Donors and Charities Need Protection as Secret Political Spending Grows

January 13, 2013

Published in The Chronicle of Philanthropy.

Secret political spending by big donors has prompted New York Attorney General Eric Schneiderman to issue new disclosure regulations for social-welfare groups that spend big money on elections. These new regulations are an important first step in protecting elections, nonprofits, and charitable donors alike.

Organizations that do not disclose their donors spent more than $200-million in the 2012 federal elections and substantial sums in state elections. Many of the secret spenders in the 2012 elections shielded their identities by using 501(c)(4) social-welfare organizations with anodyne names like “Americans for Prosperity.”

Organizations created under section 501(c)(4) of the tax code occupy the gap between political committees created specifically to get involved in political campaigns, known as 527 organizations for their section of the Internal Revenue Code, and exclusively charitable organizations, or 501(c)(3) organizations, which are prohibited from spending any money on partisan politics.

While Section 501(c)(4) organizations are primarily supposed to promote the public good, they are permitted to spend some of their money on partisan politics—but it’s supposed to be a small percentage of their budget and their overall social mission.

Unfortunately, a small but influential group of bad actors is abusing the rules on nonprofit spending to suit electoral agendas. They are taking advantage of the fact that donors to politically active 501(c)(4) organizations are easily hidden from public view.

Under Federal Election Commission regulations, 501(c)(4) organizations must disclose the names of their supporters only if the donors earmark their money for a specific election-related project. Savvy donors can easily evade this requirement while being certain that their money will support their candidates of choice.

Compounding this problem, the IRS has utterly failed to enforce the requirements of section 501(c)(4) of the tax code. It has allowed a few 501(c)(4) organizations that seem to serve no social-welfare purpose to spend millions on political campaign activities while maintaining their nonprofit status.

Instead of ensuring that organizations are complying with the tax code, the IRS has applied an informal rule that protects the nonprofit status of any organization as long as it spends no more than 49 percent of its budget for political purposes.

This rule not only contradicts the federal statute, which states that the organization must be “operated exclusively for the promotion of social welfare,” it also fails to recognize the reality of big spenders seeking political influence.

Mr. Schneiderman developed New York’s new disclosure provisions to break through the stalwart indifference of the FEC and the IRS.

Under the new regulations, 501(c)(4) organizations operating in New York State must disclose both the amount and the percentage of their expenses spent on elections, even if the balloting occurs in other states. Furthermore, any 501(c)(4) that spends at least $10,000 on New York state or local elections also has to disclose the identities of donors who contributed at least $100 to the organization in the past year.

Donors who specify that their funds are not to be used for political purposes are exempt from disclosure. Additionally, 501(c)(3) nonprofits are exempt from the regulations because they cannot spend any money on partisan activities.

The new regulations will make New York’s elections more transparent by informing voters about who is spending to influence their votes and will help the public guard against improper arrangements between spenders and candidates. Beyond these benefits, the regulations also protect both nonprofit organizations and potential donors.

Donors to nonprofits may be unaware that the organizations can and sometimes do engage in political spending. Some donors may tolerate or even encourage such activity while others may recoil.

Regardless of one’s preferences, the regulations provide potential donors with full knowledge of how organizations spend their money.

The regulations also guard the reputation of nonprofits that engage in little or no political spending. The explosion of political spending by a few 501(c)(4) organizations, which said in their initial IRS filings that their political spending would be “limited in amount and will not constitute the organization’s primary purpose,” may incidentally tarnish other organization’s nonpartisan reputations.

The new disclosure requirements allow nonprofits to prove definitively that they are not significantly involved in elections and instead work solely for the public good.

Nonprofit organizations play an important role in our society. Whether feeding the poor or promoting new government policies or any of the many other activities they pursue, they meet needs that might otherwise be neglected.

Unfortunately, a few political spenders are endangering the reputations of those groups by abusing the rules for their own partisan agendas.

That’s why Mr. Schneiderman’s move is an important first step in doing what the federal government won’t do to help traditional nonprofits and donors. It promises to help rein in these underhanded organizations to protect not only the state’s elections but also the reputations of nonprofit organizations and the confidence of donors.