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March 18, 2015
Donors to Tax-Exempts Often Give Super-Sized Amounts
by Paul C. Barton

Full Text Published by Tax Analysts®

This article first appeared in the March 17, 2015 edition of Tax Notes Today.

Many of the secret donors to politically oriented section 501(c)(4)organizations write checks with quite a few more zeros than any the average American will see in a lifetime.

Take, for instance, Crossroads GPS, the 501(c)(4) founded by conservative political strategist Karl Rove. Activity in the 2011-2012 election cycle -- as reflected on its 2012 Form 990, "Return of Organization Exempt From Income Tax" -- included total contributions received of $179.7 million. Contribution amounts have to be made public, even if the identities of those giving do not. Of 291 itemized donations of $5,000 or more to Crossroads GPS for that year, the number totaling $100,000 or more was 152; $500,000 or more was 77; and $1 million or more was 53.

Contributions were as high as $10 million, $18 million, and $22.5 million.

The Center for Responsive Politics, a nonpartisan research organization, ranks Crossroads GPS as the most politically active nonprofit from 2008 to 2012, a metric based on political spending reported to the IRS and the Federal Election Commission and compared to a group's overall spending for those years, as well as political spending generated by grants to other organizations. (See

Right behind Crossroads GPS was the Center for Patient Rights, a 501(c)(4) linked to Charles and David Koch. Also making the Center for Responsive Politics' top five on that list were American Action Network and American Future Fund, both also conservative. (See the table below for contribution figures.)

Mega-Contributions to 501(c)(4)s

   Organization (type;                           $1         Largest
   donations in 2012)      $100,000   $500,000   Million    Single
                           or More    or More    or More    Donation

   Crossroads GPS          152        77         53         $22.5
   (conservative; 291)                                      million

   Center for Patient      15         11         9          $61.2
   Rights                                                   million
   (conservative; 18)

   American Future Fund    12         6          3          $48.28
   (conservative; 30)                                       million

   American Action         31         10         7          $6.7
   Network                                                  million
   (conservative; 69)

   Patriot Majority        43         13         6          $6
   (liberal; 91)                                            million

   League of               16         11         10         $6
   Conservation Voters                                      million
   (environmental; 137)

Source: 2012 Forms 990, Return of Organization Exempt from Income Tax.

For the only liberal group to make the top 20 on that list -- Patriot Majority, coming in at 14th highest -- the 2012 Form 990 listed 91 contributions overall, including 43 of $100,000 or more; 13 of $500,000 or more; and six of at least $1 million. The highest single donation was $6 million.

And the highest-ranking environmental 501(c)(4), the League of Conservation Voters, listed 137 donations on its 2012 Form 990, including 15 of $100,000 or more; 11 of $500,000 or more; and 10 of $1 million or more. The highest single donation was $6 million, just as with Patriot Majority.

Anonymous Impact

In general, the dollar amounts of these political donations are unimaginable for most Americans. In the 2014 elections, only 0.3 percent of the U.S. adult population contributed $200 or more to a political candidate, party, or political action committee, the Center for Responsive Politics reports. Those giving $2,600 or more amounted to 0.05 percent.

And it riles advocates of campaign finance reform that nonprofit groups can influence politics yet face no requirement to put names by the contributions that fuel their ability to do so. Many say they should be forced to transform themselves from 501(c)(4)s or 501(c)(6)s into section 527organizations, which have to disclose donors' identities.

In particular what worries some political scientists and watchdog groups are outsize checks leading to outsize influence over politicians and government policy. They point to tax-exempt groups, especially conservative ones, becoming a major force in recent elections, concentrating their spending -- i.e., advertising buys -- on high-profile federal races and increasingly those at the state and local levels, as well. They can do so as long as they claim politics is not their "primary" purpose.

Government by the Rich?

"Plutocracy, anyone?" Gary Jacobson, a political scientist at the University of California, San Diego, asked in response to questions from Tax Analysts. The six- and seven-figure donations to 501(c)(4)s, he says, are "not a practice that is likely to remedy income inequality or otherwise serve the interests of the 99 percent, even if some of the funds go to helping Democrats."

"These contributions will only grow in size," added Richard L. Hasen, political scientist at the University of California, Irvine. "We are fast moving to a situation where those with wealth will have much greater ability to influence both elections and policy."

But others say these super-sized contributions are not as jaw-dropping as some make them out to be. "There is a long history of tax-exempt organizations benefiting from the support of financial 'angels' who support the organizations' missions," said Robert K. Kelner of Covington & Burling LLP.

"I suspect that if you looked back at [Form] 990s for some of the major activist organizations you would see occasional very large contributions over the years," Kelner said. "I'm sure the NAACP, NRA, Sierra Club, and similar activist organizations on the left and the right have all had wealthy benefactors from time to time. Whether one is bothered by wealthy people spending large sums to support organizations that engage in public advocacy on social and economic issues is, I suppose, a subjective matter. Personally, I am not bothered by it in the least."

