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.

Today, Representative Devin Nunes (R-CA) introduced The Congressional Redistricting Formula Act to reform the manner in which Congressional Districts are drawn following the decennial census. The legislation, which would require states to follow certain criteria as they undertake congressional redistricting, is aimed at ending the excessive partisan gerrymandering that characterizes modern day redistricting plans. The legislation, if enacted, would impact the post-2010 redistricting cycle.

J. Gerald Hebert, Executive Director of the non-partisan Campaign Legal Center, supported the goals of the Congressional Redistricting Formula Act, saying:

“The Congressional Redistricting Formula Act is to be commended as a commonsense effort to curb some of the most blatant abuses of the redistricting process.  Representative Nunes’ bill deserves broad bipartisan support, public attention, and a hearing – something that has been denied to numerous past efforts to reform redistricting system. 

“All too many politicians don’t like to constrain their redistricting power in any way, shape, or form because it makes it more difficult for them to ‘cherry pick’ their voters.  In a democracy, voters should choose elected representatives, not the other way around.  Requiring that certain specific traditional criteria be used by those who draw the political boundaries will surely constrain the excessive gerrymanders we have seen in past redistricting cycles.  The Nunes’ bill is not written to benefit either Democrats or Republicans; it is written to benefit the American people.” 

To read the bill, click here.

On September 28, the Campaign Legal Center urged Members of Congress to move quickly to pass The Federal Election Integrity Act (H.R. 512) sponsored by Rep. Susan Davis (D-CA).  The legislation addresses the inherent conflict of interest of top state election officials undertaking direct political activity for candidates over whose election they have supervisory responsibility.  Specifically, the bill would bar top elections officials from serving on an authorized campaign committee, using official authority to affect election results, or soliciting donations for a candidate running for Federal office.

The full text of the letter to House Administration Committee Chairman Robert Brady follows below.

September 28, 2010

The Hon. Robert Brady

House Administration Committee

1309 Longworth HOB

Washington, DC 20515

Dear Chairman Brady:

The Campaign Legal Center strongly supports and urges the House to pass H.R 512, the Federal Election Integrity Act, as quickly as possible. The measure seeks to prohibit chief state election officials from serving on campaign committees or engaging in other direct political activity on behalf of Federal candidates in any election over which the official has supervisory authority. The bill includes an exemption when the official or an immediate family member is running for federal office.

Up to now, efforts to protect the integrity of the election process have focused significantly on machines and technology. But in a number of states over the past several years, secretaries of states or other chief election officials have overseen races in which they were candidates or in which they served as state campaign chair for a candidate on the ballot. As the bill’s sponsor, Rep. Susan Davis (D-CA), has stated, “you can’t be both a player and a referee at the same time.”

In a democracy, it is essential that the citizens have faith in the election process and especially in the integrity of that process. Thus, it is important to ensure that those who oversee elections in a state are impartial and will be seen by the public as impartial. Not serving as a campaign manager for a candidate while overseeing the election should help give voters confidence that the election process will be administered fairly.

This is a nonpartisan issue that merits broad bipartisan support. The Legal Center urges every Member to support passage of H.R. 512 and requests that you enter this letter of support for H.R. 512 into the Record.

Sincerely,

J. Gerald Hebert                                                Meredith McGehee

Executive Director                                            Policy Director

It is unfortunate that the DISCLOSE Act has fallen victim to election season political posturing. Once the dust settles after Election Day, the Senate would be wise to revisit the DISCLOSE Act.  Polls have repeatedly shown that Americans, by overwhelming margins, are strongly opposed to corporations and unions spending unlimited amounts anonymously to elect or defeat candidates and that citizens expect their elected representatives in Washington to act. 

  Public disgust and calls for a congressional response will only increase as Americans nationwide will be forced this election season to sit through endless attack ads paid for by groups with patriotic names and completely anonymous backers.

While today’s Senate vote is disappointing, we remain optimistic that Congress will soon follow the will of the voters and enact meaningful disclosure legislation.  We also hope that efforts to rally opposition to DISCLOSE by the “Tea Party Nation” – a group which is best known for trying to turn a profit on the Tea Party movement -- will not gain traction, especially because they are so misinformed about what the DISCLOSE Act will do.  Anyone seeking to change the status-quo in Washington should be making sure that all Americans are aware of who is trying to buy and sell their elected representatives.  After the Supreme Court decision last January, new laws are critically needed to ensure that Americans are not left in the dark about the large sums of money being spent to influence the outcome of our elections.

