i).
\6\ 26 CFR Sec. 1.501(c)(4)-1(a)(2)(ii).
\7\ 26 U.S.C. Sec. 527(e)(1); 26 CFR Sec. 1.527-2(a)(1) (both
defining a political organization as one ``organized and operated
primarily for the purpose of directly or indirectly accepting
contributions or making expenditures'' for political activity).
\8\ 26 CFR Sec. 1.527-2(a)(3).
But while these statutory distinctions pose few implications for
federal revenue, they turn on nonobvious terms like ``political
activity'' and ``primary'' purposes, and these terms must be
interpreted by the IRS. The Service has responded with a complex,
eleven-factor approach known as the ``facts and circumstances''
test.\9\ The complexity of this test has a palpable impact on exempt
organizations, particularly in light of the penalties assessed for
violating the tax laws.
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\9\ IRS Rev. Rul. 2004-6, 2004-4 I.R.B. 328, 330 (January 26,
2004); cf. IRS Rev. Rul. 2007-41, 2007-25 I.R.B. 1421 (June 18, 2007)
(applying the ``facts and circumstances'' test to 21 situations).
As just one example, if a group wants to host a public forum with
several candidates for the same office without violating its tax
status, the Service's 2007 facts and circumstances guidance provides
five factors that must be taken into consideration. But the IRS
declines to be bound by those five factors, and explicitly states that
there may be more.\10\ Any potential sixth, seventh, or eighth factors
or circumstances, however, are not made public.
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\10\ IRS Rev. Rul. 2007-41, 2007-25 I.R.B. at 1423 (``[F]actors in
determining whether the forum results in political campaign
intervention include the following . . .'') (emphasis added).
The Service's test is complex, and its uncertainties will
inevitably leave speakers wondering if their words will be interpreted
by the IRS as ``political activity.'' Consequently, groups are likely
``to steer far wide[] of the unlawful zone.''\11\ As the Supreme Court
observed in Buckley v. Valeo, laws regulating speech must be drafted
with precision, otherwise they force speakers to ``hedge and trim''
their preferred message.\12\ Additionally, ``[p]rolix laws chill speech
for the same reason that vague laws chill speech: People of common
intelligence must necessarily guess at the law's meaning and differ as
to its application.''\13\
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\11\ Grayned v. City of Rockford, 408 U.S. 104, 109 (1972)
(internal citations omitted).
\12\ 424 U.S. 1, 43 (1976) (per curiam) (quoting Thomas v. Collins,
323 U.S. 516, 535 (1945)); see also Reno v. Am. Civil Liberties U., 521
U.S. 844, 871-72 (1997) (noting that ``[t]he vagueness of . . . a
regulation raises special First Amendment concerns because of its
obvious chilling effect on free speech.''); cf. Fed. Commc'ns Comm'n v.
Fox TV Stations, Inc., 567 U.S. 239, 254-55 (2012) (quoting Reno).
\13\ Citizens United v. Fed. Election Comm'n, 558 U.S. 310, 324
(2010) (quotation marks and citation omitted).
The Supreme Court recognized the independent First Amendment harm
imposed whenever a federal agency ``create[s] a regime that allows it
to select what political speech is safe for public consumption by
applying ambiguous tests.''\14\ The Service's eleven-factor ``facts and
circumstances'' test, which embraces rather than ``eschew[s] `the open-
ended rough-and-tumble of factors,' '' is just such a regime.\15\
Indeed, twelve years ago the Supreme Court held that the FEC's similar
eleven-factor test failed First Amendment review.\16\ And the
anticipated chill is all the more likely given the severe tax penalties
imposed for guessing wrong on whether the activity is permissible.\17\
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\14\ Id. at 336.
\15\ Id. (quoting Fed. Election Comm'n v. Wis. Right to Life, Inc.,
551 U.S. 449, 469 (2007) (Roberts, C.J., controlling op.).
\16\ Id. (noting that Federal Election Commission's ``11-factor
test'' to determine whether a nonprofit corporation could engage in
political speech failed ``First Amendment standards'').
\17\ See, e.g., 26 U.S.C. Sec. Sec. 4955(a)(1) and (b)(1)
(penalties for 501(c)(3)s that engage in political activity); id. at
(a)(2) and (b)(2) (personal liability for the managers of a nonprofit
engaging in political activity).
And the IRS staff itself cannot even apply the regulations
correctly or consistently, instead defaulting to key word searches and
other problematic short cuts. A National Taxpayer Advocate's Special
Report confirmed that there are enormous problems with the current
facts and circumstances test, stating that ``[t]here is very little
guidance to help the IRS determine whether an organization is
operating'' within the parameters of the Internal Revenue Code.\18\
This leads to errors and scandal. The Treasury Inspector General for
Tax Administration (TIGTA) reported that the IRS targeted ``Tea Party
and other organizations applying for tax-exempt status based upon their
names or policy positions.''\19\ And it turned out the program had
errors affecting organizations across the ideological spectrum.\20\
---------------------------------------------------------------------------
\18\ National Taxpayer Advocate, Special Report to Congress:
Political Activity and the Rights of Applicants for Tax-Exempt Status,
at 14 (June 30, 2013) available at: https://www.
taxpayeradvocate.irs.gov/wp-content/uploads/2020/09/Special-Report.pdf
(``Special Report'').
\19\ Treasury Inspector General for Tax Administration, No. 2013-
10-053, Inappropriate Criteria Were Used to Identify Tax-Exempt
Applications for Review, at i (May 14, 2013) available at: http://
www.treasury.gov/tigta/auditreports/2013reports/201310053fr.pdf; see
also id. at 5-10 (describing the program).
\20\ See, e.g., Peter Overby, ``As IRS Targeted Tea Party Groups,
It Went After Progressives Too,'' National Public Radio (October 5,
2017) available at: https://www.npr.org/2017/10/05/555975207/as-irs-
targeted-tea-party-groups-it-went-after-progressives-too.
As the National Taxpayer Advocate noted: ``What is clear from the
TIGTA report is that IRS [Exempt Organization] staff did not believe
they had sufficient criteria to make fair and consistent
decisions.''\21\ Writing better law, though, is still difficult if not
done properly. Robert Bauer, the former White House Counsel to
President Obama, noted in an analysis of one proposal suggesting a new
rule for the IRS to apply that ``[c]omplexity means hard judgments; the
judgments are about sensitive political matters; and the recent
controversy demonstrates, if anything, that the IRS is at risk when
making judgments of this nature.''\22\ Simplicity is therefore the
answer.
---------------------------------------------------------------------------
\21\ Special Report at 14.
\22\ Robert Bauer, The IRS and ``Bright Lines,'' More Soft Money
Hard Law Blog, May 28, 2013, http://www.moresoftmoneyhardlaw.com/2013/
05/irs-bright-lines/.
The IRS is ill equipped to make judgment calls on what qualifies as
``political activity.'' The existing regulatory framework--an eleven-
factor test--is so difficult to apply that even Service employees
cannot do so consistently. The Service's expertise lies in tax rates
and calculation, not in campaign finance or the regulation of protected
First Amendment activity. The IRS needs help, and fortunately the
Congress has already directed who to call.
II. The Solution: Get Help from the Federal Election Commission
In the context of regulating politically-active organizations,
Congress has provided a clear mandate that the IRS and FEC work
together to harmonize their regulations of organizations discussing
politics and public policy.\23\ Therefore, with these guidelines in
place, the role of the Service is clear: collect revenue and, where
possible, streamline regulation with the FEC when dealing with
political activity. Getting tangled in the administrative underbrush of
independently defining and regulating ``political activity'' will only
serve to slow and frustrate the Service's mandates.
---------------------------------------------------------------------------
\23\ 52 U.S.C. Sec. 30111(f); see also 107 Pub. L. 276 Sec. 4; 116
Stat. 1929, 1932 (2006) (codified at 26 U.S.C. Sec. 527 note).
The IRS is tasked with a difficult job: enforce the tax code and
guide taxpayers into properly complying with the law.\24\ This role
requires a multitude of specialized personnel with distinctive training
in the ever-changing tax code. Every day, the Service fields calls from
the public seeking help in complying with the law and regulations. The
IRS forms, schedules, handouts, and web page are all designed to guide
taxpayers. The Service is the agency with expertise in all things tax,
but it often asks for outside help. For example, the IRS has a special
Art Advisory Panel to help the Service evaluate works of art for
charitable deduction purposes--a skill set far outside most Treasury
employees' normal expertise.\25\
---------------------------------------------------------------------------
\24\ See, e.g., 26 U.S.C. Sec. 7803(a)(2).
