The NRA’s brazen shell game with donations: A Yahoo News investigation

(Yahoo News Photo Illustration/APGraphic/Getty Images)

Early last summer I began making contributions to the National Rifle Association — a dollar here, a dollar there — to see where my money would end up. Some of it quickly found its way into the account of the National Rifle Association Political Victory Fund, the NRA’s political action committee. And that was of no small interest, because I never knowingly contributed to the NRA-PVF. For me, this wasn’t a big problem; my contributions were a spit in the bucket for an organization that spent $37 million on the 2014 elections and operates on an annual budget of more than a quarter of a billion dollars. But my contributions and others like them may be a big problem for the NRA because, according to some of the nation’s top experts on federal election law, they are all illegal.

The issue is not just that my donations ended up in a political fund account, but the way the NRA solicited them — and presumably those of thousands of others. In fact, each of these transactions almost certainly violated multiple provisions of the Federal Election Campaign Act (FECA) and a legion of state and federal antifraud statutes designed to protect the public from phony charities and false or misleading solicitations.

The FECA makes a hard distinction between solicitations for elections and other solicitations, in part because many Americans don’t like donating to politicians. An NRA member might contribute to the organization because she admires its work on behalf of hunters. She might also contribute to an environmental group because she wants to preserve forests. But this same donor may vehemently oppose the candidates endorsed in federal elections by both the NRA and the environmental group. As a result, the law makes it clear that when these groups are soliciting for electoral purposes they must disclose that fact to potential donors.

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If a private citizen says he’s raising money for a cancer charity and deposits the money into his personal bank account, he can be prosecuted for committing a fraud. Similarly, under federal election law, corporations like the NRA that set up what are known as “connected PACs” must inform potential donors if a PAC is the intended beneficiary of a solicitation. The NRA can’t claim to be raising money for the corporation — to finance such things as its lobbying or research initiatives — and then deposit that money into the account of its PAC. But that’s precisely what the NRA did when it solicited my contributions.

The NRA also appears to have violated a federal law that bars soliciting for a connected PAC from anyone other than the group’s employees or members — what the law calls its “restricted class.” And the NRA appears to have violated another provision that says Internet solicitations must be at websites that are accessible only to members (the restricted class), not the general public.

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“You really can’t solicit for a connected PAC outside the connected organization’s restricted class,” says Joseph Birkenstock, an attorney with Sandler Reiff Lamb Rosenstein & Birkenstock and a former chief counsel of the Democratic National Committee. “That’s really not a gray area of campaign finance law; that’s pretty much ‘first principles.’” (The “restricted class” concept applies to corporations and unions. A corporation can raise money from its own executives and shareholders. Tax-exempt corporations like the NRA and labor unions can raise money from their members.)

Federal law also says a PAC’s solicitation must “expressly state that the contribution will be used in connection with a Federal election” and that contributions are purely voluntary. And it requires a soliciting PAC to collect information about donors, including profession or job affiliation. But the NRA ignored all those requirements in the solicitations to which I responded.

“There are at least three clear violations” of federal law, says Brett Kappel, an expert on political law and campaign finance at the law firm Akerman LLP. “First of all, they can’t be soliciting from the general public at their website. Then there’s the fact that the money is not being solicited in the name of the PAC; they have to say it’s for the PAC and what the political purpose of the PAC is. And then there are multiple missing disclaimers such as the disclaimer saying that contributions have to be voluntary.”

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In addition to violations of the Federal Election Campaign Act, the NRA’s accounting of its corporate political expenditures may have run afoul of federal tax laws, because the powerful lobbying organization apparently failed to report tens of millions of dollars in political expenditures made in connection with federal election campaigns.The Internal Revenue Service has special reporting requirements for tax-exempt corporations like the NRA, which is classified as a “social welfare organization,” or a 501(c​)(4) corporation in IRS nomenclature. Unlike tax-exempt charities such as the Red Cross or the United Way, which may engage in only very limited political activities, “social welfare” organizations are given broader latitude to spend money on politics, so long as their “primary purpose” is not political. A social welfare organization can, for example, send out communications urging its members to vote for particular candidates, and it can buy political ads that favor or oppose candidates. It can set up a political action committee, as the NRA did with its Political Victory Fund, and it can pay for a PAC’s salaries, office space and other expenses. Most important, the Internal Revenue Code allows these tax-exempt corporations to raise funds for their PACs.

