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

Sat Sep 14 05:49:13 PDT 2013

Buckley's express advocacy distinction is first raised by the Court in discussing expenditure limits, but it is ultimately unimportant to that portion of the case, since the Court proceeded to strike down limits on expenditures anyway. (The gave it some life by giving Buckley the most narrow interpretation it could, and continuing to enforce expenditure bans on corporations and unions and on groups making independent expenditures - this all ended in 2010 with Citizens United and SpeechNow.org. But that's not relevant to this part of the story).

The real importance of "express advocacy" in Buckley was that the Court brought the concept back into the discussion in order to sharply curtail the reach of the FECA's disclosure provisions. While Buckley nominally upheld FECA's disclosure, it did so only after limiting them to cover groups with a primary purpose of electing a candidate, or express advocacy. While in theory, then, disclosure was upheld, effectively most of the disclosure that would have been required by FECA's independent expenditure disclosure provisions was struck down.

It was because of this narrow definition of what independent expenditures had to be disclosed that the reform community began to pursue regulation of the basis of form rather than substance. The theory was basically, "we can't regulate on the basis of content (Buckley), but we can regulate on the basis of tax status, or form (Regan v. Taxation with Representation)." Regan did not have cause, however, to consider the scope of the disclosure provisions (indeed the case dealt with the right to spend, not with disclosure, nor did the Court consider the IRS's broad definition of political activity vs. Buckley's narrow definition), so it is not at all clear that Regan's form based analysis supersedes in any way Buckley's content analysis.

But that's how we got to form-based regulation - it was a conscious effort to end-run Buckley's constraints on substance-based regulation (to use a "loophole" in the case law, some might say), and, accordingly, to get the IRS into the campaign finance enforcement picture. Among it's many deleterious consequences, it has greatly complicated campaign finance law, both in enforcement and compliance and in public understanding.

Bradley A. Smith

Josiah H. Blackmore II/Shirley M. Nault

   Professor of Law

Capital University Law School

303 E. Broad St.

Columbus, OH 43215

614.236.6317

http://law.capital.edu/faculty/bios/bsmith.aspx

________________________________
From: law-election-bounces at department-lists.uci.edu [law-election-bounces at department-lists.uci.edu] on behalf of JBoppjr at aol.com [JBoppjr at aol.com]
Sent: Saturday, September 14, 2013 8:16 AM
To: jpomeranz at harmoncurran.com; rhasen at law.uci.edu; law-election at uci.edu
Subject: Re: [EL] Koch Bros. and the Use of the 501c(6) Over 501(c)(4) to Hide Donors

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%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.

[http://www.addtoany.com/share_save#url=http://electionlawblog.org/?p=55249&title=Koch Bros. and the Use of the 501c(6) Over 501(c)(4) to Hide Donors&description=]<http://www.addtoany.com/share_save#url=http%3A%2F%2Felectionlawblog.org%2F%3Fp%3D55249&title=Koch%20Bros.%20and%20the%20Use%20of%20the%20501c%286%29%20Over%20501%28c%29%284%29%20to%20Hide%20Donors&description=>
Posted in campaign finance<http://electionlawblog.org/?cat=10>, tax law and election law<http://electionlawblog.org/?cat=22>

_______________________________________________
Law-election mailing list
Law-election at department-lists.uci.edu
http://department-lists.uci.edu/mailman/listinfo/law-election
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://webshare.law.ucla.edu/Listservs/law-election/attachments/20130914/729213cd/attachment.html>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: image001.png
Type: image/unknown
Size: 1504 bytes
Desc: image001.png
URL: <http://webshare.law.ucla.edu/Listservs/law-election/attachments/20130914/729213cd/attachment.bin>