Robert Maguire is a researcher at opensecrets.org, a non-partisan nonprofit organization which tracks money in U.S. politics.
Ever hear the one about the social welfare organization that was punished by the IRS for its political activity? The lawyer who got the letter was so shocked by the news, he forgot to thank the flying pig that delivered it.
If you’re thinking to yourself, but wait, I’ve heard that nonprofit organizations are subject to strict oversight by the IRS and the FEC, and there are rules that forbid such groups — which don’t have to disclose their donors to the public — from devoting more than half of their activity to politics, then first of all, you’re adorable.
Second, those statements are all…let’s call them “truth adjacent.” Not because the rules don’t exist, but because they either aren’t enforced or, in some cases, aren’t widely enforceable to begin with. Oversight is always a theoretical possibility. But so is the Second Coming, and the way things are going, street preachers will soon be wearing sandwich boards that read “The End is Nigh” on one side and “Effective Regulation of Dark Money In the Current Political Environment Probably Isn’t (I’m not that crazy).”
The problem is that agencies like the IRS and, let’s not forget, the Federal Election Commission — which has more oversight of the “political” part of “politically active nonprofits” — are about as good at effectively policing dark money groups as your cat is at catching reflections on the wall.
For starters, the IRS itself doesn’t even have an established standard for measuring political activity, and that — coupled with the fact that the agency doesn’t have enough money to train its employees anymore — can lead to situations like the one discovered by a 2014 FBI probe, wherein those whose job it was to review 501(c) applications for tax-exemption didn’t actually understand the rules they were enforcing. This, in a nutshell, is why the list of nonprofits that have reported political spending to the FEC and have been denied tax-exempt status by the IRS can be summed up in a single bullet point, while the list of politically active groups with the IRS’ seal of approval is getting longer and longer.
The FEC, for its part, is a federal agency that most resembles your stubborn grandparents bickering about whose fault it is there’s a leak in the basement. They fight for a little while, then give each other the silent treatment until the basement fills up and, finally, decide that there’s nothing they can do now because the basement’s ruined.
But they’re still together after more than 40 years. Cute!
And then there’s Congress, which, well, obviously makes things worse.
This is all driving at one very important point: Nearly every report about some secretive “Dark Money” 501(c)(4) that just popped up and started running ads about how your senator is a terrible person who uses Snapchat just to keep up with Nickleback (Monster!) includes a line about how dark money groups aren’t allowed to devote most of their efforts to influencing elections.
Now, it’s true that, absent some specifically defined limit on political activity, the generally accepted standard is less than half, or 49 percent, of a 501(c)(4)’s operations can be devoted to influencing elections. But — and this is important — that doesn’t mean that nonprofits don’t routinely spend all or most of their money on elections.
The fact of the matter is that it’s really quite easy to do, and they don’t even have to openly flout the rules — but they can do that too, and probably won’t get in trouble. No, all you need to do to spend 100 percent of your anonymous nonprofit money on elections is to learn this little magic trick.
A Trick is Something a Lawyer Does for Money
Magicians have a saying that goes “Once revealed, never concealed.” That is, once someone points out how something works, you start to see it all the time. It’s what happens when someone teaches you a card trick or points out how JJ Abrams uses lens flares all.the.damn.time.
So, before you’re inducted into the Academy of Dark Money Illusions, have a look at the infographic below. And listen, we get it. The whole point of an infographic should be that you don’t actually have to explain it. But bear with us. Dark money isn’t as complicated as, say, trying to explain how counterinsurgency works in a powerpoint, but it’s still pretty complicated (which is why we launched our new site, DarkMoney.org).
Really soak it all in, and ask yourself how $10 million in anonymous contributions becomes more than $20 million in overall spending in the network of dark money groups, before being condensed back into $10 million in political spending.
You may be saying, “It doesn’t make sense, there’s only $10 million to begin with!” To which we say, “MAGIC!” (Or…er….”ALCHEMY!” I’m really mixing metaphors at this point.)
Here’s how it works. In the first step, the $10 million in anonymous contributions is divvied up into three contributions to Groups A, B and C. These three groups then spend half, or more, of their revenue on grants to other groups in the network, either to the other two original groups, or to a fourth group in the network, Group D, which then gives money to a fifth outfit, Group E, which is a group that has operations independent of the network (we’ll be back to that shortly).