Reform groups today urged Speaker of the House Nancy Pelosi (D-CA) and Minority Leader John Boehner (R-OH) to publicly commit to stand behind the Office of Congressional Ethics (OCE) in the face of numerous threats to dismantle or disempower the Office.  In the letters, the groups expressed their continued support of the OCE which has helped to revitalize an ethics process that had become the object of public scorn after years of dormancy.

The reform groups include the Campaign Legal Center, Common Cause, CREW, Democracy 21, the League of Women Voters, Public Citizen and U.S.PIRG.

 
The full text of both letters follows below.
 
 
September 15, 2010
 
House Republican Leader John Boehner
H-204
The Capitol
Washington, D.C. 20515
 
Dear Republican Leader Boehner,
 
Our organizations urge you to make a public commitment now to support the continued existence of the OCE in the next Congress.  We also urge you to make a public commitment to oppose any changes in the OCE which would prevent the Office from effectively carrying out its mission and basic responsibilities.
 
As organizations dedicated to promoting government ethics, accountability and transparency, we strongly support the OCE and the effective role it has played in this Congress.
 
Our organizations include the Campaign Legal Center, Common Cause, CREW, Democracy 21, the League of Women Voters, Public Citizen and U.S. PIRG.
 
The OCE represents an unprecedented ethics breakthrough in that, for the first time, non-members of Congress are playing a key role in the House ethics enforcement process. The OCE is the most important step taken to strengthen the House ethics enforcement process since the House Ethics Committee was created in 1966.
 
The OCE was established to serve as an action-forcing mechanism to ensure that the House Ethics Committee considered and addressed serious ethics matters and that the public received appropriate information about how these matters were resolved by the Ethics Committee.
The OCE has done in this Congress precisely what it was created to do. As an action forcing mechanism, it has provided for House Ethics Committee consideration of significant potential ethics violations. The OCE also has injected essential transparency and accountability into the House ethics enforcement process.
 
In response to these efforts, the Office has come under attack from House members of both parties and from the Ethics Committee itself. We believe these attacks are unjustified and, in particular, we have seen no evidence to support the claim made by some that race has been a factor in actions taken by the OCE or the House Ethics Committee.
 
We are well aware that efforts are likely to take place at the outset of the next Congress to eliminate or cripple the OCE. This would be a fundamental mistake on the part of House members and would signal to the American people that House members are not serious about ethics and have little interest in enforcing the ethics rules that govern their actions.
 
We recognize that any new entity like the OCE requires review at the end of its initial stage of operations. However, if and when any changes are proposed or considered it is imperative that they must not undermine or hamper the OCE’s ability to ensure that significant potential ethics violations are investigated by the House Ethics Committee. Similarly it is imperative that they must not weaken OCE’s essential role in providing the American people with transparency and accountability in the House ethics enforcement process. We urge you to publicly commit to oppose any such changes.
 
As you know, the OCE was created following the failure of the House Ethics Committee, to conduct any investigations or take any actions regarding the worst congressional ethics and lobbying scandals in decades, the Jack Abramoff scandals that occurred during the 109th Congress.  This failure demonstrated a fundamental problem with the House ethics enforcement process, namely that the House Ethics Committee had become a burial grounds for potential ethics violations which often simply disappeared in the Committee.
The OCE was created to address this problem and has worked well to protect the interests of the American people and the House as an institution. It would be a grave mistake and a disservice to the American people to abandon or cripple the OCE and return to the dysfunctional House ethics enforcement process that existed before its creation. As a New York Times editorial stated (August 5, 2010):
 
Grumblers on both sides want to gut the ethics office. That is because it has been fulfilling its mission to put life into the lawmakers' own stultified ethics process, to penetrate the murk of misbehavior and keep the public better informed.
 
