On October 18, 2010, the Campaign Legal Center, along with Democracy 21, filed an amici brief in Real Truth About Obama (RTAO) v. FEC to defend FEC rules that establish when a political organization must register as a federal “political committee” and abide by comprehensive federal disclosure requirements. 

“Given the explosion of anonymous spending and secret donors in the 2010 election cycle, it is vital to protect existing disclosure laws from legal attack,” Legal Center counsel Tara Malloy said.  “The Supreme Court has repeatedly recognized that disclosure is critical to ensuring an informed electorate and preventing political corruption.  We hope the district court in this case will follow in this tradition and reject the claims asserted by the Real Truth About Obama.”

Plaintiff RTAO, a “527 organization,” filed the case shortly before the 2008 presidential election because it wished to run ads criticizing then-Democratic nominee Barack Obama’s position on abortion without disclosing its donors or complying with other federal regulations applicable to political committees.  The district court denied RTAO’s motion for preliminary relief in September 24, 2008, and that decision was affirmed by the Fourth Circuit Court of Appeals.  Due to several subsequent judicial decisions, most notably Citizens United v. FEC, the Supreme Court on April 26, 2010, vacated the Fourth Circuit’s decision and remanded the case for further consideration in light of the Solicitor General’s suggestion of mootness.

Because the intervening judicial decisions mooted two of RTAO’s claims, the case upon remand now considers only RTAO’s challenge to the FEC’s definition of “expressly advocate” (11 C.F.R. 100.22(b)), and to the FEC’s implementation of the “major purpose” test for political committee status.  This rule and policy, however, are integral to the FEC’s enforcement of the federal disclosure requirements applicable to independent expenditures and to federal political committees.

The Legal Center highlighted in its amici brief that the case upon remand concerns only disclosure, emphasizing that the Supreme Court has twice upheld, by overwhelming 8-1 votes, laws promoting political transparency in this year alone.  The amici brief further argued that Citizens United had not cast doubt on the rule and policy that remained under challenge, and urged the district court to reaffirm its earlier decision rejecting RTAO’s challenge.

Previously, the Legal Center and Democracy 21 filed amici briefs with the district court on August 14, 2008, and with the Fourth Circuit on October 28, 2008.

As Staff Director of the Office of Congressional Ethics, Leo Wise served the House with distinction and deserves great credit for putting the OCE on the right track from the beginning.  His unwavering commitment to fair and impartial investigations brought new credibility to an ethics process in Congress that had come unhinged and frankly had become a public laughingstock. 

Leo approached his job professionally and without public fanfare, allowing the facts, rather than political considerations, to be his guide. We are sorry to see him go but wish him well in his new position at the Department of Justice.   We also commend OCE Co-Chairs David Skaggs and Porter Goss for allowing Leo to do his job effectively and without political interference.   It is critical that Mr. Wise’s replacement maintain the same high standards. 

Late yesterday, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Human Life of Washington v. Brumsickle, rejecting a First Amendment challenge brought by attorney James Bopp, Jr., to Washington state laws (1) requiring groups raising and spending money to influence ballot measure elections to register as political committees and disclose contributions received and expenditures made and (2) requiring others with more limited involvement in elections to disclose independent expenditures on political advertising to influence ballot measure elections. 

“Today’s ruling was a victory for citizens over special interests and shows that campaign finance regulation is still worth fighting for in the courts where, despite some recent setbacks, even the Roberts Court has continued to recognize the vital importance of disclosure to the health of our democracy,” said Paul S. Ryan, Campaign Legal Center Associate Legal Counsel.  “As more and more anonymous special interest money is flooding into the 2010 election cycle, the Ninth Circuit ruling is particularly important in light of the fact that disclosure laws are facing challenges from coast-to-coast.”

 The Campaign Legal Center filed a brief amicus curiae in the Ninth Circuit supporting the state’s defense of the disclosure laws.  As opponents of reasonable campaign finance laws attack disclosure laws from coast-to-coast, the importance of the Ninth Circuit’s decision can not be understated.

 At the heart of the case was the appropriate level of scrutiny to be applied to campaign finance disclosure laws.  In short, when a court applies “strict” scrutiny to a law, the law will frequently be deemed unconstitutional.  By contrast, when a court applies a lesser degree of scrutiny, as it did in this case, there is a much greater chance the law will be upheld if the government can prove it has a sufficiently important reason for enacting the law.  That is why the Legal Center’s brief in the court of appeals focused first on why disclosure laws should be subject to intermediate, not strict, scrutiny. Mr. Bopp had urged the court to subject Washington’s campaign finance disclosure laws to “strict” scrutiny and declare them unconstitutional.

