The DISCLOSE Act and the Non-Profit Campaign Finance Loophole

By: James Duane

Thanks in no small part to the efforts of comedian Stephen Colbert, the issues around Super PACs and the campaign finance regime in this country have been elevated in the national consciousness. People following campaign finance are aware of the now famous 2010 Supreme Court decision in Citizens United v. Federal Election Commission (FEC), which held that corporate and union political speech, in the form of spending on independent and electioneering communications, is protected by the First Amendment. However, there is still considerable misunderstanding about how the system works and why corporate and union donations remain largely undisclosed. This post will attempt to briefly explain the main forces at work in keeping these donations in the shadows and the current most viable legislative fix, the Disclosure of Information on Spending on Campaigns Leads to Open and Secure Elections (DISCLOSE) Act of 2012 recently reintroduced in the House.

Super PACs are among the hottest discussion topics this campaign season and are used as shorthand for the problem that ail our campaign finance system, but, in fact, the issues around Super PACs are not quite so simple. Super PACs emerged not directly from the Citizens United decision but from a subsequent DC Circuit court case called SpeechNow v. FEC. In that case, the court held that corporations and unions were permitted to make unlimited donations to support political committees making so-called independent expenditures – political spending not coordinated with a campaign. After that decision the FEC began permitting independent expenditure political action committees (IE-PACs) which were soon dubbed Super PACs.

In terms of disclosure, super PACs are not much different from the PACs that existed prior to Citizens United. As discussed last year on this blog and other places, the Justices in Citizens United actually found that the disclosure requirements in the Bipartisan Campaign Finance Reform Act to be crucial. The Court went so far as to say, “[the] prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “ ‘in the pocket’ of so-called moneyed interests.” Citizens United v. FEC, 130 S. Ct. 876, 916 (2010). With that in mind, super PACs were required to file either monthly or quarterly (PAC’s choice) reports with the FEC detailing information about any contributor of more than $200 and itemized disbursements of over $200.

With the ban on corporate giving lifted by Citizens United and the vehicle to make those contributions created by SpeechNow (and subsequent FEC Advisory Opinions) one might have thought that the corporate money would have begun to pour directly into these new super PACs. However, that has not been the case. Many corporations are quite averse to having their brand tied to strong political positions for fear of alienating potential customers. Fortunately for them, the Internal Revenue Service (IRS) code had a ready-made loophole to hide those donations, just waiting to be exploited.

That loophole involved the use of a specific type of tax exempt organization known by the code provision which created it, §501(c)(4). A 501(c)(4) is a non-profit corporations established ostensibly for the “social welfare.” However, these groups are allowed to engage in limited political activity, provided the “major purpose” of the organization is still for the social welfare. While the major purpose test has not been officially defined by the courts or the IRS, commenters have speculated that an organization could remain exempt even if it is spending 40%-50% of its funds on political activities. Due to that large exception, these organizations have become the chosen pass-through for the unlimited political donations unleashed by Citizens United. 501(c)(4) organizations do have to report their donors, but only to the IRS, which does not make that information public. In practice, a donor that wished to remain anonymous, be it a person, a corporation, or a union could make a donation to a 501(c)(4), which then could funnel the money to a super PAC which could then make an independent expenditure to influence a political campaign. That super PAC then would publicly disclose its donor, the non-profit, in its regular FEC filings, effectively masking the true source of the contribution.

Examples of the 501(c)(4)-Super PAC binary system can be found on both sides of the political spectrum. On the Republican side, the American Crossroads Super PAC – founded by GOP operatives, Karl Rove and Ed Gillespie – is closely coordinated with Crossroads GPS, a 501(c)(4). The most prominent example on the Democratic side is President Obama’s Super PAC, Priorities USA Action – run by his former press aide Bill Burton – and the affiliated 501(c)(4), Priorities USA. As if these examples weren’t enough, Stephen Colbert truly drove home the point when he supplemented his Super Pac – Americans for a Better Tomorrow, Tomorrow –  with a 501(c)(4), appropriately named “Anonymous Shell Corporation.”

The Crossroads organizations, which have existed for a few years, provide an interesting case study in the current disclosure regime, which is, in effect only to the IRS because of the status of 501(c)(4)s. Crossroads GPS was founded in roughly July 2010, early enough to participate in the 2010 midterm elections. Through a series of readily available IRS extensions, it is entirely possible that the organization would not have to close that first fiscal year or make any public disclosures until May 2012. In that time, the organization may have legitimately operated as a social welfare organization, spending money on programing as well as some percent on political activities, or it may have been operating only as a smoke screen for political donors. However, since the IRS will not investigate an organization until its books are closed for a fiscal year, it would be possible for this group to have a major effect on two election cycles before anyone would be able to apply the “major purpose” test to see if Crossroads should have been regularly disclosing as political committee to the FEC, or if it was a proper social welfare organization.

The most viable current legislative proposal to fix this loophole is the DISCLOSE Act of 2012. A similar bill was introduced in the last term, passed the House, but died in the Senate. The current version of the bill, HR 4010, was reintroduced by Rep. Chris Van Hollen in early February. The DISCLOSE Act would require corporations, unions, 501(c)(4) organizations and many other groups to report to the FEC within 24 hours of making a campaign expenditure. The bill’s definition of campaign expenditure includes not only direct spending on independent expenditures but also transfers to other political committees. This would effectively close the pass-through loophole. Second, the bill would reveal the identity of donors to these groups by forcing these groups to make regular reports to the FEC, similar to how campaigns and PACs must report today.

The bill has far from universal support and its fate is unknown. In its last iteration, it received only two Republican votes in the House. Opponents of the bill claim that it would chill free speech or could lead to donor intimidation. Disclosure of donors and expenditures may not be a cure-all for everything that is wrong with the current campaign finance system but if the Supreme Court is to be believed and “transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages,” then it is certainly an important first step. Citizens United v. US, 130 S. Ct. at 916.

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