Koch Brothers Break New Ground in Dark Money

The billionaires’ latest group could be the first in a new class of campaign finance weapons.

David Koch, executive vice president of Koch Industries, attends a meeting of the Economic Club of New York, Monday, April 11, 2011. 
National Journal
Alex Seitz Wald
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Alex Seitz-Wald
Sept. 13, 2013, 9:57 a.m.

The Koch broth­ers are noth­ing if not in­nov­at­ors in the murky world of cam­paign fin­ance, and their latest ven­ture — a secret fund that quietly dis­trib­uted $250 mil­lion to con­ser­vat­ive groups dur­ing the 2012 elec­tion, as by re­vealed by Politico yes­ter­day — is no ex­cep­tion. The group ex­plores near-vir­gin ter­rit­ory in the tax code as the first in what could be a new class of weapons in the secret money arms race.

On its face, Free­dom Part­ners looks like any of the oth­er dark-money groups that have pro­lif­er­ated in re­cent years. Those tax-ex­empt “so­cial wel­fare” or­gan­iz­a­tions, called 501(c)(4)s for their tax code des­ig­na­tion, can raise un­lim­ited amounts of money without dis­clos­ing their donors, and can spend just shy of half of it on polit­ics.

But un­like those groups, Free­dom Part­ners is or­gan­ized un­der a dif­fer­ent sec­tion of the tax code, 501(c)(6), which is typ­ic­ally re­served for cham­bers of com­merce and trade groups like the Amer­ic­an Bar As­so­ci­ation and the Na­tion­al Beer Whole­salers As­so­ci­ation. Polit­ic­al activ­ity from these groups is noth­ing new — the U.S. Cham­ber of Com­merce was one of the biggest spend­ers in the 2010 and 2012 elec­tions — but Free­dom Part­ners is plainly not a busi­ness as­so­ci­ation in the tra­di­tion­al sense; its roughly 200 donors are united by a com­mon ideo­logy, rather than a com­mon in­dustry.

“I haven’t seen a situ­ation like this, and we watch that area pretty closely,” said Jim Clarke, the seni­or vice pres­id­ent of pub­lic policy at the So­ci­ety of As­so­ci­ation Ex­ec­ut­ives, a sort of trade as­so­ci­ation of trade as­so­ci­ations. “I can safety say, an­ec­dot­ally at least, that this would be new.”

Why Free­dom Part­ners would chose 501(c)(6) status over the more com­mon 501(c)(4) is a bit of a mys­tery be­cause the rules gov­ern­ing polit­ic­al activ­ity are es­sen­tially the same for both, but ex­perts spec­u­late there may be some ad­vant­ages in the choice.

Douglas Var­ley, a pro­fess­or at Geor­getown Law and a law­yer at Cap­lin & Drys­dale who ad­vises non­profit groups, said he hasn’t seen an or­gan­iz­a­tion quite like this be­fore. “I’m sur­prised that it’s a (c)(6) from a pointy-headed law­yer’s per­spect­ive, but I’m not that sur­prised from a real­ist polit­ic­al per­spect­ive,” he said.

One ad­vant­age of the status, Var­ley ex­plained, is that com­pan­ies could write off dir­ect con­tri­bu­tions to the group as busi­ness ex­penses more eas­ily. It’s pos­sible to do that with a more tra­di­tion­al 501(c)(4) group, but harder to jus­ti­fy, while con­tri­bu­tions to busi­ness as­so­ci­ations are routine.

In­deed, when asked why his group chose the par­tic­u­lar sec­tion of the tax code it did, Free­dom Part­ners spokes­per­son James Dav­is told Na­tion­al Journ­al, “The (c)(6) struc­ture al­lows us to work with busi­nesses — both large and small — across a vari­ety of in­dus­tries to ad­vance our mem­ber’s busi­ness in­terests of pro­mot­ing the prin­ciples of a free mar­ket and a free so­ci­ety.”

Mean­while, with an eye on the in­creas­ing scru­tiny dir­ec­ted at (501(c)(4)s, Free­dom Part­ners may have de­cided it was safer to move in­to a new reg­u­lat­ory space. Rep. Chris Van Hol­len, D-Md., re­cently sued the IRS to try to force it to crack down on (c)(4)s, while some state at­tor­neys gen­er­al, such as New York’s Eric Schnei­der­m­an, have been try­ing to make the groups dis­close their donors. Then there’s all the bad press that the dark-money groups sus­tained dur­ing the 2012 cam­paign, and the re­newed scru­tiny dur­ing this year’s IRS scan­dal, which re­volved around al­leg­a­tions that the tax agency im­prop­erly tar­geted tea-party 501(c)(4) groups.

With all the heat on those groups, Viveca Novak of the Cen­ter for Re­spons­ive Polit­ics said she’s heard some polit­ic­al strategists say they’ve been look­ing at sec­tion 501(c)(6) as a po­ten­tial refuge. “Busi­ness as­so­ci­ations may not fall with­in the char­it­able trust jur­is­dic­tion of state at­tor­neys gen­er­al, so the ar­range­ment could help sty­mie states’ ef­forts to shed some light on who is be­hind the or­gan­iz­a­tions,” Novak wrote on the cam­paign fin­ance watch­dog’s blog.

Polit­ic­ally, it would also be much harder for states to reg­u­late these kinds of groups, Var­ley poin­ted out, be­cause any new policy on 501(c)(6)s would af­fect not just ideo­lo­gic­al dark-money group, but all the quo­tidi­an — and power­ful — in­dustry groups in a state, as well as loc­al cham­bers of com­merce.

There’s noth­ing il­leg­al or un­der­han­ded about us­ing the des­ig­na­tion this way, though any 501(c)(6) or­gan­iz­a­tion does have to meet cer­tain re­quire­ments to be a con­sidered a busi­ness league. Ap­par­ently Free­dom Part­ners has sat­is­fied them. Dav­is said the IRS of­fi­cially re­cog­nized his group in Janu­ary of last year after it was in es­tab­lished the pre­vi­ous Novem­ber.

And it’s not en­tirely without pre­ced­ent. The con­ser­vat­ive Amer­ic­ans for Job Se­cur­ity set up shop back in 1997 as a 501(c)(6). But oth­er­wise, Free­dom Part­ners ap­pears to be in un­charted wa­ters. “We’ve seen sig­ni­fic­ant amounts of money spent through (c)(6)s, but they’ve been through well-es­tab­lished, more well-known trade or­gan­iz­a­tions like the Cham­ber of Com­merce,” said Paul S. Ry­an of the Cam­paign Leg­al Cen­ter.

Mar­cus Owens, who for 10 years ran the IRS of­fice that over­sees tax-ex­empt or­gan­iz­a­tions, said that while he didn’t see an ob­vi­ous be­ne­fit to the new status, it might just serve to com­ple­ment oth­er groups in the Koch Broth­ers net­work. They already have their hands in 501(c)(3)s, such as the Amer­ic­an Le­gis­lat­ive Ex­change Coun­cil, and 501(c)(4)s, such as Amer­ic­ans for Prosper­ity, plus their com­pany’s PAC, so a 501(c)(6) is the next lo­gic­al place to ex­pand to cre­ate a new giv­ing op­tion for donors.

“It strikes me as maybe the Koch Broth­ers are try­ing for one of each kind of or­gan­iz­a­tion. Maybe next they’ll set up a labor uni­on!” Owens quipped. Call it the cam­paign fin­ance ver­sion of EGOT­ing.

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