Aug 27, 2010

DCCC: IRS Should Investigate Americans for Prosperity Foundation

The DCCC today requested an Internal Revenue Service (IRS) investigation into Americans for Prosperity Foundation’s tax exempt status.  The Americans for Prosperity Foundation’s attack ads are being run in coordination with the attack ads from Americans for Prosperity, which has made Americans for Prosperity Foundation a de facto political “action group,” violating its tax exempt status.

“The DCCC is asking the IRS to hold the Americans for Prosperity Foundation accountable for its illegal election ads that are being used to mislead voters,” said DCCC spokesperson Jennifer Crider.  “Americans for Prosperity Foundation is trying to avoid paying taxes by claiming to be tax exempt, while running campaign ads that benefit a Republican candidate and the NRCC.”

Americans for Prosperity is funded by Charles and David Koch.  Charles Lewis, the founder of the Center for Public Integrity, a nonpartisan watchdog group, said of the Kochs, “They have a pattern of lawbreaking, political manipulation, and obfuscation. I’ve been in Washington since Watergate, and I’ve never seen anything like it.”  [New Yorker, 08/30/10]

The text of the complaint follows:

1. Introduction

The purpose of this complaint is to provide evidence that Americans for Prosperity Foundation ("APF"), a section 501(c)(3) organization,  is an "action organization" in violation of Treas. Reg. § 1.501(c)(3)-1(c)(3), because: a) it is participating in political campaigns on behalf of, and in opposition to, candidates for public office; and because b) its main or primary purpose can be attained only by legislation, for which it advocates.  The Internal Revenue Service should open an investigation of APF through its Political Activities Compliance Initiative program.

1. APF Is Intervening in Political Campaigns
2. Legal Background

A section 501(c)(c)(3) organization must not "participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."[1]  The IRS regulations plainly state: "Activities which constitute participation or intervention in a political campaign on behalf of or in opposition to a candidate include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to such a candidate."[2]  Violation of this prohibition will result in a penalty against the organization and against the organization managers who agree to the political activity;[3] the IRS also has the authority, in the case of  flagrant political campaign activity, to seek an injunction in federal court to prevent future political expenditures.[4]  Violation can also result in the revocation of exemption.[5] 

1. Facts

As the attached media purchase estimate details, the facts indicate that APF has spent an estimated $572,522 to intervene in four competitive political campaigns for the United States Congress.  These ads are part of a $4.1 million national campaign,[6] began in the months before an extremely competitive election.

In context, it is apparent that in these four districts below, these advertisements were timed to support the political activities of APF's sister organization, Americans for Prosperity, a section 501(c)(4) organization.  In each of the below congressional districts, APF's advertisements serve to supplement a previously-aired political barrage sponsored by APF's sister organization.  The APF advertisements – which APF brags can be funded with "A TAX DEDUCTIBLE CONTRIBUTION"[7] – are on the same subject as the political ads sponsored by Americans for Prosperity, and air the two weeks after the Americans for Prosperity ads ceased to air in the same media markets.

There is no question that the Americans for Prosperity advertisements are political in nature.[8] The advertisements express disapproval of political candidates in hotly contested elections less than three months before Election Day; indeed, two of the four candidates attacked are not yet incumbents, and an attack on their positions can serve only to influence voters on November 2.  And in any case, there is no scheduled vote on specific legislation that is at issue.

Similarly, there is no non-political rationale for the APF advertisements.  Both houses of Congress are out of session, and these advertisements are not targeted towards a particular bill or issue. Instead, it is clear that they are designed to continue the political messaging began by Americans for Prosperity by using tax-deductible donations.  The facts and circumstances indicate that these APF advertisements constitute political campaign intervention.

• Kansas – 3rd Congressional District
  • From 8/4 to 8/11, Americans for Prosperity (501c4) ran this ad attacking Stephene Moore (KS-03) in the Kansas City media market

http://www.youtube.com/user/AforP#p/u/0/JRFV0hs1DWo

 Transcript: Stephene Moore. Can Kansas afford another Moore spending? Moore said she does support the votes and positions her husband has taken. But since Dennis Moors and Pelosi took over Congress, spending has skyrocketed, the deficit has tripled, and nearly 100,000 Kansans are unemployed. Moore said she would pass cap and tax, a new energy tax that could cost a Kansas family thousands. Ask Stephene Moore, will she work for Kansas or Nancy Pelosi?

• From 8/16 to 8/29, Americans for Prosperity Foundation (501c3) is running the following ad in the Kansas City Media Market.

http://www.youtube.com/aforp#p/u/9/UCCIQuKTo7Q

 Transcript: Are the streets of Hollywood paved with gold? No they’re paved with your tax dollars. The $862 billion dollar stimulus paid for pork barrel projects all across the country including $1.1 million to pave Hollywood’s Sunset Strip while America lost 2.7 million jobs. The pork barrel stimulus cost every American family nearly $10,000. The wasteful spending must stop. Go to spendingcrisis.org to make your voice heard.

