Campaign 2010

Apr 29, 2008

DCCC: IRS Should Investigate Freedomís Watch

The DCCC today requested an Internal Revenue Service (IRS) investigation into Freedom’s Watch tax exempt status.  Freedom’s Watch, violating its tax exempt status, has been running political attack ads against Democratic candidate Don Cazayoux in the LA-06 special election, designed to benefit the NRCC and the Republican candidate.

“The DCCC is asking the IRS to hold Freedom’s Watch accountable for its illegal election ads that are being used to mislead voters in LA-06,” said Brian Wolff, Executive Director of the DCCC.  “Freedom’s Watch is trying to avoid paying taxes by claiming to be tax exempt, while running campaign ads that benefit a Republican candidate and the NRCC.  Freedom’s Watch illegal activity is quickly adding to Tom Cole and the NRCC’s many problems.” 

Freedom’s Watch meets five of the six criteria the IRS uses to determine that a group is political – not a tax exempt 501(c)(4) as Freedom’s Watch claims to be:

  • The Freedom’s Watch ads identify a candidate for public office;
  • The Freedom’s Watch ads are timed to coincide with an electoral campaign;
  • The Freedom’s Watch ads target voters of a special election;
  • The Freedom’s Watch ads identify a specific candidate's position on an issue; and
  • The Freedom’s Watch ads are not part of an ongoing series of advertisements on the same issue.

On April 17, 2008, the IRS issued a letter stating it would look at 501(c)(4) organizations and determine "whether such organizations should properly be taxed as section 527 organizations, with appropriate tax consequences."  There is no question that Freedom's Watch clearly flouts the IRS’ warnings to social welfare organizations regarding their political activity. 

The DCCC has also filed two complaints with the FEC on the political attack ads that Freedom’s Watch is running in the LA-06 special election against Democratic candidate Don Cazayoux.   The first complaint was on Freedom’s Watch and the NRCC’s illegal coordination of their political attack ads.  The second complaint was on Freedom’s Watch failure to disclose the donors funding its attacks ads.

The text of the letter to the IRS follows:

April 29, 2008

 

Ms. Lois G. Lerner

Director, Exempt Organizations Division

Internal Revenue Service

1111 Constitution Avenue NW, Room 341

Washington, DC 20224

 

Re:      Complaint against Freedom's Watch

Dear Ms. Lerner:

On behalf of the Democratic Congressional Campaign Committee, I request that the Internal Revenue Service investigate the organization Freedom's Watch, 401 9th Street NW, Washington, DC 20004.  We have reason to believe that Freedom's Watch is not properly described in section 501(c)(4) of the Internal Revenue Code because its primary purpose is political intervention and the private benefit of the National Republican Campaign Committee ("NRCC") and Republican congressional candidates, and not the promotion of social welfare.

A.                 Description of Freedom's Watch and its Political & Private Benefit Activity

Freedom's Watch is organized under section 501(c)(4) of the Internal Revenue Code.[1][1]  The organization claims it "was formed to promote the common good and general welfare of the American people by supporting mainstream conservative public policies."[2][2]  However, the facts indicate otherwise.  One of its first advertising efforts was "an ad campaign targeting vulnerable House Democrats with a call to approve emergency funds for the war in Iraq."[3][3]

More recently, Freedom's Watch has talked about raising up to $200 million as a "deep-pocketed juggernaut in this year's presidential election."[4][4]  It recently hired Carl Forti, formerly the communications director of the NRCC;[5][5] Congressman Tom Cole, the chairman of the NRCC, said of Freedom's Watch that "we see them in political races all across the board."[6][6]  Freedom's Watch has been described in news accounts as a "Republican-allied organization . . . [that] appears poised to concentrate on competitive congressional contests."[7][7]

Recently, Freedom's Watch has been running an advertisement in connection with a congressional special election in Louisiana.[8][8]  The facts even indicate that Freedom's Watch coordinated the message of the advertisement with the NRCC.[9][9]  It also ran advertisements "that attacked the Democratic candidate in an Ohio special election as being soft on immigration."[10][10]

B.                 Freedom's Watch Is Not a Valid Section 501(c)(4) Organization

A section 501(c)(4) organization must be "operated exclusively for the promotion of social welfare."[11][11]  To meet this standard, it must be "primarily engaged in promoting in some way the common good and general welfare of the people of the community."[12][12]  This standard "does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office."[13][13]  Similarly the primary activity of a section 501(c)(4) organization cannot include the private benefit of a political party.  See Am. Campaign Academy v. Comm'r, 92 T.C. 1053 (1989); Rev. Rul. 75-286, 1975 C.B. 210.

