A Washington ethics watchdog group filed a complaint with the Internal Revenue Service on Tuesday against Freedom Partners, an Arlington-based nonprofit formed by the billionaire industrialist Koch brothers, asking the agency to investigate whether the group exploited a new loophole in campaign finance laws to give out anonymous “dark” money to conservative groups.
The petition challenges the tax-exempt status of Freedom Partners as the equivalent of a trade association or chamber of commerce under Section 501(c)(6) of the tax code. The definition of who qualifies for the status is ambiguous, as the IRS has never provided guidance as to what activities qualify for the designation.
“If there’s a loophole in the tax code, it’s a sure thing that someone will take advantage of it,” said Melanie Sloan, executive director of the Citizens for Responsibility and Ethics in Washington, which filed the complaint. “If the IRS fails to act, Americans should expect to see an increase in the number of so-called business leagues created to funnel money into our elections while cloaking the identities of their donors.”
The complaint says that Freedom Partners during the 2011 tax-reporting period provided more than $235 million in grants to 30 politically active tax-exempt groups, including the National Rifle Association and the Center to Protect Patient Rights.
“Because the grants were provided for ’general support,’ there is no guarantee the money was spent furthering the common business interests of Freedom Partners and its members, as the law requires,” the watchdog group said in a statement accompanying its complaint.
In addition to giving to like-minded ideological groups, nonprofits classified under Section 501(c)(6) are increasingly influential in political campaigns. In 2010, such groups spent $46 million on federal campaigns. In 2012, the figure increased to $55 million.
Billionaire brothers Charles and David Koch head Koch Industries, one of the nation’s biggest industrial conglomerates. They have given heavily to Republican, conservative, libertarian and free-market causes and candidates in recent years.
“It’s not surprising the Soros and Democracy Alliance funded CREW is attacking an organization that supports free-markets,” Freedom Partners said in a statement to The Washington Times.
“Freedom Partners Chamber of Commerce follows all IRS regulations as a non-profit, nonpartisan business league that advances our members common business interests by promoting free-market policies. All of our activities are described in our tax Form 990 which is posted on our website.”
Freedom Partners describes itself as a “nonpartisan chamber of commerce.”
According to the group’s tax filing, which also appears on its website, Freedom Partner’s 2012 grants went to business groups such as the U.S. Chamber of Commerce and the National Federation of Independent Business, but also to the NRA, the Tea Party Patriots and the Heritage Foundation’s advocacy arm, Heritage Action for America.
Joseph Sandler, a campaign finance analyst and cofounding partner of the law firm Sandler Reiff Young & Lamb, said that the problem highlighted by the Citizens for Responsibility and Ethics in Washington petition was one that deserved greater scrutiny from the IRS.
“There are a lot of groups out there that are pressing the IRS for greater clarification on the extent to which the resources of a 501(c)(6) organization can be used for partisan activity,” Mr. Sandler said. “The clarification from the IRS is definitely something that is needed.”
According to Mr. Sandler, it is difficult to predict the outcomes of these investigations or whether any changes will be made, but he believes that action needs to be taken. “Most agencies put out rules and regulations for these organizations and the IRS hasn’t done that for years. Whether [acting IRS Director Danny Werfel] is going to spur some change is unclear.”
Campaign finance watchdogs have focused in recent years on political groups registering as “social welfare” organizations under Section 501(c)(4) of the IRS code. Much of the controversy over the Obama administration’s suspected vetting of tea party groups involved agents dealing with organizations applying for that status.
But Citizens for Responsibility and Ethics and other watchdogs say the Section 501(c)(6) business group definition could prove problematic. Jim Clarke, senior vice president of public policy at the American Society of Association Executives, told National Journal recently that the 501(c)(6) status could make it easier for businesses to write off donations and may insulate groups from regulatory pressure.
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