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June 5, 2015
Crossroads GPS Changing Skins, Watchdog Says
by Paul C. Barton

Full Text Published by Tax Analysts®

File it under old wine in a new bottle.

Because its own tax exemption has yet to win IRS approval, the section 501(c)(4) organization Crossroads GPS stands ready to switch its issue advocacy and political operations to a nonprofit already enjoying the agency's seal of approval, the Center for Responsive Politics reports.

Some see it as a sign Crossroads is giving up on getting its own exemption.

The center says Crossroads -- the nation's most politically active nonprofit since 2010, having spent at least $92.06 million trying to influence elections -- recently acquired the 501(c)(4) known as the Alliance for America's Future (AAF), which has been dormant for several years but still has tax-exempt status.

The center uncovered the acquisition through a check of Virginia incorporation records. No money was involved.

An ironic twist to the case is that AAF, which Crossroads has renamed One Nation, said it had no plans to spend on politics when it filed its application for tax-exempt status in June 2010.

Crossroads now inherits that promise, as well as AAF's mission statement of promoting "sound economic and security policies in order to promote growth, prosperity, and peace for America's future." Crossroads has described its mission as "educating, equipping, and engaging American citizens to take action on important economic and legislative issues that will shape our nation's future."

When Prior Statements Don't Count

Such groups are supposed to be "exclusively" devoted to social welfare purposes by federal statute, but an informal IRS guideline allows them to claim social welfare status so long as no more than 49 percent of their money is spent on politics.

Robert Maguire, the Center for Responsive Politics' lead nonprofit investigator, told Tax Analysts that AAF's past statements to the IRS have not and will not stand in the way of election-related spending. "A group can easily get status by saying it doesn't 'plan' on spending money on politics," he said. "Then, as soon as they get status, change their plans. That's what AAF did. They applied in June [2010], saying they didn't plan on spending in elections, and they got status in July. By September of that year, they were reporting independent expenditures" to the Federal Election Commission.

Crossroads and AAF have a history with the same legal firm -- Holtzman Vogel Josefiak PLLC -- which is where the idea for the switch probably came from, Maguire said.

"Crossroads was the one group the IRS might do something about," Maguire said. Now, he said, Karl Rove, the conservative strategist who founded Crossroads along with Ed Gillespie, is showing similarly situated groups that "there is an out" if they find their applications for tax exemption stymied at the IRS.

Repeated efforts to reach Rove and other Crossroads officials were unsuccessful.

Crossroads' takeover of AAF also comes as Rove's group watches campaign finance reform advocates sue the FEC to force it to reconsider whether it should investigate whether Crossroads has been acting more like a "political committee" than a nonprofit. Crossroads is seeking permission to intervene in the federal case. The ideologically divided FEC deadlocked on the Crossroads question in December 2013.

The reform advocates, led by Craig Holman of Public Citizen, allege that the FEC has neglected its duty under the Federal Election Campaign Act regarding Crossroads. A finding that Crossroads is a political committee would require it to register with the FEC and disclose its donors, something it doesn't have to worry about as a self-declared 501(c)(4).

Crossroads' application for exempt status has been pending with the IRS since September 2010. A recent report from the Treasury Inspector General for Tax Administration saying the IRS has made considerable progress in clearing a backlog of other groups' applications for tax-exempt status has intensified speculation that it may be planning to deny Crossroads' application.

Even though Crossroads has been operating for nearly five years without tax-exempt status, borrowing that status from another group removes "this Sword of Damocles hanging above," Maguire said. "Sure, it has been able to raise lots of money, but it has never been able to go to donors and say, 'You have nothing to worry about, the IRS has given us its blessing,'" he added.

If the IRS denied the exemption, the worry was that donors could have their identities exposed as a result of FEC enforcement, Maguire said. "There's not even a guarantee there, but we haven't seen, yet, how the FEC reacts to a group whose status is denied or revoked," he said. "It's not clear that they could get four votes to force disclosure, but donors are wary of such risks."

Crossroads Desperation?

If the AAF acquisition is a sign of panic by Crossroads, that may hint that a denial of its application is in the works, said Marc Owens, former head of the IRS Exempt Organizations Division, who is now with Loeb & Loeb LLP. "The self-declaration route really isn't available if the IRS has issued a proposed denial of the application or, practically speaking, has given clear signals that it intends to do so," Owens said in an e-mail. "It's very difficult for an attorney or accountant to advise that self-declared (c)(4) status is legally correct and defensible in the face of negative feedback from the IRS."

Some campaign finance reform advocates say that's their hunch as well.

"This is an interesting -- and somewhat desperate -- move by Karl Rove," Holman said. "It shows that Rove now appears to be expecting his 501(c)(4) application for Crossroads to be denied, and it looks like he is setting up another vehicle where he can transfer dark money funds for political activity from one entity to another."

Dark money is a reference to donors to 501(c)(4)s not having to be publically disclosed, although they are disclosed to the IRS.

Similarly, Fred Wertheimer, head of Democracy 21, said: "Crossroads appears to be moving to obtain an off-the-shelf (c)(4) to deal with the fact that they apparently could not qualify for tax-exempt status because of their political activities."

Wertheimer added that "Crossroads should not be able to do indirectly what they cannot do directly. We will carefully examine this development and expect to ask the IRS to promptly examine the apparent Crossroads move and take appropriate action."

But in switching his operations to a group that already enjoys tax-exempt status, Rove may have lessened his exposure to a possible IRS investigation, nonprofit law attorneys say. The Center for Public Integrity reported in January that the IRS has selected only 26 organizations for audits of their political activity since 2010. An organization applying for exempt status is more likely to draw scrutiny than one that already has it, Kenneth A. Gross of Skadden, Arps, Slate, Meagher & Flom LLP told Tax Analysts.

If the new organization's purposes are consistent with (c)(4) purposes, "there shouldn't be an issue," Heidi K. Abegg of Webster, Chamberlain & Bean LLP, said in an e-mail, adding, "[The takeover] really is no different than a new board coming in and deciding to change the direction of the organization (assuming the new direction is consistent with section 501(c)(4))."

But if the new group known as One Nation were audited and the "activities of the 'new' organization differ materially from those described in the original [Form] 1024" and it therefore no longer qualifies as a 501(c)(4), "then the IRS would be able to retroactively revoke its exemption back to the date of the change," said Elizabeth J. Kingsley of Harmon, Curran, Spielberg + Eisenberg LLP.

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