Tracking 501(c) Non-Profit Groups Active in Elections
By Taylor Lincoln
While controversy has shone a spotlight on the activities of Section 527 groups in the 2004 elections, other groups registered under the section of the tax code reserved for social welfare organizations, unions and business leagues have continued to spend millions of dollars to influence the outcomes of elections without oversight or detailed disclosure requirements.
These electorally active groups registered under Sections 501(c)(4), 501(c)(5) and 501(c)(6) of the tax code are able to operate with greater secrecy than other types of organizations, such as federally regulated political action committees (PACs) and 527 groups. Section 527 groups take their name from the section of the IRS tax code reserved for political organizations. The financial disclosure requirements governing PACs and 527s leave Section 501(c) groups uniquely empowered to receive unlimited contributions from corporations, unions and individuals; to spend the money to influence the outcomes of elections without having to disclose how and on what races it was spent; and to shield their donors’ identities from view.
The New Stealth PACs: Tracking 501(c) Non-Profit Groups Active in Elections is a first-of-its- kind database created by Public Citizen’s Congress Watch that chronicles the activities of 30 groups that have been active since 2000 in influencing elections, the IRS definition of political activity. The database is available at a newly launched Web site, http://www.stealthpacs.org/.
Compiling this information was a major task. There are no Federal Election Commission (FEC) disclosure reports to rely on, as there are for PACs, nor is there a database like the one the IRS maintains on the activities and finances of 527 groups. As a result, the information in the New Stealth PACs database and this report is incomplete and only begins to tell the shadowy story of the electoral activities of the 501(c) groups.
Public Citizen relied on an assortment of government documents, media reports and academic studies to piece together its database. The database includes information on:
- More than 450 political advertisements and other election-oriented communications disseminated by the New Stealth PACs to affect at least 136 contests from 2000 to 2004;
- Groups’ revenues, general expenditures and election expenditures, as reported to the IRS;
- Never-before-published data disclosing the amounts of large contributions to the groups and
the percentage of overall revenue groups have received from major donors;
- Key personnel of New Stealth PACs and their political affiliations;
- Funders of the groups, when available; and
- Selected formal affiliates and coalition partners of the groups.
Besides providing a useful resource to the media and the public, Public Citizen hopes this database and report will motivate the IRS and members of Congress to consider much-needed reforms to this shadowy area of campaign finance.
Key findings from analysis of the New Stealth PACs database include:
Section I: Overview of the Political Activities and Characteristics of New Stealth PACs
- At least $91 million was spent by 26 of the 30 501(c) groups studied to influence the outcomes of at least 117 electoral contests in 2000 and 2002.Public Citizen’s $91 million estimate is almost certainly too low, probably by many tens of millions of dollars. This is because spending figures for broadcast ads are typically much higher than is reported in the news media or academic studies. The estimates also exclude the cost of many election activities – such as direct mail, telemarketing and voter identification –for which no spending estimates are available. For example, the database includes estimates for only two of 24 contests in which 60 Plus Association was involved and only one of the 11 races in which the Seniors Coalition was active in 2002.
- At least 13 of the 30 501(c) groups studied have been active in 2004 contests; two groups have announced plans to spend more than $40 million each by November. Two of the biggest players, the AFL-CIO and the U.S. Chamber of Commerce, each have reportedly budgeted at least $40 million to influence elections this cycle. The Chamber has designated Senate Minority Leader Tom Daschle (D-S.D.), who is up for re- election, as its chief target and began a $400,000 advertising blitz in August. United Seniors Association, which spent an estimated $13.6 million influencing elections in 2002, has broadcast television advertisements to affect at least 17 contests in 2004, including expenditures of at least $370,500 to boost the candidacy of one Pennsylvania congressman. The League of Conservation Voters 501(c)(4) division already has spent more than $1 million to influence elections in 2004, mostly to oppose President Bush. Americans for Job Security, the poster child for electorally active Republican-leaning 501(c) groups, has launched television campaigns in three U.S. Senate contests; the group has spent more than $700,000 on ads boosting the prospects of Rep. Richard Burr (R-N.C.) against Democrat Erskine Bowles in the race for North Carolina’s open Senate seat. Because the Bipartisan Campaign Reform Act (BCRA) prohibits ads depicting candidates within 60 days of a general election from being funded with corporate or union money, many groups may have turned to harder-to-track activities such as voter identification, direct mail, telemarketing and base-voter mobilization.
