Shedding the Light on Dark Money

M. Eli Colmenero

During the 2012 Presidential Election, Kansas billionaire brothers David and
Charles Koch spearheaded a coalition of nonprofit groups that raised $400 million to
fund voter mobilization and television ads attacking President Obama1. Known by their
tax code, 501(c)(4)2, these groups were originally created for civic groups to promote
social welfare issues.3 Unlike political contributions regulated by the Federal Election
Commission, donations to 501(c)(4) groups do not have to be disclosed4; this nondisclosure has led to these funds being called dark money.5
The Supreme Courts decision in Citizens United v. Federal Election
Commission6 provided the framework for tax savvy lawyers to push the boundaries of the
tax code and utilize social welfare organizations to support political activity while hiding
organizations sources of funding. The Kochs network used a combination of seventeen
501(c)(4) groups, trusts, and various Limited Liability Companies (LLCs) with cryptic
names (e.g., SLAH LLC) that dissolve and reappear under different monikers to create
several layers of secrecy for funds to transfer under.7
Because the Koch network and other conservative social welfare groups magnify
the voices of conservative views for election purposes, non-disclosure of the financial

Matea Gold, Koch-backed Political Coalition, Designed to Shield Donors, Rained $400 Million in 2012,
WASH. POST, (Jan. 5, 2014) (http://www.washingtonpost.com/politics/koch-backed-political-network-builtto-shield-donors-raised-400-million-in-2012-elections/2014/01/05/9e7cfd9a-719b-11e3-938909ef9944065e_story.html?wpisrc=nl_politics)
2
26 U.S.C. 501(c)(4) (2010).
3
Matea, supra note 1.
4
26 U. S. C. 6104(d)(3) (2014).
5
Matea, supra note 1.
6
Citizens United v. Fed. Election Commn 558 U.S. 310 (2010).
7
Matea, supra note 1

source of these views raises questions of election transparency. That is not to say that the
issue is only raised by conservative organizations, indeed liberal social welfare groups
also circumvent disclosure rules, however, usage of these organizations as campaign
financing vehicles has largely been on the behalf of conservative groups.8 This is best
evidenced by the 2012 election cycle where twenty of the twenty-eight 501(c)(4) groups
who spent more than $1 million were conservative organizations.9 Together, the
conservative 501(c)(4) groups spent an estimated $204 million dollars; a substantial
amount more than the $33 million spent by the seven liberal 501(c)(4) groups who spent
more than $1 million in 2012.10
In this Comment, I will argue that because the rules and regulations applicable to
501(c)(4) groups are vague and incoherent, organizations are able to utilize them for
political activity that extends far past the legally permissive amount. Additionally, nondisclosure of the source of funds supporting the extensive political activity of social
welfare groups undermines the federal election laws objective for transparency. Part I of
this comment discusses the statutory and regulatory framework of Section 501(c)(4),
particularly the requirement that exempt organizations operate exclusively for the
promotion of social welfare. Part II seeks to cover the history of disclosure policies in
America; as it considers the political implications of Americas most infamous scandals,
the political climate that led to major disclosure reformations, and the extent to which
those reformations actually curbed political corruption. Lastly, Part III seeks to put forth

Frank James, Conservative Groups Would Take Hit From New IRS Rules, NPR, (Nov. 27, 2013).
(http://www.npr.org/blogs/itsallpolitics/2013/11/27/247527956/conservative-groups-would-take-hit-fromnew-irs-rules)
9
Id.
10
Id. (one independent 501(c)(4) group rounded out the 28 groups who spent more than $1 million).

comprehensive solutions aimed at decreasing the necessity of anonymous political

contributions, thereby allowing Democratic processes to remain truly Democratic and
free from the taint of wealth and power.
Part I: Disclosure: A Historical Approach to Understanding the Politics of a
Transparent Electoral Process.
Modern campaign finance regulations and the issues surrounding elections can
trace there roots to the Progressive movement of the early 20th century, when newspapers
and reform minded politicians began to reveal and address abuse and corruption in the
business and government sectors.11 By the end of the 19th century, corporations had
come to be major contributors of campaign funds, regularly making donations of $50,000
or more to represent their share in the nations prosperity, while ensuring the donations
were made to national party committees so as to avoid public reporting requirements.12
As public awareness of shadowy corporate contributions rose the Progressive era
witnessesed more organize[d] social, economic, and reform-minded groups [that] began
to exercise power more systematically than ever before.13
Historians have noted that these emerging groups were characterized by a triad of
Progressive priorities: first, the removal of the special interests that influence
government; second, the restructuring of the government machine, then controlled by the
few, so as to make it more difficult for the few and more easily for the many to affect
government policy making; and third, the extension of government functions that had

11

Encyclopedia of American Political Parties and Elections. New York: Facts On File, Inc.,
2006. American History Online. Facts On File, Inc., (http://www.fofweb.com/activelink2.asp?
ItemID=WE52&iPin=EAPPE0141&SingleRecord=True)
12
THE BROOKINGS INSTITUTION, BROOKINGS CAMPAIGN FINANCE REFORM SOURCEBOOK, 27 (Anthony
Corrado et al. eds., 1997), available at http://fackler.webhost.utexas.edu/gov370-money/
13
Laura MacCleary, Goodbye Soft Money, Hello Grassroots: How Campaign Finance Reform
Restructured Campaigns and the Political World, journal, 58 Cath. U. L. Rev 965, 1019 (2009).

become too restricted to relieve social and economic distress.14 These progressive
endeavors fueled early 20th century campaign finance reform and have continued to
inform modern debates on electoral reform.15
Despite the lack of a legal mandate, the Democratic Party adopted resolutions
during the 1908 presidential election to disclose all contributions in excess of $100 prior
to the election date.16 Responding to the publics disappointment that the Republican
Party did not adopt similar pre-election disclosure resolutions, newly elected President
William Howard Taft called for immediate passage of federal disclosure laws in his first
message to Congress in 1909.17 The result was a bipartisan effort that passed the
Publicity of Political Contributions Act of 1910 (Publicity Act) through the Republican
controlled House, the first federal law requiring disclosure of receipts and expenses by
political campaigns.18 As adopted, the Publicity Act required party committees operating
in two or more states to disclosure any contributions or expenses affiliated with
campaigns for the House of Representatives.19 Thus, the act was applicable only to
national party committees20 and the congressional campaign committees affiliated with

14

Id.
Id. at 1021. (noting how the progressive eras focus on empowering citizens via direct democracy serves
as a direct corollary for todays online and social networking activity; this analysis is highlighted by
Supreme Courts opinions including opensecrets.org as a part of the disclosure regime; McCutcheon v. Fed.
Election Comm'n, 134 S. Ct. 1434, 1460 (2014)).
16
Trevor Potter & Bryson B. Morgan, The History of Undisclosed Spending In U.S. Elections & How 2012
Became the "Dark Money" Election, 27 ND J. L. Ethics & Pub Pol'y 383, 403 (2013).
17
Id. at 403.
18
Publicity of Political Contributions Act, ch. 392, 36 Stat. 822 (1910) (amended in 1911 and in 1925;
repealed in 1972).
19
Id.
20
The term "political committee" was defined in The Publicity Act as "the national committees of all
political parties and the national congressional campaign committees of all political parties and all
committees, associations, or organizations which shall in two or more States influence the result or attempt
to influence the result of an election at which Representatives in Congress are to be elected." 36 Stat. 822,
823 (1910) (codified as amended at 2 U.S.C. 434 (1911))
15

them while not requiring the pre-election disclosures adopted by the Democratic Party in
1908. 21
Following the 1910 congressional midterm elections, the House endeavored to
expand the Publicity Act to include pre-election reporting.22 Because Southern
Democrats revered states rights and local level primaries, opponents of additional
regulations attempted to defeat the bill by including provisions that forced state elections
to abide by the most cumbersome Federal election requirements ever seen.23 Despite
these attempts, the plan backfired and Congress ultimately passed the most expansive set
of federal campaign regulations.24 It would not be until 1972 when Congress would
attempt to regulate elections all the way down to the state primary level. 25
Less than a decade after the Publicity Act was expanded, electoral reform suffered
a serious blow from the Supreme Courts decision in Newberry v. United States.26
Truman H. Newberry, a Republican from Michigan received the Republican nomination
for U.S. Senate in the 1918 Michigan primary over Henry Ford.27 The Newberry
campaign committee reported spending upwards of $180,000 to secure the party
nomination, almost 100 times the spending limits.28 Ruling on Newberrys conviction

21

THE BROOKINGS INSTITUTION, supra note 12, at 28.

