Feb. 10, 2016

Rules of the Game: Shining a Light on Political 'Dark Money'

As secret political spending escalates in the final weeks before Election Day, it's not too early to ask: What can be done to bring "dark money" out from the shadows?

Even more than super PACs, secret money may well define the post-Citizens United era. As of Oct. 1, political spending by outside groups that do not disclose their donors had hit $122.7 million, according to the Center for Responsive Politics - more than twice their totals at the same point in 2010 and 2008, which hovered in the $45 million to $47 million range.

The rub for secret money critics is that pulling back the curtain on such groups is harder than it looks. The DISCLOSE Act, the campaign finance transparency bill authored by Democrats on Capitol Hill, faces unanimous GOP opposition. The Federal Election Commission is hamstrung by partisan gridlock; the IRS by its aversion to political controversy.

Still, there are several modest, practical steps that Congress could take to bring undisclosed campaign money into the open, and some even have bipartisan support. Many simple, interim fixes focus on the IRS, an agency that has largely been left out of the campaign finance debate but whose importance is growing as political money travels further underground.

Historically, the IRS has protected the anonymity of donors to 501(c)(4) social welfare groups, along with other tax-exempt organizations such as 501(c)(3) charities and 501(c)(6) trade groups, and for good reason. As the Supreme Court established in its landmark 1958 NAACP v. Alabama ruling, anonymity protects potentially unpopular citizen groups from government intrusion.

But this election's secret money is being spent not by vulnerable civic groups, but by multimillion-dollar campaign-style
organizations. The big spenders are
501(c)(4) tax-exempt groups whose organizers say they're promoting the social welfare but whose hard-hitting ads, robocalls, direct mail and door knocking operations give them all the trappings of political campaigns. Tax law expert Frances Hill, of the University of Miami, has dubbed these players "super (c)(4)s."

The top two such groups - the GOP-friendly nonprofits Crossroads GPS and Americans for Prosperity - had collectively spent $173.8 million on ads targeting candidates as of late September, according to the Sunlight Foundation. That's more than the top four super PACs combined, which, according to Political MoneyLine, have doled out $170.2 million.

"Wealthy, powerful individuals and financial interests are not the equivalent of a small, vulnerable, persecuted minority," noted Trevor Potter, president and legal counsel of the nonpartisan Campaign Legal Center and a former FEC chairman.

An obvious first step for the IRS, Potter and other campaign finance experts say, would be to draw a clear, bright line between legitimate "social welfare" spending and overt campaign spending. IRS regulations now rely instead on a complex, multipart test based on "facts and circumstances" to draw that line, leaving political players on both sides of the aisle wondering just what's permitted.

"The IRS standards for what constitutes political intervention is an 11-part test, which is thoroughly subjective," Potter said. "I think it would be very helpful from an IRS standpoint and a tax-exempt-law standpoint for the IRS to clarify what 501(c)(4) organizations can and can't do."

Other relatively straightforward fixes that tax experts say Congress could ask the IRS to pursue include:

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