In return for this broader authority to engage in politics, the IRS insists that tax-exempt groups like the NRA report all their corporate political expenditures. (The NRA’s PAC, the PVF, reports its expenditures to the Federal Election Commission. Both the corporation and the PVF spend money on elections; the major difference is that the PVF can contribute money directly to candidates, and the corporation cannot.) Although much of the corporation’s political spending is not subject to taxation, a subcategory that the IRS calls “exempt function expenditures” (an example would be NRA spending on ads that support a candidate) may be taxed. The size of the tax is based on a formula that compares total exempt function spending with the group’s investment income. Between 2008 and 2013 the NRA apparently failed to report any of its corporate political expenditures, which totaled nearly $33 million, according to a review of FEC reports and audited financial statements prepared for the NRA board of directors, which were obtained by Yahoo News.

The ability of corporations like the NRA to inject millions of dollars into federal elections was greatly expanded by the Supreme Court’s 2010 Citizens United decision, which allows so-called independent expenditures by super-PACs and corporations with no requirement that they identify the names of their donors. Like many politically active nonprofits, the NRA leaped at the opportunity to make expenditures of this anonymous or “dark money,” using its Institute for Legislative Action (NRA-ILA), which is best known as its $27 million-a-year political research and lobbying arm. In the 2012 elections the NRA ranked 10th among political nonprofits in spending dark money, according to an analysis by the Center for Responsive Politics. In 2014 it ranked third, spending more than all but two nonprofits — the U.S. Chamber of Commerce and Crossroads GPS, the super-PAC headed by Republican operative Karl Rove. Other major players included the liberal, union-backed Patriot Majority USA, the League of Conservation Voters, Grover Norquist’s Americans for Tax Reform, and Americans for Prosperity, which is backed by the billionaire industrialists Charles and David Koch.

All this spending was legal — but it was supposed to be reported to the IRS. Nevertheless, among the top 25 political nonprofit groups spending money in federal elections in 2012, only the NRA failed to report any of its political expenditures to the IRS. The other politically active nonprofits all acknowledged when they were involved in direct or indirect political activity, filed the required IRS reporting schedule with their tax return, declared how much they spent to support or oppose candidates, and paid any tax owed. Although several reported huge expenditures — $71 million for Crossroads GPS, $36 million for the Chamber of Commerce and $37 million for Americans for Prosperity — none had anywhere near the investment income reported by the NRA, or a substantial tax liability. Based on the NRA’s reports, it appears it would have owed more than $600,000. Put another way, none of the other groups had as much to lose by filing the returns required by law as did the NRA.

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Source: OpenSecrets.org

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One of my contributions to the NRA was made at the website of the ILA — nraila.org — under a banner that read:

NRA-ILA

Institute for Legislative Action

GET INVOLVED!

My involvement with the institute — which, for tax purposes, is simply a division of the corporate NRA — was quite limited. I filled in my name, address, credit card information and a contribution amount — $1.00 — and clicked a button that read “Submit Donation.”

I was then taken to a new webpage with the ILA banner at the top, an NRA-ILA logo in bold letters at the bottom and a URL with the ILA’s initials in the Web address. A message on my screen under an ILA banner read, “Thank you for your donation.”

A few minutes later I received an email from the ILA with the same “Thank You” message. In short, I had every reason to believe I’d made a donation to the ILA.

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Yet when I checked my Visa card statement, it became clear that the money had gone not to the ILA but to the NRA’s Political Victory Fund, a fact I confirmed with a Visa representative.