Id.
23
Id.; 36 Stat. 822, 823 (1910) (codified as amended at 2 U.S.C. 434 (1911)).
24
THE BROOKINGS INSTITUTION, supra note 12, at 28.
25
See e.g., Newberry v. United States, 256 U.S. 232 (1921) (ruling that Truman H. Newberry, a Senator
who beat Henry Ford in the 1918 Republican primary was found to be in violation of campaign spending
limits. Newberry took his fight to the Supreme Court where in 1921, it ruled that the congressional
authority to regulate elections did not enter the party primary and nominations arena. This ruling stood until
1941 when the Court ruled that Congress did have that authority when state law made the activities part of
the election process. United States v. Classic, 313 U.S. 299 (1941))
26
256 U.S. 232 (1941).
27
MARK GROSSMAN, POLITICAL CORRUPTION IN AMERICA: AN ENCYCLOPEDIA OF SCANDALS, POWER AND
GREED, 239 (2008).
28
Id.,
22

under the Publicity Act, Justice Reynolds wrote for the six-to-three majority29 that
Congress lacked the authority to regulate primary elections.30
In the aftermath of the Teapot Dome scandal, Calvin Coolidge was elected
President, because the scandal had shaken the Nation to its core and public resentment
still lingered, the win evidenced the public support of his hardline stance against
corruption.31 Responding to these sentiments, Congress hastily passed a piece of
legislation that attempted to expand the Publicity Acts disclosure requirements. This bill,
named the Federal Corrupt Practices Act of 1925 (hereinafter FCPA), remained the
primary federal disclosure legislation for almost fifty years until 1972.32
In large part, the FCPA was not a considerable regulatory departure from the
Publicity Act and offered little substantive change.33 The broadened disclosure provisions
required political committees to file quarterly reports during non-election years along
with pre and post-election reports during election years.34 The FCPA required that all
contributions in excess of $100 be reported to both the Clerk of the House of
Representatives and the Secretary of the Senate and open to public inspection.35 Thus,
the requirement to file disclosure reports to the House and Senate placed the enforcement
of the FCPA into the hands of Congress.36 Additionally, the FCPA widened the purview
of required disclosure by broadly redefining the Tillman Acts requirement for disclosure

29

Chief Justice Edward White and Justices John Clarke and Louis Brandeis dissented
See Newberry 256 U.S. at 256 (. . . Congress was empowered by law to regulate the times, places and
manner of holding the elections, except as to the places of choosing Senators.)
31
Calvin Coolidge-Scandal, PROFILES OF U.S. PRESIDENTS, http://www.presidentprofiles.com/GrantEisenhower/Calvin-Coolidge-Scandal.html (last visited August 15, 2014).
32
Federal Corrupt Practices Act, 43 Stat. 1070 (1925) (current version at 2 U.S.C.241-48 2014) (repealed
1972)
33
THE BROOKINGS INSTITUTION, supra note 12, at 20.
34
Potter & Morgan, Supra note 16, at 404.
35
Id.
36
Id.
30

of money contribution to contribution.37 Also, Congress banned any national bank,

or any corporation . . . mak[ing] a contribution in connection with any election to any
political office . . . or for any candidates, political committee, or other person to accept or
receive corporate contributions intended for political purposes. 38
Notwithstanding Congressional intent, the FCPA failed to establish an effective
disclosure system.39 The law imposed the brightline reporting requirements needed for
electoral transparency, however, it failed to provide adequate publication of disclosure
reports or enforcement mechanisms.40 Because the FCPA did not require reports be
published or publicly disseminated in any manner41, disclosure of electoral activity was
only effectuated through the open to public inspection requirement.42 The reality of the
FCPAs implementation was that interested parties would have to bring a chair into the
Capital Hill restroom, where the Clerk and Secretary stacked boxes of election reports
with no system of organization on upper shelves, and rifle through tattered reports using a
trial and error method to find a specific report.43
Even upon finding a desired report, and even if it happened to be the complete
report,44 the accuracy of the contributions and expenditures filed with Congress was poor.
Political scientists who braved the annals of Congressional bathrooms have since noted

37

Federal Corrupt Practices Act, 43 Stat. 1070 (1925) (codified at 2 U.S.C.241-48) (repealed 1972)
Id.
39
THE BROOKINGS INSTITUTION, supra note 12, at 29.
40
Id.
41
See 2 U.S.C. 247(c) (1926) (repealed)
42
Potter & Morgan, Supra note 16, at 406.
43
Id. at 406, n.124.
44
Potter & Morgan, Supra note 16, at 406 (noting that the manner in which reports were filed oftentimes
led to the publicly available reports missing pages).
38

that close friends, family and secretaries to wealthy and prominent persons were
suspiciously reported as substantial campaign donors.45
Turning to the enforcement of the FCPA, the Act did not mandate the Clerk or the
Secretary to verify accuracy nor that non-compliance be prosecuted in every instance
found.46 When faced by demands to report more accurate data than previously filed,
political committees often argued that the FCPA did not require such reports, whereby
the Clerk rested its inquiry on the conclusion that it was not his duty "to say whether an
organization, politically active, comes within the purview of the law or not.47 On the flip
side of the coin, in 1954, Attorney General Herbert Brownwell stipulated that a request
from the Clerk or Secretary was a prerequisite to pursuing prosecution of FCPA
violations.48 Because of this regulatory quagmire, prosecution under the FCPA occurred
in only one instance in its forty-five years of enforcement.49
Following the end of World War II, campaign-financing methods dramatically
changed. The party-centered election campaign of the pre-World War II era gave way to
campaigns becoming increasingly candidate based.50 Committees were now established
to focus on the election of a single candidate and raised funds independent of party
efforts.51 Likely attributing to this evolution in campaign methodology was the rise of

45

Id. at 407.
Id. at 406.
47
Id.
48
To Amend the Federal Election Campaign Act of 1971 as Amended, and for Other Purposes, Hearing
Before the Committee on Rules and Administration, 96th Cong. 48 (1979).
49
Potter & Morgan, Supra note 16, at 407 n.132 (noting that the prosecution was appealed all the way to
the Supreme Court where it upheld the disclosure requirements but none the less ended in acquittal
Burroughs v. United States, 290 U.S. 534 (1934); THE BROOKINGS INSTITUTION, supra note 12, at 29
(alleging that no prosecution occurred in the history of the FCPA and that only two candidates were
excluded from office for violating spending limits).
50
THE BROOKINGS INSTITUTION, supra note 12, at 31.
51
Id.
46

television as a critical mode of communicating specific campaign messages to an

electorate, significantly increasing the necessary funding needed to seek federal office.52
By 1956, the Citizens Research Foundation reported that an estimated $155 million had
been spent on political campaigns.53 While that year saw an estimated $9.8 million spent
on television and radio advertising, that figure grew to $58.9 million by 1968.54
Established by Executive Order in 1961, President Kennedys Commission on Campaign
Costs was the only serious effort for substantive change between World War II and the
Vietnam War.55 Written by political scientist, Alexander Heard, the Commissions report
proposed comprehensive reforms that called for the establishment of a regulatory body
insulated from outside influence and a national registry of election finance.56 Congress,
however, was unresponsive to the Commissions proposals.57
Nonetheless, the rapidly evolving landscape of campaign finance began to worry
many members of Congress. Adding to the the concern over the rising costs of election
campaigns, in the 1968 election, the Republican Party spent twice that of the Democratic
Party to elect Richard Nixon.58 Mirroring the rise of Progressive Era publicity
organizations, good-government groups began to form and dedicate their efforts
towards campaign finance reform.59
The culmination of the expensive campaigns, non-compliance with disclosure
requirements, and the rampant evasion of the ban on corporate contributions culminated

