Stephen Colbert, it turns out, is now the most effective voice anywhere in calling out lawyers for their cynical abuse of tax-exempt law to circumvent political contribution disclosure requirements. Who’d have thunk it?
For much of this year, Colbert in his role as a fake political figure has used his late-night Comedy Central program to conduct a clever, entertaining and, therefore, effective tutorial on the tax code, for goodness’ sake. He started out by creating Colbert Super PAC, aka. Americans for a Better Tomorrow, Tomorrow, as an independent, expenditure-only political committee, which, pursuant to Sec. 527 of the tax code, must disclose the names of its donors. He then created another entity called Colbert Super PAC Shh as a tax-exempt, social welfare organization under Sec. 501(c)(4) because it allows him to keep the identities of its donors secret. This setup allowed him to demonstrate how the insiders engage in legal money laundering by passing anonymously donated (c)(4) funds to the Sec. 527 political entity, which then reports the contributions, as it must, as coming from the (c)(4)—without names attached.
His shtick is hilarious, accurate and, like Thomas Nast’s drawings of Boss Tweed’s Tammany Ring, is making the politicians squirm. Don’t take my word for it—see it for yourself at ColbertSuperPac.com.
But not everybody is laughing. An equally sustained, but more formal attack on this abuse of non-profit law was launched by two groups: Democracy 21 and the Campaign Legal Center. In October, they asked the IRS to investigate whether Crossroads GPS (a conservative group) and Priorities USA (a liberal group) deserve their tax exemptions as social welfare organizations. They reminded the IRS that such organizations must lose their tax exemptions if they engage in “more than an insubstantial amount of any non-social welfare activity.” Their request then proceeded to document the many ways each of these two entities is deeply involved with political operatives, political campaigns and with its own companion “527Super PAC.” Specifically, they noted that Crossroads GPS was founded with the aid of Republican strategists Karl Rove and Ed Gillespie who, in turn, helped form a 527 entity called American Crossroads. The two groups raised a combined $70 million, the vast majority of which was spent attacking Democratic candidates in the midterm election cycle.
The request also documented the creation in April of Priorities USA and its own 527, Priorities USA Action. Its founders announced their intention to work for the re-election of President Obama by copying the structure and function of Crossroads GPA and American Crossroads.
Clearly, the people involved in these groups are not shy about their political purposes. They are hanging their legal hats on the argument that they can spend up to 49 percent of a social welfare organization’s funds on political activities because that amount is “insubstantial.” Under this magical thinking they can remain tax-exempt and continue to promise their donors anonymity. This argument is legalistic balderdash, yet it seems to have prevailed so far only because it has not been challenged.
The request for the investigation constitutes such a challenge, and it lays out in impressive detail, including court decisions, statutory provisions, IRS regulations and rulings, why this apple is not an orange. My beef is that it is other lawyers who ought to know better who set up such superficially stupid sounding controversies. So it is here.
If you tried to argue at Thanksgiving dinner that losing 49 percent of your income was “insubstantial,” you’d be laughed away from the table. That brings us back to Stephen Colbert as the voice of reason. Let’s hope the IRS is watching.
Bruce D. Collins is corporate vice president and general counsel of C-SPAN, based in Washington, D.C. E-mail him at firstname.lastname@example.org.