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Challenging the Tax Status of Outside Spending Groups

Campaign finance advocates continue to push a variety of reforms to combat the effects of last year’s Citizens United ruling, including challenging the tax status of outside spending groups.

  • Erik Opsal
February 2, 2011

Campaign finance advocates continue to push a variety of reforms to combat the effects of last year’s Citizens United ruling. In Congress, Democrats tried, and failed, to pass the DISCLOSE Act, and with a sharp shift in power on Capitol Hill, legislative reform appears off the table. A new approach seems to be taking shape, however.

Last week, Mother Jones reported on an attempt by Democrat lawmakers and interest groups to challenge the tax status of outside spending groups, specifically Crossroads GPS, Karl Rove’s group, and American Action Network.

Crossroads GPS, AAN, and similar outside spending groups are organized as tax-exempt, not-for-profits whose purpose, under the Internal Revenue Service code, is “primarily to further the common good and general welfare of the people of the community.” Such a group, classified as a 501(c)4, can, however, engage in political advocacy—running ads for or against candidates, for instance—with one major stipulation: that politicking “is not its primary activity.”

That distinction is crucial. Since a 501(c) group doesn’t have to register as a political action committee (PAC), it need not disclose its donors and open up its books to public scrutiny. They operate, more or less, under a veil of secrecy—and so do their donors. But if the Federal Election Commission or the IRS determine a group violated the rules, it would be forced to register as a PAC and disclose the sources of its funding.

The legal avenue lawmakers like Van Hollen and Price are considering wouldn’t be the first challenge to outside groups’ tax status. In late October, Public Citizen, the Center for Media and Democracy, and Protect Our Elections alleged that the Iowa-based American Future Fund violated campaign finance law by not registering as a PAC after a New York Times analysis of AFF’s advertisements showed that 56 percent of its TV budget went toward political ads. A similar coalition of public advocacy groups, led by Public Citizen, filed a similar complaint with the FEC against Crossroads GPS, claiming the group’s “major purpose is to influence the 2010 federal elections and to elect Republicans to office.” (The complaints are still pending.)

Today, Citizens for Responsibility and Ethics in Washington (CREW) joined those groups in calling for an investigation of the American Future Fund (AFF). In a letter to the IRS, CREW states:

Despite the fact that AFF repeatedly told the IRS it had not and did not plan to support or oppose candidates for office or spend any money attempting to influence elections, AFF did exactly that throughout the 2010 campaign cycle. Because of the serious nature of the tax law violations, the IRS should consider revoking the AFF’s tax-exempt status and/or impose appropriate excise taxes and penalties on the organization.

By pushing back on tax status, it’s clear some campaign finance reform advocates hope to keep the conversation focused on the drastic increase in outside spending in the 2010 election cycle. Other reform groups, such as the Brennan Center, will continue to push forward on public financing, as it did last month in New York.