52

Id.
Id.
54
Id.
55
Id..
56
Comm'n on Campaign Costs, Financing Presidential Campaigns, 4-5 (1962), available at
http://www.jfklibrary.org/Asset-Viewer/Archives/JFKPOF-093-002.aspx.
57
THE BROOKINGS INSTITUTION, supra note 12, at 31.
58
Id. at 32..
59
Potter & Morgan, Supra note 16, at 402.
53

in the passage of the Federal Election Campaign Act of 1971 (hereinafter FECA).60
Shifting the paradigm of campaign finance regulation, Congress combined two
approaches for its reformations. First, FECA addressed the issues that had come to plague
the efficacy of the FCPA by imposing a stringent disclosure system on candidates and
committees.61 Secondly, it sought to cut the rising costs of running for elected office by
capping amounts spent on campaign communications.62
Under the new regime, candidates and committees came under new disclosure
requirements that significantly departed from previous reform efforts.63 . Expanding the
list of parties subject to disclosure, FECA mandated disclosure for presidential
candidates, primary activity, conventions, and political committees that received or spent
at least $1,000 in a calendar year.64 Parties who were involved in federal elections were
required to file quarterly disclosure reports and any contribution of $5,000 or more
required an additional filing due after forty-eight hours of its receipt.65 Additionally, the
filed disclosure reports were required to be made available within 48-hours of their
filing66 and subsequently be published.67
While FCPA empowered the Clerk and Secretary to audit filings, FECA further
mandated that they, along with the Comptroller General, make periodic field

60

Federal Election Campaign Act of 1971, Pub. L. No. 92-225, 86 Stat. 3 (codified as amended at 2
U.S.C.431 et seq. (2006)).
61
The Oxford Encyclopedia of American Political and Legal History 104 (Donal T. Critchlow & Philip
Vandermeer, 1st ed. 2012).
62
Id.
63
THE BROOKINGS INSTITUTION, supra note 12, at 32.
64
304(a), 86 Stat. at 14.
65
304(a), 86 Stat. at 14.
66
308(a)(4), 86 Stat. at 17.
67
CONG. QUARTERLY, CONGRESSIONAL CAMPAIGN FINANCES: HISTORY, FACTS, AND
CONTROVERSY 40 (1992)..

investigations and audits to verify reporting accuracy.68 Additionally, if the Clerk

Secretary, or Comptroller had substantial reason to believe a party violated FECA, the
violation was to be swiftly investigated and if found, turned over to the Attorney General
who was required to institute a civil action for relief.69
The ramifications of the Watergate scandal, the revelations of reliance on big
donors, illegal corporate donations, and private slush funds revealed a darker side of
American politics and the extent to which money could corrupt it.70 Convinced that a
more extensive regulatory regime than that adopted under FECA was necessary,
Congress passed the Federal Election Campaign Act Amendments of 1974. While
technically an amendment to FECA, the legislation is the most sweeping set of campaign
finance reform ever adopted.71 The newly established Federal Election Commission
(FEC), is a bipartisan agency tasked with the administration of the new election laws and
implementing the public financing program.72 As well as establishing the Federal
Election Commission (FEC), the bill included a number of provisions that strengthened
FECA disclosure requirements.73 Under these new disclosure provisions, candidates were
required to limit their campaign operation to one central campaign committee for its
direct expenditures and contributions.74 Unless a committee spent less than $1,000 in a
quarter, quarterly filing was required as well as filing ten days before and thirty days after
Election Day.75 If a contribution in excess of $1,000 was received within fifteen days of

68

308(a)(11).
308(d)(1)
70
THE BROOKINGS INSTITUTION, supra note 12, at 32
71
Id. at 53.
72
Id. at 54.
73
Id. at 54.
74
Id.
75
Id.
69

an election, it had to be reported within forty-eight hours of its receipt.76 In non-election

years, candidates were required to file a year-end financial activity report.77 Additionally,
all bank depositories authorized to receive campaign funds were required to be
disclosed.78
As the FEC began to implement the FECA Amendments, the Supreme Court
complicated the enactment with its decision in Buckley v. Valeo.79 In a rare per curiam
decision of which the specific authors of its various portions have remained unknown, the
Court laid out what has become the bedrock of modern campaign finance jurisprudence.80
Focusing on the Buckley holdings related to disclosure, the Court recognized three
interests that may justify disclosure requirements.81 First, Buckley recognized that
disclosure informs the electorate of the sources of campaign funding so as to alert a voter
to the interests a candidate may be most responsive to and thus more precisely place each
candidate on the political spectrum than if solely relying on party affiliation and
campaign speeches.82 Second, the Court recognized that disclosure requirements deter
corruption and help avoid the appearance of corruption by exposing large donors who
may seek special treatment.83 Third, it was noted that disclosing donations and
expenditures helps gather data necessary to detect violations of contribution limits.84
Centered on these interests, Buckley found no constitutional infirmity in FECAs
disclosure requirements.

76

Id.
Id.
78
Id.
79
424 U.S. 1 (1976).
80
Potter & Morgan, supra note 16, at 416.
81
Buckley 424 U.S. at 66-7.
82
Id.
83
Id. at 67
84
Id. at 76-8.
77

Despite the fine-tuning by the Supreme Court, the new regulatory regime
dramatically improved public access to campaign finance data and the ability of
regulators in enforce the law.85 Following Buckley, expenditures made for advertisements
that expressly advocated for or against candidates were almost fully disclosed to the
Commission.86 On a broader scale, about 98.3% of all independent expenditures,
regardless of what they were spent on, were disclosed to the Commission. 87
As with any major overhaul of a regulatory system, the FECA Amendments as
altered by Buckley were not without their own set of critics. Candidates and campaign
officials argued that because of their burdensome detail, the new disclosure requirements
greatly increased the administrative expenses of already expensive election campaigns.88
Because the law limited the funds parties could spend on individual candidates, they
began to concentrate their resources on media-based advertising. 89 Thus, state and local
government level grassroots efforts like voter mobilization and registration drives, which
traditionally formed a strong party base of volunteers, sustained significant decreases in
funding.90
Responding to these concerns, Congress moved to consider noncontroversial
changes to FECA and passed the Federal Election Campaign Act Amendments of
1979.91 The amendments created a two-tier disclosure process: registration and reporting.
Political committees, upon their organization, must register with the Commission.92

85

THE BROOKINGS INSTITUTION, supra note 12, at 33.

Potter & Morgan, supra note 16, at 419.
87
Id.
88
THE BROOKINGS INSTITUTION, supra note 12, at 33.
89
Id.
90
Id.
91
Pub. L. No. 96-187, 93 Stat. 1354 (1980) (codified as amended at 2 U.S.C. 434(c) (2014)).
92
2 U.S.C. 433 (The registration statement is a simple initial disclosure document or statement of
organization that describes basic information about the committee, such as who serves as the committees
86

Reflecting Congress attempt to streamline the reporting process and ease administrative
burdens, the reporting frequency depended on who was filing the disclosure.93 While
candidates file reports quarterly regardless if in an election year94, political action
committees (hereinafter PAC) file reports quarterly or monthly depending whether the
report is being filed during an election year.95 Additionally, political committees must
make their best efforts towards obtaining the identities, address, occupation, and
employer of each contributor donating for the purpose of furthering an independent
expenditure.96
The most significant change under the new disclosure provisions was the moving
of contribution disclosures from the donor of the funds, to the recipient of the funds.97
These provisions functionally consolidated the reporting requirements for independent
contributions and the reporting requirements for independent expenditures into a single
requirement filed by whoever makes the independent expenditure.98 Because
contribution had been defined to include contributions for the purpose of influence
any election for Federal office,99 political parties began soliciting contributions intended
to influence state elections.100 These contributions came be to be known as soft money

treasurer, the bank that holds the committees accounts, and so forth. For a detailed description of
registration requirements, see FEC campaign guides (available at www.fec.gov/general/library.shtml [July
2014]).
93
Potter & Morgan, supra note 16, at 423.
94
Pub. L. 106-230, sec. 503; 2 U.S.C. sec. 434(a)(2)(B) (2014).
95
2 U.S.C. sec. 434(a)(4) (2014); 11 C.F.R. sec. 104.5(c) (2014).
96
2 U.S.C. 434(c)(2)(c) (2014); 11 C.F.R 104.7 (2014); the law, however, does not compel contributors
to provide this information to candidates or PACs.
97
2 U.S.C. 434(c)(2)(c) (2014).
98
Fed. Election Comm'n, Annual Report 40 (1978), available at http://www.fec.gov/pdf/ar78.pdf
99
2 U.S.C. 431(8)(A)(i) (2014) (emphasis added).
100
Potter & Morgan, supra note 16, at 428.

