CREW: IRS: Regarding Records Provided to Senate Finance Committee Chairman Max Baucus: 11/7/2011 - FOIA Exhibits

8/3/2019 CREW: IRS: Regarding Records Provided to Senate Finance Committee Chairman Max Baucus: 11/7/2011 - FOIA Ex

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Moi\X 9AUCUS, MONTANA, CHA IRMANJOHN 0 . ROCKEFHLER IV, W!:ST VIRGINIAKENT CONRAD, NORTH DAKOTAJEFF Bll'iGAMAI'i, NEW MEXICOJOHI'i F KERRY, MASSACHUSETTSBLANCHE L LINCOLN, ARKANSASRON wYOEI'i, OREGONCHARLES E. SCHUMER, NEW YORKDEBBIE STABENOW, MICHIGANMARIA CANTWELL. WASHINGTONBILL NELSON, FLORIDAROBERT MENENDEZ. NEW JERSEYTHOMAS R CAAPfR. DELAWARE

CHUCK GRASSLEY, IOWAORRIN G. HATCH, UTAHOLYMPIA J . SNOWE, MAINEJON KYL. ARIZONAJIM RUNNING, KENTUCKYMIKE CRAPO, IDAHOPAT ROBERTS. KANSASJOHN ENSIGN, NEVADAMICHAEL B. ENZI, WYOMINGJOHN CORNYN , TEXAS

RUSSELL SULLIVAN . STAFF DIRECTORKOLAN OA\115 , REPUBLICAN STAFF DIRECTOR AND CHIEF COUNSEL

The Honorable Douglas H. ShulmanCommissionerInternal Revenue ServiceIIII Constitution A venue, N. W.Washington, DC 20224Via Electronic Transmission

Dear Commissioner Shulman:

tinitcd ~ t a t r s ~ r n a t r COMMITIEE ON FINANCE

WASHINGTON, DC 20510-6200

September 28, 20 I 0

The Senate Finance Committee has jurisdiction over revenue matters, and theCommittee is responsible for conducting oversight of the administration of the federal taxsystem, including matters involving tax-exempt organizations. The Committee hasfocused extensively over the past decade on whether tax-exempt groups have been usedfor lobbying or other financial or political gain .The central question examined by the Committee has been whether certaincharitable or social welfare organizations qualify for the tax-exempt status providedunder the Internal Revenue Code.Recent media reports on various 50I(c)(4) organizations engaged in politicalactivity have raised serious questions about whether such organizations are operating incompliance with the Internal Revenue Code.The law requires that political campaign activity by a 50I(c)(4), (c)(5) or (c)(6)entity must not be the primary purpose of the organization.If it is determined the primary purpose ofthe 50I(c)(4), (c)(5) and (c)(6)organization is political campaign activity the tax exemption for that nonprofit can beterminated.Even if political campaign activity is not the primary purpose of a 50 I (c)(4),(c)(5), and (c)(6) organization, it must notify its members of the portion of dues paid due

to political activity or pay a proxy tax under Section 6033(e).


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Also, tax-exempt organizations and their donors must not engage in privateinurement or excess benefit transactions. These rules prevent private individuals orgroups from using tax-exempt organizations to benefit their private interests or to profitfrom the tax-exempt organization's activities.A September 23 New York Times article entitled "Hidden Under a Tax-ExemptCloak, Private Dollars Flow" described the activities of the organization Americans forJob Security. An Alaska Public Office Commission investigation revealed that AJS,organized as an entity to promote social welfare under 501(c)(6), fought development inAlaska at the behest of a "local financier who paid for most of the referendumcampaign." The Commission report said that "Americans for Job Security has no otherpurpose other than to cover money trails all over the country." The article also noted that"membership dues and assessments ... plunged to zero before rising to $12.2 million forthe presidential race."A September 16 Time Magazine article examined the activities of Washington

D.C. based 501 (c)(4) groups planning a "$300 million .. . spending blitz" in the 20 I 0elections. The article describes a group transforming itself into a nonprofit under501(c)(4) ofthe tax code, ensuring that they would not have to "publically disclose anyinformation about its donors."These media reports raise a basic question: Is the tax code being used to eliminatetransparency in the funding of our elections- elections that are the constitutional bedrock

of our democracy? They also raise concerns about whether the tax benefits of nonprofitsare being used to advance private interests.With hundreds of millions of dollars being spent in election contests by tax

exempt entities, it is time to take a fresh look at current practices and how they comportwith the Internal Revenue Code's rules for nonprofits.I request that you and your agency survey major 501(c)(4), (c)(5) and (c)(6)organizations involved in political campaign activity to examine whether they areoperated for the organization's intended tax exempt purpose and to ensure that politicalcampaign activity is not the organization's primary activity. Specifically you shouldexamine if these political activities reach a primary purpose level- the standard imposedby the federal tax code - and if they do not, whether the organization is complying withthe notice or proxy tax requirements of Section 6033( e). I also request that you or youragency survey major 501(c)(4), (c)(5), and (c)(6) organizations to determine whether theyare acting as conduits for major donors advancing their own private interests regardinglegislation or political campaigns, or are providing major donors with excess benefits.Possible violation of tax laws should be identified as you conduct this study.Please report back to the Finance Committee as soon as possible with yourfindings and recommended actions regarding this matter.


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Based on your report I plan to ask the Committee to open its own investigationand/or to take appropriate legislative action.

Sincerely,

} 4 . ~ MaxBaucusChairman


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by Groups IOpenSecrets

f4

GroupWest Virginia Conservative Foundation 0


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by Groups IOpen Secrets http://www.opensecrets.org/outsidespending/summ.php?cycle=20 10&

f4

Group TotalEquality California 0 $455 L

IndependentExpendlturoa$455

ElecComm

$0CommCoats$0

C =Conservative. L =Liberal. X = BIPartlsan. U = Unknown

SuperPAC 501c

50 1c

t Indicates that this organization has a 527 committee registered with the IRS. The committee's 527 spending oulslde of elactloneerlng communications Is NOT Included In these totals. !'!.m!Q '91!! ab ou ti l l ! .0 = No disclosure of donors0 =Partial disclosure of donorse = Full disclosure of donors0 =Ad available

Based on data released daily by the FEC. Last update on Monday, November 07,2011Feel free to distribute or cite this material. but please credit the Cent er for Responsive Politics. For permission to reprint for commercial uses. such as textbooks, W n ! 1 1 f . L ! b G ~ n t e

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of corporate politica. .. http://articles.latimes.com/print/20 11/may/08/nation/la-na-0509-dono

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[os Angeles

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There is recent precedent for that: After Target Corp. suffered a consumer backlash last year for supporting an organization that backed a candidate opposedto gay rights, it adopted a new policy restricting how the company's funds are used for political purposes.The chamber 's Claffee said the message sent by the executive order will be: "I f you want to get a fair shake in the contrac ting sphere, you should avoid politicalspending that raises eyebrows" and instead donate to the party in power.Other critics, such as Steven Law, president of conservative nonprofit groups American Crossroads and Crossroads GPS, maintain that the proposed ordercould usher in a new era of dirty politics."When I was in the executive branch, mixing politics with procur ement was called corruption," Law, who served as depu ty secretary of Labor for PresidentGeorge W. Bush, wrote in an email.The battle puts the chamber at sharp odds once again with the Obama administration, with which it tangled during the 2010 election.The fate of the executive order, which remains under review at the Office of Management and Budget, is unclear. Daley, the chief of staff hired in part tosmooth administration relations with business, called it "just a proposed rule" that the White House was considering."We're going to do things they like, do things the y don't like," Daley said of the chamber. "We're not going to do things because they do or don't like them.That's just the way it is."Advocates are cautiously optimistic.

"I expect President Obama to sign an executive order sometime in the nea r future," said Fred Wertheimer, president of Democracy 21 . "This is their idea-there's no reason for th em to back away from it ."But lack of a signature so far, Holman said, "means we have to keep applying the pressure and reassuring the White House that despite the screaming of theChamber of Commerce, the rest of America wants to have this kind of transparency."[email protected]@latimes.comMelanie Mason and Christi Parsons in the Washi ngton bureau contributed to this report.