\25\ IRS, ``Art Appraisal Services'' available at: https://
www.irs.gov/appeals/art-appraisal-services.
The FEC has a clear mandate to enforce the campaign finance laws,
regulate political actors, and advise participants on the applications
of the complex campaign finance law.\26\ The FEC has spent nearly fifty
years in rulemaking, drafting advisory opinions, and litigating the
constitutional contours of campaign finance law. Every day, their staff
answer questions about filing disclosure reports and registering as a
political committee. The FEC is the expert agency for regulating
political activity.
---------------------------------------------------------------------------
\26\ 52 U.S.C. Sec. 30106.
This idea of IRS deference to the FEC has the approval of the
former National Taxpayer Advocate. Almost nine years ago Nina Olson,
when she was still in office as Taxpayer Advocate, suggested Congress
instruct the IRS to defer to the FEC on these matters: ``Specifically,
the FEC would have to determine that proposed activity would not or
does not constitute excessive political campaign activity.''\27\
Therefore, in crafting any regulation of political entities, the IRS
should defer to the expertise of the FEC on matters of substantive
regulation of political activity and disclosure.
---------------------------------------------------------------------------
\27\ Special Report, at 16.
The IRS just endured one of its toughest filing seasons yet.\28\
The Service has more than enough work to do in many specialized areas
of law, ranging from 199A implementation from the Coronavirus Aid,
Relief, and Economic Security Act to the Enhanced Child Tax Credit.\29\
And the IRS has proposed an ambitious plan for restructuring under the
Taxpayer First Act.\30\ Plus the Service is woefully behind in
processing returns during the pandemic.\31\ The IRS has enough on its
plate applying the tax laws.
---------------------------------------------------------------------------
\28\ See, e.g., Andrew Wilford, Pete Sepp, and Joe Bishop-Henchman,
Taxpayers Desperately Need Help with Disastrous Filing Season, National
Taxpayers Union Foundation (February 17, 2022) available at: https://
www.ntu.org/library/doclib/2022/02/Taxpayers-Desperately-Need-Help-
with-Disastrous-Filing-Season-2-.pdf.
\29\ Lynn Mucenski Keck, ``Pass-Through Entities Claiming the
Employee Retention Credit May Have a Limited 199A Deduction,'' Forbes
(March 14, 2022) available at: https://www.
forbes.com/sites/lynnmucenskikeck/2022/03/14/pass-through-entities-
claiming-the-employee-retention-credit-may-have-a-limited-199a-
deduction/?sh=197ca98f7983; Wilford, ``Taxpayers Expecting a Big Refund
Could Be In For a Nasty Surprise,'' supra note 2.
\30\ IRS, Taxpayer First Act Report to Congress (January 2021)
available at: https://www.irs.gov/pub/irs-pdf/p5426.pdf.
\31\ See, e.g., National Taxpayer Advocate, ``IRS Delays in
Processing Amended Tax Returns Are Impacting TAS's Ability to Assist
Taxpayers,'' NTA Blog (November 10, 2021) available at: https://
www.taxpayeradvocate.irs.gov/news/nta-blog-irs-delays-in-processing-
amended-tax-returns-are-impacting-tass-ability-to-assist-taxpayers/.
The core roles of the Service remain as they always were: to
collect revenue and serve taxpayers. The IRS should not add to itself
an attempt at wading into the prolix campaign finance laws. Thus, the
Service's rules on exempt organizations' political activity should be
aimed at steering clear of substantive regulation of the content of the
speech.
III. Any New Statute or Treasury Regulation Must Protect Donor Privacy
The Supreme Court ardently protects our First Amendment rights,
especially in public policy discussion. In Buckley, the Court noted
that ``a major purpose of that Amendment was to protect the free
discussion of governmental affairs, . . . of course includ[ing]
discussions of candidates.''\32\ The Supreme Court has also recognized
the need to protect the freedom of association from undue disclosure to
the government.\33\ For decades, the Supreme Court has consistently
shielded organizational donors and supporters from the generalized
donor disclosure found in campaign finance law.
---------------------------------------------------------------------------
\32\ Buckley, 424 U.S. at 14 (1976) (quoting Mills v. Alabama, 384
U.S. 214, 218 (1966)).
\33\ See, e.g., Americans for Prosperity Found. v. Bonta, 594 U.S.
___, 141 S.Ct. 2373 (2021) (``AFPF''); Gibson v. Florida Legislative
Comm., 372 U.S. 539 (1963); Talley v. California, 362 U.S. 60, 65
(1960); Shelton v. Tucker, 364 U.S. 479 (1960); Bates v. Little Rock,
361 U.S. 516 (1960); NAACP v. Ala. ex rel. Patterson, 357 U.S. 449
(1958).
The Supreme Court's tailoring analysis in Buckley was
straightforward: organizations with the ``major purpose'' of supporting
or opposing candidates are also subject to campaign finance disclosure
at the FEC.\34\ Thus candidate committees, political committees, and
issue committees are all focused on engaging in electoral politics.
Generalized donor disclosure makes sense in the context of such
organizations with ``the major purpose'' of politics because donors
intend their funds to be used for political purposes. The IRS would put
such organizations in the Sec. 527 category.
---------------------------------------------------------------------------
\34\ Buckley, 424 U.S. at 79.
But if an organization is neither controlled by a candidate nor has
as its ``major purpose'' speech targeting electoral outcomes, then
disclosure is appropriate only for activity that is ``unambiguously
campaign related.''\35\ That is, when (1) the organization makes
``contributions earmarked for political purposes . . . and (2) when [an
organization] make[s] expenditures for communications that expressly
advocate the election or defeat of a clearly identified
candidate.''\36\ Such limited disclosure is appropriate because it
involves ``spending that is unambiguously related'' to electoral
outcomes.\37\ Thus, Buckley held that comprehensive disclosure can be
required of groups only insofar as those groups exist to engage in
unambiguously campaign related speech.\38\
---------------------------------------------------------------------------
\35\ Id. at 81.
\36\ Id. at 80 (emphasis added). Of course, the Buckley Court
narrowly defined ``expressly advocate'' to encompass only ``express
words of advocacy of election or defeat, such as `vote for,' `elect,'
`support,' `cast your ballot for,' `Smith for Congress,' `vote
against,' `defeat,' [and] `reject.' '' Id. at 80 n.108 (incorporating
by reference id. at 44 n.52).
\37\ Id. at 80.
\38\ Id. at 81.
While the Supreme Court upheld certain disclosure outside the major
purpose framework in Citizens United, it addressed only a narrow form
of disclosure. The Court merely upheld the disclosure of a federal
electioneering communication report, which disclosed the entity making
the expenditure and the purpose of the expenditure.\39\ Such a report
only disclosed contributors giving over $1,000 for the purpose of
furthering the electioneering communication.\40\ The Citizens United
Court specifically held that the limited disclosure of an
electioneering communications report is a ``less restrictive
alternative to more comprehensive regulations of speech,'' such as the
regular reporting and generalized donor disclosure required of
political committees.\41\ What is ``less restrictive'' in Citizens
United is that the disclosure was focused on the entity making the
message and the donors who gave for that specific activity, not the
organization's general donor list.
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\39\ 52 U.S.C. Sec. Sec. 30104(f)(2)(A) through (D).
\40\ 52 U.S.C. Sec. Sec. 30104(f)(2)(E) and (F); Citizens United,
558 U.S. at 366.
\41\ Citizens United, 558 U.S. at 369.
Just last year the Supreme Court in a 6-3 decision continued to
protect nonprofits from generalized donor disclosure to government
officials. The Court recognized the long line of precedent that
``compelled disclosure of affiliation with groups engaged in advocacy
may constitute as effective a restraint on freedom of association as
[other] forms of governmental action.''\42\ That is because
``[e]ffective advocacy of both public and private points of view,
particularly controversial ones, is undeniably enhanced by group
association,'' and there is a ``vital relationship between freedom to
associate and privacy in one's associations.''\43\ Therefore
generalized donor disclosure will fail unless the government can prove
it survives ``exacting scrutiny,'' which ``requires that there be a
substantial relation between the disclosure requirement and a
sufficiently important governmental interest'' and ``the disclosure
requirement be narrowly tailored to the interest it promotes.''\44\ Any
expansion of the existing disclosure framework would need to meet this
high standard of judicial scrutiny. This will be even more strenuous
for any proposal for public disclosure of nonprofit supporters.