• Michigan – 1st Congressional District
  • From 8/4 to 8/11, Americans for Prosperity (501c4) ran this ad in the media markets of Michigan’s 1^st Congressional District attacking Gary McDowell:

http://www.youtube.com/aforp#p/u/17/b9UI5UfEVV0

Transcript: Michigan’s economy, once strong and vital, now an economy in ruins. Under Nancy Pelosi’s congress, spending has skyrocketed, the deficit has tripled, and Michigan’s unemployment is near highest since the great depression. Pelosi’s budget will increase the national debt by trillions. Government health care will increase spending and may reduce quality of care. Congress just voted to cut our seniors Medicare. And new jobs are no where in sight. Ask Gary McDowell, how can he support Pelosi?

• From 8/16/ to 8/29, Americans for Prosperity Foundation (501c3) is running this ad in the media markets of Michigan’s 1^st Congressional District:

http://www.youtube.com/aforp#p/u/9/UCCIQuKTo7Q

 Transcript: Are the streets of Hollywood paved with gold? No they’re paved with your tax dollars. The $862 billion dollar stimulus paid for pork barrel projects all across the country including $1.1 million to pave Hollywood’s Sunset Strip while America lost 2.7 million jobs. The pork barrel stimulus cost every American family nearly $10,000. The wasteful spending must stop. Go to spendingcrisis.org to make your voice heard.

• Michigan – 7th Congressional District
  • From 8/4 to 8/11, Americans for Prosperity (501c4) ran this ad attacking Rep. Mark Schauer (MI-07) in the media markets of Michigan’s 7^th Congressional District.

http://www.youtube.com/user/AforP#p/u/1/DsK5q2yo3cY

 Transcript: Mark Schauer says he wants to turn Michigan around. But Schauer and Nancy Pelosi have turned Michigan upside down. Under Pelosi, spending skyrocketed, deficit tripled, our unemployment near highest since the great depression. Schauer voted for Pelosi’s budget which would increase the national debt by trillions, he voted for government health care that will increase spending and may reduce quality of care. And he voted for cuts to our seniors Medicare. Tell Schauer: He works for us, not Nancy Pelosi.

• From 8/16 to 8/29, Americans for Prosperity Foundation (501c3) is running the following ad in the media markets of Michigan’s 7^th Congressional District.

http://www.youtube.com/watch?v=l98zLy5H0Ec

Transcript: Vivian Washington: “Small businesses like ours create two-thirds of new jobs. But at every turn, Washington is making it harder for small business to succeed. “Billions to bail out Wall Street giants that created the mess, and nothing for main street.  Billions more wasted in the stimulus, and now a health care law that threatens small business with taxes and fines. “What will I tell good people if I have to lay them off?”

Female V/O: “Wasteful spending must stop.  Go to spendingcrisis.org to make your voice heard.”

• Missouri – 4th Congressional District
  • From 8/4 to 8/11, Americans for Prosperity (501c4) ran this ad attacking Rep. Ike Skelton (MO-04) in the Kansas City media market

http://www.youtube.com/user/AforP#p/u/3/iFJsHa--vTE

 Transcript: 34 years ago, Rocky was in movie theaters, Missouri’s economy was humming along and Ike Skelton first went to Washington. Today, Skelton and Nancy Pelosi vote together 98% of the time. Under their control, spending has skyrocketed, the deficit has tripled, and nearly one in ten Missourians are unemployed. Now, they want to pass a new energy tax which could cost a Missouri family thousands. Tell Skelton: He works for Missouri, not Nancy Pelosi.

• From 8/16 to 8/29, Americans for Prosperity Foundation (501c3) is running the following ad in the Kansas City Media Market.

http://www.youtube.com/aforp#p/u/9/UCCIQuKTo7Q

 Transcript: Are the streets of Hollywood paved with gold? No they’re paved with your tax dollars. The $862 billion dollar stimulus paid for pork barrel projects all across the country including $1.1 million to pave Hollywood’s Sunset Strip while America lost 2.7 million jobs. The pork barrel stimulus cost every American family nearly $10,000. The wasteful spending must stop. Go to spendingcrisis.org to make your voice heard.

1. APF Is an Action Organization Due To its Legislative Agenda
2. Legal Background

Under Treasury regulations, a section 501(c)(3) organization may not be an "action organization."[9]  An action organization is not merely an organization that engages in political activity; it also includes an organization whose "main or primary objective or objectives . . . may be attained only by legislation or a defeat of proposed legislation" and that "advocates, or campaigns for, the attainment of such main or primary objective."[10]

1. Facts

APF is a public charity organized under section 501(c)(3) of the Internal Revenue Code.  Its exempt purpose, according to its calendar year 2008 annual return, is to "Educate citizen leaders on ensuring economic freedom and opportunity."

