Club 527: All the Private Inurement You Can Eat!

Neither the prohibition against private inurement, the tax on excess benefit transactions, nor the private benefit doctrine apply to IRC 527 political action committees.  That's why a "group of conservative operatives" using PACs were able to raise nearly $90 million, spend only about $800,000 (.09%) on political activity, and pay the rest to themselves via an extended family of entities all tied to a former college Republican who seems to have touched on a motherlode.  Sunday's NY Times has a multi-media story that's worth the Easy Like Sunday Morning read.  Here are a few snippets:

A group of conservative operatives using sophisticated robocalls raised millions of dollars from donors using pro-police and pro-veteran messages. But instead of using the money to promote issues and candidates, an analysis by The New York Times shows, nearly all the money went to pay the firms making the calls and the operatives themselves, highlighting a flaw in the regulation of political nonprofits.

The American Police Officers Alliance is not what it seems.  In theory, it is a political nonprofit called a 527, after a section of the tax code, that can raise unlimited donations to help or oppose candidates, promote issues or encourage voting.  In reality, it is part of a group of five linked nonprofits that have exploited thousands of donors in ways that have been hidden until now by a blizzard of filings, lax oversight and a blind spot in the campaign finance system.

Since 2014, the five groups have pulled in $89 million from small-dollar donors who were pitched on building political support for police officers, veterans and firefighters.  But just 1 percent of the money they raised was used to help candidates via donations, ads or targeted get-out-the-vote messages, according to an analysis by The Times of the groups’ public filings.

About 90 percent of the money the groups raised was simply sent back to their fund-raising contractors, to feed a self-consuming loop where donations went to find more donors to give money to find more donors. They had no significant operations other than fund-raising, and along the way became one of America’s biggest sources of robocalls. 

The groups also paid $2.8 million, or 3 percent of the money raised, to three Republican political consultants from Wisconsin who were the hidden force behind all five nonprofits, according to people who worked for the groups and who in some cases were kept in the dark by the consultants about the finances of the operations.

The article quotes an attorney for the five PACs who says the PACS were examined and given a clean bill of tax health from the Service.  The article's authors seem skeptical.  And they makes a prima facie case of private inurement, excess and private benefit violations.  But sorry those rules don't apply to 527 organizations.  What are the rules?  There are no rules.  In fact, it seems the only tax response is "ho hum, report your gains on line 13, form 1040 and get back to what you were doing."  That's it.  No excise tax, no nothing. So the Service is right if that's what they said. 

Carry on, nothing to see here.  Just a couple of kids getting rich with robocalls asking for money to support first responders, soldiers, sailors and Marines is all.  All with a 527 stamp of approval.  Move along people.

 

darryll jones