and eventually received the stamp of approval from the Commission via advisory
opinions approving of their solicitation and use.101
A decade later, soft money funding became an integral part of national election
financing, with Democratic and Republican candidates, groups and parties spending tens
of millions in soft money.102 National parties were not required to disclose their soft
money receipts and expenditures until 1990 when the government organization, Common
Cause, filed suit for increased regulation of soft money.103
Despite the efforts of Common Cause, the 1990s experienced increasingly large
amounts of soft money flood into elections.104 Contributions jumped from $86 million in
1992 to around $260 million in 1996; and in 2000, $495 million in soft money was
contributed to elections.105 Creating the demand for soft money contributions was a 1995
Advisory Opinion, which held that legislative advocacy media advertisements
sponsored, by a national party could be funded with a mixture of hard and soft money.106
These legislative advocacy media advertisements, which came be to known as sham
issue ads, circumvented FECA regulation107 by focusing on an issue, that issues
importance, and which candidates supported or opposed it.108 Just as a wolf in sheeps
clothing, sham issue ads were simply just candidate campaign advertisements in disguise,

101

Id; see also Application of the Federal Election Campaign Act of 1971, Fed. Election Comm'n, Adv.
Ops. 1978-10, 1978-50, 1979-17.
102
THE BROOKINGS INSTITUTION, supra note 12, at 32.
103
11 C.F.R. 106 (2014); Common Cause v. Fed. Election Comm'n, 692 F. Supp. 1391 (D.D.C. 1987)
104
THE BROOKINGS INSTITUTION, supra note 12, at 33.
105
Id..
106
See Fed. Election Comm'n, Adv. Op1995-25, n.1
107
In Buckley, the court created the magic words test when it narrowed regulable political
advertisements to only those containing express words of advocacy of election or defeat, such as vote
for, elect, support, cast your ballot for, Smith for Congress, vote against, defeat, reject.
Buckley v. Valeo 424 U.S. 1, 44 n.52 (1976).
108
Potter & Morgan, supra note 16, at 429.

such that opened the floodgates of corporate soft money by carefully avoiding the magic
words of express advocacy.109
Following the rise of soft money; Congress, the Department of Justice, and the
Commission initiated investigations into campaign practices during the 1996 elections,
which led to discovery of how soft money eroded the FECA disclosure system.110
Prompted by the investigations, the Democratic National Committee was forced into
revealing it had received illegal contributions in the amount of at least $3 million
dollars.111 President Clinton attended at least 103 coffee klatches with contributors who
had given more than $26 million to the Democratic Party in 1996.112 Additionally, VicePresident Al Gore repeatedly used his White House office to conduct fundraising phone
calls for the Democratic National Committee seeking $50,000 contributions.113
After investigations into the 1996 elections, the Senate Committee on
Governmental Affairs concluded that soft money had resulted in a meltdown of
FECA,114 which then led to the passage of the Bipartisan Campaign Reform act of 2002
(BCRA). 115 The new disclosure requirements of the BCRA were characterized by two
key features: the important move away from disclosure triggered by specific intent to
influence federal elections, and the breadth of its application to persons or groups

109

See THE BROOKINGS INSTITUTION, supra note 12, at 32 (noting that Corporations and Labor unions, who
before the rise of soft money and issue ads were prohibited from participating in election financing, was the
largest contributor of soft money). See also McConnell v. Fed. Election Comm'n, 540 U.S. 93, 126 n.20
(2003) (noting that between $135 million and $150 Million was spent on issue ads by coporations and
unions).
110
Potter & Morgan, supra note 16, at 432.
111
Stephen Labaton, Democrats Say Theyll Return about $1.5 Million More in Questionable Gifts, N.Y.
TIMES (Mar. 1, 1997) http://www.nytimes.com/1997/03/01/us/democrats-say-they-ll-return-about-1.5million-more-in-questionable-gifts.html.
112
S. Rep. No. 105-167, vol. 4, pt. 4611 (1998)
113
Id.
114
Id. at 7515.
115
McConnell v. Fed. Election Comm'n, 540 U.S. 93, 132 (2003).

engaging in a certain threshold of election activity.116 BCRA addressed the issue of sham
issue ads by creating a new type of political advertisement called an electioneering
communication.117 The relevant provisions to electioneering communications required
that the ad include a disclaimer indicating, _______ is responsible for the content of this
advertising.118
Because earlier attempts to get the BCRA to a vote had been filibustered by
Senator Mitch McConnell,119 the sponsors of the bill included provisions providing for
expedited court review of its challenges.120 Unsurprisingly, Sen. McConnell took his
grievances to the Supreme Court who quickly moved and scheduled an unusually lengthy
four hours of oral arguments to hear the array of issues raised.121 Only three months later,
eight Justices voted to uphold BCRAs disclosure requirements against a First
Amendment facial challenge.122 According to the Court, "the important state interests that
prompted the Buckley Court to uphold FECA's disclosure requirements, providing the
electorate with information, deterring actual corruption and avoiding any appearance
thereof, and gathering the data necessary to enforce the more substantive electioneering
restrictions", were furthered by the BCRAs new disclosure requirements.123
Following the retirement of Justice OConnor and her replacement by Justice
Alito, the Supreme Court embarked on a dangerous route in its disclosure and corruption

116

See 147 Cong. Rec. S2433 (daily ed. Mar. 19, 2001) (statement of Senator Feingold).
2 U.S.C. 434(f)(3) (2014).
118
Id.
119
The Public Campaign Action Fund conducted a case study in 2013 of Sen. McConnel that analyzed FEC
data compiled by the Center for Responsive Politics that connected McConnels donors to Republican
obstruction in Congress of bills and nominees. The full report can be accessed at:
http://www.scribd.com/doc/118823453/McConnell-Campaign-Finance-Report
120
THE BROOKINGS INSTITUTION, supra note 12, at 38.
121
Id.
122
McConnell, 540 U.S. at 196.
123
Id. at 103.
117

jurisprudence. Writing for the Court in McConnell, Justices Stevens and OConnor
critiqued the dissenting opinion of Justice Kennedys by noting that his narrow
understanding of corruption was one that ignores precedent, common sense, and the
realities of political fundraising.124 Notwithstanding these words of caution before
OConnors departure, Justice Alito would join the 5-4 majority in striking down the
BCRAs prohibition on corporate and union treasuries from funding electioneering
communications on First Amendment grounds.125
Just seven years after Stevens and OConnor cautioned against Kennedys
approach to corruption jurisprudence, he would pen the decision that set the stage for the
rise of dark money. In Citizens United v. Federal Election Commission,126 the Court
quoted Justice Kennedys McConnell dissent to hold that the corruption interest
articulated in Buckley was limited to quid pro quo corruption and does not include
improper influence, access, or ingratiation.127 Following on the coattails of Citizens
United, the U.S. Court of Appeals for the D.C. Circuit ruled that if a PAC did not make
contributions directly to candidates, it was permitted to accept contributions in excess of
federal contributions limits.128 Recognizing the potential to create a new loophole in the
BCRA, the constitutionality of federal limits on contributions to organizations not
coordinating with campaigns was quickly challenged. In SpeechNow.org v. FEC,129 the
U.S. Court of Appeals for the D.C. Circuit ruled that if independent expenditures

124

Id. at 152.
Fed. Election Commn v. Wis. Right to Life, 551 U.S. 449, 469-76 (2007).
126
558 U.S. 310 (2010).
127
Id. at 359.
128
Emilys List v. Fed. Election Commn, 581 F.3d 1, 10 (D.C. Cir. 2009).
129
SpeechNow v. Fed. Election Comm'n, 599 F.3d 686 (2010)
125

themselves do not rise to the level of corruption, then neither do the contributions made
to those groups making the independent expenditures.130
In November of 2007, those hoping for change in the regulation of the rising
amounts of dark money saw these hopes begin to dash when Democratic presidential
candidate Barack Obama broke his pledge to participate in the presidential public
financing system.131 This move made Obama become the first President in U.S. history to
decline public financing for the general election.132 After his election, President Obama
allowed five of the six FEC commissioners posts to expire without making an effort to
replace the deadlocked commissioners with individuals that would pursue a prodisclosure agenda.133 Despite these failures, President Obama followed in the footsteps of
Presidents Teddy Roosevelt, Wilson and Reagan, when a week after the issuance of
Citizens United his State of the Union speech called upon Congress take preventative
measures to avoid what he thought would be a flood of corporate dollars into the
campaign finance system.134
Part II: Social Welfare Organizations: Statutory, Regulatory and Judicial
Authority

130

Id. at 689 (holding that individuals may make unlimited independent expenditures and unlimited
contributions to independent expenditure-only committees).
131
Potter & Morgan, supra note 16, at 476.
132
Justin Elliott, Obama's Flip-Flops on Money in Politics: A Brief History, PROPUBLICA (Jan. 30, 2013,
3:00 PM), http://www.propublica.org/article/obamas-flip-flops-on-money-in-politics-a-brief-history.
133
Michael Beckel, Gridlocked Election Commission Awaits Action by Obama, CTR. FOR PUB. INTEGRITY
(Nov. 20, 2012, 6:00 AM), http://www.publicintegrity.org/2012/11/20/11819/gridlocked-electioncommission-awaits-action-obama.
134
Jackie Calmes & Carle Hulse, Obama Assails Repubicans on Campaign Finance, N.Y. TIMES (Jul. 26,
2010) http://www.nytimes.com/2010/07/27/us/politics/27obama.html?_r=0 (it is notable that Obamas call
was unique amongst other State of the Union requests for electoral reform in that he stood before the
members of the Court and essentially told them what they did was wrong and that it reversed a century of
law. . . ).