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line between politics and issues spending by secretive 50l(c)(4) ... http://www. iwatchnews. org/print/72

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iwatchewsPublished on iWatch News (http://www.iwatchnews.org)Home> Fine line between politics and issues spending by secretive 501(c)(4) groups

Politics [11Fine line between politics and issues spending bysecretive 501 (c)(4) groups [2]The conservative American Action Network, a leading independent player in last year'selection, poured $26 million - ou t of some $30 million in spending - f rom secret donorsinto political ads and activities to help Republican candidates.Set up in 2009, the network enjoys a prized tax status from the Internal Revenue Service asa social welfare, tax-free 501 (c)(4) organization, which permits it to accept secret donationsand engage in some political advocacy. But to qualify for this special status, an organizationcannot spend the majority of its money on politics, and its primary advocacy must be onissues.As required by law, the network reported the $26 million !31 it spent on political activities to theFederal Election Commission before Election Day.But the network's hefty spending on politics poses an important question: is its primarypurpose social welfare, as the IRS intended, or political activity?Former Sen. Norman Coleman, who chairs the network, told iWatch News his organization"followed the law" in spending its almost $30 million.Justifying their spending, Coleman's group further said that $20.4 million went to broadcastads close to the elections - officially called "electioneering communications" - tha tmentioned candidates' names but didn't recommend a vote for or against the candidate.These ads mostly "urged center-right action on issues" before Congress, the group said. Theremaining $5.7 million was spent on ads that directly called for the election or defeat ofcandidates."Not all electioneering communications are candidate advocacy under the campaign financeor tax laws," network president Brian Walsh said.However, some veteran tax experts say the group's status with the IRS could be in jeopardy."If over 80 percent of a group's expenditures are for political purposes that require reportingto the FEC, then that organization will not qualify for tax-exempt status under section501 (c)(4 )," Marc Owens, who was director of the IRS exempt organizations division for adecade, told iWatch News.

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"They're saying they can dress up electioneering communications that they've reported tothe FEC as a lobbying message, and have the IRS view that with blinders."IRS rulings indicate that advocacy communications do not have to expressly support acandidate to qualify as political activity, say tax and election lawyers.Dozens of other GOP-allied 501(c)(4) groups- and a smaller number of Democratic ones-a re on spending sprees fueled by donor secrecy and the Supreme Court's historicCitizens United vs. FEC decision last year. That ruling gave the green light to corporations,unions and individuals making unlimited contributions for ads and other political tools thatback specific candidates, provided there is no coordination with campaigns or partycommittees.As a result of this secrecy, voters will never know how much money is manipulating the 2012elections.Almost no reporting requiredThese 501(c)(4) groups- nicknamed after the provision in the IRS code that allows themare taking in and spending tens of millions of dollars and reporting only a fraction of it to theFEC as political activity. Donors never have to be disclosed publicly by these groups - onlyto the IRS.TV viewers are being bombarded with ads on issues such as taxes and regulations thatoften mention candidates and are only being reported in a general way, long after the fact, tothe IRS. How do these organizations, run by veteran political operatives whose ideology iswell-known, manage to largely escape scrutiny by regulators and public disclosure on thesmall fortune they spend on these ads?Since the Watergate-era campaign finance scandal, following the money has been aWashington obsession, but the emergence of 501 (c)(4)s has created a murky labyrinth."The fact that so far 501 (c)(4 )s are only reporting a fraction of what they're spending- andnothing at all about their donors - underscores the wholesale inadequacy of our disclosurerequirements," Sheila Krumholz, executive director of the Center for Responsive Politics(CRP), told iWatch News ."Our current system of campaign finance disclosure is on shaky ground."The limited evidence available shows that 501(c)(4)s have become magnets for big money:last year at least 65 groups reported spending over $89 million on political activities to theFEC, according to a CRP analysis.Krumholz predicts a dramatic increase next year in 501(c)(4) spending on political activities."I think it's plausible that the number of c4s reporting political activity to the FEC will doublethis cycle," she said. "Last year was viewed as a toe-in-the-water post Citizens United, andnow more liberal groups have formed too."The total universe of organizations granted 501(c)(4) status is enormous, according to IRS

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data. In 2010, the number of c4s registered with the IRS jumped to over 139,000, up 2,000from the prior year. These include such organizations as AARP and Disabled AmericanVeterans.Gaining c4 status is increasingly popular because it provides "quite a bit of flexibility instructuring activities with minimal reporting to the Internal Revenue Service and the FederalElection Commission," Marc Owens said.While c4s have become more popular post Citizens United, they include older conservativegroups like the 60 Plus Association and liberal bastions like Moveon.org.Owens, the former IRS official who's now a tax lawyer, said the huge disparity between the65 groups that reported to the FEC last year and the vastly larger number of these groupsregistered with the IRS, is partly attributable to the vagueness about how issue ads aredefined. "Activities that have political impacts can also be dressed up or characterized aspublic education of some sort," Owens said.So how many c4 groups will be players in the 2012 elections? The answer isn't clear, andnever will be, but campaign finance watchdog Krumholz estimates, "There are likely a fewhundred of these c4 groups that are largely focused on issue advocacy, if not electoraladvocacy."In 2010, GOP-leaning 501 (c)(4) groups accounted for almost $74 million of the $89 millionreported to the FEC, according to CRP.Seasoned Republican operatives like Karl Rove and Ed Gillespie seized on the opportunityto raiseundisclosed, unregulated money. The frenetic money chase is exemplified by CrossroadsGPS, a c4 launched by Rove and Gillespie, and its affiliated Super PAC, AmericanCrossroads. A Super PAC can take unlimited checks but must disclose the names of donorsin filings with the FEC. The Crossroads groups intend to raise $240 million for the 2012elections, more than triple the $71 million they pulled in last year.Last year, Democratic operatives were slow to respond to the GOP groups, relying heavilyinstead on the tens of millions that several big unions supplied for get out the vote and adsto boost candidates on Election Day. After losing the House last fall, Democrats vowed theywould not get clobbered again and launched several new 501 (c)(4)s including PrioritiesUSA, which was started by two former White House aides to help President Obama win in2012. But at the end of the first half of 2011, fund raising totals were lackluster and paledbeside their GOP counterparts.Bill Burton, a cofounder of Priorities USA and an allied super PAC Priorities USA Action,sounds unfazed that the two groups raised just over $5 million in the first half of the year."Donors understand the urgency and see the need to keep up with what Rove and the Kochbrothers are doing,"said Burton, former deputy White House press secretary. "I'm confidentwe will have the resources that we need."The two groups are shooting to raise about $100 million.

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Meanwhile, several of the largest GOP allied groups have already spent tens of millions onad blitzes on policy issues involving taxes, spending and regulations in states andcongressional districts where they would like to defeat Democratic incumbents.Coleman of the American Action Network said his group intends to focus their funds andfirepower heavily on keeping the House in Republican hands next year. "You can't take theHouse for granted," Coleman said.In what looks like a synergistic move, Coleman spearheaded the creation of a Super PAC,the Congressional Leadership Fund, which will also be devoted to bolstering Housemembers. Its president is the same as Coleman's c4."I envision there will be many races in which the Network will be involved and the Super PACwill be involved too," providing opportunities for the two outside groups to legally coordinate,Coleman said.Last summer, Crossroads GPS said it spent $20 million on ads blasting the Obamaadministration's economic policies - including ads that targeted five vulnerable Democraticsenators who are running for re-election. The ads featured people fretting about highunemployment, rising gas prices and other economic worries. The ads charged that theDemocratic senators back "billions in new taxes" and urged viewers [41 to tell their senator:"No more blank checks."To counter Crossroads GPS and defend Senate Democrats, a little known c4 group calledPatriot Majority USA has been very active. Last summer it ran $400,000 of issue ads inNebraska, Missouri and Montana where Sens. Ben Nelson, Claire McCaskill, and Jon Testerwere being pummeled by Crossroads GPS. The ads from the Democratic c4 attacked aGOP sponsored budget plan that would have substituted a kind of voucher system forMedicare. One ad ended with the line [sJ "Tell Congress the Republican plan is wrong forMissouri."Patriot Majority USA chief Craig Varoga says the group will raise significantly more than the$4 million it spent in 2010.Some c4s have been around for years, but are also ratcheting up their spending plans fornext year. One case in point is the Republican Jewish Coalition, a conservative pro-Israelgroup. The RJC plans to spend as much as $5 million next year on electoral and issueadvocacy, or about double its previous high mark, RJC executive director Matt Brooks said.For RJC, the stakes are high: three Jewish candidates are running for Senate seats inFlorida, Hawaii and Ohio. There are no Jewish GOP senators currently.Another example is Americans for Prosperity, the grassroots goliath that was launched withfunding from the billionaire Koch brothers. Tracy Henke, AFP's chief operating officer, saidthe group spent about $25 million on issue advocacy last year that focused heavily oncutting regulations and federal spending. Of that sum, only $1.3 million was publicly reportedto the FEC as political activity.Who are the secret donors?

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Though there is no mechanism to officially identify the people who make big contributions tothe c4 groups, iWatch News has learned the names of a few recent big check writers. Sheldon Adelson, the Las Vegas casino titan whose net worth has been pegged atmore than $20 billion by Forbes, has for a few years been the RJC's leading financialangel, according to two board members. The Libre Initiative, a group that was set up early this year by Dan Garza who workedin the George W. Bush White House to help promote free enterprise in the Hispaniccommunity, has received a multimillion-dollar commitment from Koch family interests,say three fundraisers with ties to the group. The group co-hosted a conference in LasVegas with Americans for Prosperity this month. A secret donor to Crossroads GPS last year was Paul Singer, a billionaire who runs thehedge fund Elliott Management, say four fund raisers close to the group.