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\42\ AFPF, 141 S.Ct. at 2382 (citation omitted, brackets in AFPF).
\43\ Id. (citations omitted, brackets in AFPF).
\44\ Id. at 2385.
Indeed, as we detailed to the Supreme Court last year, Form 990's
Schedule B was never intended to uncover wrongdoing and its collection
of donor data is ripe for abuse.\45\ Instead, Congress added the list
of major contributors as a method of protecting donor information
against IRS disclosure under other statutes, especially the Freedom of
Information Act.\46\ Unfortunately, Schedule B became a treasure trove
for opposition researchers if and when it does get leaked. Warehousing
the information is risky, and for little benefit. As it stands, the IRS
itself found that Schedule B's general questions were useless compared
to the detailed information contained in other areas of Form 990.\47\
And the IRS has for decades exercised discretion to relieve a broad
swath of organizations from the donor disclosure of Schedule B.\48\ As
a result, the IRS no longer uses Schedule B for most exempt
organizations, and 47 states do not require the information either.\49\
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\45\ Brief of National Taxpayers Union Foundation and the Public
Policy Legal Institute as Amici Curiae in Support of Petitioners,
Americans for Prosperity Found. v. Bonta, U.S. Nos. 19-251 and 19-255
at 15 (February 26, 2021) available at: http://www.supremecourt.gov/
Docket
PDF/19/19-251/170004/20210226150717748_NTUF-
PPLI%20Amicus%20AFPF%20TMLC%20v
%20Becerra.pdf.
\46\ See, e.g., Landmark Legal Found. v. Internal Rev. Serv., 267
F.3d 1132, 1135 (D.C. Cir. 2001).
\47\ IRS, Tax-Exempt and Government Entities Div. ``Disclosure Risk
on Form 990, Schedule B and Re. Proc. 2018-38'' Slide 7 (August 2018)
as reprinted in Gurbir S. Grewal, Attorney General of New Jersey, et
al., Letter to Secretary Steven T. Mnuchin, Appendix C (December 9,
2019) available at: https://downloads.regulations.gov/IRS-2019-0039-
8296/attachment_1.pdf.
\48\ IRS ``Guidance Under Section 6033 Regarding the Reporting
Requirements of Exempt Organizations,'' 85 Fed. Reg. 31959, 31960 (May
28, 2020) (collecting examples).
\49\ Id. See also Brief of Arizona, et al., Americans for
Prosperity Found. v. Bonta, U.S. Nos. 19-251 and 19-255, at 4 (March 1,
2021) available at: http://www.supremecourt.gov/Docket
PDF/19/19-251/170569/20210301165759643_19-251%20-
255%20tsac%20Arizona.pdf.
In reality, the rest of Form 990 is far better suited for detecting
problems. For example, Part IV of Form 990 alone contains 38 questions
triggering a requirement to file more information, each designed to
spot particular situations which the IRS has determined may pose
issues. These include questions about grants of money to officers,
directors, and other key employees, as well as to substantial
contributors ``or to a 35% controlled entity or family member of any of
these persons.''\50\ The same information is required for loans, but
details are not provided via Schedule B's general list.\51\ Business
relationships with substantial contributors too must be disclosed, but
that information is also not on Schedule B, but on the publicly-
available sections of Form 990.\52\ And once a problem is detected, it
becomes an enforcement matter with investigation of one organization,
not the warehousing of thousands of organizations' thousands of donors.
A general donor list is not nearly as useful as the rest of Form 990 in
enforcing the tax laws.
---------------------------------------------------------------------------
\50\ IRS, ``Form 990, Return of Organization Exempt form Income
Tax,'' Part IV, Line 27 at 4 available at: https://www.irs.gov/pub/irs-
pdf/f990.pdf.
\51\ Id. at Part IV, Line 26 and Schedule L, Part II.
\52\ Id. at Part IV, Line 28 and Schedule L, Part IV.
Preventing wrongdoing by charities is an important interest, but
greater generalized donor disclosure is not the answer. Already the IRS
struggles to keep taxpayer information secure.\53\ This is a repeated
problem recognized by the Government Accountability Office.\54\ And the
leaks are already used to make political hay against ideological
foes.\55\ Multiple Senators on the Finance Committee have already
called for reforms to better protect taxpayer data.\56\ The government
should be wary of collecting and storing more sensitive donor
information than is necessary.
---------------------------------------------------------------------------
\53\ See, e.g., Andrew Wilford and Andrew Moylan, ``What's the
Fallout From the ProPublica Leak?'', National Taxpayers Union
Foundation (July 27, 2021) available at: https://www.ntu.org/
foundation/detail/whats-the-fallout-from-the-propublica-leak; see also
Michael Tasselmyer, ``IRS Security Breach Impacts 100,000 Taxpayers,''
National Taxpayers Union Foundation (May 28, 2015) available at:
https://www.ntu.org/foundation/detail/irs-security-breach-impacts-
100000-taxpayers-05-28-2015.
\54\ See, e.g., GAO, ``Information Technology: IRS Needs to Address
Operational Challenges and Opportunities to Improve Management,'' GAO-
21-178T, at 6 (October 7, 2020) available at: https://www.gao.gov/
assets/gao-21-178t.pdf.
\55\ See, e.g., Jesse Eisinger, et al., ``The Secret IRS Files:
Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid
Income Tax,'' ProPublica (June 8, 2021) available at: https://
www.propublica.org/article/the-secret-irs-files-trove-of-never-before-
seen-records-reveal-how-the-wealthiest-avoid-income-tax.
\56\ Senator Mike Crapo, et al., Letter to Commissioner Rettig
(December 1, 2021) available at: https://www.finance.senate.gov/imo/
media/doc/finance_r_letter_to_rettig.pdf.
Thank you for considering our comments. We look forward to
answering any questions and working with you and your staff to develop
the necessary reforms to assure regulation of tax-exempt organizations
comports with the needs of proper IRS oversight, as well as the First
---------------------------------------------------------------------------
Amendment.
Respectfully submitted,
Tyler Martinez
Senior Attorney
______
OpenSecrets
Statement of Sheila Krumholz, Executive Director
Chairman Whitehouse, Ranking Member Thune, and members of the
Subcommittee:
On behalf of OpenSecrets, thank you for the opportunity to submit
written testimony at this hearing on ``Laws and enforcement governing
the political activities of tax-exempt entities.''
OpenSecrets is a nonpartisan, nonprofit research organization tracking
and reporting on money in U.S. politics and its effect on elections and
public policy. Our vision is for Americans across the ideological
spectrum to be empowered by access to clear, unbiased information about
money's role in politics and policy so they can use that knowledge to
strengthen our democracy. Our mission is to produce and disseminate
peerless data and analysis on money in politics to inform and engage
Americans, champion transparency, and expose disproportionate or undue
influence.
Millions of dollars from anonymous financiers from across ideological
and partisan spectrums is flowing into U.S. political systems, and the
methods through which it is funneled continue to increase in complexity
and opacity.
The role of groups spending to influence elections using funds from
anonymous donors has increased in recent years, but the vast majority
of spending by those groups is not disclosed to the Federal Election
Commission.
The Flood of Dark Money From 501(c) Groups After Citizens United
The 2022 election cycle's ad spending and political contributions by
nonprofits that do not disclose their donors follows a decade of rising
spending by politically-active nonprofits. Nonprofit organizations
operating under 501(c) of the federal tax code--especially 501(c)(4)
organizations--are a key vehicle used by anonymous donors to quietly
influence U.S. politics.
Federal elections have attracted more than $2 billion in spending and
contributions from nonprofits operating under section 501(c) of the tax
code since 2010, the majority of that coming from dark money groups
that do not disclose their donors.\1\ Political activity by
organizations exempt under IRC 501(c) is not a new phenomenon but it
has increased markedly in recent years.
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\1\ https://www.opensecrets.org/news/2020/01/dark-money-10years-
citizens-united/.
The number of 501(c)(4) organizations registered with the IRS increased
precipitously after 2010, the year Citizens United was decided, as did
the number of 501(c)(4) organizations reporting political activity in
---------------------------------------------------------------------------
Form 990 tax records.