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Just before Christmas I received a note from the PVF wishing me “a very happy holiday season” and advising me that “every dollar you contributed to NRA-PVF this year all added up to invaluable victories in last month’s elections.”

Throughout this transaction, the only thing that might have led any prospective donor to think the PVF might be involved in any way was a confusing notation in tiny print directly below the button marked “Submit Donation” to the ILA, which read: “Contributions to NRA-PVF are not deductible as charitable contributions for Federal income tax purposes.” But this “disclaimer” did nothing to make the solicitations legal.

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Larry Noble, who was general counsel at the Federal Election Commission for 13 years, now serving as senior counsel at the Campaign Legal Center, said there was no question that the way the NRA solicited my contributions violated federal election law if the money went into a PVF account. “The bottom line is that it is illegal for the NRA to solicit money for the ILA and have that money go to the PVF. I don’t see how your contributions could legally be put in the PVF account.”

The Institute for Legislative Action, the advertised beneficiary of my largesse, is headed by Chris W. Cox, who is also chairman of the PVF. Cox, who is paid more than $825,000 a year, oversees eight NRA divisions, including the lobbying arm, the PVF, NRA finances, national advertising and direct mail fundraising, a major source of revenue for both the corporation and its PAC. In short, Cox oversees virtually all NRA finances, both corporate and political. And while his wide-ranging responsibilities may have led him to forget which hat he’s wearing at any particular time, the law is quite explicit about what he can do with his PAC (the PVF), as opposed to the ILA and other corporate entities he administers.

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Chris W. Cox, executive director of the National Rifle Association’s Institute for Legislative Action, at the NRA’s annual convention in 2013. (Photo: Steve Ueckert/AP Photo)

The NRA and Cox failed to respond to repeated requests for a comment about this story.

I made another contribution at a second Cox-operated website — nrapvf.org, the official website of the NRA Political Victory Fund. At this website visitors may search for information about upcoming elections and learn how particular members of Congress are rated by the NRA, but only if they enter an NRA identification number. However, no member ID was required to make a political contribution, in apparent violation of the Federal Election Campaign Act.

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Misleadingly, the PVF homepage did not explicitly solicit contributions for the PVF but instead claimed to be raising money for the ILA. “Donate to the NRA-ILA,” a blue and white button at the bottom of the PVF homepage read. Clicking on that button, I was directed to a series of ILA webpages, where I made my modest gift, and received an online message and subsequent email thanking me for contributing to the NRA-ILA. Yet, on checking my Visa account, I learned, once again, that the money had gone not to the ILA but to the PVF.

Lloyd Mayer, a professor of law at the University of Notre Dame and an expert on tax law and nonprofit organizations, confirmed that this misrepresentation of the actual beneficiary violated the law. “You’ve got a problem because it’s not the PVF’s money; it’s the NRA’s money, because the NRA claimed it was the beneficiary in making the solicitation. It’s a nonprofit corporation’s money. They own it. They control it. They’re responsible for it. … If you’re giving to the NRA, and the NRA is just sort of saying, ‘Oh, how much money does PVF need, we’ll give it a bunch of the money, and they can spend it on whatever they want,’ that’s violating the federal election law.” Under federal election law, corporations — including nonprofits like the NRA — are prohibited from making direct contributions to PACs that contribute to federal candidates.

Assuming money was, in fact, moved by corporate NRA to its PAC, it would not be the first time the organization has engaged in such illegal transfers. In 1983, the Federal Election Commission settled a claim against the NRA for illegally making contributions to the PVF. The NRA agreed it would “no longer spend corporate funds in connection with any federal election” and would limit its “partisan communications” to members. Eight years later, in 1991, U.S. District Court Judge Stanley Sporkin held that a $415,744 payment by corporate NRA to the PVF was an “illegal contribution” in violation of the Federal Election Campaign Act. But an appeals court ruled that the FEC as then constituted lacked authority to enforce the law.