- Republican-leaning 501(c) groups outspent Democratic groups 61 percent to 39 percent in the 2000 and 2002 election cycles. Groups within Public Citizen’sstudy aligned with the Republican Party spent $55.8 million to influence elections in 2000 and 2002, while Democratic groups spent at least $35.2 million, according to Public Citizen estimates. The disparity was most pronounced in 2002, when pro-Republican spending outpaced pro-Democratic spending by at least $25.1 million to $7.8 million, better than a 3- to-1 ratio. Again, these estimates are most likely far below the amounts that were actually spent.
- New Stealth PACs are highly partisan. Though many electorally active 501(c) groups claim to be non-partisan, those attempting to influence elections almost always use most of their resources to help a single party. From 2000 to 2003, 22 of the 27 active groups during that period exclusively favored candidates from one party. Excluding the primaries, no group favored candidates from one party less than 80 percent of the time.
• “Grassroots” 501(c) groups are often funded by only a few supporters. By obtaining never-before-published data showing the amounts of contributions to groups (but not the donors’ names), Public Citizen learned that several purportedly “grassroots” groups received nearly all of their funding from a few big donors. The 60 Plus Association, which claims 225,000 members, received 91.4 percent of its revenue ($11 million) from a single contributor in 2002, according to its tax form. The United Seniors Association, which claims 1.5 million members, received 79.1 percent of its money – $20.1 million – from a single donor that same year. America 21, which purports to be an evangelical Christian organization, reported to the IRS that it received 98.3 percent of its funding – $3.65 million –from a single contributor in 2002. Citizens for a Sound Economy (now known as Freedom Works), which claims 280,000 members, received 78.6 percent of its funding in 2000 and 2002 from an average of 56 donors who gave $5,000 or more each year.
- The Pharmaceutical Research & Manufacturers of America (PhRMA) appears to have given nearly $41 million to four New Stealth PACs in 2002. By obtaining redacted copies of the IRS forms on which groups report their big contributions, Public Citizen learned that two supposed senior citizens advocacy groups – the United Seniors Association and 60 Plus Association – received contributions of $20.1 million and $11 million, respectively, in 2002. PhRMA, the main trade association for the drug industry, reportedly gave “unrestricted educational grants” to both groups in 2002, and both groups disseminated substantial communications promoting PhRMA-favored political candidates that year. Evidence strongly suggests that PhRMA was responsible for the $31.1 million in contributions. Further evidence suggests that two other organizations promoting PhRMA- favored candidates, the Seniors Coalition and America 21, may have received contributions of $6 million and $3.65 million, respectively, from PhRMA. All four groups helped to elect candidates who supported industry-backed Medicare prescription drug legislation. In 2003, Congress passed a landmark Medicare prescription drug law that was favored by PhRMA. It will result in billions of dollars in new business to the drug companies but it blocked the federal government from using its bulk purchasing power to negotiate lower drug prices. The bill also effectively prohibits the “reimportation” of lower-cost prescription drugs from countries such as Canada. This electioneering could have made the difference in the passage of the Medicare prescription drug bill, which passed the House by only five votes.
- “Qualified Non-Profit Corporations” (QNCs) can evade advertising restrictions immediately before an election. QNCs are ideological 501(c)(4) groups that do not accept money from corporations or unions. They are able to broadcast ads mentioning candidates right up to Election Day. Under BCRA, other 501(c) and 527 groups are prohibited from running such ads unless they establish separate accounts that don’t include corporate or union money, a far less appealing option than simply drawing funds out of agroup’s treasury. If other 501(c) and 527 groups set up the separate accounts, they must report itemized contributions and expenditures to the FEC. QNCs, however, are not generally required to report detailed contributor data. Two Democratic-leaning groups – Planned Parenthood and NARAL Pro-Choice America – are poised to take advantage of their QNC status in 2004. Another, the League of Conservation Voters, has already made extensive use of its QNC status to oppose President Bush.