Just 82 organizations operating under 501(c)(4) of the tax code
reported political activity to the IRS in a Form 990 for the 2008
fiscal year and 56 reported political activity during the 2009
political year. In the 2010 fiscal year, and every year OpenSecrets has
tracked since, the number of organizations operating under 501(c)(4) of
the tax code reporting political activity in a Form 990 has exceeded
100.
Treasury Department regulations require organizations operating under
section 501(c)(4) of the tax code to have the promotion of social
welfare as their primary purpose in order to maintain their tax-exempt
status but those organizations do not necessarily only engage in
activities that directly support their stated exempt-purpose.
The IRS has ruled that primarily benefiting partisan interests could
also jeopardize an organization's 501(c)(4) status.
But the IRS has been criticized for failing to issue enough guidance in
this area.
Dark money groups paying for ostensible political advertising under the
guise of issue advocacy or educational purposes and he lack of bright
line rules established by the IRS make it difficult to determine
exactly how much political activity an individual 501(c)(4) nonprofit
could engage in for social welfare to still be considered a group's
primary purpose.
While it is a generally accepted rule of thumb that 501(c)(4)
organizations are not allowed to devote more than half of their
activities to non-exempt activities such as political purposes,
organizations may dilute the percentage of money that goes to politics
with spending on politically charged ads run under the guise of
``issue'' advocacy. They do this by giving money to other groups that
can then spend on elections or by spending on other more legitimate
``social welfare'' activities within the organization's tax-exempt
purpose.
According to a Government Accountability Office report, IRS officials
say the ``absence of bright line rules regarding what constitutes
political campaign intervention'' poses an ``overarching challenge'' to
oversight of politically-active 501(c) organizations, especially
regarding the lack of ``clear and concise guidance'' on the extent to
which 501(c)(4) nonprofits can engage in political campaign
activities.\2\
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\2\ https://www.gao.gov/products/gao-20-66r.
In 2013, the IRS released proposed regulations to clarify the limits on
political campaign intervention by 501(c)(4) social welfare
organizations. But in every annual appropriations bill since 2016,
Congress has prohibited the IRS from implementing rules to clarify
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501(c) politicking.
Even without that additional clarity, it still falls squarely within
the IRS's authority to enforce the existing laws governing 501(c)
political spending.
There is no shortage of examples of 501(c) groups that have spent the
bulk of their funds on ads boosting or attacking candidates, though
that spending is not always reported as political activity.
More than $320 million in ad spending and contributions during the 2020
cycle can be traced back to nondisclosing 501(c) groups aligned with
Democratic or Republican party leadership, accounting for about $3 in
every $10 of dark money in 2020 elections. These 501(c) groups share
office space and resources with party leaderships' super PACs but,
unlike the super PACs, the 501(c) groups can raise and spend unlimited
funds without disclosing their donors.
Spending fueled by undisclosed donors leaves the American public in the
dark about which wealthy donors may have gained influence with party
leaders.
Senate Republican leadership-aligned 501(c)(4) nonprofit One Nation was
the top dark money spender of the 2020 election cycle with around $125
million between political contributions and ads.
Dark Money Is Getting Darker
Some critics of increasing transparency around politically active
501(c) groups point to the comparably small portion of overall spending
reported to the FEC that is made up by 501(c) groups.
While 501(c) spending reported to the FEC makes up only a portion of
the multibillion dollar spending documented in recent election cycles,
501(c) groups funded by secret donors have poured significantly more
money into influencing elections through ad spending that is not
required to be disclosed to the FEC. Nonprofit groups funded by
anonymous donors have also increased contributions to political
committees such as super PACs and Carey committees.
During the 2010 election cycle, 501(c) organizations gave under $7
million in political contributions to federal groups. In the 2020
election cycle, political contributions from 501(c) groups topped $723
million.
The 2020 election cycle also saw record gray money spending, which is
spending on elections by groups funded in part by shell companies and
501(c) groups that do not disclose their donors. The vast majority of
2020 dark money was channeled through donations from 501(c) nonprofits
to outside groups like super PACs that are legally required to disclose
their donors. But despite being required to disclose their donors,
super PACs can just disclose a 501(c) or shell company as their
contributor, hiding the ultimate source of funding.
Overall, 501(c) groups poured more than $820 million into influencing
2020 federal elections. Most of that came from groups that do not
disclose their donors.
Including contributions from shell corporations formed as limited-
liability companies as well as 501(c) groups, the 2020 election alone
attracted more than $1 billion in total dark money, though only a small
portion of that was reported as spending to the FEC.\3\
---------------------------------------------------------------------------
\3\ https://www.opensecrets.org/news/2021/03/one-billion-dark-
money-2020-electioncycle/.
Only about $79 million in spending during the 2020 cycle was reported
by 501(c) groups that don't have to disclose their donors. Super PACs
funded entirely or almost entirely by dark money groups reported over
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38 million more in spending, according to an OpenSecrets analysis.
The 2022 election cycle has already attracted more than $115 million in
contributions from 501(c) groups and spending reported to the FEC,
OpenSecrets' new analysis found.
Many of the top spenders on so-called ``issue'' ads mentioning
candidates are also politically-active nonprofits that do not disclose
their donors. Issue ads aired on TV or radio are only required to be
disclosed in the weeks leading up to an election, and online ads that
avoid expressly advocating for an election outcome are not required to
be disclosed at all.
Nonprofits that do not disclose their donors have reported just $2.8
million to the FEC during the 2022 election cycle.
Most of the spending on these issue ads has not been disclosed to the
FEC because they do not explicitly advocate for the election or defeat
of a candidate within the weeks leading up to an election.
One top dark money spender that has yet to disclose any spending to the
FEC is American Action Network, a 501(c) nonprofit aligned with House
Republican leadership.\4\ According to analyses by OpenSecrets and the
Wesleyan Media Project, the group has spent more than $9.5 million on
TV ads mentioning House candidates and about $800,000 on Facebook ads
during the 2022 cycle--none of which have been disclosed to the FEC.
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\4\ https://www.opensecrets.org/donor-lookup/
results?name=American+Action+Network&order=
desc&sort=D.
In addition to its own spending this cycle, American Action Network has
given more than $11.5 million to Congressional Leadership Fund, a super
PAC aligned with House Republicans that shares staff and resources with
the dark money group.\5\
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\5\ https://www.opensecrets.org/news/2021/08/secret-donors-are-
already-pouring-dark-money-into-2022/.
Senate Republican leadership's dark money group, One Nation, has also
poured millions of dollars into 2022 elections but has yet to disclose
any spending to the FEC. The dark money group has spent over $2.8
million on TV ads and hundreds of thousands of dollars on digital ads
---------------------------------------------------------------------------
tracked by OpenSecrets.
One Nation has avoided disclosing their spending to the FEC by framing
the advertising as issue advocacy since the ads attack Democratic
incumbents without explicitly advocating for their election or defeat.
One Nation has also given $14.4 million to Senate Leadership Fund, a
super PAC tied to Senate Minority Leader Mitch McConnell (R-KY) that
shares staff and resources with the dark money group.\6\ The dark money
group makes up the majority of the super PAC's funding, leaving the
ultimate donors fueling the group undisclosed.
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\6\ https://www.opensecrets.org/outsidespending/
contrib.php?cycle=2022&cmte=C00571703.
During the 2020 election cycle, One Nation did not disclose any
spending to the FEC but poured about $125 million into political
contributions and ads--more untraceable money than any other dark money
group.\7\
---------------------------------------------------------------------------
\7\ https://www.opensecrets.org/news/2020/10/senate-gop-dark-
money/.
Dark money groups aligned with Democratic party leadership have also
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poured millions of dollars into influencing 2022 elections.
Congressional Democrats' dark money group, House Majority Forward, has
spent more than $2.3 million on TV ads, according to figures from the
Wesleyan Media Project, and $453,000 on Facebook ads.
House Majority Forward gave another $2.5 million in contributions to
House Majority PAC, a super PAC aligned with House Democratic
leadership that shares resources with House Majority Forward.\8\
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\8\ https://www.opensecrets.org/outsidespending/
contrib.php?cmte=C00495028&cycle=2022.
