Watchdog: Koch-Backed Group Bending Tax Code

Citizens for Responsibility and Ethics in Washington asks the IRS to clarify rules governing a section of the tax code that a group tied to the Koch Brothers has used in an unusual way to advance its agenda.

 The Internal Revenue Service Building is shown July 22, 2013 in Washington, DC.
National Journal
Alex Seitz Wald
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Alex Seitz-Wald
Nov. 5, 2013, 7:04 a.m.

Cit­izens for Re­spons­ib­il­ity and Eth­ics in Wash­ing­ton, the cam­paign fin­ance watch­dog, is call­ing on the IRS to in­vest­ig­ate Free­dom Part­ners, a fund tied to the Koch Broth­ers that quietly doled out $235 mil­lion in grants to con­ser­vat­ive groups last year.

As we re­por­ted in Septem­ber, when news of the group’s ex­ist­ence first broke, Free­dom Part­ners made fairly nov­el use of a sec­tion of the tax code — 501(c)(6) — re­served for trade as­so­ci­ations, like the Na­tion­al Beer Whole­salers As­so­ci­ation, or cham­bers of com­merce. Free­dom Part­ners calls it­self a cham­ber of com­merce, but it seems to be driv­en by polit­ic­al ideo­logy rather a com­mon busi­ness in­terest.

“I haven’t seen a situ­ation like this, and we watch that area pretty closely,” Jim Clarke, the seni­or vice pres­id­ent of pub­lic policy at the So­ci­ety of As­so­ci­ation Ex­ec­ut­ives, a sort of trade as­so­ci­ation of trade as­so­ci­ations, told Na­tion­al Journ­al at the time. Most “dark money” polit­ic­al groups are or­gan­ized as “so­cial wel­fare” or­gan­iz­a­tions un­der Sec­tion 501(c)(4) of the tax code, but 501(c)(6) status makes it easi­er for busi­nesses to write off dona­tions and may in­su­late groups from reg­u­lat­ory pres­sure.

Now, CREW is call­ing on the IRS to look in­to the Koch-backed group’s use of this tax des­ig­na­tion, writ­ing in a com­plaint to the tax agency that “it is clear the or­gan­iz­a­tion’s activ­it­ies do not meet [the] cri­ter­ia” of a 501(c)(6) or­gan­iz­a­tion. Free­dom Part­ners’ only activ­ity last year was to dis­trib­ute money to oth­er groups. “How does op­er­at­ing as a pass-through for an­onym­ous sources to in­flu­ence our elec­tions mesh with the concept of a busi­ness league?” CREW Ex­ec­ut­ive Dir­ect­or Melanie Sloan asked in a state­ment.

CREW is also ask­ing the IRS to is­sue new rules cla­ri­fy­ing what 501(c)(6) or­gan­iz­a­tions can and can’t do ahead of next year’s elec­tion.

“If the IRS fails to act, Amer­ic­ans should ex­pect to see an in­crease in the num­ber of so-called ‘busi­ness leagues’ cre­ated to fun­nel money in­to our elec­tions while cloak­ing the iden­tit­ies of their donors,” Sloan said. “With the 2014 elec­tion cycle get­ting un­der­way, it is im­per­at­ive for the IRS to cla­ri­fy its reg­u­la­tions and nip ab­use of 501(c)(6) status be­fore it gets out of hand.”

After Cit­izens United, Speech Now, and oth­er re­cent court rul­ings, wealthy people of all polit­ic­al stripes seek­ing to in­flu­ence elec­tions have been in an arms race with reg­u­lat­ory agen­cies as well as out­side watch­dog groups and journ­al­ists seek­ing more trans­par­ency. CREW and oth­ers worry that Sec­tion 501(c)(6) could be a brand new class of weapons in this battle.

UP­DATE (4:55 p.m.): James Dav­is, the spokes­per­son for Free­dom Part­ners, re­spon­ded to the com­plaint in a state­ment to the Na­tion­al Journ­al: “It’s not sur­pris­ing the Sor­os and Demo­cracy Al­li­ance fun­ded CREW is at­tack­ing an or­gan­iz­a­tion that sup­ports free-mar­kets. Free­dom Part­ners Cham­ber of Com­merce fol­lows all IRS reg­u­la­tions as a non-profit, non­par­tis­an busi­ness league that ad­vances our mem­bers com­mon busi­ness in­terests by pro­mot­ing free-mar­ket policies. All of our activ­it­ies are de­scribed in our tax Form 990 which is pos­ted on our web­site.”

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