[EL] Koch Bros. and the Use of the 501c(6) Over 501(c)(4) to Hide Donors
JBoppjr at aol.com
JBoppjr at aol.com
Sat Sep 14 05:16:13 PDT 2013
Thanks to John for clarifying the law here.
Regarding this:
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.
This is either sloppy reporting or intentionally highly misleading. Of
course a "political group," one that is primarily engaged in political
intervention -- a very broad term -- does not qualify as a c4, but as a 527
organization. In order to qualify as a c4, the group needs to spend a majority
of its money on lobbying and education, not political intervention -- in
IRS talk, its primary purpose must be social welfare activity.
Thus to call these c4 groups "political groups" grossly distorts the
readers understanding of what is happening here -- in order to fit the
"reformers" talking points. The reporter could have easily and accurately said:
"Other donor clearinghouses, along with nearly all of the lobby and education
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. These groups can spend some, but not most, of their money on
politics."
Jim Bopp
In a message dated 9/13/2013 12:45:05 P.M. Eastern Daylight Time,
jpomeranz at harmoncurran.com writes:
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(c)(6)-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.
(http://www.addtoany.com/share_save#url=http://electionlawblog.org/?p=55249&title=Koch%20Bros.%20and%20the%20Use%20of%20the%20501c(6)%20Over%20501(c)(4
)%20to%20Hide%20Donors&description=)
Posted in _campaign finance_ (http://electionlawblog.org/?cat=10) , _tax
law and election law_ (http://electionlawblog.org/?cat=22)
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