Democrats' Senate Majority PAC received $14.3 million from Majority
Forward, a dark money group that shares the super PAC's staff and
resources.\9\ Majority Forward has spent more than $2.1 million on TV
ads and about $250,000 on Facebook ads during the 2022 cycle.
---------------------------------------------------------------------------
\9\ https://www.opensecrets.org/outsidespending/
contrib.php?cmte=C00484642&cycle=2022.
While some of the Facebook ads are through Majority Forward's own
Facebook page, the group also pays for ads on regional-themed pages.
Most recently, Majority Forward became the sole funder of about $74,000
in digital advertising for Nevada Unido, a Facebook page created in
March that has mostly boosted Sen. Catherine Cortez Masto (D-NV) with
messages about how the senator is ``standing up for victims of human
trafficking'' and ``working to protect our communities and fighting for
a strong Nevada economy.''\10\
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\10\ https://www.facebook.com/ads/library/
?active_status=all&ad_type=political_and_issue_ads
&country=US&view_all_page_id=107498775216001&sort_data=desc&sort_data=re
levancy_month
ly_grouped&search_type=page&media_type=all.
Several groups across the country received the bulk of their funds from
501(c) groups aligned with national party leadership. A recent example
is Coalition for a Safe and Secure America, which spent mailers aimed
at depressing Republican voter turnout during the 2022 election and
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received the bulk of its funds from Senate Democrats' Majority Forward.
``Pop up'' dark money groups can form shortly before an election and
spend millions of dollars without even trying to give the appearance of
engaging in activities other than politicking since there are generally
few consequences when the group does not plan to remain active after
the election.
A recent example of a pop-up dark money groups is Better Tomorrow for
Tennessee, a 501(c)(4) organization with little footprint other than
giving money to a super PAC named Tennesseans for a Better Tomorrow
that spent more than $1 million dollars on a toss-up Senate race in the
2018 midterm elections then closed up shop less than a month after
election day.\11\
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\11\ https://www.opensecrets.org/news/2019/01/dark-money-fueled-
super-pac/.
Another 501(c) called Broken Promises spent more than 99% of its funds
on political activity backing a spoiler candidate in a Florida's 2018
state Senate race but told the IRS it didn't spend anything on
---------------------------------------------------------------------------
politics.
An older example of this is a group called Carolina Rising, which was
formed shortly before 2014 elections then spent 97% of its funds on ads
in North Carolina's Senate race then shut down. Carolina Rising did not
voluntarily disclose its donors, but an OpenSecrets' investigation
later found that the group was entirely funded by Crossroads GPS.\12\
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\12\ https://www.opensecrets.org/news/2015/10/political-nonprofit-
spent-nearly-100-percent-of-funds-to-elect-tillis-in-14/.
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Secretly-funded 501(c) Groups Increase the Risk of Foreign
Interference in U.S. Elections
Due to the lack of disclosure requirements, 501(c) dark money groups
provide a vehicle for foreign interests to quietly influence U.S.
elections.
While the lack of transparency around these groups makes it nearly
impossible to get a comprehensive total of how much dark money comes
from foreign sources, OpenSecrets has tracked several 501(c)
organizations that have reported foreign activities and foreign
fundraising in their tax returns during the same year they reported
political activity--raising the stakes even further.
Foreign nationals are prohibited from giving money to influence U.S.
elections but are able to spend unlimited sums to politically active
nonprofits and even fund issue advocacy ads that may mention a
candidate so long as the ads do not call for a candidate's election or
defeat.
Nonprofits reporting foreign activities include dark money groups that
spent tens of millions of dollars to influence U.S. elections in recent
years.
The National Rifle Association started reporting foreign fundraising in
2018 and continued to disclose foreign program activities through its
most tax return filed last year.\13\, \14\ The NRA has given
over $141 million in contributions to candidates during the 2022
elections cycle.
---------------------------------------------------------------------------
\13\ https://www.opensecrets.org/news/2019/12/nra-discloses-
spending-on-foreign-fundrais
ing/.
\14\ https://www.opensecrets.org/news/2019/12/nra-discloses-
spending-on-foreign-fundrais
ing/.
The U.S. Chamber of Commerce has received revenue from foreign
corporations that are dues-paying members. In some of the most recent
years it reported foreign revenue and program services, the Chamber
spent over $9.5 million on 2018 elections and $29.3 million on 2020
elections.\15\
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\15\ https://www.opensecrets.org/political-action-committees-pacs//
C00053553/summary/2020 See eg. https://theintercept.com/2020/02/15/
dark-money-irs-reporting-501c/.
Despite the risk, a 2020 report from the Government Accountability
Office revealed that the IRS doesn't check nonprofit tax records for
signs of illegal foreign money in U.S. elections.\16\ The finding was
used to justify policy change under the former President Donald Trump's
administration that now enables 501(c) nonprofits--including
politically active dark money groups--to no longer report donor names
or addresses to the tax agency unless they are requested under court
order or as part of an examination.\17\
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\16\ https://www.opensecrets.org/news/2020/08/parties-dark-money-
to-2020-elections/.
\17\ https://www.opensecrets.org/news/2020/02/dark-money-steers-
millions-to-super-pacs-2020/.
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The Need for Modernization
Ensuring the IRS has the resources to fulfill public records requests
in a timely way is crucial for ensuring transparency.
More standardized electronic reporting of financial information,
especially information about 501(c) spending mentioning candidates for
elected office, would also help the IRS get a more complete accounting
of political campaign activities that may be couched as educational or
issue advocacy.
Until recently, tax-exempt groups were only required to file returns
electronically if they have total assets of $10 million or more at the
end of the tax year and the organization files at least 250 returns of
any type during the calendar year ending with or within the
organization's tax year and file at least 250 returns of any type
during the calendar year ending within the organization's tax year.
Many 501(c) groups that pop-up and spend significant sums of money on
an election before disappearing do not leave over $10 million in assets
at the end of the tax year in order to trigger that requirement so only
a portion of groups actually show up in the e-file data. More
widespread e-filing requirements streamline disclosure processes and
allow for more timely access to crucial data contained in Form 990
returns.
Fiscal sponsorship of politically active groups poses new challenges to
donor disclosure since there is no standardized way to report fiscal
sponsorship arrangements in a Form 990. The form includes space for a
``DBA'' but several politically-active 501(c) groups have multiple
fictitious names or trade names registered with state agencies that may
not be listed on their Form 990 at all.
Donors who steer money to projects operating under the umbrella of a
fiscal sponsor report donations to the fiscally sponsoring organization
rather than the project, adding an extra layer of secrecy that further
obscures the source of funds. Those sponsored projects are not required
to file separate annual 990 tax returns with the IRS, and the fiscal
sponsor is not necessarily required to report grants to the project in
its annual 990 tax filings because the fiscally sponsored initiatives
are not technically independent entities for tax purposes.
Although multiple federal agencies are tasked with oversight of 501(c)
groups spending to influence U.S. elections, this more often results in
agencies pointing fingers at each other than duplicative enforcement.
A 2020 Inspector General report on nonprofit political activity found
that the IRS did not ``adequately document research related to the
allegation, tax-exempt laws evaluated, or the rationale'' and failed to
forward over a thousand cases of impermissible activity to the
appropriate committee. A 2021 Treasury inspector general report found
that the IRS examined just 0.13% of 501(c) tax-exempt nonprofit's Form
990 tax returns for the fiscal year of 2018 and about 20% of Form 990
returns selected for examinations were not examined.\18\
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\18\ https://www.treasury.gov/tigta/auditreports/2021reports/
202110013fr.pdf.
Thank you for your attention to our concerns on this critical issue. We
would be honored to work with members further to address concerns
related to politically-
---------------------------------------------------------------------------
active 501(c) groups.
______
People United for Privacy
5955 W. Peoria Ave., #6282
Glendale AZ 85302
(202) 743-2118
May 4, 2022
The Honorable Sheldon Whitehouse The Honorable John Thune
United States Senate United States Senate
Washington, DC 20510 Washington, DC 20510
Re: Support for Citizen Privacy and Opposition to Harmful Anti-Privacy
Legislative and Regulatory Proposals
Dear Chairman Whitehouse, Ranking Member Thune, and Members of the
Senate Finance Committee's Subcommittee on Taxation and IRS Oversight:
On behalf of People United for Privacy (PUFP),\1\ I submit the
following comments for the May 4, 2022 hearing in the United States
Senate Committee on Finance's Subcommittee on Taxation and IRS
Oversight to examine ``Laws and Enforcement Governing the Political
Activities of Tax Exempt Entities.'' Associational privacy is an
enduring First Amendment right that has been repeatedly affirmed by the
United States Supreme Court and shares widespread support among
Americans regardless of their political leanings. PUFP exists to
safeguard the freedom of speech and association rights of nonprofit
supporters in America--regardless of their beliefs or the level of an
individual's financial support for the causes of their choice.