Other secret donors to Koch-connected c4s came to light in September when Mother Jonesobtained a tape [61 of Charles Koch thanking over two dozen GOP donors for makingcontributions of $1 million or more in the last year to conservative groups aligned with theKochs. Among the prominent conservatives on that list were Art Pope, a North Carolinabusinessman who is a director of Americans for Prosperity; long time GOP donors from theDeVos family that founded Amway; and Ken Griffin, a Chicago hedge fund mogul who headsCitadel Investments.Veteran fundraisers plus Democratic and Republican operatives running these groups saythe main reason donors want anonymity is to avoid political retribution."Business people don't want to create problems for their own companies," said MelSembler, the former finance chairman of the Republican National Committee, whoacknowledged he has written checks to several 501 (c)( 4 )s.By way of example, Sembler cited a Minnesota ad campaign last year for a GOPgubernatorial candidate who opposed gay rights that was partly financed by Target. Theretailer, which helped finance the ad effort by a fledgling c4 called MN Forward, was hit witha shareholder resolution calling for disclosure of its political contributions and review of themby independent board members.Regulation is almost nonexistentTo keep their coveted tax status as social welfare organizations, these groups must spendthe majority of their funds on educational efforts -which can include issue advocacy withpolitical overtones and grassroots lobbying. Generally, the IRS has allowed these groupsconsiderable leeway to spend substantial amounts - but under 50 percent- on strictlypolitical ads. This has expanded to include ads that call for the election or defeat of aparticular candidate since Citizens United made them legal.Owens, the former IRS official, says that under the rubric of issue advocacy, "activities thatare styled as educational can nevertheless have a very significant political campaign effectin terms of driving certain groups of voters to the polls and causing other voter groups tostay away."

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Such efforts, Owens added, are permitted under the tax code and reflect "the increasingsophistication of political campaigning. Some groups are undoubtedly pushing the envelopebut others are not."Of the 65 non-profit c4s that reported spending to the FEC in the lastelection cycle, the lion's share of money went for ads that helped GOP candidates.Conservative groups spent $74 million while liberal groups spent just $15.1 million in themidterm elections.Overall, CRP says that c4s along with unions, trade associations and Super PACs reportedto the FEC spending $305 million on election activities in 2010 -or our times what theyspent in 2006.More millions went into issue ads and get out the vote activities by 501(c)(4)s. Theseactivities don't have to be reported to the FEC, only to the IRS and typically as part of thegroup's general expenditures.For instance, Crossroads GPS and its affiliated American Crossroads reported to the FECthat it spent a total of $38.6 million on ads in 2010. Of that sum, GPS spent about $16 millionon advocacy ads that specifically endorsed or opposed candidates, which is now permissiblewith unlimited donations post Citizens United .GPS spent another $10 million on ads last year that fell under issue advocacy guidelinesand therefore were not disclosed to the FEC, American Crossroads president Steven Lawsaid.Last summer's $20 million ad blitz by GPS was on similar issues related to the economyincluding taxes, while bashing policies of the Obama administration and several Democraticsenators. The ad spending wasn't reported to the FEC since it was part of their educationalmission, Law said. The ads were "aimed at promoting issues that we've continued topromote this year wholly apart from any election context."Law also said Crossroads GPS plowed a few million into other areas such as sophisticatedmicro-targeting that is used increasingly to help turn out voters sympathetic to candidates.This too was not reported to the FEC.Because of concerns that this kind of spending by c4s should be made public, outsideanalysts and election watchdogs are calling for more oversight and reporting."There's a lack of regulation and enforcement involving outside groups such as c4s andSuper PACs including ones started by people who had ties to the candidates," said LarryNoble, the former general counsel at the FEC.Some watchdogs assert that several of these groups are not entitled to c4 status becausethey're too involved in politics. Crossroads GPS, the American Action Network and PrioritiesUSA were singled out in September by Democracy 21 and the Campaign Legal Center,which wrote the IRS challenging [7] their status as social welfare organizations."The overriding purpose of these organizations is to influence elections and this makes themineligible for tax exempt status," Fred Wertheimer, the president of Democracy 21 toldiWatch News . "The idea that these groups are social welfare organizations is nonsense."

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The heads of those groups all dispute Wertheimer and defend their tax status with the IRSas legitimate.Still another issue that's looming with c4s: foreign donations to 501 (c)( 4 )s can be legallymade as long as the money is not spent on any political activities but only for education.Owens, the former IRS official, frets that the agency is ill equipped to monitor potentialabuses arising from foreign donations seeping into the American political system."IRS reporting rules are not really designed to capture those foreign financial flows," Owenssaid. "The whole reporting and oversight mechanism is not designed to generate informationfor regulators or law enforcement regarding financial support from the outside the UnitedStates."Watchdogs are also nervous about possible abuses of foreign donations. "The CitizensUnited decision opened the door for foreign countries and foreign entities to launderundisclosed and unlimited money in our elections through 501 (c)(4) groups makingcampaign expenditures," Wertheimer said.When asked if they had received any foreign funds, Law, Coleman and Burton said theyweren't aware that was an option or had not pursued it.Only 65 501(c)(4) organizations reported spending in 2010. U.S. campaign disclosureis "on und " Sheila Krumholz

Karl Rove and Ed Gillespie, principals in Crossroads Lawrence Jackson/APKicker:[21

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wens Comments on IRS's Role of Overseeing Campaign E .. http:/ www.capdale.com/marcus-owens-comments-on-irss-role-of-o\1

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Caplin& DrysdaleMarcus Owens Comments on IRS's Role of Overseeing Campaign ExpendituresSeptember 30, 2010, EO Tax JournalMarcus Owens, member of Caplin & Drysdale and former Director of the Exempt Organizations Division of the IRS, discusses theimplications of the IRS's role of supervising campaign spending.From the Desk of Paul StreckfusEditor, EO Tax JournalEmail Update 2010-139 {Thursday, September 30, 2010)Copyright 2010 Paul StreckfusTwo events occurred yesterday at about the same time. One was the release of a letter {reprinted below) by the Chairman of the SenateFinance Committee, Senator Max Baucus. The other was a panel discussion titled "Political Activities of Exempt Organizations This ElectionCycle" sponsored by the D.C. Bar, from which I hope to have a transcript in the near future.

After reading Senator Baucus' letter and accompanying news release, my sense is that Senator Baucus should have been at the D.C. Bardiscussion since he is concerned that political campaigns and individuals are manipulating 501{c){4), {5}, and {6) organizations to advancetheir own political agenda, and he wants the IRS to look into this situation.At the D.C. Bar discussion, Marc Owens of Caplin & Drysdale, Washington, explained that there is little that the IRS can do on a current,real-time basis to regulate {c){4)s for two reasons. First, a new {c){4) does not have to apply for recognition of exemption. Second, a new{c){4) formed this year would not have to file a Form 990 until next year at the earliest and the IRS would probably not do a substantivereview of the filed Form 990 until 2012 at the earliest. By then, Owens joked, the winners are in office, and the losers are in another career.At the same time that the IRS can do little to regulate new {c){4)s, it is not even looking at existing {c){4)s. According to Owens, the IRS haslittle interest in regulating exempt organizations beyond {c){3)s . The IRS has "effectively abandoned the field" at a time of heightened politicalactivity by all exempt organizations, including {c){3)s . Owens added that "we seem to have a haphazard IRS enforcement system nowbreaking down completely." This results in a corrosive effect on the integrity of exempt organizations in general and a stimulus to evasion oftheir responsibilities by organizations and their tax advisors.Karl Sandstrom of Perkins Coie, Washington, was equally negative. According to Sandstrom, the IRS is "a poor vehicle to regulate politicalactivity," in that this is not their focus or interest. in defense of the IRS, he did say Congress was also guilty in foisting upon the IRS regulationof political activity, using section 527 as an example. At the same time, Sandstrom did not see an active IRS as an answer to currentconcerns. Section 501 {c){4) organizations are just the current vehicle du jour. if {c){4)s are shut down, Sandstrom said many other vehiclesremain.My guess: I doubt if we'll see much of Owens' and Sandstrom's views in the IRS' report to Senator Baucus and the Finance Committee.........Senate Committee on Finance News ReleaseFor Immediate ReleaseSeptember 29, 2010Contact: Scott Mulhauser/Erin Shields{202) 224-4515Baucus Calls On IRS to Investigate Use of Tax-Exempt Groups fo r Political ActivityFinance Chairman works to ensure special interests don't use tax-exempt groups to influence communities, spend secret donationsWashington, DC- Senate Finance Committee Chairman Max Baucus {D-Mont.) today sent a letter to IRS Commissioner Doug Shulmanrequesting an investigation into the use of tax-exempt groups for political advocacy. Baucus asked for the investigation after recent mediareports uncovered instances of political activity by nonprofit organizations secretly backed by individuals advancing personal interests andorganizations supporting political campaigns. Under the tax code, political campaign activity cannot be the main purpose of a tax-exemptorganization and limits exist on political campaign activities in which these organizations can participate . Tax-exempt organizations also

