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May 9, 2016
Should Political Nonprofits Disclose More Frequently?
by Paul C. Barton

Full Text Published by Tax Analysts®

Not only do many politically active nonprofits operate with dark money from undisclosed donors, but they carry out their work behind another shield, some say: the time lag before having to report their spending to the IRS.

Long before the IRS receives a politically oriented nonprofit's Form 990, "Report of Organization Exempt From Income Tax," the election involved will have come and gone. With easily available extensions, a nonprofit exempt under section 501(c)(4) can have up to 10-1/2 months after the end of its fiscal year before filing its return.

In an ideal world, say advocates of campaign finance reform, there would be more frequent and thorough disclosure of nonprofits' political spending. But, they say, that would require a Republican Congress, one already hostile to policing these groups, to change either the tax code, federal election law, or both.

Meanwhile, there are some reports they have to file in a more timely fashion. For instance, they must report to the Federal Election Commission, sometimes in as little as 24 hours, after they pay for an ad that advocates the election or defeat of a candidate for federal office. A 24-hour disclosure rule also applies to some television or radio ads purchased within 30 days of a primary election or 60 days of a general election that mention specific candidates in the context of an issue but don't expressly advocate their election or defeat. These are called "electioneering communications."

Within a two-year federal election cycle, however, there could be spending on issue ads that fall outside those time windows, or on other ads easily construed as political, that are not included under political spending on Form 990. John Pomeranz of Harmon, Curran, Spielberg & Eisenberg LLP gave the example of ads that might feature Republican senators up for reelection this fall and that mention their refusal to consider the nomination of D.C. Circuit Chief Judge Merrick B. Garland to the Supreme Court.

As a result, Form 990 totals can fall far short of telling the whole story, complicating the all-important evaluation of whether nonprofits are spending less than half their budget on politics, the requirement for keeping their exempt status.

"There are things that almost anyone would acknowledge as having a possible impact on an election that the IRS might well agree are not reportable as political activity on the [Form] 990," Pomeranz told Tax Analysts.

Added Notre Dame law professor Lloyd Hitoshi Mayer: "I agree that the annual tax filing system is a poor fit with the frantic pace of electoral activities. By the time the IRS or the public receives the information, the relevant election is long past."

But Cleta Mitchell of Foley & Lardner LLP, who represents several conservative 501(c)(4) organizations, says the reporting on issue ads is done even if the communications are not election related. "These morons on the left act like" that rule has never been implemented, she said.

Further, many states have enacted laws governing nonprofits' issue ads, defining them more broadly, Mitchell said, adding that the calls for more prompt disclosure aren't "based on reality or the laws, many of which have been the result of demands by the very people now whining about the absence of reporting."

Presidential-Year Spending

So far for the 2016 elections, the Center for Responsive Politics has been able to identify $22 million in dark money spending by 501(c)(4)s, as well as groups exempt under section 501(c)(6). It's nearly three times the amount at roughly the same point in the last presidential election year. After all was said and done in 2012, dark money spending totaled $308.69 million, the center says.

"The $22 million is purely what has been reported to the FEC," Robert Maguire, lead nonprofit investigator at the center, told Tax Analysts, adding "the actual total is much higher."

The money in this election cycle has gone to fund nearly 24,000 television ads for presidential and congressional candidates as of mid-February, the center reports. At a similar point in the 2012 cycle, the total was less than half that.

Some of the spending not captured in that figure involves mailers and robocalls made under the guise of issue advocacy, Maguire said.

As the election year goes on, he said, the center also expects to find super PACs funded entirely by 501(c)(4)s or limited liability companies that front for anonymous donors, adding to the dark money totals.

The Form 990, Maguire said, helps put context around a nonprofit's spending or seeing relationships between groups -- "grants" given by a 501(c)(4) to another, for instance -- but the situation could be improved. He added that a lot more "relevant actionable information" would be available if the organizations had to file monthly or quarterly reports with the IRS like those exempt under section 527. For those organizations, the IRS requires Form 8872, "Political Organization Report of Contributions and Expenditures," as well as Form 8871, "Political Organization Notice of Section 527 Status."

"The 8872 reports -- and not to mention the 8871 reports that give contact information -- are accompanied by searchable database and machine-readable data that does not have to be digitized by hand," Maguire said. "In short, it's a system more in fitting with the most basic technological standards of the 21st century."

But the idea of quarterly reporting ought to be a non-starter, said David Keating, president of the Center for Competitive Politics. "This mania for more reporting is getting completely out of hand," he said.

Before groups file reports with the IRS, they have to get auditors to verify them, Keating said. "This would send their administrative costs through the roof," he said. "I can't understand anybody wanting to do this quarterly."

Decoding the Problem

But increasing disclosures may be a complex undertaking involving potential revision of the tax code.

The current reporting requirement for Forms 990 was established more than a century ago, when Congress envisioned nonprofit organizations as "actually serving social welfare and trade association purposes," said Craig Holman of Public Citizen. "But now that many nonprofits have taken up electioneering activities instead, the tax code should be amended to enhance disclosure of these groups."

"Now that sections 501(c)(4) and 501(c)(6) of the tax code have become havens for electioneering groups that want to conceal the sources of their funds, it is perfectly reasonable to require more frequent and timely disclosure of their financial activity," Holman said.

But Mayer said neither the IRS nor Treasury is going to stick its neck out to change the system. "Even if in theory Treasury has the necessary authority, it would be subject to withering criticism from Congress and elsewhere if it tried to unilaterally impose additional filing requirements on politically active exempt organizations," he said.

But it's clear that the current system "makes it very hard for the IRS to identify any improper spending until after the election," said Lawrence M. Noble, general counsel for the Campaign Legal Center.

Gregory L. Colvin of Adler & Colvin said some key questions need answering before new disclosure requirements are imposed. "What level of political spending would trigger such a requirement? What would the timetable be? What agency of government should impose the requirement?" Colvin asked.

If the reporting is done to the FEC, Colvin said, that would involve federal elections only. If to the IRS, he said, it "would accomplish universal transparency at all levels of government."

But what constitutes political campaign activity, he said, won't be known "with any clarity" until the IRS can resume work on drafting new rules for political nonprofits. Congress passed legislation in December that froze work on those rules through September.

"Wherever the reporting is done, it needs to be timely and actually disclose the spending and the real source of the funds," Noble said. "The best solution would be a change in the law to require greater reporting. If the FEC would actually enforce the law, I think it would be best for the reporting of political activity to be done at the FEC."

But Ellen Aprill, professor at Loyola Law School, cautions in a new article for the Pittsburgh Tax Review that Congress has so intertwined sections 527 and 501(c)(4) that any stepped-up regulation of the latter is going to require looking at the former.

Many activities that are tax exempt for section 527 groups are limited for noncharitable 501(c)s and forbidden for 501(c)(3)s, she writes, adding, "Reconciling political campaign intervention under current law is fraught and difficult."

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