Exemption from the federal income tax for social welfare organizations began
with the Tariff Act of 1913.135 Legislative history of the Tariff Act contains no comment
on the purpose, reason or explanation for the creation of the exemption.136 but the general
assumption is that the United States Chamber of Commerce requested an exemption for
civic and commercial nonprofit organizations, what today are IRC 501(c)(4) and IRC
501(c)(6) organizations.137 The absence of legislative history to assist courts in
interpreting the proper scope and application of IRC 501(c)(4) is only the beginning for
the issues surrounding social welfare organizations. 138
Under IRC 501(a) of the code, organizations are exempt from federal taxes by
qualifying for one of twenty-nine exemption categories under IRC 501(c). Social
welfare organizations are defined in IRC 501(c)(4) as:
(A) Civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or local associations of
employees, the membership of which is limited to the employees of a
designated person or persons in a particular municipality, and the net
earnings of which are devoted exclusively to charitable, educational, or
recreational purposes.
(B) Subparagraph (A) shall not apply to an entity unless no part of the net
earnings of such entity inures to the benefit of any private shareholder or
individual.139
A social welfare organization may be exempt from federal tax liability if: (1) it is
not organized for profit; (2) it is a civic league or organization; (3) it is operated

135

Tariff Act of 1913, Ch. 16, II (G)(a), 38 Stat. 172.

John Francis Reilly ET AL., IRC 501(c)(4) organizations, Exempt OrganizationsTechnical Instruction
Progran for FY 2003 at I-2 (2003 EO CPE TEXT) (citing hearings on Schedules of the Revenue Act of
1913 Before the Subcomm of the Comm. Of Fin., 53d Cong, 1 st sess. At 2001 (1913)).
137
Id.
138
Id. (quoting: 1981 EO CPE TEXT, Social Welfare: What does it mean? How much private benefit is
permissible? What is a community?) (noting that the resulting judicial inconsistency becomes both the
cause for and affect of confusion surrounding IRC Section 501(c)(4)).
139
26 U.S.C. 501(c)(4) (2014).
136

exclusively for promoting social welfare140; and (4) its net earnings, in no part, do not
inure to the benefit of a private shareholder or individual.141
Section 501(c) does not include a definition of what Congress intended by the
promotion of social welfare. The Internal Revenue Service (hereinafter: Service)
provides once source of clarification of the congressionally enacted tax code, called
Treasury regulations (hereinafter: regulations), these regulations serve as the Services
official interpretation of the tax code.142. The regulations, however, only provides some
guidance by stating that an organization is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some way the common good and
general welfare of the people of the community.143 Falling under this wide umbrella of
social welfare are activities for the purpose of bringing about civic betterments and
social improvements. 144
Additionally, the regulations also contain the term social welfare when defining
charitable under IRC 501(c)(3).145 In the 501(c)(3) context, social welfare generally
refers to the lessening of government burdens, eliminating prejudice and discrimination,
defending human and civil rights, or reversing community deterioration and juvenile

140

In the alternative, an organization may be elgible for tax-exempt status under Section 501(c)(4) if it is a
local association of employees, the members of which is limited to the employees of a designated person
or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable,
educational, or recreational purposes. 26 U.S.C. 501(c)(4) (2014).
141
26 U.S.C. 501(c)(4) (2014); Treas. Reg. 1.501(c)(4)-l(a)(as amended in 1990); This comment does
not focus on 501(c)(4) organizations that are local associations of employees.
142 26 U.S.C. 7805 (2014) (Except where such authority is expressly given by this title to any person
other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules
and regulations for the enforcement of this title, including all rules and regulations as may be necessary by
reason of any alteration of law in relation to internal revenue.)
143 Treas. Reg , 26 C.F.R. 1.501(c)(4)-1(a)(2)(i) (2014).
144
26 C.F.R. 1.501(c)(4)-1(a)(2)(i).
145
Treas. Reg. 26 C.F.R. 1.501(c)(3)-1(d)(3) (2014).

delinquency.146 This overlap in the regulations is intentional,147 as 501(c)(3) regulations

specifically indicate that its definition is the broad judicial understanding of the term
charitable and is not to be construed as limited by the separate enumeration in
501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of
charity.148 Thus, the case law and administrative rulings defining social welfare for
purposes of 501(c)(3) are applicable to organizations applying for the 501(c)(4)
exemption.149
The vast amount of authority and the substantial amount of interpretive variance
has led to a complete lack of clear rules for determining if organizations activities are
permissive under IRS Section 501(c)(4).150 Outside of the common good and general
welfare of the people of the community,151 there is little guidance on what purposes and
activities promote social welfare. The IRS has eschewed clear guidelines applicable to all
instances, and has instead mandated a case-by-case approach of reviewing the facts and
circumstances of individual social welfare organizations.152 Relevant to these
determinations are factors like the manner in which the organizations activities are
conducted; resources used in conducting such activities, such as buildings and equipment;
the time devoted to activities (by volunteers as well as employees); the purposes
furthered by various activities; and the amount of funds received from and devoted to
particular activities.153

146

26 C.F.R. 1.501(c)(3)-1(d)(3).
Terence Dougherty, Section 501(c)(4) Advocacy Organizations: Political Candidate-Related and Other
Partisan Activities in Furtherance of the Social Welfare, 36 Seattle Univ. L. R. 1337, 1342 (2013)
148
Id.
149
Id.
150
Id.
151
Treas. Reg., 26 C.F.R. 1.501 (c)(4)-l(a)(2)(ii) (as amended in 1990)(2014)
152
Rev. Rul. 68-45, 1968-1 C.B. 259.
153
I.R.S. Priv. Ltr. Rul. 200903080 (2008).
147

Courts attempting to clarify the law have instead provided generic definitions no
more precise than the applicable regulation. For example, in Erie Endowment v. United
State154s, the Third Circuit held that eligibility for the IRC 501(c)(4) exemption requires
that the organization be a community movement designed to accomplish community
ends.155 The Court in Flat Top Lake Ass'n Inc. v. United States156 found that social
welfare activities further the "national interest by expanding potential, by opening
opportunities to all citizens who may someday find themselves within the bounds of [the]
particular community [being served by the organization]."157
Later, the Second Circuit reviewed the activities of a group of plumbers working
in New York City who were responsible for damaging the citys streets.158 The plumbers
formed the organization as a response to an ineffective billing system the City of New
York had in place for reimbursement for its repairs of the plumbers damages. The
organization formed to repair the streets but only for the damages caused by the
plumbers. The Court found a substantial benefit to the public from the program, but
concluded that the organization was primarily organized to serve the private economic
interests of its members. The Court reasoned that private benefits were both "substantial
and different" from the benefits provided to the community at large.159 In other words,
even though a single activity was the source of both the community and private benefit,
the Court was concerned with how the different benefit provided to the private interests
was substantial and direct.

154

316 F. 2d 151 (3d Cir. 1963).

Id. at 156.
156
868 F.2d 108 (4th Cir. 1989).
157
Id. at 112.
158
Contracting Plumbers Coop. Restoration Corp. v. U.S. 488 F. 2d 684 (2d cir. 1973).
159
Id. at 687.
155

The private benefit doctrine noted above was also applied in the context of
political activity conducted by the American Campaign Academy when the tax court
found it was operated for the benefit of private interests.160 The Academy was organized
as a 501(c)(3) organization for charitable and educational purposes.161 The primary
activity was the operation of a school for careers as campaign managers, communication
directors and other campaign professionals.162 Jan W. Baran incorporated the Academy,
the then General Counsel of the National Republican Congressional Committee
(NRCC).163 Its funding was exclusively provided by the National Republic Congressional
Trust, an organization that collects political donations. 164 In the Academys application
for recognition of exemption, it stated that the schools training program was an
outgrowth of a similar program run by the NRCC.165 Thereunder, the Academys
curriculum included the study of the Growth of NRCC, etc., Why are people
Republicans, and How some Republicans have won Black votes.166 The curriculum
did not include comparable courses studying the Democratic or other political parties.167
Based upon these facts among many others, the Court ruled that the Academys
curriculum operated to advance Republican interests and that the placement of 85 of its
graduates into 98 Republican campaigns conferred a benefit on those candidates.168 In
refining the private benefit doctrine, the Court noted two classes of benefits in the case at
bar: the primary private benefit provided to students and the secondary benefits students

160

Am. Campaign Acad. v. Commr, 92 T.C. 1053 (1986).