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cannot serve private interests. Baucus expressed serious concern that if political groups are able to take advantage of tax-exemptorganizations, these groups could curtail transparency in America's elections because nonprofit organizations do not have to disclose anyinformation regarding their donors."Political campaigns and powerful individuals should not be able to use tax-exempt organizations as political pawns to serve their own specialinterests. The tax exemption given to nonprofit organizations comes with a responsibility to serve the public interest and Congress has anobligation to exercise the vigorous oversight necessary to ensure they do," said Baucus. "When political campaigns and individualsmanipulate tax-exempt organizations to advance thei r own political agenda, they are able to raise and spend money without disclosing adime, deceive the public and manipulate the entire political system. Special interests hiding behind the cloak of independent non profitsthreatens the transparency our democracy deserves and does a disservice to fair, honest and open elections."Baucus asked Shulman to review major 501 (c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity. He asked theCommissioner to determine if these organizations are operating for the organization's intended tax exempt purpose, to ensure that politicalactivity is not the organization's primary activity and to determine if they are acting as conduits for major donors advancing their own privateinterests regarding legislation or political campaigns, or are providing major donors with excess benefits. Baucus instructed Shulman toproduce a report for the Committee on the agency's findings as quickly as possible. Baucus' full lette r to Commissioner Shulman follows here.September 28, 201 0

The Honorable Douglas H. ShulmanCommissionerInternal Revenue Service1111 Constitution Avenue, N.W.Washington, DC 20224Via Electronic TransmissionDear Commissioner Shulman:The Senate Finance Committee has jurisdiction over revenue matters, and the Committee is responsible for conducting oversight of theadministration of the federal tax system, including matters involving tax-exempt organizations. The Committee has focused extensively overthe past decade on whether tax-exempt groups have been used for lobbying or other financial or political gain.The central question examined by the Committee has been whether certain charitable or social welfare organizations qualify for thetax-exempt status provided under the Internal Revenue Code.Recent media reports on various 501 (c)(4) organizations engaged in political activity have raised serious questions about whether suchorganizations are operating in compliance with the Internal Revenue Code.The law requires that political campaign activity by a 501 (c)(4), (c)(5) or (c)(6) entity must not be the primary purpose of the organization.If it is determined the primary purpose of the 501 (c)(4), (c)(5) and (c)(6) organization is political campaign activity the tax exemption for thatnonprofit can be terminated.Even if political campaign activity is not the primary purpose of a 501(c)(4), (c)(5), and (c)(6) organization, it must notify its members of theportion of dues paid due to political activity or pay a proxy tax under Section 6033(e).Also, tax-exempt organizations and their donors must not engage in private inurement or excess benefit transactions. These rules preventprivate individuals or groups from using tax-exempt organizations to benefit their private interests or to profit from the tax-exemptorganization's activities.A September 23 New York Times article entitled "Hidden Under a Tax-Exempt Cloak, Private Dollars Flow" described the activities of theorganization Americans for Job Security. An Alaska Public Office Commission investigation revealed that AJS, organized as an entity topromote social welfare under 501 (c)(6), fought development in Alaska at the behest of a "local financier who paid for most of the referendumcampaign." The Commission report said that "Americans for Job Security has no other purpose other than to cover money trails all over thecountry." The article also noted that "membership dues and assessments ... plunged to zero before rising to $12.2 million for the presidentialrace."A September 16 Time Magazine article examined the activities of Washington D.C. based 501 ( c)(4) groups planning a "$300 million ...spending blitz" in the 2010 elections. The article describes a group transforming itself into a nonprofit under 501 (c)(4) of the tax code,ensuring that they would not have to "publically disclose any information about its donors.

11/1/2011 3:19]


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of Overseeing Campaign E .. http://www.capdale.com/marcus-owens-comments-on-irss-role-of-ove

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These media reports raise a basic question: Is the tax code being used to eliminate transparency in the funding of our elections-- electionsthat are the constitutional bedrock of our democracy? They also raise concerns about whether the tax benefits of nonprofits are being used toadvance private interests.With hundreds of millions of dollars being spent in election contests by tax-exempt entities, it is time to take a fresh look at current practicesand how they comport with the Internal Revenue Code's rules for non profits.I request that you and your agency survey major 501 (c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity to examinewhether they are operated for the organization's intended tax-exempt purpose and to ensure that political campaign activity is not theorganization's primary activity. Specifically you should examine if these political activities reach a primary purpose level - the standardimposed by the federal tax code - and if they do not, whether the organization is complying with the notice or proxy tax requirements ofSection 6033(e). I also request that you or your agency survey major 501(c)(4), (c)(5), and (c)(6) organizations to determine whether they areacting as conduits for major donors advancing their own private interests regarding legislation or political campaigns, or are providing majordonors with excess benefits.Possible violation of tax laws should be identified as you conduct this study.Please report back to the Finance Committee as soon as possible with your findings and recommended actions regarding this matter.Based on your report I plan to ask the Committee to open its own investigation and/or to take appropriate legislative action.Sincerely,Max Baucus, ChairmanSenate Committee on Finance219 Dirksen Senate Office BuildingWashington, DC 20510-6200

2011 Caplin & Drysdale, Chartered 1Attorney Advertising 1Terms & Conditions

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EXHIBIT F


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CREWI itizens .for. r e s p o n ~ i b i l i t y and ethtcs tn washtngtonDouglas H. ShulmanCommissionerInternal Revenue Service1111 Constitution Ave., N.W.Washington, DC 20224

March 8, 2011

Re: Complaint Against American Action Network. Inc.Dear Commissioner Shulman:

Citizens for Responsibility and Ethics in Washington ("CREW") respectfully requests anInternal Revenue Service ("IRS") investigation into whether the American Action Network, Inc.,("AAN"), a non-profit organization exempt from taxation pursuant to section 501(c)(4) of theInternal Revenue Code ("Code"), is operating with the primary purpose of influencing politicalcampaigns in violation of the Code. 1

Despite the fact that AAN told the IRS only a minor portion of its activities would bepolitical, AAN extensively participated in political campaigns throughout the 201 0 campaigncycle. Because of the serious nature of the tax law violations, the IRS should consider revokingAAN's tax-exempt status and/or impose appropriate excise taxes and penalties on theorganization.

Under the law, section 501(c)(4) organizations such as AAN must be primarily engagedin the promotion of social welfare,2 which does not include "direct or indirect participation orintervention in political campaigns on behalf of or in opposition to any candidate for publicoffice."3 The Code does not state precisely what constitutes political activity, but some activitiesunquestionably are political, such as explicitly advocating tl1e election or defeat of a candidate forpublic office.4 For other activities, the IRS currently applies a facts and circumstances test todetennine whether an organization has intervened in a political campaign. 51 CREW submits this letter in lieu ofFonn 13909; a copy is being sent to the Dallas office.2 26 U.S.C. 501(c)(4); Treas. Reg. 1.501(c)(4)-1(a)(2)(i) ("an organization is operatedexclusively for the promotion of social welfare if it is primarily engaged in promoting in someway the common good and general welfare of the people of the community").3 Treas. Reg. 1.501(c)(4)-1(a)(2)(ii). While the Supreme Court's landmark decision in CitizensUnitedv. FEC, 130 S. Ct. 876 (2010) greatly expanded the types of political activities in whichsection 501 (c)( 4) organizations could engage, it did not alter the requirement that politicalactivity may not be the primary activity of these organizations.4 See Election Year Issues, 2002 EO CPE Text at 349, 388; see also Rev. Rul. 2004-6.5 Rev. Rul. 2007-41.

1400 Eye Street, N.W., Suite 450, Washington, D.C. 20005 I 202.408.5565 phone I 202.588.5020 fax I WW\v.citizensforethics.org


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Douglas H. ShulmanMarch 8, 2011Page2

AAN was aware that, as a section 501(c)(4) organization, its primary activity could not beparticipation in political campaigns. Nevertheless, a review of AAN's activities demonstratesthat the organization's primary activity in 2010 was sponsoring express advocacy independentexpenditures and clearly political electioneering communications.

The American Action Network's Representations to the IRSAAN was established in 2009, and submitted under penalty of perjury an application for

recognition under section 501(c)(4) in February 2010.6 In a lengthy statement in support of itsapplication, AAN claimed its primary purpose was to promote social welfare by advocating for arange of economic and national security policies, and that only a "minor portion" of its plalUledactivities would be politicaU Specifically, AAN identified several activities through which itplalUled to pursue its purported mission, including policy advocacy, c itizen forums, town hallmeetings, college tours, policy conferences, training programs, new media, direct lobbying, andpress and public outreach.8 AAN represented that while it plaimed to "primari ly focus" onlobbying and educational efforts, a "minor portion" of its activities might be classified aspolitical campaign intervention.9 These political activities included endorsing or criticizingproposals advanced by public officials, providing training and materials to candidates for office,and "in unusual cases" distributing candidate surveys, voter guides, and voting records ofofficials and candidates. 10

AAN further told the IRS that "[i]n certain cases, and within the limits allowed by federaltax law and federal and state election laws, it may also run advertisements in support ofcandidates." 11 AAN promised to adopt appropriate intemal controls to guarantee that its politicalactivity "remains a minor activity, and does not become its primary activity."12 AAN representedthat it expected its polit ical campaign activity to be 20 percent or less of it activity, and claimedthe amount might vary from year to year. 136 See Form 1024, Application for Recognition Under Section 501(a) ("AAN Form 1024")(attached as Exhibit A).7 See Statement in Support of Application for Tax-Exempt Status (Exhibi t A to AAN Form 1024)at 1-2, 4.8 Id. at 2-4.9 Id. at 4.10 !d.11 See Statement in Support of Application for Tax-Exempt Status (Exhibit A to AAN Form1024)at4.12 !d. at 5, 8-9.13 !d. at 5.