Section II: Some New Stealth PACs May Be Violating Their Tax Status and IRS Disclosure Requirements
- Despite documentation of sizable election expenditures, most 501(c) groups studied report no such expenditures to the IRS. The IRS requires 501(c) groups to report “political expenditures,” which it defines as spending “intended to influence the selection, nomination, election, or appointment of anyone to a federal, state, or local publicoffice.” But few groups appeared to provide accurate data to the IRS. Of 15 groups disseminating messages in 2000 that appeared intended to influence elections, only five reported any political expenditures to the IRS. Those five groups reported $11.3 million in political spending to the IRS, whereas Public Citizen estimates that the 15 groups spent at least $58.1 million. Of 21 active groups in 2002, only four reported any political expenditures. Those four groups reported about $950,000 in political spending, but Public Citizen estimates the 21 groups spent at least $32.9 million. The NAACP National Voter Fund and the Planned Parenthood Action Fund stood out as groups that reported substantial political expenditures.
- One-third of the 30 groups in the studied may have violated the terms of their 501(c) status. The IRS allows 501(c) groups to engage in substantial activities to influence elections, but these actions may not constitute the groups’ primary activity. The lack of accurate disclosure by the groups makes it impossible to draw definitive conclusions. But Public Citizen found that 10 of the 30 groups studied engaged in enough election-related activity relative to their revenues in 2000 and 2002 to raise questions as to whether they violated the terms of their tax status. The groups were: 60 Plus Association, America 21, American Family Voices, Americans for Job Security, the American Taxpayers Alliance, Every Child Matters, the Law Enforcement Alliance of America, the Seniors Coalition, Social Security Choice.org, and United Seniors Association. Eight of these groups overwhelmingly supported Republican candidates. At least one additional group, Citizens United, may be pushing the bounds of its tax status in 2004.
- At least two organizations financing election activities by 501(c) groups failed to disclose grants to other organizations. The IRS requires 501(c) groups to disclose“grants & allocations” to other organizations. Yet on its 990 form for 2002, PhRMA failed to report “unrestricted educational grants” it provided to the United Seniors Association and the 60 Plus Association. Likewise, the U.S. Chamber of Commerce did not report a $2.6 million grant to the American Taxpayers Alliance in 2002 – though the ATA acknowledged receiving the grant on its own tax forms. The Chamber also reportedly funneled money into local judicial contests through groups such as Mississippians for Economic Progress. Neither PhRMA nor the Chamber would explain to Public Citizen why it listed no grants or whether it counted these payments as “lobbying and political” expenditures on its tax forms. If either group failed to categorize their grants as “lobbying and political” expenditures it would raise the possibility that tax-deductible contributions from their members financed the political ads run by United Seniors Association, 60 Plus Association and the American Taxpayers Alliance. If so, these contributions would amount to a prohibited tax break.
• Four 501(c) groups have been accused of violating state election laws. State courts and election boards in at least six states have accused 501(c) groups of illegally influencing elections, either for failing to make proper disclosures or engaging in outright illegal activity. The U.S. Chamber of Commerce has been accused of breaking laws inMississippi and in Ohio, where the state election board found that the Chamber actually crossed the “express advocacy” standard. The American Taxpayers Alliance has been accused of breaking laws in California and Illinois. The Law Enforcement Alliance of America has been accused of breaking laws in Illinois and Pennsylvania, and is under scrutiny in a Texas grand jury investigation into allegedly illegal corporate electioneering activity. The results of the legal challenges have been mixed. The groups often successfully argued that their messages did not satisfy the constitutional test for electioneering, because they did not use “express advocacy.” But these challenges provide additional evidence that the groups have tried to influence elections, even though most of them reported zero“political” expenditures to the IRS.
Section III: Policy Recommendations to the IRS, FEC and Congress for Improving Disclosure of Election Activities by 501(c) Groups
- The IRS should reiterate to 501(c) groups the distinction between “political”expenditures and “lobbying” expenditures. The New Stealth PACs database reveals that many electioneering non-profit groups have disregarded the filing requirements of Line 81 on the Form 990, which calls for organizations to declare their expenditures to influence elections. To achieve more accurate reporting of political versus lobbying expenditures, the IRS should republish its longstanding definitions that distinguish between political and lobbying activity, highlight these distinguishing definitions on the appropriate forms, and reiterate the distinction in a newly issued Revenue Ruling.