The advertisements sponsored by Freedom's Watch regarding congressional candidates are unquestionably political in nature.  For instance, with regard to the Louisiana advertisement, the script of which is attached as Exhibit A, five of the six factors of Revenue Ruling 2006,[14][14] that tend to show that an "advocacy communication on a public policy issue" is in fact for a political purpose, are present:

  • The advertisement identifies a candidate for public office;
  • Its timing coincides with an electoral campaign;
  • It targets voters of the special election;
  • It identifies the candidate's position on the issue; and
  • The advertisement was not part of an ongoing series of advertisements on the same issue.

C.                 Freedom's Watch is a Section 527 Organization

All the evidence indicates that Freedom's Watch was organized, and is operated, for the primary purpose of intervening in political campaigns, and for privately benefiting Republican congressional candidates and the NRCC.  As a result, Freedom's Watch is not described under section 501(c)(4) of the Internal Revenue Code, but under section 527, as an organization "organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for . . . the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office."[15][15]  A section 527 organization must notify the Internal Revenue Service within 24 hours of formation,[16][16] and must regularly disclose its contributors and its expenditures.[17][17]

Freedom's Watch has deliberately chosen to organize under section 501(c)(4) instead of section 527 so that it may hide its donors from public scrutiny.  By operating as a section 527 organization, however, it has willfully and flagrantly violated the registration and reporting requirements required of political organizations.   Thus, it should be subject to the statutory penalty, which is thirty-five percent of each contribution not disclosed, and thirty-five percent of each expenditure not disclosed.[18][18]

D.                Conclusion

Ms. Lerner, you very recently issued a letter describing the 2008 Political Activities Compliance Initiative, noting that it will include an examination project for section 501(c)(4) organizations that will "[d]etermine whether such organizations should properly be taxed as section 527 organizations, with appropriate tax consequences."[19][19]  Freedom's Watch is the most notorious political organization of the 2008 election cycle, and its putative organization under section 501(c)(4) flouts your clear warnings to social welfare organizations regarding their political activity. 

I urge you to take immediate action under the 2008 Political Activities Compliance Initiative to investigate Freedom's Watch for political activity in excess of that permitted by a section 501(c)(4) social welfare organization, and to levy the appropriate fines for failing to register and report as a section 527 organization.

 

Respectfully submitted,

/s/

___________________
Brian Wolff
Executive Director
Democratic Congressional Campaign Committee

 

cc:        Internal Revenue Service 
Fresno, CA  93888

 

[1][1] "The Donors Behind Those New TV Ads," MSNBC (Aug. 22, 2007), at http://firstread.msnbc.msn.com/archive/2007/08/22/328681.aspx.

[2][2] "About Us," at http://www.freedomswatch.org/About/tabid/38/Default.aspx.

[3][3] " Ads target new House Democrats on war funding; Debate on '08 bill set to start," Washington Times, Nov. 14, 2007, at A3.

[4][4] "Great Expectations for a Conservative Group Seem All But Dashed, New York Times, Apr. 12, 2008, available at http://www.nytimes.com/2008/04/12/us/politics/12freedom.html?pagewanted=print.

[5][5] Id.

[6][6] "GOP May Find Comfort in Soft Money," Washington Post, Mar. 30, 2008, at A6, available at http://www.washingtonpost.com/wp-dyn/content/article/2008/03/29/AR2008032902197.html.

[7][7] "Leading GOP Donors Push to Catch Up to Liberal Groups," Washington Post, Apr. 21, 2008, at A1, available at http://www.washingtonpost.com/wp-dyn/content/article/2008/04/20/AR2008042002387.html.

[8][8] "Democrats Accuse GOP Campaign Arm of Covertly Writing Ad," Washington Post, Apr. 16, 2008, at A3, available at http://www.washingtonpost.com/wp-dyn/content/article/2008/04/15/AR2008041503030.html.

[9][9] Id.

[10][10] Supra note 6.

[11][11] Treas. Reg. § 1.501(c)(4)-1(a)(1)(ii) (2008).

[12][12] Id. § 1.501(c)(4)-1(a)(2)(i).

[13][13] Id. § 1.501(c)(4)-1(a)(2)(ii).

[14][14] Rev. Rul. 2004-6, 2004-4 I.R.B. 328.

[15][15] I.R.C. § 527(e).

[16][16] Id. § 527(i).

[17][17] Id. § 527(j).

[18][18] Id. § 527(j)(1).

[19][19] http://www.irs.gov/pub/irs-tege/2008_paci_program_letter.pdf.

 

 

 


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