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Douglas H. ShulmanMarch 8, 2011Page 3

In further support of its application, AAN submitted a budget for three fiscal yearsbetween July 2009 and June 2012. 14 AAN represented its total expenses for the 2010 electioncycle would be no more than $2.4 million- $715,640 for July 2009-June 2010 and $1.68 millionfor July 2010-June 2011. 15 Although AAN asserted in its application that it might run politicaladvertisements, the budget it submitted did not identify any expected expenses related totelevision, radio, or internet advertising. 16Based on these submissions, the IRS granted AAN's application for section 501(c)(4)status on April 3, 2010. 17

The American Action Network's Political ActivityContrary to its sworn application for tax-exempt status, AAN extensively participated inpolitical campaigns in 2010, making political activity its major purpose, not just a minor one. Asa result, AAN violated its tax-exempt status under section 501(c)(4).While the exact amount ofAAN's total spending on political activity in 2010 cannot beascertained from public data, it unquestionably dwarfed the organization's total plannedexpenditures of $2.4 million for the entire 2010 campaign cycle. In fact, within days of receivingthe IRS's approval ofAAN's section 501(c)(4) status, the organization acknowledged it planned

far greater political activity in 2010 than it represented on its application. AAN Chief ExecutiveOfficer (and former Minnesota Republican Senator) Norm Coleman publicly announced thegroup hoped to be active in 8-1 0 Senate races and 25 House races in 2010, and AAN reportedlysought to raise $25 million to fund a political advertising "blitz." 18 Days before the November

14 See Statement of Revenue and Expenses (Exhibit C to AAN Form 1024).15 !d. AAN further projected its total expenditures for July 2011 through June 2012 would be$1.73 million. !d.16 !d. For each of these three years, more than half ofAAN's expenses were to be consumed bycompensation of officers and directors, and other salaries. !d. AAN further represented that thebulk of this compensation was to be paid to chief executive officer Norm Coleman ($250,000 peryear) and president Rob Collins ($200,000 per year). See Officers and Directors (Exhibit B toAAN Form 1024).17 See Letter from the IRS to AAN, April3, 2010 (attached as Exhibit B).18 See Peter H. Stone, Party Allies Raising Millions, National Journal, Apri116, 2010 (attachedas Exhibit C).


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Douglas H. ShulmanMarch 8, 2011Page42010 election AAN president Rob Collins predicted the organization would meet its $25 millionfundraising goal. 19

Based on reports submitted to the Federal Election Commission ("FEC") of itsindependent expenditures and electioneering communications, AAN spent at least $18 million onpolitical campaigns in 2010. Specifically, AAN spent more than $4 million on independentexpenditures expressly advocating the election or defeat of candidates for public office, and atleast $14 million on electioneering communications - advertisements that mention a candidate byname close to an election. 20AAN's independent expenditures included $850,000 to broadcast adve1tisements againstBill Keating, a Democrat running for a House seat in Massachusetts, and millions more foradvertisements against Sen. Russ Feingold (D-WI), and congressional candidates Bryan Lentz(D-PA), Dan Seals (D-IL), and Chad Causey (D-AR). 21 AAN also intervened in the NewHampshire Senate race between Democrat Paul Hodes and Republican Kelly Ayotte, sponsoringa website that asked for signatures on a petition to "help send Hodes packing"22 and spendingmore than half a million dollars on television, radio, and internet advertisements calling Hodes"unaffordable."23 As independent expenditures repmted to the FEC, these activitiesunquestionably represent participation in political campaigns.The more than $14 million AAN spent on electioneering communications reported to theFEC also constitutes political activity. While these advertisements stop short of expresslyadvocating the election or defeat of candidates, they represent political campaign interventionunder IRS authority. In Revenue Ruling 2007-41, the IRS promulgated guidance on the

19 See Jason Horowitz, Money Makes his World Go Round, Washington Post, October 25, 2010(attached as Exhibit D).20 See http://guery.nictusa.com/cgi-bin/fecimg/?C90011230 (FEC reports of independentexpenditures); http://guel:y.nictusa.com/cgi-bin/fecimg/?C3000 1648 (FEC reports ofelectioneering communications). See also Sunlight Foundation, Follow the Unlimited Money,American Action Network. Inc. (summarizing independent expenditures) (attached as Exhibit E);Sunlight Foundation, Follow the Unlimited Money, American Action Network (summarizingelectioneering communications) (attached as Exhibit F).21 See Sunlight Foundation, Follow the Unlimited Money, American Action Network. Inc . Theadve1tisements AAN broadcast can be seen on the YouTube Channel the organizationestablished. See http:/ www.youtube.com/user/AmericanActN et.22 See www.hodesmustgo.com.23 See http://www.youtube.com/user/AmericanActNet#p/u/55/wqoOp8ugflE.


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Douglas H. ShulmanMarch 8, 2011Page 5distinction between issue advocacy and political campaign intervention.24 The IRS takes intoconsideration all the facts and circumstances of a particular communication, and identified thekey factors as: (1) whether the statement identifies one or more candidates; (2) whether thestatement expresses approval or disapproval for a candidate's position; (3) whether the statementis delivered close to an election; (4) whether the statement makes reference to voting or anelection; (5) whether the issue addressed has been raised as an issue distinguishing candidates foran office; (6) whether the communication is part of an ongoing series of communications by theorganization on the issue that are made independent of the timing of any election; and (7)whether the timing of the communication is related to a non-electoral event such as a scheduledvote on specific legislation by an officeholder running in an election.25 Applying these factors,nearly all of the advertisements AAN broadcast in 201 0 constitute political campaignparticipation.

For example, starting on October 22, 2010, AAN spent $725,000 broadcasting anadvertisement against Rep. Ed Perlmutter (D-CO) expressing disbelief that "convicted rapists canget Viagra paid for by the new health care bi11 ."26 Noting Rep. Perlmutter had voted for thelegislation, the advertisement encouraged viewers to "tell Congressman Perlmutter vote forrepeal in November" and to "vote yes on H.R. 4903.'>27 The advertisement identified Rep.Perlmutter, expressed disapproval for his position on the health care bill, was broadcast veryclose to the election, does not appear to have been part of any ongoing series of communicationsby AAN independent of the election, and addressed an issue that distinguished Rep . Perlmutterfrom his opponent.28 Moreover, the timing of the advertisements was not related to anyscheduled vote on repealing health care legislation. The House went into recess at the end ofSeptember,29 and no votes were scheduled on H.R. 4903 or any other bill repealing the health24 While Revenue Ruling 2007-41 addresses political activity by section 501(c)(3) organizations(which may not participate at all in political campaigns), the IRS applies the ruling's analysis todetermine if the activities of a section 501 (c)(4) organization are political. See, e.g., Frances R.Hill, Exempt Organizations in the 2008 Election: Will Wisconsin Right to Life Bring Changes?,19 U. Fla. J.L. & Pub. Pol'y 271,284 (2008).25 Rev. Rul. 2007-41.26 See http://query.nictusa.com/pdt7181/1093175918111093175918l.pdf#navpanes=O;http://www youtube.com/user/AmericanActN et#p/u/25N3nnl9P 8eN c.27 !d.28 See Ryan Frazier for Congress, Healthcare page (stating his position supporting an "ImmediateRepeal of ObamaCare" which must be "a top priority" of the incoming Congress) (available athttp://www. frazierforco Iora do. com/?q=healthcareissue .29 See David M. Herszenhorn, Congress Wraps Up Session Early as Midterm Races Loom, NewYork Times, September 30, 2010 (attached as Exhibit G).


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Douglas H. ShulmanMarch 8, 20 11Page 6care law dwing November 2010 or in the remainder of the 111 th Congress.30 AAN's referenceto a vote "in November," while ostensibly related to the legislation, appears to be a furtivereference to the upcoming election in which viewers could vote.