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Why my contributions to the corporation ended up in the PVF account is unclear; likewise the total amount of money the NRA collected through these apparently illegal online fundraising appeals. But the NRA actually collects the majority of its funds through direct mail, which raises the question of whether that much larger pool of money is also being illegally siphoned off for its political action fund.

The NRA is, undoubtedly, a formidable fundraiser. It claims to have 5 million members, and it raises tens of millions of dollars each year, mostly in small donations, but at times in amounts as high as $13 million from a single individual. During the 2012 election cycle, the NRA told the IRS it raised more than $145 million. In 2013 it reported raising an additional $96 million. Yet moving any of this money to the PVF would constitute an illegal corporate transfer. So how does the PVF get all its money?

Federal Election Commission records for the 2014 election make one thing clear: The PVF isn’t raising all its money by itself. We know that because the PVF reported spending only $89,000 on fundraising in 2013 and 2014 while it counted receipts of nearly $22 million. That would be a completely improbable return on investment of more than 24,000 percent. There is, however, another way for the PVF to raise money: Corporate NRA can do some or all of its fundraising for it — provided that it reports those expenditures to the IRS. Audited financial statements prepared for the NRA board of directors by McGladrey, an independent accounting firm, and obtained by Yahoo News, make clear that the NRA spent more than $22 million on fundraising and administration for the PVF between 2008 and 2013. Yet there is no evidence in the public record that the NRA has ever reported any of those expenditures to the IRS, in apparent violation of the law.

The NRA has been able to hide the full extent of its corporate political spending from the IRS by answering “no” to the following question on its IRS Form 990 tax returns, the tax form required of tax-exempt organizations: “Did the organization engage in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office?”

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That’s right. The NRA, which routinely threatens to destroy any politician who dares to challenge its Second Amendment orthodoxy, the same NRA that spent more than $66 million on the 2012 and 2014 elections and recently boasted of winning 91 percent of the races in which it spent money last year, wants the IRS to believe it doesn’t engage in politics.

How is that possible?

Well, simply stated, it’s not. True, in IRS speak, “political campaign activities” is a term of art referring to a somewhat limited group of political expenditures. But even this narrow definition would cover $29 million in NRA corporate expenditures in 2012 and 2014. The PVF, for its part, spent $37 million. In other words, NRA corporate political expenditures accounted for 44 percent of the total of $66 million spent in these elections. Although it is not unheard of for politically active nonprofits to claim they don’t engage in politics, it seems far-fetched for the NRA, given its high profile and the magnitude of its corporate political spending.

John Pomeranz, an attorney with Harmon, Curran, Spielberg + Eisenberg and one of the country’s leading experts on the election-related activities of tax-exempt organizations, says there is no question that the NRA should be reporting its political expenditures to the IRS. “A quick look at the FEC’s website makes it clear that the NRA-ILA is making both independent expenditures in federal races and membership communications in federal races. It ought to be reporting at least the former and, I would argue, the latter, as political expenditures on its 990” return, Pomeranz said.

Pomeranz said it makes no sense for the NRA to tell the IRS it’s not making political expenditures at the same time it’s reporting them to the FEC: “I would be fascinated by the logic that says you can do that.” In 2012, ILA independent expenditures and membership communications reported to the FEC totaled more than $8 million, with total political expenditures running to at least $13 million. None of those payouts was reported on the NRA’s federal tax return.

Marc Owens, director of the IRS’s Exempt Organizations Division from 1990 to 2000, considered the nation’s leading expert on exempt organization tax law, maintains that not only should the NRA have reported these political expenditures, but that they “would be taxable.” Owens referred me to the Internal Revenue Code (IRC) section 527(f), which states that tax-exempt organizations engaging in political activities and also earning income from investments are required to pay a tax — either on their political expenditures or on their investment earnings, whichever is smaller. “I think it is wishful thinking to imagine” that tax-exempt corporations such as the NRA are allowed “to expend funds on political activities without regard to IRC 527(f),” Owens said.