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\1\ People United for Privacy (PUFP) defends the rights of all
Americans--regardless of their beliefs--to come together in support of
their shared values. Nonprofit organizations perform important work in
communities across the United States, and we protect the ability of
nonprofit donors to support causes and exercise their First Amendment
rights through private giving.
In last year's ruling in Americans for Prosperity Foundation (AFPF) v.
Bonta, the Supreme Court reaffirmed that all Americans have the right
to exercise their First Amendment freedoms privately. PUFP agrees
strongly with the Court's decision. We believe it is essential for
individuals to be free to express their views through the causes they
support without being personally exposed to a political firestorm or
governmental retaliation, especially in today's hyperpolarized and
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caustic political climate.
On multiple occasions, the Supreme Court has recognized that forcing an
organization to release its member and donor lists to the government
not only divulges the First Amendment activities of individual members
and donors but may also deter such activities in the first place.
Individuals may legitimately fear any number of damaging consequences
from disclosure, including harassment, adverse governmental action, and
reprisals by an employer, neighbor, or community member. Or they may
simply prefer not to have their affiliations disclosed publicly or
subjected to the possibility of disclosure for a variety of reasons
rooted in religious practice, modesty, or a desire to avoid unwanted
solicitations. For nonprofits, privacy is especially important for
organizations that challenge the practices and policies of the very
governments that seek the identities of the group's members and
supporters.
Over 280 groups signed 43 amicus briefs in support of the petitioners
in AFPF v. Bonta.\2\ These signers represent a wide range of causes and
political preferences, including progressive advocacy groups,
conservative think tanks, religious organizations, trade associations,
animal and human welfare advocates, educational institutions, community
services, and arts and culture-focused organizations. As Chief Justice
Roberts wrote in the Court's majority opinion, ``[t]he gravity of the
privacy concerns in [the disclosure] context is further underscored by
the filings of hundreds of organizations as amici curiae in support of
the petitioners. Far from representing uniquely sensitive causes, these
organizations span the ideological spectrum, and indeed the full range
of human endeavors: from the American Civil Liberties Union to the
Proposition 8 Legal Defense Fund; from the Council on American-Islamic
Relations to the Zionist Organization of America; from Feeding
America--Eastern Wisconsin to PBS Reno. The deterrent effect [of
disclosure] feared by these organizations is real and pervasive. . .
.'' One thing the nonprofit community can agree on is the importance of
defending our right to engage in free speech and to debate issues that
we may disagree on, as well as the need to protect citizen privacy and
the rights of individuals to exercise their First Amendment rights
privately.
---------------------------------------------------------------------------
\2\ See ``Free speech case attracts support from nearly 300 diverse
groups,'' Americans for Prosperity. Available at: https://
americansforprosperity.org/wp-content/uploads/2021/04/AFPF-v-Becerra-
Amici.pdf (April 2021).
Beyond widespread support for this First Amendment right in the
nonprofit community, polling confirms strong support for citizen
privacy--and fear of disclosure--among Americans as well. A Harvard
CAPS-Harris poll released in March 2021 found that 64% of respondents
believe a ``growing cancel culture'' threatens their freedom while 36%
of those surveyed agreed that cancel culture is a ``big problem.''\3\
Only 13% percent of participants replied that ``cancel culture'' is
``not a problem.'' Additionally, the poll found that 54% of respondents
were ``concerned'' that voicing their opinions online could result in
lost employment or the shuttering of their social media accounts. These
worrying findings reinforce the conclusions of a summer 2020 poll from
the Cato Institute, which verified that 62% of Americans across the
political spectrum and various identity groups have political views
that they are afraid to share in our current political climate.\4\
Further, 32% of respondents in that poll were worried about being
passed by for job opportunities solely because of their political
views. If Americans were forced to publicize the nonprofit causes they
support, it is clear many would refrain from giving at all.
---------------------------------------------------------------------------
\3\ Brittany Bernstein, ``Poll: Majority of Americans See Cancel
Culture as Threat to Freedom,'' AOL. Available at: https://www.aol.com/
news/poll-majority-americans-see-cancel-213920486.html (March 29,
2021).
\4\ Emily Ekins, ``Poll: 62% of Americans Say They Have Political
Views They're Afraid to Share,'' Cato Institute. Available at: https://
www.cato.org/survey-reports/poll-62-americans-say-they-have-political-
views-theyre-afraid-share (July 22, 2020).
In recent weeks, I have heard dangerous comments from both Republican
and Democratic Members of Congress critical of groups that advocate for
the beliefs of American citizens. Such rhetoric typically invokes the
hollow term ``dark money,'' which has no legal definition and is used
inconsistently and pejoratively to describe a wide range of groups and
activities that the person speaking dislikes. Many groups criticized
for their advocacy on behalf of their supporters are, in fact,
longstanding nonprofits supported by large and diverse memberships
throughout the country--the kind of groups that set aside other policy
disagreements last year to join together in AFPF v. Bonta to defend the
privacy of their supporters. Some of those groups have existed for over
a century and perform important work to offer valuable perspectives on
government and public policy. Whether criticism of these groups comes
from the left or the right, ``dark money'' is often just a cheap smear
against nonprofit organizations that value their members' privacy and
that are working to ensure those in power hear the voices of American
---------------------------------------------------------------------------
citizens.
Nonprofit organizations are forces for good and have long played a role
in educating Americans and policymakers about complex issues.
Nonprofits also serve as a shield for people who are uncomfortable
speaking publicly about an issue on their own, a vital societal
function. While some donors may like having their name listed publicly
as a supporter of a cause, many donors dislike or fear such attention
because they value their privacy. If anything, today's highly charged
political climate gives Americans even more reason to keep their
beliefs and giving private. Nonprofit organizations play a crucial role
in protecting the voices of many citizens who would otherwise remain
silent.
Unfortunately, there are numerous examples of Americans who have been
targeted because their private support for a cause was exposed. Earlier
this year, tens of thousands of Americans donated to the Freedom Convoy
of truckers protesting COVID-19 vaccine mandates. That donor database
was hacked, exposing the personal information of donors to the cause.
The Washington Post and other media outlets wasted no time launching a
harassment campaign, demanding those donors explain their support--
regardless of the amount of their donation. Both $50 and $90,000 donors
were identified in an article published by The Post. Reporting on the
illegal database hack led to outrage on social media from both sides of
the aisle, with Senator Ted Cruz (R-TX) and Congresswoman Ilhan Omar
(D-MN) finding common ground by pointing out that the only reason to
expose small donors is to encourage people to harass them for their
beliefs.\5\
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\5\ See Timothy H.J. Nerozzi, ``Ted Cruz asks if civil liberties
groups will support Canadian freedom truckers as they clash with
police,'' Fox News. Available at: https://www.foxnews.com/politics/ted-
cruz-civil-liberties-groups-canadian-truckers-clash-police (February
19, 2022) and Darragh Roche, ``Ilhan Omar Defends `Freedom Convoy'
Donors After GiveSendGo Leak,'' Newsweek. Available at: https://
www.newsweek.com/ilhan-omar-defends-freedom-convoy-donors-givesendgo-
leak-1680116 (February 17, 2022).
In another illustrative story, a homeless shelter in Atlanta, Georgia
that houses an average of 500-700 men, women, and children each night
was targeted by city officials who sought to claim the land it sits on
for other development projects. When the shelter fell behind on its
water bill, threatening to give those politicians the land they sought,
several anonymous donors contributed enough to enable the shelter to
pay its bill. When local media inquired about the donors' identities,
the shelter's director explained their desire to remain anonymous:
``Anytime a donor appears and is public with us, that donor gets
attacked.''\6\
---------------------------------------------------------------------------
\6\ ``Anonymous donors help pay water bill for homeless shelter,''
WSBTV. Available at: https://www.wsbtv.com/news/local/anonymous-donors-
help-pay-water-bill-homeless-shel/138014681/ (September 26, 2014).