Hans A. von Spakovsky, a specialist on election law at the conservative Heritage Foundation, said the idea that money can buy American elections has been disproved "time and time again."

He added, "I think that shows an amazingly dismissive attitude toward the American people."

The contributions to 501(c)(4)s can be from almost any source, including individuals, other nonprofits, and for-profit firms.

Elizabeth J. Kingsley of Harmon, Curran, Spielberg + Eisenberg LLP said, "It is likely that a significant number of large contributions to 501(c)(4)s are coming from other entities -- this gets back to the daisy chain problem we've discussed before." The reference was to tax-exempts passing essentially the same donation among themselves and each counting it as "social welfare" spending when they give it to another nonprofit, freeing more of its other funds for politics.

Yet, the dollar amounts make one thing clear, says attorney Gregory L. Colvin of Adler & Colvin in San Francisco. "To give that much money, the donor must be from a very small upper echelon of high-net-worth individuals or companies," he said.

And if the donations don't suggest plutocracy, then "oligarchy" comes to mind, Meredith McGehee of the Campaign Legal Center said, noting that the latter is "defined in the dictionary as a form of power structure in which power rests with a small number of people."

How Much Influence?

But academic studies offer a mixed view of just how effective outside spending is in influencing political races. Jacobson himself acknowledged as much. "In the data I've analyzed for recent congressional elections, the huge investment in outside spending has had no measurable payoff in terms of vote share for the candidate helped, once fundamentals like state [and] district partisanship, incumbency, and the candidate's own spending are taken into account," he said. "Perhaps the plutocrats are wasting their money. On the other hand, in the hot contests both sides have extensive outside support, so it may be an arms race standoff; if one side did not have the support, the result could be quite different."

Regardless, Fred Wertheimer, head of the watchdog group Democracy 21, still sees a transparency issue. "These huge contributions are not secret to the donors, of course, and the donors and amounts are not going to be secret to the candidates and officeholders who benefit from them. The only people to whom the donors and the amounts they give are secret are the American people," Wertheimer said.

Still another view comes from Paul S. Ryan of the Campaign Legal Center, who said campaign finance laws exist to prevent corruption of the governing process generally, not just to regulate elections. "We limit contributions to candidates, for example, to reduce the likelihood that officeholders will give preferential treatment to donors in the legislative process -- e.g., killing bills in committee, scheduling or not scheduling markups of bills, etc.," he told Tax Analysts in an e-mail. "The concern about well-funded 501(c)(4)s is that those known to have the capacity to make big independent expenditures will have disproportionate influence over members of Congress."

Ryan points to a 2014 study by two Ohio State University researchers, Daniel P. Tokaji and Renata E.B. Strause, who conducted extensive nationwide interviews with former members of Congress, congressional candidates, political operatives, legislative staff, and those working for outside groups. Among their key findings:

  • "Outside groups engaged in independent spending do much of the dirty work in congressional campaigns, running negative ads, while at the same time making it more difficult for candidates to maintain message discipline.
  • "Members of Congress see independent spending as a threat -- usually implicit but sometimes explicit -- for those who refuse to toe the line of outside groups.
  • "There is a high degree of cooperation between outside groups and congressional campaigns, generally through publicly transmitted signals, even as campaign professionals and outside organizations tread carefully to avoid 'coordination' as defined by federal law."

But von Spakovsky said the idea that contributors to a 501(c)(4) can later pull the strings of a winning candidate "is the kind of anecdotal claim for which [progressives] have no proof." Most winning candidates, he said, will have no idea who contributed to a 501(c)(4) that might have supported them.

"I think there is not much evidence that policies at the federal level are tilted to the right. Barack Obama is still president, and last time I looked he has not been signing bills endorsed by Crossroads GPS," said David Keating, president of the Center for Competitive Politics.

Gift Tax Argument

Another issue that arises periodically is whether the IRS should levy gift taxes on mega-contributions to a tax-exempt. According to a 2012 Congressional Research Service report, the agency has the authority to levy such a tax but has not used it. However, it did send letters to five 501(c)(4) donors in 2011, informing them that such contributions might end up subject to the tax. That sparked accusations that the IRS was acting on political motivations, and the agency failed to follow up on the threat. Some object that a gift tax on such donations made for political advocacy would violate First Amendment rights of free speech and free association.

Kingsley said that whether to impose gift taxes boils down to a campaign finance issue -- one the IRS should avoid. "As a policy matter it doesn't make much sense," she said, adding, "The IRS is not equipped to enforce campaign finance."

And Jack Pitney, a political scientist at Claremont McKenna College in California, added: "Attempting to dam up the flow of money always has the effect of rechanneling it or forcing it underground. The best way to redirect political money back into the open is to raise -- or better, eliminate -- the caps on individual contributions to political parties and campaigns, as long as there is immediate and complete disclosure."

Correction, March 18, 2015: The number of donations of $500,000 or more to Crossroads GPS for tax year 2012 was 77, not 73 as originally reported.

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