Under this provision, the NRA would have been taxed in 2012 on its investment income of $1.8 million at a rate of 35 percent, resulting in a tax of more than $630,000. It is unclear if that tax was ever paid, but the public record, the NRA’s 990 return, strongly suggests it was not. True, some of the NRA’s political expenditures in 2012 would have been allowed without being subject to any tax. But, cautioned Owens, “‘allowable’ doesn’t mean that they don’t have to report” all their political expenditures, because the IRS can ascertain if an organization deserves to retain its tax-exempt status, and whether it owes taxes, only if the organization comes clean about the total amount it spent on political activities.

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Just how big a deal is it if an organization fails to report its political expenditures to the IRS? Speaking broadly about IRS enforcement polices, Mark Everson, who was IRS commissioner under President George W. Bush — and recently announced his candidacy for the Republican presidential nomination — said, “If people aren’t reporting honestly and accurately what are clearly political expenditures, that’s a problem. … If they [the IRS] believed there was a problem along the lines that you’ve described” — a corporation that had failed to report political expenditures for six years — “they might very well look into it.” It would depend on the evidence, the “materiality,” Everson said. “If they had comments that came in and believed there was a problem,” they might act. But Everson also said that during his tenure (2003-07), he was unaware of any significant actions brought against politically active exempt corporations.

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Much depends on the NRA’s intent. The IRS typically tries to work with taxpayers who fail to file reports to encourage them to comply. According to Owens, “If it’s a situation where they simply refuse to file and were making clear political expenditures, it’s an incomplete tax return; if there was an intentional effort to mislead the IRS, then it could become a criminal matter.” The NRA neglected to report these expenditures for six years beginning in 2008. John Pomeranz calls the NRA’s failure to report this information, which normally would be filed annually on a form known as a Schedule C, “a pretty serious violation, in that it’s an inaccurate report filed under penalty of perjury to the federal government.” He acknowledges, though, that the IRS enforcement program “is perhaps not what we might wish it to be.” Indeed, the IRS has seen its budget for audits and enforcement slashed repeatedly in recent years, and it is currently operating with about $1 billion less than five years ago. IRS audits of tax-exempt groups have historically been very low. In addition, an avalanche of negative publicity in recent years about IRS employees singling out tea party and other conservative groups for special scrutiny has probably made the agency even more gun-shy about challenging any politically powerful conservative organization, including the NRA.

The job of enforcing violations of federal campaign laws, meanwhile, falls to the Federal Election Commission. With its membership evenly divided between Democrats and Republicans, the FEC is widely regarded as one of the most dysfunctional federal agencies. That said, it has on multiple occasions imposed penalties in the hundreds of thousands of dollars and twice ordered payments of $1 million or more. In a 2010 case with facts strikingly similar to the NRA’s conduct in its 2014 fundraising, the FEC imposed a $300,000 fine against a resort development PAC, which illegally solicited contributions from members without advising them that contributions were voluntary and that the money was to be used for “political purposes.”

The legal standard for an FEC enforcement action is actually extraordinarily low, requiring nothing more than “reason to believe” a violation occurred. And while commissioners have successfully blocked any number of investigations of alleged campaign law violations by a variety of political organizations in recent years, it may be difficult for them to ignore a complaint in which there is documented evidence of illegal activity. Any sanction against the NRA would turn on, among other things, the length of time it employed illegal practices to raise money for the PVF and how much of that money was actually spent in federal campaigns.