 The Ninth Circuit’s decision embraced the Legal Center’s call for intermediate scrutiny, explaining that “[r]ecent Supreme Court decisions have eliminated the apparent confusion as to the standard of review applicable in disclosure cases[,]” and that a campaign finance disclosure law is constitutional if it is “substantially related to a sufficiently important governmental interest.”  This victory should enable those defending campaign finance disclosure laws to prevail in future cases, especially in those states within the Ninth Circuit (AK, AZ, CA, HI, ID, MT, NV, OR, WA). 

In a letter to the Internal Revenue Service today, Democracy 21 and the Campaign Legal Center called on the IRS to investigate whether Crossroads GPS, a 501(c)(4) tax-exempt organization, "is operating in violation of its tax status because it has a primary purpose of participating in political campaigns in support of, or in opposition to, candidates for public office."

Crossroads GPS was organized in July, 2010 as a "non-profit social action organization" under section 501(c)(4) of the Internal Revenue Code. In order to qualify for such tax status, the organization must not be "primarily engaged" in participating or intervening in political campaigns to support or oppose candidates. Crossroads GPS is affiliated with American Crossroads, a section 527 group.

The letter notes, "The status of Crossroads GPS as a section 501(c)(4) entity allows its donors to evade the public disclosure requirements that would apply if the organization was registered as a section 527 political organization." 

According to the letter, "if, in fact, Crossroads GPS is impermissibly operating as a section 501(c)(4) organization  in order to conceal its donors from the American people, the IRS has an obligation to take steps to protect the integrity of our tax laws and to make clear that such abuses will not be permitted in future elections."

"Absent timely and appropriate action by the IRS, such abuses will become common place in the 2012 presidential and congressional races, at the expense of the credibility of the tax laws and of the right of the American people to know the identity of the donors providing the money to influence their votes," the letter states.

Following the 2004 election, Democracy 21 and the Campaign Legal Center took action against section 527 groups for violating the campaign finance laws. Democracy 21 and the Campaign Legal Center called for an investigation of two pro-Democratic 527 groups, ACT and the Media Fund, the two biggest spending 527 groups in the 2004 presidential election.

In response to FEC complaints filed by Democracy 21 and the Campaign Legal Center against the two 527 groups, the FEC entered into conciliation agreements that found that the 527 groups, combined, had spent more than $150 million illegally in the 2004 presidential election. Both groups paid substantial civil penalties to the FEC.

According to Democracy 21 President Fred Wertheimer, "It is becoming clearer each day that goes by in the 2010 elections just what an unmitigated disaster theCitizens United decision is for the American people.  Not only has the decision unleashed a torrent of influence - seeking  money in our elections, but 501(c)(4) non-profit corporations are being used to hide the sources of hundreds of millions of dollars being spent in the elections, depriving voters of essential campaign finance information about who is trying to influence their votes." 

"In our view, Crossroads GPS is a classic example of a 501(c)(4) organization that is impermissibly using its tax status to spend tens of millions of dollars in the 2010 congressional races while hiding the donors funding these expenditures from the American people. The IRS cannot sit idly by and ignore what is going on without enormous damaging consequences to the interests of the American people and to the integrity and credibility of the tax laws," Wertheimer said.

"While the abuses of 501(c)(4) tax designation for no-fingerprint political attack ads seems rampant in this election cycle, the most blatant certainly appears to be Crossroads GPS" said J. Gerald Hebert, Executive Director of the Campaign Legal Center.  "The group makes almost no effort at all to hide the fact that it was created principally to impact the 2010 elections, and to take money from those interested in contributing to their efforts but doing so anonymously. The IRS has a duty to ensure that groups are not violating their tax status in this election cycle, and Crossroads GPS certainly seems like a logical place to start."

According to the letter from Democracy 21 and the Campaign Legal Center to the IRS:

Under applicable IRS standards, there is no requirement that an organization's activities and communications contain express advocacy or the functional equivalent of express advocacy in order to determine that the organization is engaged in "direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office."

If, in fact, Crossroads GPS is primarily engaged in political campaign activity under applicable IRS standards, it does not qualify for section 501(c)(4) status.  By cloaking itself in the status of a section 501(c)(4) social welfare organization, Crossroads GPS is avoiding the public disclosure obligations that the law imposes on nonprofit entities organized and operated primarily for the purpose of influencing elections. 