Americans for Prosperity is funded by Charles and David Koch.  Charles Lewis, the founder of the Center for Public Integrity, a nonpartisan watchdog group, said of the Kochs, “They have a pattern of lawbreaking, political manipulation, and obfuscation. I’ve been in Washington since Watergate, and I’ve never seen anything like it.”[11]    

It lists two programs.  The first, on which it spent $3,048,529, is "National Office – educate citizens in support of restraining federal government growth, and returning government to its constitutional limits."  The second, on which it spent $3,870,879, is "State chapters – educate citizens in support of restraining state government growth, and returning government to its constitutional limits."

The APF website, www.spendingcrisis.org, describes its mission in starkly legislative terms:

Americans for Prosperity Foundation® (AFP Foundation) is committed to educating citizens about economic policy and a return of the federal government to its Constitutional limits. AFP Foundation’s educational programs and analyses help policymakers, the media, and individual citizens understand why policies that promote the American enterprise system are the best method to ensuring prosperity for all Americans. To that end, AFP Foundation supports:

Cutting taxes and government spending in order to halt the encroachment of government in the economic lives of citizens by fighting proposed tax increases and pointing out evidence of waste, fraud, and abuse.

Tax and Expenditure Limitations to promote fiscal responsibility.

Removing unnecessary barriers to entrepreneurship and opportunity by sparking citizen involvement in the regulatory process early on in order to reduce red tape.

Restoring fairness to our judicial system.[12]

It is clear, from APF's calendar year 2008 annual return and its public materials, that its entire budget is spent engaging in grassroots lobbying on two issues: the restraint of federal and state government growth; and "returning government to its constitutional limits."  These are not only its primary goals; they are APF's only goals.  Both goals are achievable only through federal and state legislation; and it is clear from its current media advertisements that APF is campaigning in support of those goals.  APF's primary focus on legislation is made apparent by its $4.1 million television campaign.  These advertisements center on the stop of government "wasteful spending" – which can only be done through either the passage or defeat of legislation. 

APF is an "action organization" primarily focused on legislation; it is therefore not operating under section 501(c)(3).

1. Conclusion

Because the Americans for Prosperity Foundation has violated both the political campaign activity prohibition and the legislative objective prohibition, it can  no longer be classified as a section 501(c)(3) organization.[13]  Moreover, it may not be reclassified as a section 501(c)(4) organization.[14]

In light these flagrant violations of IRS law, we request that the IRS open an immediate investigation through the Political Activities Compliance Initiative; revoke the tax-exempt status of the organization; and seek an injunction to prevent future political expenditures.

^[1] I.R.C. § 501(c)(3); see also Treas. Reg. § 1.501(c)(3)-1(c)(3)(i).

² Treas. Reg. § 1.501(c)(3)-1(c)(3)(iii).

³ § 4955.

⁴ § 7409.

⁵  See, e.g., Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000); Christian Echoes Ministries, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973).

⁶ See http://americansforprosperityfoundation.org/082010-see-afps-new-41-million-tv-ad-government-spending (accessed Aug. 23, 2010). 

⁷ Id.

⁸ See Rev. Rul. 2007-41.

⁹Treas. Reg. § 1.501(c)(3)-1(c)(3)(i), (v).

¹⁰ Id. § 1.501(c)(3)-1(c)(3)(iv).

¹¹ See http://www.newyorker.com/reporting/2010/08/30/100830fa_fact_mayer

¹² See http://www.spendingcrisis.org/about/ (accessed Aug. 23, 2010).

¹³ See id. § 1.501(c)(3)-1(c)(3)(i).

¹⁴ I.R.C. § 504(a); Treas. Reg. § 1.504-1.

[1] I.R.C. § 501(c)(3); see also Treas. Reg. § 1.501(c)(3)-1(c)(3)(i).

[2] Treas. Reg. § 1.501(c)(3)-1(c)(3)(iii).

[3] § 4955.

[4] § 7409.

[5] See, e.g., Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000); Christian Echoes Ministries, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973).

[6] See http://americansforprosperityfoundation.org/082010-see-afps-new-41-million-tv-ad-government-spending (accessed Aug. 23, 2010).

[7] Id.

[8] See Rev. Rul. 2007-41.

[9] Treas. Reg. § 1.501(c)(3)-1(c)(3)(i), (v).

[10] Id. § 1.501(c)(3)-1(c)(3)(iv).

[11] See http://www.newyorker.com/reporting/2010/08/30/100830fa_fact_mayer

[12] See http://www.spendingcrisis.org/about/ (accessed Aug. 23, 2010).

[13] See id. § 1.501(c)(3)-1(c)(3)(i).

[14] I.R.C. § 504(a); Treas. Reg. § 1.504-1.

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