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According to attorney Brett Kappel, the NRA could also be targeted for violations of federal or state consumer fraud statutes. “You can’t make false claims to the general public; you can’t ask for money for X for educational purposes when in fact the money is going to Y for political purposes,” said Kappel. “It would be a fraud for a 501(c​)(4) [like the NRA] to solicit money for itself but then divert it to another legal entity” such as the NRA Political Victory Fund. A fraud complaint could be lodged either with the Federal Trade Commission or with any number of state agencies. Many have strong statutes on fraudulent fundraising. So, for example, California’s law says that charitable organizations “shall not misrepresent … the nature or purpose or beneficiary of a solicitation,” and requires that contributions be deposited to an account “that is solely in the name of the charitable organization on whose behalf the contribution was solicited.” Virginia, where the NRA is headquartered, has a solicitation law that bars contributions “for any purpose other than the solicited purpose.” And New York, where the NRA is incorporated, has extensive laws against obtaining charitable contributions by “false pretense,” including the use of “materially misleading advertising or promotional material.” NRA solicitations through its corporate and PVF websites have arguably violated all these state statutes. And because of the way the NRA has structured its PAC, any state attorney general with an interest in investigating these apparent violations would have authority to subpoena all relevant NRA records dealing with its nationwide fundraising operations.

Correction: An earlier version of this story reported that the NRA spent more than $34 million on political expenditures. The correct number is $32.9 million.

UPDATE: As noted, the National Rifle Association did not respond to numerous requests for comment on its fundraising practices and tax reporting, either before or after this article was published. After Yahoo News published a follow-up article, NRA spokeswoman Jennifer Baker contacted us with a response. The main points are these:

1. The NRA acknowledges that for a period of four months in 2014, online donations to the NRA-ILA, including the two made by Alan Berlow, the author of the articles, were in fact deposited to the account of the NRA-PVF. According to Baker, this was inadvertent, the result of a “coding error” that was caught and corrected internally. The total amount of donations affected was approximately $125,000, according to Baker, out of a total of $50.8 million raised by the ILA and PVF combined for that election cycle. That amount has been transferred from the PVF to the ILA account, Baker says, which will be reflected in documents that will be filed with the Federal Election Commission on May 20. The NRA also denies that it solicited donations to the PVF from nonmembers. Nonmembers who attempted to make donations on the publicly accessible part of the PVF website were sent to a page which, in turn, led to another page with an option to make contributions to the ILA. According to Baker, the same coding error routed some of these to the PVF by mistake.

2. The NRA acknowledges that its tax filings for 2012 were incomplete with respect to its political expenditures, as reported by Yahoo, but says it paid the taxes that were due, of approximately $600,000, and has provided Yahoo with the evidence.

3. The NRA confirms that it failed to report its political expenditures (such as fundraising on behalf of the PVF) to the IRS for the years 2008 to 2013, as Yahoo News reported. Baker adds that the NRA “did not engage in any taxable [emphasis added] corporate political campaign activity from 2007-2011; nor did we do so in 2013” — in other words, it didn’t owe taxes for those years, and the lack of reporting was, in Baker’s words, “a clerical error” that did not affect its tax liability. Yahoo News did not claim that the NRA owed taxes for those years; it reported, correctly, that even if no taxes are due, the IRS requires this information from all 501(c​)(4) organizations, including the NRA. Baker’s statement reads, in part: “While a box was erroneously left unchecked … the assertion that this represents fraud on the NRA’s part is absurd, as is the suggestion that the NRA would file publicly-available documents that deliberately attempt to conceal any of our activities.” The article did not claim that the NRA’s failure to report these expenditures represented fraud. The follow-up article quoted a spokesman for the Coalition to Stop Gun Violence calling for the IRS and the FEC to “launch investigations into the NRA’s fraudulent activities immediately.”

4. The article said that Berlow “never knowingly contributed to the NRA-PVF.” That statement was accurate with respect to the online donations that were the subject of the article, but in fact Berlow made separate contributions by check to both the ILA and the PVF. Those checks were deposited to the correct accounts. The article should have reported these donations. Yahoo News regrets the error.

Alan Berlow, the author of Dead Season: A Story of Murder and Revenge, has written for The New York Times Magazine, The Atlantic and Harper’s.

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