December 19, 2019
Dark money nonprofits that spend money to influence elections without disclosing their donors still have to report their political spending to the IRS, but a new tax filing obtained by CREW shows how these groups can use technical tax rules to obscure that spending from the tax agency, seemingly making millions in political spending disappear.
In 2018, State Solutions, Inc., a nonprofit affiliated with the Republican Governors Association, gave $11 million to a state-focused super PAC called the American Comeback Committee that spent millions supporting Republican gubernatorial candidates. But when State Solutions filed its taxes for 2018, it told the IRS it only contributed $6.5 million. Avoiding disclosing the additional $4.5 million it gave to the super PAC may have been necessary for State Solutions to convince the IRS that it spent less than half of its overall spending on political activity, an important threshold for maintaining the tax-exempt status that allows the group to keep its donors secret.
So, how did State Solutions make the $4.5 million disappear, at least on paper? It’s a matter of timing. Since its founding in 2011, when it was known as Make Ohio Great, State Solutions closed its tax year on December 31. But in 2018, State Solutions ended its tax year early, closing it on September 30.
The accounting change is not explained on the tax return, but tax-exempt organizations are generally allowed to change their accounting period by timely filing a “short tax period” return using the new end date. State Solutions’ move, however, is all the more curious because another nonprofit that is also part of the Republican Governors Association’s network, whose tax return CREW also obtained, did not make a similar change.
The effect of the change is that any spending by State Solutions between October 2018 and the end of the year did not have to be reported on the 2018 tax return, including the $4.5 million State Solutions gave to the American Comeback Committee on October 23, 2018, just before Election Day. That spending won’t need to be reported until State Solutions files its taxes for its 2019 fiscal year.
As a result of the tax year change, both State Solutions’ overall spending and its political spending were lowered on its 2018 tax return. With the shortened tax year, State Solutions reported spending a little more than $14 million overall, making the $6.5 million it gave to the American Comeback Committee 46 percent of its total spending, cutting it just below the 50 percent threshold that has generally been defined as indicating politics is a group’s primary activity.
Though both the Republican Governors Association and the American Comeback Committee, which are officially related to State Solutions, are political organizations established under Section 527 of the tax code and publicly report their contributors and expenditures to the IRS, State Solutions is a section 501(c)(4) social welfare organization and is not required to disclose its donors. Social welfare groups like State Solutions are allowed to spend money to influence elections, but they cannot have politics as their primary activity.
If State Solutions had used its normal end of December tax year, and assuming for the sake of argument that the group did not raise or spend any other money from October through the end of the year, the group would have spent $18.5 million overall and $11 million on politics, which would have made politics 59 percent of State Solutions’ total spending in 2018. Such a high percentage of political spending could have potentially drawn scrutiny from the IRS about whether the group was violating its tax-exempt status by having politics as its primary activity.
Some of State Solutions’ Others Spending Could Also Be Political
Even though the change of tax year allowed State Solutions to delay reporting millions in political activity, some of the other spending that the nonprofit reported to the IRS could potentially be considered political as well, which would push the group closer to the 50 percent threshold.
State Solutions told the IRS that between January 1, 2018 and September 30, 2018 it spent more than $4.3 million on “[a]dvertising and promotion costs to promote sound public policy on issues including taxation, job training, education, human trafficking, healthcare and drug abuse resistant treatment.” The content on State Solutions’ YouTube pages suggests that many, if not all, of these ads targeted gubernatorial candidates, even if they didn’t expressly advocate for or against their elections.
The IRS, however, considers several factors beyond whether express advocacy language like “vote for” or “elect” is used when it determines whether particular communications constitute political campaign intervention. These factors include whether one or more candidate is identified, whether the communication expresses approval or disapproval of a candidate’s position, and whether the timing of the communication is related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder running in an election.
For instance, in early September 2018 State Solutions started running an ad in Illinois criticizing Democratic candidate JB Pritzker for reportedly considering a plan for a vehicle mileage tax. Notably, since Pritzker did not hold any electoral office at the time, State Solutions’ ad encouraged viewers to contact their legislators to “tell them to oppose the mileage tax.” Around the same time, State Solutions launched an ad in Michigan touting then-Attorney General Bill Schuette’s “plan” to strengthen job training in the state. Just as in Illinois, the nonprofit encouraged viewers to contact their legislators to “tell them to pass Bill Schuette’s plan.”
Those ads, as well as State Solutions’ contributions to the American Comeback Committee, were largely funded by donors whose identities are not publicly reported, including seven who contributed $1 million or more. If State Solutions’ primary activity was found to be influencing elections it could put the anonymity those donors enjoy at risk.
The Other GOP Governors-Related Nonprofit Didn’t Change Its Tax Year
In addition to the Republican Governors Association and the American Comeback Committee, State Solutions is related to another nonprofit that is not required to disclose its donors, the Republican Governors Public Policy Committee (RGPPC). Though the RGPPC shares a board with State Solutions, the nonprofit did not change the date when its tax year ended in 2018 like State Solutions did, making State Solutions’ decision to cut its tax year short even more curious. The RGPPC’s tax year closed at the end of December, just as it had in previous years.
Unlike State Solutions, the RGPPC, which maintained the tax year it previously used, did not report any political spending to the IRS. The bulk of its spending came in the form of a $4.3 million grant to another nonprofit called Be Registered, LLC that the RGPPC characterized as dedicated to the “encouragement of increased voter participation without reference to candidates or political parties.” According to the employer identification number for Be Registered listed by the RGPPC, the voter turnout focused nonprofit used to be known as Be Counted, Inc, which CREW previously reported on as the source of voter shaming mailers distributed in Kansas and Maine during the 2014 election.
Be Registered spent nearly $600,000 on Facebook ads in 2018 encouraging voter registration and turnout. Though some of the ads warned about the policies “liberals” would pursue if the targeted voters didn’t go to the ballot box, none of them appear to mention specific candidates. After letters sent to Connecticut voters by Be Registered made some people worry they may not be eligible to vote in the 2018 election, attorneys for the nonprofit told the Connecticut secretary of state’s office that it was a “bipartisan group that is seeking to encourage millions of potential voters to be eligible to vote in the upcoming elections.” The RGPPC’s 2018 tax return now reveals, of course, that this “bipartisan group” received significant funding from an organization affiliated with the Republican Governors Association.
Photo by Marco Verch.