In summary, our organizations call on you to make a public commitment to the American people to support the continuation of the OCE and to oppose any efforts to prevent the OCE from effectively carrying out its mission and basic responsibilities. The OCE must continue to ensure that significant potential ethic violations are investigated by the House Ethics Committee and that effective accountability and transparency exists in the ethics enforcement process
 
We would appreciate receiving a response to the matters we have raised in our letter.
 
Campaign Legal Center       League of Women Voters
Common Cause                    Public Citizen
CREW                                      U.S. PIRG
Democracy 21
 
 
 
September 15, 2010
 
House Speaker Nancy Pelosi
H-232
The Capitol
Washington, D.C. 20515
 
Dear Speaker Pelosi,
 
As organizations dedicated to promoting government ethics, accountability and transparency, we very much appreciate the outstanding leadership you provided in establishing the Office of Congressional Ethics in 2008 (“OCE”).
 
Our organizations include the Campaign Legal Center, Common Cause, CREW, Democracy 21, the League of Women Voters, Public Citizen and U.S. PIRG.
 
The OCE represents an unprecedented ethics breakthrough in that, for the first time, non-members of Congress are playing a key role in the House ethics enforcement process. The OCE is the most important step taken to strengthen the House ethics enforcement process since the House Ethics Committee was created in 1966.
The OCE was established to serve as an action-forcing mechanism to ensure that the House Ethics Committee considered and addressed serious ethics matters and that the public received appropriate information about how these matters are resolved by the Ethics Committee.
The OCE has done in this Congress precisely what it was created to do. As an action forcing mechanism, it has provided for House Ethics Committee consideration of significant potential ethics violations. The OCE also has injected essential transparency and accountability into the House ethics enforcement process.
 
In response to these efforts, the Office has come under attack from House members of both parties and from the Ethics Committee itself. We believe these attacks are unjustified and, in particular, we have seen no evidence to support the claim made by some that race has been a factor in actions taken by the OCE or the House Ethics Committee.
 
We are well aware that efforts are likely to take place at the outset of the next Congress to eliminate or cripple the OCE. This would be a fundamental mistake on the part of House members and would signal to the American people that House members are not serious about ethics and have little interest in enforcing the ethics rules that govern their actions.
 
Our organizations urge you to make a public commitment to support the continued existence of the OCE in the next Congress.  We also urge you to make a public commitment to oppose any changes in the OCE which would prevent the Office from effectively carrying out its mission and basic responsibilities.
 
We recognize that any new entity like the OCE requires review at the end of its initial stage of operations. However, if and when any changes are proposed or considered it is imperative that they must not undermine or hamper the OCE’s ability to ensure that significant potential ethics violations are investigated by the House Ethics Committee. Similarly it is imperative that they must not weaken OCE’s essential role in providing the American people with transparency and accountability in the House ethics enforcement process. We urge you to publicly commit to oppose any such changes.
 
As you know, the OCE was created following the failure of the House Ethics Committee, to conduct any investigations or take any actions regarding the worst congressional ethics and lobbying scandals in decades, the Jack Abramoff scandals which occurred in the 109th Congress.
 
This failure demonstrated a fundamental problem with the House ethics enforcement process, namely that the House Ethics Committee had become a burial grounds for potential ethics violations which often simply disappeared in the Committee.
The OCE was created to address this problem and has worked well to protect the interests of the American people and the House as an institution. It would be a grave mistake and a disservice to the American people to abandon or cripple the OCE and return to the dysfunctional House ethics enforcement process that existed before its creation. As a New York Times editorial stated (August 5, 2010):
 
Grumblers on both sides want to gut the ethics office. That is because it has been fulfilling its mission to put life into the lawmakers' own stultified ethics process, to penetrate the murk of misbehavior and keep the public better informed.
 
In summary, our organizations call on you to make a public commitment to the American people to support the continuation of the OCE and to oppose any efforts to prevent the OCE from effectively carrying out its mission and basic responsibilities. The OCE must continue to ensure that significant potential ethic violations are investigated by the House Ethics Committee and that effective accountability and transparency exists in the ethics enforcement process
 
We would appreciate receiving a response to the matters we have raised in our letter.
 
Campaign Legal Center       League of Women Voters
Common Cause                    Public Citizen
CREW                                  U.S. PIRG
Democracy 21