Id. at 1055.
162
Id.
163
Id. at 1054.
164
Id. at 1061.
165
Id. at 1070.
166
Id.
167
Id. at 1071.
168
Id. at 1072.
161

conferred to their employers.169 Discussing the secondary benefits, the Court rejected the
argument for deeming the secondary benefits provided to Republican organizations and
candidates as a benefit to the community at large because the Republican Party included
millions of people.170 In doing so, the Court noted that quantitative measurements of size
are only a factor to the prevailing qualitative analysis required to determine the
definiteness and charitable nature of the class to be benefited and the overall purpose for
which the organization is operated.171
Simply stated, while the private benefit doctrine demands any private benefit be
quantitatively insubstantial vis--vis the tax-exempt benefits arising from an
organizations activity, American Campaign Academy, indicates that a private benefit
will not be deemed incidental if it is in the pursuit of the substantial purpose of an
organization. This holding is important in that it is the only case addressing the private
benefit doctrine as applied to political party-related activities. Since the decision, the IRS
has noted that the 501(c)(3) private benefit doctrine is the same as applied to
501(c)(4).172
Unlike 501(c)(3), 501(c)(4) places no explicit restriction on a social welfare
organizations political activity.173 Treasury regulations under 501(c)(4) have stated
that the promotion of social welfare does not include direct or indirect participation or
intervention in political campaigns on behalf of or in opposition to any candidate for

169

Id. at 1073.
Id. at 1076.
171
Id. at 1075.
172
IRS Determination Letter 201221028 (May 25, 2012) http://www.irs.gov/pub/irs-wd/1221028.pdf
(Ruling that "the standard for determining what constitutes private benefit described in American
Campaign Academy applies to both [section 501(c)(3) and section 501(c)(4)]").
173
See 26 U.S.C. 501(c)(3) (prohibiting organizations organized thereunder from political activities that
attempt to influence legislation or political campaigns).
170

public office.174 However, the regulation further states that a social welfare organization
may qualify under section 501(c)(4) even though it is an action organization described
in Section 1.501(c)(3)-1(c)(3)(ii) or (iv), if it otherwise qualifies under this section.175
These two provisions, one permitting campaign activity and the other prohibiting it from
social welfare promotion, seem to conflict. Despite the apparent friction between the two
provisions, the IRS has acknowledged that political and campaign activities are
permissive under 501(c)(4).176 Under the regulations, the provisions are reconciled by
the different treatment afforded to lobbying activities and political campaign activities.177
In 1967, the IRS ruled that substantially engaging in the promotion of legislation
to protect laboratory animals is not exempt under 501(c)(3), but could possibly qualify
for the exemption under 501(c)(4).178 Similarly, the IRS found that an organization
formed to educate the public on the subject of pro-life issues and constitutional changes
to restrict womens access to abortions qualified for an exemption under 501(c)(4).179
The primary activity of the organization was the participation in forums, lectures, and
educational programs related to legal access to abortions and abortion alternatives.180 The
IRS found that the organizations activities promoted in some way the common good
and general welfare of the people of the community within the meaning of the
regulations.181 The reasoning behind this determination was that the issue of abortion

174

Treas. Reg., 26 C.F.R 1.501(c)(4)-l(a)(2)(ii) (as amended in 1990) (2014).

26 C.F.R 1.501(c)(4)-l(a)(2)(ii).
176
Dougherty, supra note 147, at 1378-79.
177
ROBERT J. DESIDERIO, PLANNING TAX-EXEMPT ENTITIES, 23.02(5) (2013).
178
Rev. Rul. 67-293, 1967-2 C.B. 185.
179
Rev. Rul. 76-81, 1976-1 C.B. 156.
180
Id.
181
Id.
175

access is a matter of public concern within many communities and the activities were
designed to increase the publics knowledge and understanding of the subject. 182
The applicable regulations concerning lobbying by social welfare organizations
have not only found the activity to be permissive, but also have allowed for lobbying to
be the sole activity of an organization.183 Thus it seems that, so long as the lobbying
activity promotes social welfare, it is permissible no matter how substantial the lobbying
effort.184 The sole qualifier for the open season on social welfare lobbying is that the
lobbying activity must by germane to the social welfare purpose of the organization. 185
Meaning, the legislation a social welfare organization supports must further or otherwise
benefit its social welfare purpose and the legislation it opposes must be detrimental to its
social welfare purpose.186
The political campaign activity of social welfare organizations, on the other hand,
does not enjoy the similarly liberal rules afforded to lobbying activities. While the
Service has ruled that political campaign activity will not prevent receiving the
501(c)(4) exemption, it has also ruled that an organization may carry on lawful political
activities and remain exempt under IRC Section 501(c)(4) as long as it is primarily
engaged in activities that promote social welfare.187 While the Service has not issued a
brightline rule for this primary purpose test, many practitioners argue that the test is

182

Id.
See Rev. Rul. 71-530, 1971-2 CB 237 (The fact that the organizations only activity may involve
advocating changes in law does not preclude the organization from qualifying under Section 501(c)(4) of
the Code.).
184
Id.
185
Id.
186
Id.
187
Rev. Rul. 81-95, 1981-1 CB 332 (relying on the legislative history of 26 U.S.C. 527(f), which
recognizes that social welfare organizationsmay engage in political campaign activities; See also S Rep No
93-1357, 93d Cong, 2d Sess, 29 (1974), 1975-1 CB 517, 533.
183

satisfied when an organizations political activity is forty-nine percent or less of its total
expenditures.188
For example, the IRS held that a social welfare organization, whose primary
purpose was promotion of an enlightened electorate, did not qualify for a 501(c)(4)
exemption.189 The primary activity for achieving the organizations social welfare
purpose was the nonpartisan rating of candidates for public office as average, good, or
excellent and publishing these ratings to the public.190 The IRS reasoned that, despite the
organizations attempts to avoid partisanship, the comparative ratings constituted
participation or intervention for the favorably rated candidates and in opposition to the
less favorable rated candidates.191
In issuing the aforementioned decision, the IRS defined political activities to
include participation in and intervention in political campaigns on behalf of or in
opposition to candidates for nomination or election to public office.192 Accordingly, the
IRSs position is that 501(c)(4) organizations may participate in the political activities
prohibited under 501(c)(3), so long as the activity is not its primary function.193
The United State Supreme Court decision in Citizens United194 has largely
spurred the usage of social welfare groups for campaign purposes, as is the Court struck
down a prohibition on corporations and unions using their general treasury funds for
donations that would expressly influence federal elections. In doing so, the Court noted
that:

188

Potter & Morgan, supra note 16, at 465.