The New York Times recently quoted Marcus S. Owens, former head of the IRS division that oversees section 501(c)(4) groups, as saying with regard to the new 501(c)(4)s being formed this year:

"These groups are popping up like mushrooms after a rain right now, and many of them will be out of business by late November," Mr. Owens said.  "Technically, they would have until January, 2012 at the earliest to file anything with the I.R.S.  It's a farce."

This "farce" harms both the American people's right to transparency regarding the financing of federal elections, and the integrity and credibility of the nation's tax law. 

The letter states:

It is the job of the IRS to ensure that the nation's tax laws are not being improperly used by political operatives and political activists to hide campaign finance information which citizens and voters have a right to know, as the Supreme Court affirmed in its decision in Citizens United v. FEC, 130 S.Ct. 876 (2010).

The letter sent to the IRS today states:

According to published reports, Crossroads GPS is the brainchild of leading Republican Party political operatives and is operated by former Republican Party operatives.  Published reports indicate that Crossroads GPS was formed in order to support Republican candidates in the 2010 congressional races and that it is engaged primarily, if not exclusively, in activities to promote and support Republican candidates and to oppose and attack Democratic candidates in the 2010 congressional elections. 

The letter states:

According to a report in Time, "American Crossroads was the brainchild of a group of top Republican insiders, including two of George W. Bush's closest White House political advisers, Karl Rove and Ed Gillespie, both of whom remain informal advisers."  Another published report referred to American Crossroads and Crossroads GPS as "a political outfit conceived by Republican operatives Karl Rove and Ed Gillespie." According to the Los Angeles Times, both groups "receive advice and fundraising support from Rove."

The letter notes:

According to one published report, the organizers of American Crossroads and Crossroads GPS intend "to raise a combined total of 'approximately $50 million' to attack Democrats and boost Republicans heading into the 2010 midterm elections."

According to another published report, "Mike Duncan, chairman of American Crossroads, told The Washington Times that his group and [American] Crossroads Grassroots Policy Strategies (sic) plan to plow more than $49 million of it into 11 Senate races in anticipation that the Republican Party is within reach of a Senate majority."

We note that former RNC Chairman Duncan is not quoted as saying the two groups plan to spend more than $49 million to promote lower taxes or reduced government spending, but rather to plow into 11 Senate races.

The letter sets forth the text of multiple ads being run by Crossroads GPS in states with battleground Senate races across the country, and which attack the Democratic nominee in those races.  For example, the letter cites one ad being run in Pennsylvania that attacks Democratic nominee Joe Sestak:

Over half a million Pennsylvanians unemployed.  And what's Congressman Joe Sestak done?  He voted to gut Medicare, slashing benefits for Pennsylvania seniors.  The Obama-Sestak scheme could jeopardize access to care for millions.  Sestak even voted to raise taxes over $525 billion, devastating small businesses, killing jobs, gutting Medicare, hurting seniors, killing jobs.  Pennsylvania can't afford Joe Sestak.  Crossroads GPS is responsible for the contents of this advertising         

The letter to the IRS states that published reports indicate that Crossroads GPS was created in order to provide anonymity to the donors funding such ads.  The letter states:

As one published reports states:

A new political organization conceived by Republican operatives Karl Rove and Ed   Gillespie formed a spin-off group last month that - thanks in part to its ability to promise donors anonymity - has brought in more money in its first month than the parent organization has raised since it started in March.

The same article quotes Steven Law, the head of both American Crossroads and Crossroads GPS as saying that "the anonymity of the new 501(c)(4) GPS group was appealing for some donors."  Law said, "We're not inclined to get into much detail about the 501(c)(4) on the financial side given its different report status."  The article also states:

[A] veteran GOP operative familiar with the group's fundraising activities said the spin-off was formed largely because donors were reluctant to see their names publicly associated with giving to a 527 group, least of all one associate with Rove, who Democrats still revile for his role in running former President George W. Bush's political operation.

In another article, Law stated, "I wouldn't want to discount the value of confidentiality to some donors."

Another published report calls Crossroads GPS a "spinoff of American Crossroads" and states that "this 501(c)(4) group can keep its donor list private - a major selling point for individuals and corporations who want to anonymously influence elections."

According to the letter, tax law requires a 501(c)(4) group to be "primarily engaged" in promoting social welfare in order to be eligible for its tax status. According to the letter:

Political activity - spending to influence campaigns - does not constitute promoting the social welfare.  Section 1.501(c)(4)-l(a)(2)(ii) of the regulations provides that political campaign activities do not promote social welfare as defined in section 501(c)(4).  The regulation states, "The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office."  26 C.F.R. § 1.501(c)(4)–1(a)(2)(ii) (emphasis added).

