Donors Look for Alternatives to Skirt IRS Rules for Political Fundraising

Monday, 06 Jan 2014 08:10 AM

By Melanie Batley

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As the IRS moves to limit campaign fundraising by nonprofit groups, lawyers are looking for new ways to enable donors to continue to pour money into elections while remaining anonymous.

According to the Wall Street Journal one option being considered is the creation of taxable, for-profit businesses which would be used as campaigning vehicles. Another idea involves donors banding together in trade associations. Neither type of group is required to disclose their members.

In November, the IRS proposed new rules to limit political activity by social-welfare groups, known as 501(c)(4) groups, whose influence on political campaigns has skyrocketed in the last two years, partially because donors can contribute unlimited amounts on an anonymous basis.

"They've become the hot trend over the last year or so," Robert Kelner, head of the political law group at Covington & Burling LLP, said of the for-profit vehicles, according to the Journal. "It's a trend that is accelerating, and the new proposals are going to put more steam behind the train."

A 2010 Supreme Court ruling allowed for companies to spend unlimited amounts of money to support or oppose candidates. These organizations are not required to report their activities to the Federal Election Commission since they are not seeking tax-exempt status.

Unlike political action committees, these entities, such as the Democratic firm Catalist and the GOP group called America Rising, do not have to disclose donors, clients, or spending and can work directly with political campaigns, though they are required to pay taxes on any profits. Even then, election-law specialists say those requirements can be minimized or possibly eliminated depending on how a company is structured, according to the Journal.

"The arrival of these taxable, for-profit entities in the political arena will make it increasingly difficult to distinguish political-consulting firms from advocacy groups," Kelner said.

At the same time, companies must be able to demonstrate they have a legitimate business purpose other than campaign activity to avoid being defined by the IRS as a PAC. Many already do, saying they are providing services for a price, such as polling, consulting, and advertising.

"Are you just a political committee parading around as something other than a political committee?" Kenneth Gross, former associate general counsel of the FEC, and now at Skadden, Arps, Slate, Meagher & Flom LLP, told the Journal. "That can be pierced either by FEC or IRS, depending on the nature of the entity."

Meanwhile, political trade associations and charities, known as 501(c)(6) groups, similar to the U.S. Chamber of Commerce, are also finding ways of raising huge sums on an anonymous basis. The IRS has already hinted it may institute new rules to regulate these types of groups for their role in campaigning.

"If the IRS fails to act, Americans should expect to see an increase in the number of so-called 'business leagues' created to funnel money into our elections while cloaking the identities of their donors," Melanie Sloan, executive director of the watchdog group Citizens for Responsibility and Ethics, told the Journal.

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