It is not difficult to imagine a nonstop wave of targeting and
harassment campaigns across the country if donor information is
routinely published in a searchable government database. The First
Amendment would effectively be a dead letter as Americans would
sacrifice their free speech rights to preserve their privacy and save
themselves from lost employment, physical harm, and other forms of
harassment and intimidation. Frequently, this silencing of debate
appears to be exactly what nonprofit donor disclosure proponents hope
---------------------------------------------------------------------------
to accomplish.
To the extent some members of this Subcommittee wish to propose
legislative or regulatory prescriptions that would impose onerous
disclosure mandates on nonprofits, we encourage Members to do the
following:
(1) Oppose ``For the People Act'' and ``Freedom to Vote Act''-
Style Donor Disclosure Policies. Buried among a litany of unrelated
provisions,\7\ the misleading and Orwellian sounding ``For the People
Act'' (S. 1) and ``Freedom to Vote Act'' (S. 2747) contain multiple
policies that would force public exposure of the names and home
addresses of Americans that give to nonprofit groups. This outcome
would chill the speech of issue advocacy groups and nonprofits across
the political spectrum.
---------------------------------------------------------------------------
\7\ PUFP takes no position on the other provisions in this
expansive package that have no impact on citizen privacy protections
and nonprofit advocacy.
In particular, standalone legislation contained in S. 1, like
the so-called ``DISCLOSE Act,'' ``Stand By Every Ad Act,'' and ``Secret
Money Transparency Act,'' would, in different ways, expose sensitive
information about Americans' support for nonprofit causes for no reason
other than an organization's decision to voice an opinion in
legislative and policy debates. As Senator Chuck Schumer (D-NY) boasted
when first introducing the ``DISCLOSE Act'' in 2010, ``[t]he deterrent
effect'' of the bill's nonprofit donor disclosure provisions ``should
not be underestimated.''\8\ Rather than a disturbing symptom, the
chilling impact of the ``DISCLOSE Act's'' (S. 443, S. 2671) exposure
mandate is the intent. This draconian measure would force organizations
to report many of their donors to the Federal Election Commission for
engaging in common types of nonprofit communications, including on the
Internet, and, in some cases, when one nonprofit gives a grant to
another nonprofit. The aggressive mandates in this bill would violate
Americans' privacy, facilitate harassment, and decrease civic
engagement.
---------------------------------------------------------------------------
\8\ T.W. Farnam, ``The Influence Industry: DISCLOSE Act could deter
involvement in elections,'' The Washington Post. Available at: https://
www.washingtonpost.com/wp-dyn/content/article/2010/05/12/
AR2010051205094.html (May 13, 2010).
The ``Stand By Every Ad Act'' (H.R. 1171), which has been
included in some versions of the ``DISCLOSE Act,'' would go a step
further by requiring nonprofits to list the names of their top donors
in lengthy disclaimers on communications about public policy. This
senseless invasion of privacy will make it more burdensome for groups
to fulfill their mission and dangerously expose citizens to uninvited
public scrutiny. In many cases, the named donor may not be aware of or
even support the message that bears their name. In effect, the
disclaimer will shift the public's focus onto a nonprofit's supporters
rather than the substance of a group's message, accelerating the
---------------------------------------------------------------------------
erosion of quality public discourse about the issues of the day.
The ``Secret Money Transparency Act'' in S. 1 and its
nefarious cousin, the ``Spotlight Act'' (S. 215), would eliminate
safeguards placed on the Internal Revenue Service that prevent the
agency from abusing its power. After the IRS was caught systematically
harassing right-of-center nonprofits, restrictions were placed on the
agency to prevent it from regulating nonprofit organizations' speech
and Americans' privacy.
The ``Secret Money Transparency Act'' repeals policies
repeatedly passed by Congress that prohibit the agency from using
funding to issue a rulemaking that would crack down on issue advocacy
by nonprofits and jeopardize the privacy of nonprofit supporters. The
``Spotlight Act'' goes a step further by reversing recent reforms that
eliminated the requirement for certain nonprofits to report their
supporters' confidential information to the agency and requiring
disclosure to the IRS of the names and addresses of all Americans that
give more than $5,000 annually to many types of nonprofits. This would
render nonprofit supporters vulnerable to doxxing and harassment by
government officials for information the IRS has said it does not need
to enforce the tax code.\9\
---------------------------------------------------------------------------
\9\ See Allen Dickerson, ``Comments on REG-102508-16: Guidance
Under Section 6033 Regarding the Reporting Requirements of Exempt
Organizations,'' Institute for Free Speech. Available at: https://
www.ifs.org/wp-content/uploads/2019/11/2019-11-04_IFS-Comments_IRS_REG-
102508-16_Exempt-Org-Reporting-Requirements.pdf (November 4, 2019).
Each of these measures, and those like them, should be
rejected for the devastating impact they would have on the privacy
---------------------------------------------------------------------------
rights of Americans of all stripes and the diverse causes they support.
(2) Resist Congressional Pressure for Rulemaking Efforts at the
IRS that Would Trample Nonprofit Advocacy and Citizen Privacy. During
the Obama administration, the Internal Revenue Service admitted that it
targeted conservative nonprofits for more than two years leading up to
the 2012 presidential election.\10\ After being forced to acknowledge
this reprehensible practice, the IRS proposed a rulemaking that would
have codified many of these improper targeting practices and severely
chilled issue speech by nonprofits. As a result of the proposal's
harmful impact on nonprofit advocacy, it received widespread bipartisan
opposition from groups typically on opposite sides of policy issues,
such as the AFL-CIO and National Right to Work Committee and the
American Civil Liberties Union and American Conservative Union.\11\
Thanks to such overwhelming disapproval, the rulemaking stalled until
Congress stepped in and halted the effort.
---------------------------------------------------------------------------
\10\ Abby D. Phillip, ``IRS admits targeting conservative groups,''
ABC News. Available at: https://abcnews.go.com/Politics/irs-admits-
targeting-conservative-groups/story?id=19151646 (May 10, 2013).
\11\ ``Analysis: 97% of Comments from 955 Organizations, Experts,
and Public Officials Oppose IRS's Proposed 501(c)(4) Rulemaking in its
Current Form,'' Institute for Free Speech. Available at: https://
www.ifs.org/wp-content/uploads/2014/07/2014-07-08_IFS-One-
Pager_Drapkin_IRS-Rulemaking-Organizational-Expert-And-Public-Official-
Comment-Analysis.pdf (July 8, 2014).
In response, Congress adopted a budget rider that restricts
the agency's ability to adopt regulations that police and chill speech
and violate citizen privacy. This policy enjoys bipartisan support and
has been included in successive federal spending agreements since 2013,
including in the most recent budget bill that was signed by President
Biden in mid-March. The IRS is a tax collection agency, not the speech
police, and it has no business surveilling the activity of nonprofit
organizations or their supporters. This budget rider prevents the IRS
from writing new regulations to limit political speech by nonprofit
groups. Any pressure by Members of Congress to undertake a similar
rulemaking is prohibited by law for the next fiscal year, would receive
widespread bipartisan opposition from the nonprofit community, and
---------------------------------------------------------------------------
should be summarily rejected.
(3) Support the Privacy of Nonprofit Donor Lists by Passing the
``Don't Weaponize the IRS Act'' (S. 1777) and the ``Simplify, Don't
Amplify the IRS Act'' (S. 4046). Taken together, these measures ensure
that the IRS does not collect and store nonprofit donors' private
information--material the IRS does not need to enforce the tax code--
and will protect groups regardless of their political ideology or
beliefs. PUFP is proud to endorse both bills. Rather than regulate
further in this sensitive area, Congress should be proactive in
preventing the IRS from demanding nonprofit donor information that the
agency does not want or need.
Privately supporting causes--and the organizations advancing those
causes--is a fundamental freedom that is robustly protected by the
First Amendment. As Members of Congress, you have taken an oath to
support and defend the Constitution of the United States. On behalf of
the millions of American citizens represented by organizations that
speak on their behalf, we strongly urge you to protect nonprofit donor
privacy and reject harmful donor disclosure mandates.
Sincerely,
Heather Lauer
Executive Director
______
Public Citizen
Bright Lines Project
215 Pennsylvania Avenue, SE
Washington, DC 20003
(202) 546-4996
https://www.citizen.org/article/bright-lines-project-4/
Thank you for holding this important hearing. Given their prominence in
the national consciousness, nonprofits have in important role to play
in shaping civic discourse. They can and should do political activity
(within the legal limits) to further their missions.
