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As Influence Money Flows, Nonprofits Tread Carefully As Influence Money Flows, Nonprofits Tread Carefully

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Legacy Content / RULES OF THE GAME

As Influence Money Flows, Nonprofits Tread Carefully

Some Social Welfare Groups Have A Lot To Lose If They're Not Cautious Under New Spending Rules

September 27, 2010

As concerns grow over secret political spending, nonprofit groups lavishing big money on elections could find themselves playing a dangerous game.

So far critics sounding the alarm over corporate-backed nonprofits, particularly a new generation of GOP-friendly issue groups, have trumpeted voters' right to know who's paying for costly campaign ads. Some liken the recent spike in secret money to the abuses of the Watergate era or even the 19th-century "robber barons."

But the danger of undisclosed corporate spending goes beyond voter deception. The risk extends to nonprofits themselves. The Supreme Court's landmark Citizens United v. Federal Election Commission ruling this year has upended the rules for tax-exempt groups large and small. Whether liberal or conservative, campaign-driven or issue-focused, such groups face mounting regulatory, reputational and ethical hazards.

 

A string of controversies involving tens of millions in secret corporate spending could give the nonprofit sector a black eye.

These include the threat of additional congressional scrutiny and regulation. The Senate last week failed for a second time to approve the Democrat-authored DISCLOSE Act, which proposed new political reporting rules. Even some on the left have said the bill goes too far, proving that disclosure can sometimes be a controversial issue.

But soaring nonprofit political spending may soon prove impossible for Congress to ignore, tax experts say. IRS rules for politically active tax-exempt groups are murky and outdated, many agree, and are long overdue for an update.

"The inflow of money could put a lot of pressure on Congress someday to examine with a more finely tuned microscope the issue of donor disclosure," said Marcus Owens, a tax lawyer with Caplin & Drysdale and former director of the IRS Exempt Organizations Division. "There might be constitutionally permitted distinctions to be made, with certain categories of donors protected and others not."

To be sure, the Supreme Court's NAACP v. Alabama case in 1958 gave private groups the right to keep their backers confidential. But that case "is by no means absolutist," said Frances R. Hill, a professor at the University of Miami School of Law. Congress could decide that corporate campaign contributions or explicit political ads should be publicly reported, for example.

A string of controversies involving tens of millions in secret corporate spending could also give the nonprofit sector a black eye. Lately, public attention has zeroed in on such groups as American Crossroads and Crossroads GPS, two groups founded by GOP operatives Karl Rove and Ed Gillespie.

Together those two groups plan to spend more than $50 million on the midterms, organizers say. As a political organization, American Crossroads is publicly reporting its donors and expenditures. But Crossroads GPS, which appears on track to spend the bulk of that money, is a 501(c)4 social welfare group, which means it need not report anything at all until next spring, and even then donors won't be detailed.

Such high-profile groups aren't the only nonprofits eager to weigh in politically. Long-established social welfare groups, including progressive ones, also want to play -- in part for fear of being swamped by corporate interests. At the same time, they fear being tarred with the same brush as the corporate-backed players making the headlines. And some worry about alienating their donors by jumping into elections too blatantly or directly, nonprofit sector advocates say.

"Groups are really trying to figure out what this new playing field is," said Abby Levine, legal director of advocacy programs at the Alliance for Justice, a progressive umbrella group. "There are some organizations that recognize the ground has changed. We may never be able to compete with big business, but we need to be at the table. If we're not in the game, we're definitely going to lose."

Yet the rules of that game are far from clear. Things haven't changed much for 501(c)3 charities in the wake of Citizens United. They remain barred from engaging in partisan political activities -- though some charities could get drawn into controversies thanks to their affiliations with more politically active 501(c)4 social welfare groups, and because (c)3s are free to do voter mobilization.

But the social welfare groups, known as (c)4s, face a real conundrum. IRS regulations say they can weigh in politically as long as politics isn't their "primary purpose." How that's defined, however, is anyone's guess. Historically, the IRS has been slow to prosecute politically active nonprofits, so few may risk seeing their tax status revoked in the near term. But some could prove vulnerable.

"For organizations that are aggressively entering election races as (c)4s, they need to keep in mind that they need to [do] a commensurate amount of lobbying or education activity as well, to retain their tax status," noted Owens. "That will be a challenge for some organizations."

But the biggest risk to nonprofits jumping feet-first into elections may be what Hill describes as "rent-seeking" -- the likelihood that lawmakers will cease being satisfied with donations and start looking to nonprofit allies to help them with undisclosed, independent expenditures. That could put many a nonprofit in an awkward spot.

"The reputational risk, I think, is huge," said Hill. "... It's a reputational risk with the general public, and I think it's a reputational risk with their own supporters."

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