- The IRS should add a new line to Form 990 for “candidate-relatedexpenditures.” Currently, the IRS lacks a bright-line standard to help distinguish sham issue advocacy ads – electioneering communications clearly designed to influence the election or defeat of candidates – from genuine issue advocacy ads. Form 990 should be modified to include a separate category where groups declare the amount of expenditures made for paid communications, distributed beyond the organization’s membership, that depict a formal candidate for public office through electronic means (other than the Internet), print, direct mail and telemarketing (except direct mail and telemarketing conducted primarily to fund the organization’s advocacy and lobbying activities), and that target that candidate’s voting constituency. These candidate-related expenditures may or may not be expenditures intended to influence elections. But the designation of expenditures that depict candidates and target their constituencies will help flag to the IRS those groups that may be conducting substantial communications to affect elections.
- The IRS should provide a means for reporting transfers and grants among 501(c)(4), 501(c)(5) 501(c)(6) and Section 527 groups. Funds frequently are transferred between non-profit entities, with one group serving as a fundraising vehicle for another entity, such as a 501(c)(4) transferring money to a 527 organization. While such transfers are permissible as long as the funds are not used for purposes otherwise prohibited for the original non-profit group that raised the funds, they do pose the potential for providing an ever-larger flow of untracked soft money into federal and state elections. To preserve the integrity of both campaign finance law and the tax code, the IRS must provide a better means for tracking transfers among affiliated as well as unaffiliated non-profit entities and enforce its requirement that groups disclose grants to other organizations.
- The IRS should create a searchable, sortable, downloadable electronic filing and disclosure system for Form 990 filings. Obtaining the Form 990 for any particular non-profit group is an arduous task, even though these documents are required to be disclosed as public records. A group’s Form 990 must be requested in writing from the IRS or the organization or in person at the organization’s headquarters. (One organization in the New Stealth PACs database, the Law Enforcement Alliance of America, refused to provide its 990 to Public Citizen in violation of the law.) The only effective way to make these records readily available to the public is to require all 501(c) groups recording contributions or expenditures of at least $50,000 a year to file their 990 forms electronically with the IRS. The IRS should use its electronic disclosure system for 527 groups as a model for also making 501(c) filings easily accessible to the public via the IRS Web site.
- The FEC should enforce its existing disclosure regulations for Qualified Non-Profit Corporations (QNCs). FEC regulations place similar disclosure requirements on non-profit groups, including Qualified Non-profit Corporations, however the election agency does not enforce these disclosure requirements for QNCs. This special category of 501(c)(4) organization is, in practice, currently exempted from disclosing contributions unless the gifts are explicitly earmarked for specific electioneering activity. The FEC should place these groups on par with all other non-profit groups that engage in electoral activity. QNCs that make independent expenditures or electioneering communications should be required to report the sources of the contributions used specifically to pay for those political communications as well as their itemized expenditures, as all other non-profit groups must.
- Congress should amend the tax code to hold those who prepare and file 990 forms reasonably responsible for the accuracy of the reports. Like preparers of most other filings with the IRS, a tax preparer for a 501(c) should be subject to financial penalties for failure to include the required information or to report the correct information on 990 forms, if the preparer should have reasonably known that such information was incomplete or inaccurate. These penalties should be modest but escalate depending on the degree of neglect or deliberation in the errors.
• Congress should increase funding for monitoring and enforcement of electioneering of 501(c) organizations by the IRS Exempt Organizations Division. The Exempt Organizations Division of the IRS, which regulates non-profits, is at a disadvantage compared to other divisions in terms of allocation of resources. It is the one IRS division that does not derive significant funds from fines. As a result, the Exempt Organizations Division is viewed as a minor, cost-inefficient wing of the IRS and is not allocated adequate resources to monitor non-profits and enforce compliance with the tax code. Congress needs to establish an adequate funding mechanism for the Exempt Organizations Division of the IRS to ensure that the tax code does not continue to be a haven for those who want to evade federal election laws.