Rev. Rul. 67-368, 1967-2 CB 194.
190
Id.
191
Id.
192
Id.
193
Dougherty, supra note 147, at 1383.
194
558 U.S. 310, 365 (2010).
189

With the advent of the Internet, prompt disclosure of expenditures can

provide shareholders and citizens with the information needed to hold
corporations and elected officials accountable for their positions and
supporters. Shareholders can determine whether their corporation's
political speech advances the corporation's interest in making profits, and
citizens can see whether elected officials are 'in the pocket' of so-called
moneyed interests.195
The Courts faith in such prompt and effective disclosure is curious. The FEC regulation
pertaining to disclosure does not require a social welfare organization to disclose the
identities of its contributors, but only those contributors who contributed for the purpose
of furthering the reported independent expenditure.196 However, the reality is that
organizations refuse to disclose the major donors by claiming that their donors did not
earmark the funds for election activity. This quirk in federal election law was somehow
not briefed by the Citizens United amicus curae and similarly was not addressed by the
Court.
A prime example of a politically minded social welfare organization pushing the
legal envelope is the Republican Jewish Coalition. Despite being found in 1985, this
organization has been on the forefront of the dark money movement. The organizations
initial exemption application to the IRS indicated that the group would not spend money
attempting to influence elections.197 However, the organization reported donations of
$3.8 million to other groups for political activities in its 2010 tax return.198 Additionally,
to ensure the appearance of compliance with the primary purpose test, the organization

195

Id. at 370.
11 C.F.R. 109.20 (2014).
197
Form 1024: Application for Recognition of Excemption Under Section 501(a) or for Determination
Under Section 120, National Jewish Coalition, PRO PUBLICA (1985)
http://www.propublica.org/documents/item/357970-1024-national-jewish-coalition.
198
Kim Barker, How Nonprofits Spend Millions on Elections and Call it Public Welfare, PRO PUBLICA
(Aug. 18, 2012, 11:25 p.m. ) http://www.propublica.org/article/how-nonprofits-spend-millions-onelections-and-call-it-public-welfare.
196

also gave two other social welfare groups, Crossroads GPS and the American Action
Network, $8 million in grants.199 When disclosing the purpose of the grants on its 990
form, eschewed specificity and instead provided a broad response that stated the grants
were intended to better implement various programs that support the mission of the
Republican Jewish Coalition.200
Coincidentally, both Crossroads GPS and the American Action Network also
reported in their own 2010 filings, grants to the RJC in the amounts of $250,000201 and
$200,000.202 Crossroads GPS noted their $250,000 grant was for social welfare
purposes203 while American Action Network reported their $250,000 for general
support. 204 The stated purposes for these grants serve as an excellent microcosm for the
broken state of our disclosure system of campaign spending.
Even more interesting, is that the chair of the RJC is Republican mega-donor and
casino mogul Sheldon Adelson.205 According to publicly available data, Adelson and his
wife Miriam contributed more than $98 million to Republican causes during the 2012
election cycle.206 The Adelson family initially backed the presidential bid of Newt
Gingrich and provided 90 percent of the funds raised by the Gingrich super PAC,

199

Form 990: Return of Organization Exempt From Income Tax, Republican Jewish Coalition, PRO
PUBLICA (2010) http://www.propublica.org/documents/item/351775-990-2010-republican-jewish-coalition.
200
Id.
201
Form 990: Return of Organization Exempt From Income Tax, Crossroads Grassroots Policy Strategies,
PRO PUBLICA (2010) http://www.propublica.org/documents/item/339122-crossroads-gps-990-2010.
202
Form 990: Return of Organization Exempt From Income Tax, American Action Network, PRO PUBLICA
(2010) http://www.propublica.org/documents/item/357315-990-2010-american-actionnetwork#document/p29/a57977.
203
Form 990 Crossroads Grassroots Policy Strategies, supra note 201, at 39.
204
Form 990: Return of Organization Exempt From Income Tax, supra note 202, at 20.
205
Republican Jewish Coalition, Board of Directors, http://www.rjchq.org/2012/07/sheldon-gadelsonboard-of-directors/ (last visited Aug. 8, 2014).
206
Theodoric Meyer, How Much Did Sheldon Adelson Really Spend on Campaign 2012?, PRO PUBLICA
(Dec. 20, 2012, 12:47 PM.), http://www.propublica.org/article/how-much-did-sheldon-adelson-reallyspend-on-campaign-2012.

Winning our Future.207 Following Gingrichs bowing out of the presidential race, the
Adelson family turned their resources to the Mitt Romney Super-PAC, Restore Our
Future.208 According to the available data, the couple donated $30 million through two
businesses they own, the Las Vegas Sands and the Adelson Drug Clinic.209
The Federal Election Commission (hereinafter: Commission), was created as an
independent regulatory agency to enforce disclosure laws.210 The Commission is
composed of six members of which no more than three may be members of the same
political party.211 Since the emergence of dark money following Citizens United, the
Commission has become become notorious for its deadlock.212 This partisan deadlock of
the Commission has created an atmosphere that allows social welfare organizations to
have additional comfort for non-disclosure.213 Knowing that the FEC currently lacks the
required votes to bring enforcement actions, an organization may proceed with planned
activity without adhering to disclosure requirements.214 If someone chooses to take action
against an organization for non-compliance under the enabling statute, the complaint will
have to be filed with the FEC first.215 Unless one or more of the Commissioners have

207

Alexandra Duszak, PAC profile: Winning Our Future, CTR. FOR PUB. INTEGRITY, (Jan. 30, 2012, 6:00
AM.) http://www.publicintegrity.org/2012/01/30/7998/pac-profile-winning-our-future.
208 Alicia Mundy & Sara Murray, Adelson gives $10 Million to Pro-Romoney Super-Pac, WALL ST. J. L.
BLOG (Jun. 13, 2-12, 10:47 AM),.http://blogs.wsj.com/washwire/2012/06/13/adelson-gives-10-million-topro-romney-super-pac/.
209
Center for Responsive Politics, Top Organizations Disclosing Donations to Restore our Future,
OpenSecrets.org (2012,
http://www.opensecrets.org/outsidespending/contrib.php?cmte=C00490045&cycle=2012.
210
The Federal Election Commission, About the FEC, http://www.fec.gov/about.shtml (last visitied Aug.
15, 2014).
211
id.
212
Angela Bradbery & Craig Holman, Roiled in Partisan Deadlock, the Federal Election Commission is
Failing, PUBLIC CITIZEN (Jan. 2013) http://www.citizen.org/documents/fec-deadlock-statement-and-chartjanuary-2013.pdf.
213
Kristy Eagan, Dark Money Rises: Federal And State Attempts to Rein in Undisclosed Campaign-Related
Spending, 40 Fordham Urb. L.J. 2 (2012).
214
.See 2 U.S.C. 437c(c) (2014) (Four votes are required for the FEC to act)
215
See 2 U.S.C. 437g(a)(1) (2014).

changed positions or have been replaced, deadlock would likely prevent the Commission
from finding violations and cause the complaint to be dismissed.216 That challenger may
then petition the United States District Court for the District of Columbia to review of the
Commissions dismissal.217 The three commissioners who voted to dismiss the original
complaint will then be requested to make a statement.218 Unless the Court determines that
the Commissions action was contrary to law, the Court will defer to the three
dissenting commissioners decisions.219
Adding to the controversy surrounding social welfare organizations has been the
IRSs close scrutiny of tax-exempt applications of organizations affiliated with the TeaParty movement. In May of 2013, the Treasury Inspector General for Tax Administration
released a report that confirmed the IRS utilized inappropriate criteria that targeted
organizations affiliated with the Tea Party movement while not similarly targeting liberal
leaning groups.220 While the IRS has stated that the special review of conservative
organizations was a part of a misguided attempt by low-level civil servants in its
Cincinnati office to centralize the growing number of 501(c)(4) applications,
investigations into this potentially egregious abuse of power have not concluded.221 Amid

216

See Democratic Cong. Campaign Comm. v. Fed. Election Comm'n, 831 F. 2d 1131, 1133 (D.C. Cir.
1987).
217
See 2 U.S.C 437g(a)(8)(A) (2014).
218
See Fed. Election Comm'n v. Nat'l Republican Senatorial Comm., 966 F. 2d 1471, 1476 (D.C. Cir. 1992)
219
2 U.S.C. 437g(a)(8)(C) (2014); See also Nat'l Republican Senatorial Comm., 966 F. 2d at 1476
("Since [the dissenting Commissioners] constitute a controlling group for purposes of the decision, their
rationale necessarily states the agency's reasons for acting as it did."). A decision is "contrary to law" if it is
the result of an "impermissible interpretation" of law or is otherwise "arbitrary or capricious or an abuse of
discretion." Orloski v. Fed. Election Comm'n, 795 F. 2d 156, 161 (D.C. Cir. 1986).
220
John D. McKinnon& Siobhan Hughs, Wider Problems Found at IRS, WALL ST. J. (May 12, 2013, 7:48
PM),
http://online.wsj.com/news/articles/SB10001424127887324715704578478851998004528?mg=reno64wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB100014241278873247157045784788519980
04528.html.
221
Id.

this controversy, the Service has instituted a new application for tax-exempt status for
501(c)(3)s organizations whose estimated 80% approval rate essentially amounts to a
rubber stamp of approval for applicants.222
The investigations that have been concluded have noted that there was no
evidence of enemy targeting to give rise to criminal prosecution and only evidence of the
IRSs mangled bureaucracy using personnel who did not fully understand the Code to
enforce its provisions.223 Amid this controversy, the IRS has instituted a new application
for tax-exempt status for 501(c)(3) organizations, as the applications approval rating is
nearly 80% , which essentially amounts to a rubber stamp of approval for applicants.224
Part III: There is a Light, and it Shines, Especially for Democracy.
In order to properly address the risk of corruption from the rise of dark money, the
issue must be addressed comprehensively. Political scientist Natan Sharansky devised the
Town Square Test, a threshold test for the true freedom enjoyed by Democratic
societies.225 The test asks that if an individual cannot walk into their towns square and
voice her view without fear of some form of retribution, is that person really living in a
free society, or a fear society?226 Asking this question is important to deliberations over
why non-disclosure of political speech is desirable in American society. Protecting the
democratic process from the fear of disclosing contributions requires action from both the
Judicial as well as the Legislative branches of government.

