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Rules of the Game: Bad News for Nation’s Nonprofits

In an election that until lately has been dominated by super PACs, politically active nonprofits are the new bad guys, drawing ethics complaints, letters to the IRS and legislative action.

That is bad news for the nation’s 1.6 million nonprofits, which have much to lose as their sector gets dragged into political money controversies. For reform advocates, the problem with big-spending, secretive nonprofits is that they answer to no one and keep voters in the dark. But the worst damage inflicted by unrestricted, undisclosed campaign money could be on nonprofits themselves.

“Charitable organizations depend on the confidence and trust of the public for support,” said Diana Aviv, president and CEO of Independent Sector, which represents the nonprofit and philanthropic community. Campaign spending by nonprofits, she added, could pose “a serious reputational risk” to the sector.

Overtly partisan groups such as the Karl Rove-founded nonprofit Crossroads GPS and the White House-friendly nonprofit Priorities USA Action have drawn fire for blurring the line between legitimate social welfare advocacy and blatant politicking.

Independent Sector has put together a task force to respond to the explosion in political spending by tax-exempt organizations, particularly 501(c)(4) social welfare groups. The Supreme Court’s Citizens United v. Federal Election Commission ruling lifted campaign spending limits not just on corporations but on all incorporated groups, including unions, trade associations and 501(c)(4) nonprofits.

Such tax exempt groups have drawn as much or more controversy lately than the hundreds of unrestricted super PACs ushered in by Citizens United. That’s because unlike super PACs, which at least in theory must disclose their activities to the FEC, nonprofits face no disclosure requirements whatsoever.

Yet some 501(c)(4) social welfare groups are making direct transfers to super PACs, and others are spending tens of millions of dollars on TV ads that look a lot more like campaign commercials than educational messages. In 2010, the first election after Citizens United, non-disclosing tax-exempt groups spent $133.3 million on candidate-oriented expenditures, according to the Center for Responsive Politics.

In 2012, election-related nonprofit spending is expected to soar even higher. Crossroads GPS collected an estimated $32.6 million in 2011 — far more than the $18.4 million raised by the group’s affiliated super PAC, American Crossroads. Together, the groups have said they will spend $240 million.

The conservative super PAC FreedomWorks for America received $1.4 million — nearly half of its $3 million budget — from its affiliated nonprofit FreedomWorks, according to the CRP. Two
Democrat-friendly super PACs — Priorities USA Action and American Bridge 21st Century, have received more than $200,000 apiece from their respective nonprofit affiliates.

All this has roiled reform advocates on and off Capitol Hill. A group of Democratic Senators recently called on the IRS to act “immediately to prevent abuse of the tax code” by politically active social welfare nonprofit groups. The Senators pledged to pursue legislation if the IRS fails to respond. House Democrats have introduced a disclosure bill that would require nonprofits, as well as super PACs, to reveal more about their election-related activities.

Watchdog groups have repeatedly asked the IRS to investigate. Most recently, Citizens for Responsibility and Ethics in Washington complained to the IRS and the FEC that the pro-business nonprofit Americans for Job Security violated tax laws by spending more than 70 percent of its money on political activities. The group’s organizers have denied any wrongdoing.

But reining in nonprofits is a lot harder than it looks. Going back to the Supreme Court’s 1958 ruling in NAACP v. Alabama, which found that the state could not compel the civil rights group to turn over its membership lists, nonprofits have enjoyed the constitutional right to keep their donors anonymous.

Attempts to regulate advocacy groups are notoriously politically charged. Witness the recent outcry over IRS questionnaires to tea party groups and the subsequent letter from a dozen GOP Senators warning the agency to steer clear of selective enforcement and “politics of any kind.”

The IRS permits 501(c)(4) and trade groups to engage in politics, as long as that is not their primary purpose. But it has failed to define clearly what that means.

“I think there is a lot of concern in the nonprofit community about this,” said Leslie Lenkowsky, an Indiana University professor who studies nonprofits. “The problem is: What do you do about it? It’s hard to see a solution that’s workable.”

Mainstream nonprofits face multiple risks — from losing donors to scandals that could lead to a new wave of regulation to losing sight of their mission.

Part of the answer, says Lenkowsky, lies with nonprofits themselves: “I think they should be a little more forthcoming about what they’re doing and who’s supporting them voluntarily — or preferably, from my point of view, cut it out and go back to delivering services.”

Nonprofit leaders tend to passionately defend their right to engage in public policy debates and to raise money anonymously. But some are beginning to recognize that undisclosed, unrestricted campaign spending is a problem they can no longer ignore.

“We can’t duck away from this and wait until after the election,” Aviv said. “This is something we have to engage ourselves, and figure out how we can resolve these conflicting goals of protecting donors’ right to anonymity and the public’s right to know about partisan political activity.”

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