The donor counts each grant as fulfilling the “social welfare” mission for which it ostensibly sought tax-exempt status to begin with — while offsetting its spending on politics. Meanwhile, each grantee tallies the grant as revenue — and, once it goes out the door, as spending that it uses in calculating its ratio of permissible spending to political activity. (Since the IRS doesn’t have a standard for measuring political activity, the permissible spending-to-political activity ratio is sort of the de facto metric.)
Having made a sufficient number of grants to other groups in the network, each group then spends the rest of its money on direct political activity. Group E, for its part, spends the money that Group D gave it on political activity — or, since money is fungible, it spends its own money now that it has just been offset by the contribution from Group D.
This isn’t always the way it happens in the real world. For example, some groups will further insulate themselves from oppressive nonregulation by spending heavily on “educational” — which is to say, “often demonstrably false” — issue ads that are really just thinly veiled political ads. Most of the time, these ads don’t have to be reported to the FEC, so there’s little chance of the IRS noticing them without an audit.
The network laid out in the infographic fulfills all of the requirements for Dark Money Magic. First, if you calculate all of the money coming into the networked groups from the beaker at the top, there is in fact only $10 million. Second, if you look at each group individually, you would see that they are all spending the entirety of the funds they received, but never devoting more than half of their spending to clearly political activity. Third, you will see that the money going into the beaker at the bottom does indeed add up to $10 million, despite the fact that if you add up the total spending for Groups A through D, and include just the $2.75 million in political spending for Group E, you see that the net spending for all of the network’s activities is $20.3 million, more than double the amount of money put into the network in the first place.
Ta-da! (Don’t forget to tip your magician generously on the way out.)
So, why is there a non-network group or “established nonprofit” — Group E — in the infographic? This is to illustrate a common tactic wherein a group, or network of groups, will get an established nonprofit — one that has a clear social welfare function but is also a political ally — to allow the shell nonprofits to piggy back its political spending during an election year. Because the established group already has its own donor base and year-to-year activities, it has very little chance of being held to any account by the IRS for one year of abnormal spending; it also helps that the IRS only audits seven out of every 1,000 annual nonprofit tax returns every year.
The best example of this practice in the wild is Americans for Tax Reform, which has received massive cash infusions from groups like Crossroads GPS and the Center to Protect Patient Rights, always during election years, that inevitably materialized as some sort of political spending. There is no evidence that Americans for Tax Reform has ever been penalized by either the FEC or the IRS for being a passthrough.
Now that you are an expert in the dark arts and you understand that the ability of a nonprofit to spend up to half of its money on activity effectively means it can spend all of its money on political activity, consider that IRS Commissioner John Koskinen has spoken favorably of the 49 percent rule, even asserting that it is “the framework Congress has set up,” which it’s not. It’s not even a rule, actually. It’s just an interpretation of conflicting legal and regulatory statements that say, on the one hand, 501(c)(4)s must be devoted “exclusively” to the promotion of social welfare and, on the other, that they must be devoted “primarily” to the promotion of social welfare.
All the Wrong People Already Know This
Don’t worry about people reading this and using it as a blueprint for their own dark money networks. We’re not telling them anything their lawyers don’t already know. We’re telling you so that you can start spotting them in the wild.
You can look at the daisy chains of contributions in the Koch network, for example, and start to understand that as the money flows through each node in the network, it racks up revenue and expenditure totals that exist only on paper and can later be used to offset political spending without any of the groups having to worry about disclosing donors in the future.
But there’s one more thing the lawyers know that you can’t do anything about in the short term: None of these groups will have to report any of these transfers until long after the election is over. Indeed, by the time all of the dark money groups active in the 2016 race so far file their annual tax returns, Beyoncé’s #LEMONADE will be so old — more than a year-and-a-half — that people will refer to it as “That time Beyonce made a film about enjoying a refreshing summer drink with her friend Becky.”
Put another way, remember that movie The Interview that North Korea got really angry about, precipitating a hack of Sony Pictures that made Sony really embarrassed? That is closer to the present, chronologically, than the deadline for the groups we are tracking today to file their returns with the IRS. And if there’s one thing that both the entertainment industry and politics have in common, it’s that a year-and-a-half is ancient history.
(Ok, that, and sex scandals.)