AAN spent another $705,000 broadcasting an identical advertisement against Rep. DinaTitus (D-NV),31 $725,000 on a different advertisement also encouraging viewers to call Rep.Perlmutter "in November" and tell him to vote to repeal the health care law,32 and nearly $2million on similar electioneering communications advertisements directed at Reps. Mark Critz(D-PA), Stephanie Herseth Sandlin (D-SD), Chris Murphy (D-CT), Mark Schauer (D-MI), andCharlie Wilson (D-OH).33

All of these advertisements are similar to the hypothetical situation analyzed in Situation15 ofRevenue Ruling 2007-41, in which an organization broadcast an advertisement identifyingan officeholder shortly before an election that was not part of an ongoing series of similarcommunications on the same issue, was not timed to coincide with a non-election event, and tooka position on an issue that distinguished the officeholder from his or her opponent.l 4 Suchadvertisements, the IRS concluded, constitute political campaign intervention.35

30 See Library ofCongress, Bill Summary and Status, 111th Congress, H.R. 4903 (attached asExhibit H).31 See http://query.nictusa.com/pdf/518/1 0931520518/1 0931520518.pdf#navpanes=O;http://www.youtube.com/user/AmericanActNet#p/u/45/PqhySwOOOxg.32 See http://query.nictusa.com/pdf/170/1 0931541170110931541170.pdf#navpanes=O;http://www.youtube.com/user/AmericanActNet#p/u/33/uph2ZbxacQI.33 See http://guery.nictusa.com/cgi-bin/fecimg/?C3000 1648;http://www.youtube.com/user/AmericanActNet.34 Rev. Rul. 2007-41.35 Id. Several ofAAN's electioneering communications were related to bills calling for spendingcuts and extending the Bush tax cuts. See, e.g., http://www.youtube.com/user/AmericanActNet#p/u/29/NfZMm6eC8wE (encouraging viewers to call Rep. Kurt Schrader (D-OR) and tell him to vote yes on H.R. 5542, a bill that would have cut certain discretionaryspending); http://www.youtube.com/user/AmericanActNet#p/u/38/tbpnqsWBgdA (encouragingviewers to call Rep. Steve Kagen (D-WI) and tell him to vote yes on H.R. 4 7 46, a bill that wouldhave permanently extended the Bush tax cuts) . While these issues were raised in the lame ducksession that followed the election, none of the bills referenced or even the broader issues theyaddressed were scheduled for a vote at the time AAN broadcast the advertisements. Consideringall the facts and circumstances, these electioneering communications also constitute politicalactivity.


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Douglas H. ShulmanMarch 8, 2011Page7

AAN also classified as electioneering communication millions of dollars it spent onadvertisements that did little more than call candidates "extreme" and tie them to former HouseSpeaker Nancy Pelosi. For example, AAN spent $875,000 on an advertisement claiming thatAnn Kuster, the Democratic candidate for a New Hampshire House seat, supported massive taxhikes, and asserting that "Nancy Pelosi is not extreme. Compared to Annie Kuster."36 Similarly,AAN spent $225,000 on an adve11isement noting that Mike Oliverio, the Democratic candidatefor a West Virginia House seat, supported Mrs. Pelosi and would do whatever she told him to. 37These advertisements also constitute political activity.AAN's total spending figures for 2010 are not yet available, and as a new organizationAAN has no Form 990 tax returns for earlier years. Based on its spending, however, it appearspru1icipation in political campaigns was AAN's primary activity in 2010. AAN's total projectedexpenditures for the 2010 election cycle were $2.4 million, a fraction of the $18 million or morethe organization spent on political activity in 20 I0. While AAN' s other expenditures for 2010cannot be ascertained from public data cunently available, it does not appear the organizationspent a significant amount ofmoney on non-political issue adve11ising. AAN has placed on itsYouTube channel nearly all of the political adve11isements referenced in its FEC reports.38 Bycontrast, very few of the other videos included on its YouTube channel could be considered nonpolitical issue advertisements, strongly suggesting AAN did not make and broadcast more ofthem. In sum, considering AAN told the IRS it would spend less than 20 percent of its projected

$2.4 million budget on political activities, the fact that it spent at least $18 million out of anunknown total budget, suggests that statement in its application likely was untrue.That participation in political campaigns was AAN's primary activity in 2010 is fm1herunderscored by AAN' s coordination of political advertisements with other outside groups and byits naked political calculations in targeting specific races where it believed it could impact theoutcome. Just weeks after the IRS granted AAN section 501(c)(4) status, AAN began, at thebehest ofKarl Rove and former Republican National Committee Chairman Ed Gillespie,coordinating with American Crossroads, Crossroads GPS, the U.S. Chamber of Commerce, andother outside groups seeking to influence the 2010 elections.39 The groups "worked together tospend millions to take down the Democratic House majority" by targeting specific races and

36 See http://guery.nictusa.com/pdf/557 10931636557110931636557 .pdf#navpanes=O;http://www.youtube.com/user/AmericanActNet#p/u/49/0GyCvH-92jE.37 See http://guery.nictusa.com/pdf/91911 09316369I9/l 093I6369I9.pdf#navpanes=O;http://www.youtube.com/user/AmericanActNet#p/u/55/F4YT4BTeivU.38 See http://www.youtube.com/user/AmericanActNet.39 See Peter H. Stone, GOP Fundraiser Conclave, Under the Influence blog, April 22, 20 I 0(attached as Exhibit I); Jim Rutenberg, Pro-G.O.P. Groups Prepare Big Push at End ofRaces,New York Times, October 25, 20IO (attached as Exhibit J).


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Douglas H. ShulmanMarch 8, 2011Page8deciding which organization would broadcast advertisements in a particular race.40 Many of thegroups, including AAN, traded information in regular strategy sessions and conference calls, anddivided up races to avoid duplication and put as many Democrats as possible on the defensive.41AAN President Rob Collins acknowledged the unabashed political motives of these efforts inlate October, noting the groups "carpet-bombed for two months in 82 races, now it's sniper time.. . . You're looking at the battle field and saying, 'Where can we marginally push - where canwe close a few places out?'"42 AAN Chairman Fred Malek similarly admitted that theorganization "carefully calibrated really tight House races" in deciding where to broadcastpolitical advertisements.43

The amount of money AAN spent on clearly political advertisements and other politicalactivity suggests its primary purpose in 2010 was political campaigning.The American Action Network's Political Ties

In addition to spending heavily on political advertisements against Democratic candidatesand coordinating with other outside groups to target specific Democrats, AAN has extensive andstrong ties to the Republican party. These include:

CEO Norm Coleman previously was a Republican senator from Minnesota andthe Republican mayor of St. Paul, Minnesota.44Chairman Fred Malek previously was the national finance chairman of SenatorJohn McCain's presidential campaign, the campaign manager for PresidentGeorge H.W. Bush in 1992, and an aide and advisor to four Republicanpresidents. 45 Mr. Malek is also a significant Republican fundraiser.46

40 See Jeanne Cummings, GOP Groups Coordinated Financial Firepower, Politico, November 3,2010 (attached as Exhibit K).41 See Rutenberg, New York Times, October 25, 2010.42 !d.43 See Kenneth P. Vogel, House is New Front for GOP Groups, Politico, October 13,2010(attached as Exhibit L).44 See htt;p://americanactionnetwork.org/senator-norm-coleman-r-minn?phpMyAdmin=yVaoFisOJaixGsCDOKevn%2Cgw%2CQ9 (attached as Exhibit M).45 See http://americanactionnetwork.org/frederic-v-malek?phpMyAdmin=yVaoFisOJaixGsCDQKevn%2Cgw%2CQ9 (attached as Exhibit N).46 See Peter H. Stone, Fred Malek, Center for Public Integrity, October 4, 2010 (attached asExhibit 0) .


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Douglas H. ShulmanMarch 8, 2011Page 9

President Rob Collins previously was the chief of staf f to House Majority LeaderEric Cantor (R-VA), and worked for the National Republican SenatorialCommittee, the Republican National Committee ("RNC"), Sen . John Thune (RSD), and former Sen. Chuck Hagel (R-NE).47

Board member Maria Cino previously was the president of the 2008 Republicanconvention, RNC deputy chairman, and executive director of the NationalRepublican Congressional Committee.48 Ms. Cino also recently ran for RNCchair.49

In fact, most of AAN's officers and directors are Republican party leaders, fundraisers,former members of Congress, and/or former aides to Republican presidents or congressionalleaders. 50 These close ties to Republican leaders further support the need for the IRS to conductan investigation to confirm CREW's conclusion that AAN's primary purpose is political activity.

Conclusion

Based on the publicly available information, it appears AAN's activities during the 2010election cycle were inconsistent with its tax exemption application and do no comport with itsstatus as a section 501(c)(4) organization. Therefore, the IRS should investigate AAN and,should it find that AAN has violated its tax-exempt status, take appropriate action, which mayinclude revoking its section 501(c)(4) status, imposing any applicable excise taxes under section4958 for excess benef it transactions, and treating AAN as a taxable corporation or as a section527 organization.

