Calling on the IRS to Investigate Crossroads GPS' Tax Status

It is becoming clearer each day that goes by in the 2010 elections just what an unmitigated disaster the Citizens 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.

Crossroads GPS was organized in July, 2010 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, however, appears to be a classic example of a 501(c)(4) organization that is improperly 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.

That is why Democracy 21 and the Campaign Legal Center have sent a letter today calling on the Internal Revenue Service 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."

The IRS letter points out that 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."

The letter also notes that 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."

It is interesting to note that former RNC Chairman Duncan is not saying the two groups plan to spend more than $49 million on "issue-advocacy" like promoting lower taxes or reducing government spending. Rather, Duncan makes clear the purpose of the expenditures is to plow the money into 11 Senate races.

The tax 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.

The IRS letter from Democracy 21 and the Campaign Legal Center states that 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.

If Crossroads GPS is improperly operating as a 501(c)(4) rather than as a 527 group, the IRS has an obligation to take action to protect the credibility of the tax laws and the right of the public to know who is providing money to influence their votes.

The letter to the IRS states "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 to the IRS points out that 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."

Instead, the IRS uses a "facts and circumstances" test to determine if activity constitutes participation or intervention in a campaign. Thus 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 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 concludes that "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."