Decades of decisions from the Internal Revenue Service (IRS), the
Treasury Department (Treasury), Congress, and the Supreme Court have
distorted the rules governing nonprofit political activity, separating
nonprofits from what Congress intended when writing section 501(c).
Social welfare organizations in particular have become conduits for
secret election spending rather than working to boost the country's
social welfare as they were designed to do. These organizations have
become attractive to powerful donors wanting to influence elections
while concealing their identity. The 2010 Citizens United decision, in
combination with revisions of the gift tax rules, spurred the creation
of partisan (c)(4) organizations designed specifically to exploit
existing laws that were never designed for this new type of election
spending.
Congress and the Treasury Department must act to clarify the rules
surrounding political activity for nonprofits to ease enforcement,
simplify true civic participation activities for nonprofits, and stop
bad actors willing to flout the rules.
In this submission, we recommend several steps to rectify what's gone
wrong and put nonprofits back on firmer ground.
Congress should:
Pass legislation outlining objective standards for nonprofit
political activity applicable to all 501(c) organizations, such as the
Bright Lines Project proposal;\1\
---------------------------------------------------------------------------
\1\ http://brightlinesproject.org/wp-content/uploads/2015/06/2014-
11-15-draft-Regs-and-Cover-FINAL.pdf.
---------------------------------------------------------------------------
Increase IRS funding for nonprofit enforcement;
Approach IRS funding decisions apolitically; and
Remove the budget rider preventing Treasury from making rules in
this area for 501(c)(4)s.
The Treasury Department should:
Begin a rulemaking to clarify political activity rules for 501
(c)(3) organizations, which it can still do in advance of the repeal of
the rider;
Rescind the 2020 rule ending the requirement that nonprofits
submit form 990 section B to the IRS.
Actions for Congress
Pass Legislation Creating a Comprehensive Framework of Objective Rules
and Safe Harbors for All Nonprofits
The Bright Lines Project was drafted nearly a decade ago by a group of
nonprofit attorneys (the drafting committee) who repeatedly heard from
their clients that better rules were needed in this area (even before
Citizens United and the IRS scandal of 2013, which made the need for
new rules more obvious still). The rules are based around the rules
governing (c)(3) lobbying, rules that have worked well for decades.
The drafting committee set out to create a comprehensive framework
covering the full range of potential communications and transactions,
defining safe harbors on one side and per se intervention on the other,
with a much narrower range for prosecutorial discretion in the middle.
This would achieve improved voluntary compliance--with more predictable
standards of conduct--and have the immediate effect of invigorating
nonprofit participation in our democracy.
The plan consists of objective rules designed to be easy to follow by
nonprofit workers and IRS enforcers alike. The rules clearly define and
differentiate between per se intervention and candidate advocacy, and
lay out a safe-harbor system designed to encourage truly nonpartisan
civic activity.
The rules define per se political intervention first, obvious political
activity such as expressly advocating for the election or defeat of a
candidate or political party. They specify that any communication that
clearly refers to and expresses a view on a political candidate would
generally be deemed political activity unless the communication fits
within one of several specific exceptions that would protect:
Legitimate grassroots advocacy on current policy issues;
Nonpartisan efforts to educate the public on candidate policy
positions; and
Measured responses to candidate statements about the
organization or its core issues.
These exceptions wouldn't be available for paid ``mass media''
communications--such as TV, radio, newspaper, direct mail, online
advertising, and phone banks.
The plan recognizes that subjective analysis may be helpful in some
cases, and so keeps the current test as a back-up in the unlikely event
that the full analysis does not provide a clear answer.
Boost IRS Funding Generally, and for Nonprofit Enforcement
In addition, Congress should boost the IRS's funding in general and for
nonprofit enforcement in particular. In 2018, the Tax Inspector General
found \2\ that many complaints of impermissible political activity by
nonprofits were not being referred to the correct committee for further
investigation and potential audit. Increased staffing and funding of
the Tax Exempt and Government Entities division should be prioritized
to ensure that the recommendations of that report are fully
implemented, and that adequate oversight of nonprofit political
activity occurs.
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\2\ https://www.tigta.gov/
?utm_campaign=Washington%20Snapshot&utm_source=hs_email&ut
m_medium=email&utm_content=66618699&_hsenc=p2ANqtz-
9ixaIODqHpcw3Lg3ePCaLlohXo8v
YpqEpbWgd3phs3nF1GaHOjQYHtjprqQTrgo2xb90oxp3u8uNaMTAb52dO1Epld-
KV_3WOXcY8M
KJireMo77v4&_hsmi=66618699.
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Approach IRS Funding Without Political Bias
The IRS's cash-strapped position increases the risk that fear of
congressional retaliation could have a chilling effect on what issue
areas the IRS and Treasury undertake drafting guidance or issuing
NPRMs. Drafting new guidance or proposed rules, considering public
comment to those rules, and revising and issuing new rules are resource
consuming endeavors, particularly for an agency that lacks adequate
funding. Fear of congressional punishment through appropriations could
stop Treasury and the IRS from undertaking vital work to solve the
problems this subcommittee has identified.
Lift the Appropriations Rider Banning the Treasury Department From
Making Rules Surrounding 501(c)(4) Political Activity
Over and over for years now, Congress has renewed an appropriations
rider in the Financial Services and General Government title that
prevents the IRS and Treasury from clarifying the rules for political
activity for social welfare organizations. This rider, inserted without
transparency or debate in the final negotiations of the 2015
appropriations bill, prevents Treasury from taking its inspector
general's own advice on how best to avoid ``scandals'' like that of
2013. In fact, the rider stopped a Treasury rulemaking on that very
issue in its tracks.
Partisan budget riders are no way to make good law, and do not belong
in budget negotiations. Congress should remove this rider and allow
Treasury to make better rules for all nonprofits.
Actions for Treasury
Begin a Rulemaking for 501(c)(3) Organizations
It may seem counterintuitive that detailed standards for political
activity would help section 501(c)(3) organizations. In fact, they have
a particular need of guidance because of their significant presence in
the U.S. and the dire consequences they face for crossing the nebulous
line into impermissible political activity.
They are the most numerous among tax-exempt organizations; they have
the most assets; and they, alone, risk revocation of their tax-exempt
status as a result of any political activity, however minor.
Furthermore, many (c)(3) organizations seek to engage in the democratic
process, especially in an election year, in ways that have long been
accepted and even encouraged. In fact, both Congress and Treasury have
long recognized that (c)(3)s play an invaluable role in preserving a
healthy democratic system and an engaged citizenry. Yet, the experience
of the Bright Lines Project drafting committee indicates that a lack of
clear guidance in the political space has made many (c)(3)s overly
risk-averse, causing these organizations to shy away from even the most
benign nonpartisan efforts altogether. This creates a tremendous
chilling effect on the speech of law-abiding 501(c)(3) organizations
and deters long-standing civic engagement and voter education efforts.
Perversely, the current system can also empower more brazen 501(c)(3)
organizations to engage in overt efforts to influence election outcomes
with little fear of enforcement action.
As the rest of this submission indicates, the best way to help
nonprofits would be to issue rules that apply to all 501(c)
organizations. However, in absence of congressional action lifting the
rider restricting clearer definitions for (c)(4)s, a rulemaking
providing guidance for (c)(3)s would be a good start.
Rescind the 2020 Rule Ending the Requirement That Some Nonprofits
Provide Donor Information to the IRS
In 2020, the Treasury Department ended the requirement that nonprofits
that do political activity submit basic information about their donors
to the IRS. Rescinding that requirement eliminated one of the only
opportunities for enforcers to find and stop illegal foreign
interference into our election system. The change also makes it harder
to adequately enforce the rules, because bad-actor nonprofits will have
more notice before an audit, giving them time to cook their books.
Treasury should reinstate this requirement and take this opportunity to
review other ways to prevent foreign election spending and other
malfeasance.
Public Citizen on behalf of the Bright Lines Project deeply appreciates
the opportunity to submit testimony for this important hearing, and we
applaud the subcommittee for exploring these vital issues.
For further information or with any questions, please contact:
Emily Peterson-Cassin
[email protected]; 202-445-1401o
[all]
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