In other words, an organization primarily engaged in political campaign activity is not primarily engaged in the promotion of the social welfare of the community and, therefore, is not eligible for tax-exempt status under section 501(c)(4).  For example, "[a]n organization whose primary activity is rating candidates for public office is not exempt from Federal income tax under section 501(c)(4) of the Internal Revenue Code of 1954 because such activity does not constitute 'promotion of the social welfare.'"  Rev. Rul. 67–368, 1967–2 C.B. 194.

The letter further states:

IRS rules make clear that "direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office" is not limited to activities or communications which contain express advocacy or the functional equivalent of express advocacy.

Instead, according to the letter, the IRS uses a "facts and circumstances" test to determine if activity constitutes participation in a campaign.  According to the letter:

Thus, regardless of whether an "issue ad" contains express advocacy, it may nonetheless be treated as "exempt function" electioneering activity under IRS regulations, depending on the "facts and circumstances."

Even if an ad discusses an "issue," and even if the ad does not contain express advocacy or the functional equivalent of express advocacy, it can still be treated as "direct or indirect participation or intervention in political campaigns" under IRS standards for purposes of determining whether a 501(c)(4) organization is "primarily engaged" in activities to influence elections.

The letter continues:

Under this multi-part test, the "facts and circumstances" here certainly indicate that the ads and activities of Crossroads GPS involve "exempt function" activity that constitutes "participation or intervention in political campaigns."

First, the organization was created just months before the 2010 congressional elections, was conceived, organized and staffed by leading political party strategists and operatives, self-defined its activities as spending money in Senate races and is closely affiliated with other organizations similarly committed to spending large sums to influence the 2010 congressional races.

Second, the activities of the organization are targeted to battleground states involving key Senate races, and to supporting Republican candidates in those elections.

Third, the ads run by the organization identify candidates by name, discuss the candidates' position on issues in the midst of a campaign and do so in ways that criticize the positions of the Democratic candidates opposed by Crossroads GPS.

Fourth, the timing of the group's activities do not correspond with external events outside the group's control, such as a legislative vote on an issue, but rather correspond with congressional election campaigns.

The letter states that the IRS should investigate "whether the "facts and circumstances" show that Crossroads GPS is primarily engaged in activities which constitute political participation or intervention in political campaigns under IRS regulations, and if it is, to find that the organization is a violation of its section 501(c)(4) status."

The letter notes:

The "primarily engaged" test should be applied on the basis of the activities undertaken by Crossroads GPS during calendar year 2010.  If a section 501(c)(4) group is found to have primarily engaged in campaign-related activities during an election year, it should not be permitted to dilute that finding by engaging in non-election related activities in subsequent years.

The letter notes that "the IRC uses a "taxable year" analysis - in other words, a calendar year analysis - to determine whether a section 501(c)(3) charitable group has complied with the limit on the amount of lobbying expenditures the group is permitted to engage in, consistent with its charitable status.  26 U.S.C. § 501(h)."

The letter states:

Although we do not have access to the contribution and expenditure data that Crossroads GPS is required to file with the IRS, published reports indicate that the organization is primarily engaged in activities to influence the 2010 congressional elections. As part of its investigation, the IRS needs to examine the organization's financial data.

The letter concludes:

Crossroads GPS was organized under section 501(c)(4) of the Internal Revenue Code.  Based on the discussion of the published reports set forth above, the facts and circumstances surrounding the formation and activities of Crossroads GPS show that the group was organized to participate and intervene in the 2010 congressional races while providing donors to the organization with a safe haven for hiding their role in funding expenditures to influence the 2010 congressional races. 

For the reasons set forth above, the IRS should investigate whether Crossroads GPS has a primary purpose of "participation or intervention in political campaigns on behalf of or in opposition to" candidates for public office, which is not a permissible primary purpose for a section 501(c)(4) organization.  See 26 C.F.R. § 1.501(c)(4)-1(a)(2).

If the IRS investigation establishes that the facts and circumstances show that Crossroads GPS is primarily engaged in participating or intervening in political campaigns, appropriate penalties should be imposed on the organization, including penalties that take into account the need to deter similar widespread violations from occurring in future elections.  The penalties should apply to the organization's misuse of the nonprofit tax laws to improperly claim section 501(c)(4) tax status and its failure to operate as a nonprofit 527 group required to disclose its contributions and expenditures.