Recently, CREW and others have filed complaints with the IRS against groups that haveengaged in impermissible political activity in violation of their tax exempt status.51 It is47 See http://americanactionnetwork.org/president?phpMyAdmin=yVaoFisOJaixGsCDQKevn%2Cgw%2CQ9 (attached as Exhibit P).48 See http://americanactionnetwork.org/maria-cino?phpMyAdmin=yVaoFisOJaixGsCDQKevn%2Cgw%2CQ9 (attached as Exhibit Q).49 See Jerry Zremski, Cino is Endorsed by House Speaker in her Race to Head GOP, BuffaloNews, January 13, 2011 (attached as Exhibit R).50 See http://americanactionnetwork.org/content/about (attached as ExhibitS); see also Officersand Directors (Exhibit B to AAN Form 1024).51 See, e.g., Letter from CREW to the IRS, February 1, 2011 (requesting investigation oftheAmerican Future Fund, Inc. for violating its 501(c)(4) status); Letter from CREW to the IRS,October 26,2010 (requesting investigation ofPray in Jesus Name Project for violating its


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Douglas H. ShulmanMan.:h 8, 2011Page 10imperative that the IRS investigate likely tax law violators and institute enforcement actions priorto the 2012 election season. Only vigorous enforcement by the IRS will deter other exemptorganizations from violating om nation's ta.x laws for political gain.

Thank you for your prompt attention to this matter.

Executive DirectorCitizens for Responsibility and Ethics in WashingtonEncls.cc: IRS-EO Classification

501(c)(3) status); Letter from Campaign Legal Center and Democracy 21 to the IRS, October 5,2010 (requesting investigation ofCrossroads GPS for violating its 501(c)(4) status); Letter fromAmericans United for Separation ofChurch and State to the IRS, September 30, 2010 (requestinginvestigation of Cornerstone World Outreach for violating its 501(c)(3) status).


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EXHIBIT G


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Hon. Douglas H. ShulmanCommissionerInternal Revenue ServiceRoom 3000 IR1111 Constitution Avenue, N.W.Washington, DC 20224Lois LernerDirector of the Exempt Organizations DivisionInternal Revenue Service1111 Constitution Avenue, N.W.Washington, DC 20224

September 28, 2011

Re: Request for IRS investigation into whether certain organizationsare ineligible for tax exempt status under section 501Cc)(4).

Dear Commissioner Shulman and Director Lerner:Democracy 21 and the Campaign Legal Center call on the Internal Revenue Service(IRS) to conduct an investigation into whether Crossroads GPS, Priorities USA, American

Action Network and Americans Elect, all of which claim to be tax exempt groups organizedunder section 501(c)(4) ofthe Internal Revenue Code (IRC), 26 U.S.C. 501(c)(4), are ineligiblefor the tax exempt status provided to section 501(c)(4) organizations.1Under the IRC, IRS regulations and court decisions interpreting the IRC, section501(c)(4) organizations are required to primarily engage in the promotion of social welfare inorder to obtain tax exempt status. Court decisions have established that in order to meet this

requirement, section 501(c)(4) organizations cannot engage in more than an insubstantial amountof any non-social welfare activity, such as directly or indirectly participating or intervening inelections.

Thus, the claim made by some political operatives and their lawyers that section501(c)(4) organizations can spend up to 49 percent of their total expenditures on campaignactivity and maintain their tax exempt status has no legal basis in the IRC and is contrary to courtdecisions regarding eligibility for tax-exempt status under section 501(c)(4). An expenditure of49 percent of a group's total spending on campaign activity is obviously far more than aninsubstantial amount of non-social welfare activity.

Last October, we asked for an investigation of Crossroads GPS on similar grounds. By this letterwe re-state and supplement our earlier request for an investigation of Crossroads GPS.


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2

The IRS applies the "primarily engaged" test on the basis of the "facts andcircumstances" of an organization's formation and operations. Here, we believe, the "facts andcircumstances" show that each organization has engaged in far more than an insubstantialamount of participation or intervention in elections and that the overriding purpose of eachorganization is to influence elections.

Thus, under the IRC and court decisions interpreting the IRC, these organizations are noteligible to receive section 50 I (c)(4) tax exempt status.

In a 2008 Letter Ruling, the IRS stated that a group is not eligible for tax exempt statusunder section 50l(c)(4) where the facts and circumstances show that the group's "first andprimary emphasis" is to get candidates elected to public office.

This standard is different than, and in conflict with, the standard applied by the courts.But even under this standard, we believe the "facts and circumstances" relating to the formationand activities of the four organizations discussed in this letter show that each group wasorganized and is operated for the overriding purpose of participating or intervening in elections.

Therefore, none of the four groups meets the standard for tax exempt status under section50 I (c)( 4) because they are not primarily engaged in "the promotion of social welfare."

By claiming tax-exempt status under section 501(c)(4), these groups allow their donors toevade the public disclosure requirements that would apply if the organizations were registeredunder section 527 as "political organizations." In fact, it appears that avoiding disclosure of theirdonors is the basic reason that these groups organized under section 501(c)(4).

Absent timely and appropriate action by the IRS, widespread abuses of the tax code bygroups organized under section 50l(c)(4) are likely to become commonplace in the 2012presidential and congressional races. These abuses will come at the expense of the integrity andcredibility of the tax laws and of the right of the American people to know the identity of thedonors providing money to influence elections.

Accordingly, we request that the IRS promptly investigate the groups discussed in thisletter and take appropriate enforcement action and impose appropriate penalties for anyviolations of section 501(c)(4) that the agency may find.I. Crossroads GPS

On October 5, 2010, Democracy 21 and the Campaign Legal Center filed a letter with theIRS requesting an investigation into whether Crossroads GPS was operating in violation of therequirements for obtaining tax-exempt status under section 50l(c)(4). Here, we supplement theinformation set forth in that earlier Jetter and continue our request for an investigation.

Crossroads GPS was organized in June, 2010 under section 501(c)(4) ofthe IRC "as anorganization for the promotion of social welfare." ("GPS" stands for "Grassroots PolicyStrategies.")


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3

Crossroads GPS is affiliated with American Crossroads, a non-profit politicalorganization registered under section 527 ofthe IRC. American Crossroads is registered withthe Federal Election Commission (FEC) as a political committee under the Federal ElectionCampaign Act. As such, the major purpose ofAmerican Crossroads is to raise and spend moneyto influence federal campaigns. As a registered political committee, American Crossroads mustreport all of its contributions and expenditures to the FEC under federal campaign finance laws.As a section 501(c)(4) organization, Crossroads GPS does not publicly disclose its donors.

An article in Politico, dated April29, 2011, notes that Crossroads GPS was "foundedunder the guidance of GOP strategists [Karl] Rove and Ed Gillespie.... and that it "acceptsunlimited contributions from donors whose identities can be kept secret."2 The article notes:In response to [the Citizens UnitedJ ruling, Rove and Gillespie helped formAmerican Crossroads, which did disclose donors, and Crossroads GPS, whichdidn't. During last year's midterms, they raised a combined $70 million, ofwhichthe donors of about $43 million are still secret. The vast majority of that moneywas spent attacking Democratic candidates for the House and the Senate.

ld. According to another report:Crossroads GPS took advantage of elements of the tax code to collect unlimiteddonations from individuals and corporations to spend tens ofmillions of dollarsagainst Democratic candidates in the 2010 election.3

Another report noted that Crossroads GPS was formed for the very purpose ofavoiding donor disclosure:Meanwhile, section 501(c)(4) ofthe code, under which Crossroads GPS isincorporated, allows groups to shield their donors ' identities, but requires them tospend a majority of their cash on apolitical purposes- an obligation Democraticcritics say Crossroads GPS and other right-leaning groups flaunted during thecampaign, when they bombarded Democratic candidates with bitingly critical ads."Disclosure was very important to us, which is why the 527 was created," Fortisaid. "But some donors didn't want to be disclosed and, therefore, a (c)(4) wascreated," Forti explained, referring to Crossroads GPS.

2 J. Cummings, "New Dem money group takes on GOP," Politico (Apri l29, 2011) (emphasisadded).3 M. O'Brien, "Obama alumni launch new outside group to boost reelection," The Hill (April 29,20 II).


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4Forti's frank explanation differs from that previously offered by the Crossroadsteam, which had asserted that they always intended to create a 501(c)(4) becauseit was better suited to facilitate issue-based advocacy.4A report in The Wall Street Journal discussed the plans of Crossroads GPS (andAmerican Crossroads) to play a significant role in the 2012 elections:Two conservative groups founded last year with the help ofRepublicans KarlRove and Ed Gillespie have set a goal of raising $120 million in the effort todefeat President Barack Obama, win a GOP majority in the Senate and protect theparty 's grip on the House in the 2012 election. . . .If the conservative groups meet the target disclosed to The Wall Street Journal,they would establish their organizations -American Crossroads and CrossroadsGPS - as possibly the largest force in the 2012 campaign, aside from thepresidential candidates themselves and the political parties.5

According to another report," '2010 was only Crossroads' opening act,' Steven Law, thegroup's president, told the Center for Public Integrity. These two groups hope to rake in $120million for 2012 compared to $71 million last year."6In February, 2011, Crossroads GPS launched a radio ad campaign that was specificallydesigned to counter ads run by the Democratic Congressional Campaign Committee. Accordingto one report:Crossroads GPS, a 50l(c)(4) group associated with GOP heavyweights Karl Roveand Ed Gillespie, is spending $90,000 on radio ads in 19 districts where theDemocratic Congressional Campaign Committee (DCCC) launched ads thisweek.The group launched the ads to hit back against the DCCC ads, which accused theRepublicans, many ofwhom are freshmen from swing districts, ofwanting toslash spending for education and research and investment. 7

4 K. Vogel, "SEIU, American Crossroads look back at 2010 spending," Politico (Dec. 13, 2010)(emphasis added).B. Mullins, "2012 Election Spending Race Heats Up," The Wall Street Journal (March 1, 2011)(emphasis added).