222

Massimo Calabresi, IRS to Rubber-Stamp Tax-Exempt Status for Most Charities After Scandal, TIME
(Jul. 13, 2014), http://time.com/2979612/irs-scandal-tax-exempt-tea-party-political-groups-john-koskinen/.
223
Fox News, Officials Say No Evidence Criminal Charges Warranted so Far in IRS Targeting Probe,
FoxNews.com (Jan. 13, 2014), http://www.foxnews.com/politics/2014/01/13/officials-say-no-evidencecriminal-charges-warranted-so-far-in-irs-targeting/.
224
Calabresi, supra note 222.
225
,NATAN SHARANSKY, THE CASE FOR DEMOCRACY 40-41 (PublicAffairs, 2004).
226
Id.

The first meaningful protection against dark moneys corrupting influence would
be the adoption of an originalist approach towards corruption jurisprudence. Throughout
the ratification debates, discussions of political corruption mainly addressed systematic
corruption and the avoidance of institutional dependency.227 When assessing the moral
health of the body politic,228 the framers contemplated the distributions of wealth and
power, relationships between leaders and followers, the source of power, and the moral
right of rulers to rule229 Accordingly, the popular sovereignty envisioned by the Framers
was one that held the critical institutions of government out to be dependent upon the
people alone.230
The realities of how campaigns are financed demands an originalist approach to
Constitutional interpretation that includes the Framers understanding of corruption. The
institutional reliance on social welfare groups to solicit undisclosed contributions is in
complete contravention of the Framers intent for the most important functions of
government to be accountable to all, regardless of wealth.
Additionally, not only must Congress take action to clarify the regulations
applicable to 501(c)(4) organizations, but it must also address socio-economic factors
that allow money to influence politics. After nearly a decade of research on the
aggregation of wealth,231 economist Thomas Piketty, warns that the accumulation of

227

See e.g.,Brief for Professor Lawrence Lessig as Amicus Curiae Supporting Appellee, McCutcheon v.
Fed. Election Comm'n, 134 S. Ct. 1434 (2013) (No. 12-536), 2013 WL 3874388
228
Id.
229
Lisa Hill, Adam Smith and the Theme of Corruption, 68 REV. POL. 636, 636-37 (2006)
230
THE FEDERALIST NO. 52, at 294 (Madison). See also Arizona v. Inter Tribal Council, 133 S. Ct.
2247, 2258 (2013) ; (James Madison furthered that the people to elect representatives were Not the rich,
more than the poor; not the learned, more than the ignorant; not the haughty heirs of distinguished names,
more than the humble sons of obscure and unpropitious fortune. The electors are to be the great body of the
people of the United States. THE FEDERALIST No. 57, at 319 (Hamilton)
231
Chuck Collins, Thomas Piketty and Our U.S. Estate Tax, The Huffington Post (May 26, 2014, 8:06 PM),
http://www.huffingtonpost.com/chuck-collins/thomas-piketty-our-us-est_b_5376359.html.

dynastic wealth is increasing the gap between the rich and the poor and will soon have a
corrosive effect on our Democratic institutions.232 Pikettys prophecy has already seen
manifestations in American electoral politics. In 2013 it was discovered that Sheldon
Adelsons estate planning activities were also pushing the limits of the code .233 Upon
establishing thirty different trusts to rapidly shuffle assets through, Adelsons estate
planners were able to reserve $8 billion for his heirs that remained unscathed from the
40% gift and estate tax, about $2.8 billion in savings.234
Expanding on this thought, political scientist Martin Gillens study of political
power and economic inequality has unsurprisingly found that the more affluent an
individual is the more likely her representative is going to be responsive to her political
preferences.235 Gillens also concluded that higher income individuals are generally more
educated, more likely to vote and have more time to volunteer to party efforts.236 Gillens
regression analysis concluded that decreased responsiveness of elected officials to the
preferences of the poor and middle class mirrors the unequal distribution of political
contributions amongst wealthy and poor individuals. 237
Because one of the purposes furthered by the estate tax is the minimization of
accumulated dynastic wealth,238 expanding it will help ensure the proper functioning of

232

See e.g., THOMAS PIKETTY, CAPITAL IN THE TWENTY-FIRST CENTURY (Arthur Goldhammer trans.,
Belknap Press, 2014).
233
Zachary R. Milder, Accidental Tax Break Saves Wealthiest Americans $100 Billion, BLOOMBERG ( Dec. 16,
2013, 11:01 PM), http://www.bloomberg.com/news/2013-12-17/accidental-tax-break-saves-wealthiestamericans-100-billion.html.
234
Id.
235
Martin Gilens, Inequality and Democratic Responsiveness, Pub. Op.Quarterly Vol 69, No. 5, Special
Issue 2005, pp. 778-96, 793 Table 3, available at http://poq.oxfordjournals.org/content/69/5/778.full.pdf.
236
Russell Sage Foundation, Inequality and Democratic Responsiveness, RSF,
http://www.russellsage.org/research/inequality-and-democratic-responsiveness
237
Gilens, supra note 253, at 793-94.
238
Miranda Perry Fleisher, Charitable Contributions in an Ideal Estate Tax, 60 Tax L. Rev. 263, 268
(2007).

elected and representative democracy239. For example, elimination of the step-up basis in
capital gains at death that protects heirs from a parents tax liability will decrease the
accumulation of dynastic wealth by $50 billion per year.240 By stemming the rise of
dynastic wealth, this preventative approach ensures that wealth and the influence it
inevitably purchases will not become sequestered to a small segment of society. This and
other changes to the estate tax must be implemented to protect against what Piketty
forecasts could be the re-creation of the familial oligarchs of the Gilded Era.241
Also, Congress should broaden disclosure requirements pertaining both to
individuals and to organizations. Specifically, the Democracy is Strengthened by Casting
Light on Spending in Elections Act of 2014 (hereinafter: DISCLOSE) provides an ideal
model for needed reformations.242 Because the DISCLOSE Act includes any organization
described in 501(c) under its definition of covered organization[s],243 social welfare
groups who spend more than $10,000 shall be required to disclose donors who contribute
$10,000 or more during the disclosure cycle.244 It also broadens the definition of a
reportable independent expenditure by imposing a reasonable person standard to
determine if a political communication is only advocating the election or defeat of a
candidate.245 Additionally, if a covered organization transfers over $50,000 to another
covered organization, and the originating organization knew or had reason to know the
receiving organization would make campaign related disbursements,246 the originating

239

Id. at 267.
The Committee for a Responsible Federal Budget, The Tax Break-Down: Preferential Rates on Capital
Gains, CRNFB (Aug 27, 2013) http://crfb.org/blogs/tax-break-down-preferential-rates-capital-gains.
241
Id.
242
S. 2516, 113th Cong. (2014)
243
234(e)(2)
244
234(a)
245
2(a)(1)
246
234 (f)(1)(E)
240

organization must report its contributors to the receiving organization who must then
discloses those contributors as if their own.247
Another goal to curb the influence of social welfare groups is increasing the
funding of the IRSs and Commissions enforcement efforts. There should be no qualms
about these objectives, the federal government should endeavor to close tax loopholes for
the rich along with other endeavors to slow the accumulation of generational wealth and
use that money to fund a better and more efficient government. Specifically, if the service
is to remain a participant in the regulation of politically active groups, it must be properly
funded and given more guidance and authority from Congress.
The adoption of the 1023-ez applications, the understaffing of the IRS exempt
organization application review office, and the Services current beleaguered funding
level are all evidence of a complete disregard for the importance of elections in our
Democracy. If the Democratic process is to remain truly Democratic, the institutions
created to safeguard it should be adequately funded so as to meet their original
purposesthe success and longevity of the great American experiment.

247

234(f)(3)(A)(ii)