[EL] Koch Bros. and the Use of the 501c(6) Over 501(c)(4) to Hide Donors

[John Pomeranz]

I certainly agree that there has been a wrong-headed effort to demonize 501(c)(4)s engaged in political activity while ignoring the political activities of other types of tax-exempt organizations.  Efforts in legislatures, regulatory agencies, and the courts that seek to restrict the political activities of 501(c)(4)s will only drive political operatives to 501(c)(6)s, just as surely as the focus on 527s a decade ago drove political activities to 501(c)(4)s.  Some of us told you so then<http://sers.nictusa.com/fosers/showpdf.htm?docid=46335>, and we're telling you so now.

However, it overstates the case to say that contributions to Freedom Partners will be tax deductible as a business expense.  Under section 162(e) of the Internal Revenue Code, dues and contributions to a 501(c)(6) are not deductible as a business expense to the degree the funds are used for lobbying or political activity (with political activity defined under the broad IRS "facts and circumstances" definition, not the narrow "express advocacy" definition the campaign finance regulators are constitutionally obliged to observe).   Under IRC section 6033(e), Freedom Partners will be obliged either (i) to notify its members of the pro-rated portion of their dues and contributions that will be used for lobbying and political activity and that such portion may not be claimed as a business deduction or (ii) to pay a "proxy tax" designed to cover the improper tax deductions the members will take absent such a notice.  (I should note that there are some exceptions to this general rule, but they likely don't apply to Freedom Partners.  Also note that IRC 162(e) and 6033(e) apply to other 501(c)s in addition to 501(c)(6)s.)

One other point:  To qualify as a 501(c)(6), Freedom Partners will have to spend the bulk of its funds on efforts that support its tax-exempt purpose as a business league, and spending to intervene in races for public office (again, using the broad IRS definition) doesn't count toward that.  My guess is that the Freedom Partners will spend the majority of its funds on lobbying or non-lobbying advocacy efforts that don't quite cross the line into electioneering (a fuzzy line, the exact placement of which will depend on who's advising the organization and how risk averse the organization's managers are).

Despite all this, the central point is still true:  Freedom Partners allows the Koch brothers and other donors to make unlimited contributions to an organization that may use a significant portion of those funds (directly or via grants to others) to influence elections, and the remainder of the funds may be used to influence public policy in other ways.


John Pomeranz
Harmon, Curran, Spielberg & Eisenberg, LLP
1726 M Street, NW, Suite 600
Washington, DC  20036
p: 202.328.3500
f: 202.328.6918
e: jpomeranz at harmoncurran.com



From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Rick Hasen
Sent: Friday, September 13, 2013 11:28 AM
To: law-election at UCI.edu
Subject: [EL] ELB News and Commentary 9/13/13

Koch Bros. and the Use of the 501c(6) Over 501(c)(4) to Hide Donors<http://electionlawblog.org/?p=55249>
Posted on September 13, 2013 8:23 am<http://electionlawblog.org/?p=55249> by Rick Hasen<http://electionlawblog.org/?author=3>

Nick Confessore follow-up<http://www.nytimes.com/2013/09/13/us/politics/tax-filings-hint-at-extent-of-koch-brothers-reach.html?ref=politics&_r=0> to yesterday's Politico report<http://www.politico.com/story/2013/09/behind-the-curtain-exclusive-the-koch-brothers-secret-bank-96669.html> makes the key point:

But the returns also reflect a significant shift in the tax strategies the Koch operation deploys to avoid challenge from the Internal Revenue Service, which limits how much nonprofit groups can spend to aid or defeat candidates.

Other donor clearinghouses, along with nearly all of the political groups they support, register with the I.R.S. as "social welfare" groups under Section 501(c)4<http://www.irs.gov/pub/irs-tege/eotopici03.pdf> of the tax code. That has let such groups spend money on elections while keeping their donors secret - drawing increasing regulatory and legislative scrutiny from critics who assert that some of the groups are violating campaign laws.

But Freedom Partners established itself in November 2011 as a 501(c)6<http://www.irs.gov/pub/irs-tege/eotopick03.pdf> "business league," typically a trade association of corporations, like the Chamber of Commerce, organized to promote a common business interest. Instead of donors, it has more than 200 "members," each making a minimum $100,000 contribution, which Freedom Partners classifies as member dues. The approach gives it many of the same advantages social welfare groups have, with one significant addition: Some contributions to the group may be tax deductible as business expenses<http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits/Tax-treatment-of-donations-501%28c%29%286%29-organizations>.

This is why I long been saying (see my testimony<http://electionlawblog.org/?p=32374> regarding DISCLOSE ACT II) that effective campaign finance disclosure reform must target the nature of the activity not the organizational form a group takes. Otherwise, as Roy Schotland argued<http://electionlawblog.org/?p=16127> a few years ago, the Koch Bros and others would just form a veterans group under 501(c)(19) or take some other form.


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