Koch Brothers Break New Ground in Dark Money

Alex Seitz-Wald

The Koch brothers are nothing if not innovators in the murky world of campaign finance, and their latest venture—a secret fund that quietly distributed $250 million to conservative groups during the 2012 election, as by revealed by Politicoyesterday—is no exception. The group explores near-virgin territory in the tax code as the first in what could be a new class of weapons in the secret money arms race.

On its face, Freedom Partners looks like any of the other dark-money groups that have proliferated in recent years. Those tax-exempt "social welfare" organizations, called 501(c)(4)s for their tax code designation, can raise unlimited amounts of money without disclosing their donors, and can spend just shy of half of it on politics.

But unlike those groups, Freedom Partners is organized under a different section of the tax code, 501(c)(6), which is typically reserved for chambers of commerce and trade groups like the American Bar Association and the National Beer Wholesalers Association. Political activity from these groups is nothing new—the U.S. Chamber of Commerce was one of the biggest spenders in the 2010 and 2012 elections—but Freedom Partners is plainly not a business association in the traditional sense; its roughly 200 donors are united by a common ideology, rather than a common industry.

"I haven't seen a situation like this, and we watch that area pretty closely," said Jim Clarke, the senior vice president of public policy at the Society of Association Executives, a sort of trade association of trade associations. "I can safety say, anecdotally at least, that this would be new."

Why Freedom Partners would chose 501(c)(6) status over the more common 501(c)(4) is a bit of a mystery because the rules governing political activity are essentially the same for both, but experts speculate there may be some advantages in the choice.

Douglas Varley, a professor at Georgetown Law and a lawyer at Caplin & Drysdale who advises nonprofit groups, said he hasn't seen an organization quite like this before. "I'm surprised that it's a (c)(6) from a pointy-headed lawyer's perspective, but I'm not that surprised from a realist political perspective," he said.

One advantage of the status, Varley explained, is that companies could write off direct contributions to the group as business expenses more easily. It's possible to do that with a more traditional 501(c)(4) group, but harder to justify, while contributions to business associations are routine.

Indeed, when asked why his group chose the particular section of the tax code it did, Freedom Partners spokesperson James Davis told National Journal, "The (c)(6) structure allows us to work with businesses—both large and small—across a variety of industries to advance our member's business interests of promoting the principles of a free market and a free society."

Meanwhile, with an eye on the increasing scrutiny directed at (501(c)(4)s, Freedom Partners may have decided it was safer to move into a new regulatory space. Rep. Chris Van Hollen, D-Md., recently sued the IRS to try to force it to crack down on (c)(4)s, while some state attorneys general, such as New York's Eric Schneiderman, have been trying to make the groups disclose their donors. Then there's all the bad press that the dark-money groups sustained during the 2012 campaign, and the renewed scrutiny during this year's IRS scandal, which revolved around allegations that the tax agency improperly targeted tea-party 501(c)(4) groups.

With all the heat on those groups, Viveca Novak of the Center for Responsive Politics said she's heard some political strategists say they've been looking at section 501(c)(6) as a potential refuge. "Business associations may not fall within the charitable trust jurisdiction of state attorneys general, so the arrangement could help stymie states' efforts to shed some light on who is behind the organizations," Novak wrote on the campaign finance watchdog's blog.

Politically, it would also be much harder for states to regulate these kinds of groups, Varley pointed out, because any new policy on 501(c)(6)s would affect not just ideological dark-money group, but all the quotidian—and powerful—industry groups in a state, as well as local chambers of commerce.

There's nothing illegal or underhanded about using the designation this way, though any 501(c)(6) organization does have to meet certain requirements to be a considered a business league. Apparently Freedom Partners has satisfied them. Davis said the IRS officially recognized his group in January of last year after it was in established the previous November.

And it's not entirely without precedent. The conservative Americans for Job Security set up shop back in 1997 as a 501(c)(6). But otherwise, Freedom Partners appears to be in uncharted waters. "We've seen significant amounts of money spent through (c)(6)s, but they've been through well-established, more well-known trade organizations like the Chamber of Commerce," said Paul S. Ryan of the Campaign Legal Center.

Marcus Owens, who for 10 years ran the IRS office that oversees tax-exempt organizations, said that while he didn't see an obvious benefit to the new status, it might just serve to complement other groups in the Koch Brothers network. They already have their hands in 501(c)(3)s, such as the American Legislative Exchange Council, and 501(c)(4)s, such as Americans for Prosperity, plus their company's PAC, so a 501(c)(6) is the next logical place to expand to create a new giving option for donors.

"It strikes me as maybe the Koch Brothers are trying for one of each kind of organization. Maybe next they'll set up a labor union!" Owens quipped. Call it the campaign finance version of EGOTing.