6 P. Stone, "Democrats desperately seeking their own Rove," Center for Public Integrity -iWatchNews (March 14, 2011).7 M. O'Brien, "Rove-backed group spends to bolster 19 targeted Republicans," The Hill (Feb. 3,201 I).


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5Crossroads GPS also started to run ads attacking President Obama in key electoralbattleground states:In an early sign of its financial strength, Crossroads GPS announced Friday that itwas launching a two-month, $20 million television ad blitz attacking Obama'srecord on jobs, the deficit and the overall economy. The first ads will start June27 and run in key battleground states such as Colorado, Florida, Missouri, Nevadaand Virginia.8A subsequent report stated that Crossroads GPS "is about midway through a two-monthadvertising binge attacking President Barack Obama and congressional Democrats that isexpected to cost more than $20 million, alone."9

President Obama announced his candidacy for re-election in the 2012 presidential race onApril 4, 20 11, well before the Crossroads GPS ads were run.One report notes that Crossroads GPS is already spending money in Missouri as part ofan effort to defeat Senator Claire McCaskill, who is up for reelection in 2012:With nearly a year and a half to go before Election Day 2012, conservativeleaning national advocacy groups already have spent more than $500,000 onadvertising in Missouri in hopes of unseating incumbent Democratic SenatorClaire McCaskill. . . .The conservative groups, American Crossroads political action committee and itsnonprofit affiliate, Crossroads GPS, already have hired southwest Missouripolitical operative Paul Mouton to help research and manage their efforts againstMcCaskill. Missouri is the only state with such an on-the-ground presence."As long as the race remains competitive, we will remain highly involved," saidJonathan Collegia, communications director for both groups. "Having someoneon the ground in Missouri is a testament to how important we view this race."When all is said and done, American Crossroads and Crossroads GPS expect tospend far and away more in Missouri than they did in 20 10, when they spentaround $2.4 million opposing Democrat Robin Carnahan during her unsuccessfulcampaign for the U.S. Senate.10

P. Stone, "Obama groups raise $4-5 million in first two months," Center for Public IntegrityiWatch News (June 24, 2011).K. Vogel, "Both sides now in dash for anonymous cash," Politico (Aug. 9, 2011).

10 J. Hancock, "Both sides spending big to win Missouri Senate seat," St. Louis Post-Dispatch (Aug.15,2011).


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6Jonathan Collegio, the spokesman for Crossroads GPS and American Crossroads, said"Crossroads will continue to spend heavily in many competitive races through next

November." 11 According to this story, '"The Crossroads groups have stated that we'll beinvolved heavily in 20I2. both in congressional races and the presidential side as well,' Collegiosaid." !d. (emphasis added).Karl Rove, one of the founders ofthe Crossroads groups, was recently quoted at anappearance in Ohio as discussing their plans for campaign spending in Ohio in 2012:Speaking with reporters before addressing an audience last night at CedarvilleUniversity, Rove said American Crossroads and its sister group, Crossroads GPS,view Ohio as the battleground where President Barack Obama must be stoppedand where it is crucial to defeat incumbent Democratic Sen. Sherrod Brown tohelp Republicans take control of the Senate."Our objective is to be a strong presence in Ohio on the presidential contest, theSenate contest and wherever we might be needed in the House," Rove said. "Weraised $72 million last time (in 20 I 0); our goal is to raise $250 million thistime." 12Another report indicates that the Crossroads groups may be shifting to emphasizespending through the section 50I(c)(4) arm, Crossroads GPS. According to this report,"Crossroads Spokesman Jonathan Collegio said the group's nonprofit arm, registered as a50I(c)(4) social-welfare organization by the IRS would be 'more active' than Crossroad's main527 group." 13This may reflect the fact that Crossroads has been more successful in its fundraising ofundisclosed contributions through the section 50I(c)(4) arm. According to one report, thesection 527 arm "has seen its fundraising lag behind its non-disclosing sister group. In the firstsix months of20II, . . .it raised only $3.9 million." 14The same report described the evolution of the Crossroads groups as moving towardreliance on the section 50 I (c)(4) arm as a way to shield donors from disclosure:[B]ack when Crossroads started out last year, it, too, shunned secret donations andextolled disclosure. Its chairman, Mike Duncan, described himself in May 20 I 0

II D. Eggen, "Political groups, now free of limits, spending heavily ahead of 20 12," TheWashington Post (May 21, 2011).12 J. Hallett, "Rove-affiliated PACs to spend big in Ohio," The Columbus Dispatch (Sept. 21, 2011).13 J. Gillum, "Priorities USA Raises $5 Million to Counter Attack Ads From Karl Rove-BackedCrossroads GPS," AssociatedPress (July 31, 2011).14 K. Vogel, "Both sides now dash for anonymous cash," Politico (Aug. 9, 2011).


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!d.

7as "a proponent of lots ofmoney in politics and full disclosure in politics," andsaid Crossroads intended to "be ahead of the curve on" transparency.Less than one month later, with American Crossroads struggling to raise moneyfrom donors leery of having their names disclosed, operatives spun off CrossroadsGPS, and its fundraising team, led by Rove, began emphasizing to prospectivedonors the ability to give anonymous contributions.Fundraising took off, and together, the groups ended up raising more than $70 in20 I0, with the majority of it -- $43 million- going to Crossroads GPS.

On September 9, 20II, a published report stated that American Crossroads andCrossroads GPS have set a new fundraising goal that is at least twice the $120 million announcedearlier this year. 15 According to the published report:We see a pathway to at least doubling our earlier projected goal," Steven Law, thepresident of Crossroads, told iWatch News. "Everyone is going to stretch as far asthey can here because we all feel this is the most important election we have everbeen involved with."To help achieve its new goal, the two groups have been talking to some prominentGOP figures, notably Mississippi Gov. Haley Barbour. The former RepublicanNational Committee chairman has agreed to lend his Midas like rolodex to theCrossroads efforts."Gov. Barbour's involvement with us gives us the capacity to focus on thepresidential race, the Senate and the House at the same time," Law said.

Id. (emphasis added).II . Priorities USA.

Priorities USA announced its formation as a social welfare organization under section50I(c)(4) of the tax code by a memorandum distributed "to interested parties" on April29, 2011.The memorandum makes clear that Priorities USA (and its companion section 527 politicalorganization, Priorities USA Action), are intended to work for the reelection of President Obamaby mimicking the structure and function ofCrossroads GPS (and American Crossroads).According to the Priorities USA memorandum:Our groups were formed to answer the hundreds of millions of dollars Karl Roveand the Koch brothers have dedicated to spending in the 20 I2 election. In 20 I0,Republicans spent millions distorting the debate on important issues and running

15 P. Stone, "Karl Rove-linked Crossroads has more than doubled its earlier fundraising goal of$120 million," Center for Public Integrity- iWatch News (Sept. 8, 2011).


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8vicious, dishonest attack ads. This is an effort to level the playing field and notallow right-wing activists to hijack the political system. 16

One published report described Priorities USA as follows:A group ofDemocrats aligned with the Obama administration today announcedthat they are starting an outside spending group similar to the conservative groupsthat President Obama has decried.The new group has two arms: Priorities USA and Priorities USA Action. Whileone of the Priorities groups will disclose its donors, the other will not. The modelis similar to that used by American Crossroads and Crossroads GPS, theconservative outside groups that raised more than $70 million in the midtermelection cycle to spend on behalf of candidates with a "conservative free-marketlegislative agenda."17

Another report noted:A group of leading Democrats, including some with close connections to theWhite House, have officially formed what are expected to be the major outsidegroups to combat Republicans- and support President Obama- in the 2012elections with help from huge donations from big money donors and corporationswho will have the legal ability to stay in the shadows that Mr. Obama haspreviously so vocally criticized.The groups are to be called Priorities USA and Priorities USA Action, and, assuch, are modeled after the Republican groups American Crossroads andCrossroads GPS that were started with help from the strategist Karl Rove andwere credited with helping greatly in the party's takeover of the House ofRepresentatives this year- and, it happens, with facilitating a waterfall ofanonymous donati

Documents

CREW: IRS: Regarding Records Provided to Senate Finance Committee Chairman Max Baucus: 11/7/2011 - FOIA Exhibits