Shadow Money Magic: Five Easy Steps That Let You Play Big in Politics, Hide Your Donors and Game the IRS

Reference: Center for Responsive Politics

By Robert Maguire and Viveca Novak

First of five parts

Let’s say you want to be a player in Washington. Maybe there are policy issues that matter to you, or you simply want to help elect more politicians on the right or the left. And let’s say you also have some potential donors who could help propel your cause. Problem is, they don’t want their names made public.

You’re out of luck, right? Isn’t disclosure the backbone of our campaign finance system? Wasn’t it the solution to the bad old days of special interests passing bags and briefcases full of mystery money to candidates — the core of the post-Watergate reforms?

Hah! Where there’s a will — and a favorable court decision or two — there’s a way. During the 2010 and 2012 elections, dozens of groups pumped hundreds of millions of dollars into the electoral system while dodging the disclosure requirements that apply to almost all other organizations that support or oppose political candidates; it came to be known as “shadow” or “dark” money. The groups took in unlimited amounts of money from people and corporations and spent it on ads or passed it along to friends at other groups that did the spending themselves, all while avoiding more than glancing oversight by federal regulators.

Call it the return of mystery money.

What follows is a five-part primer on how it’s done by the pros. Our chief protagonists are part of a network of groups that spent more than $76 million in the 2010 election, according to their reports to the Federal Election Commission. Two groups — Crossroads GPS and the Center to Protect Patient Rights (CPPR) — are at the center of this network, having given money to the other groups we’ll mention. In 2012, the network’s reported spending more than doubled, to $190 million, making up nearly two-thirds of all shadow money spent in that election cycle.*

Step 1: Create a 501(c)(4) tax-exempt group, and spend away

The first and most critical step, for those who want to be politically active while keeping their donors out of the public eye, is to form a group under the 501(c)(4) provisions of the Internal Revenue Service. Why a 501(c)(4) and not a super PAC — another type of group that’s allowed to raise and spend unlimited amounts of money? Secrecy. These groups are regulated by the IRS, where confidentiality is routine, rather than the FEC, where disclosure is the rule.

The only catch? These nonprofit organizations are supposed to have “social welfare” as their primary mission. Fortunately for these groups, the definition of “primary” is a little loose. In practice, though not in regulation, it has come to mean anything over 50 percent — so, in theory, such a group can devote up to 49.9 percent of its resources on politics.

Surprisingly, groups aren’t required to seek the IRS’ approval before they start operating as 501(c)(4)s. Social welfare organizations can self declare and start raising and spending money right away. Some do request official approval, but the process is complicated and often time-consuming: Crossroads GPS, one of the best-funded shadow money groups, asked for the IRS’ blessing in mid-2010 and after three years it still hasn’t received it — though that hasn’t stopped the group from operating on a grand scale.

Crossroads, started by GOP operatives that include Karl Rove, former uberaide to President George W. Bush, opened for business about five months after the Supreme Court’s January 2010 decision in the case Citizens United v. Federal Election Commission. That decision said corporations could spend unlimited money in campaigns, as long as their spending occurred independently of the candidate who stood to benefit. The ruling applied to nonprofit corporations as well as it did to for-profit companies, a fact that was key to the future strategies of Crossroads and similar groups.

In its first year, Crossroads GPS — a sister group to the super PAC American Crossroads — reported to the FEC that it spent $16.7 million on ads directly and indirectly advocating for or against candidates. (Even 501(c)(4) groups, while not required to reveal much to the FEC, must disclose when they run certain kinds of ads and how much they spend on them — and they must do so promptly.) It later told the IRS, in its first tax form 990 filed with the agency, that it spent $15.9 million on politics. Both figures understate the reality of what GPS spent in the political arena by millions. In either case, they are well under half of GPS’ reported overall spending of $42.3 million (including salaries, overhead and so on) that year.

Likewise, other members of the Crossroads-CPPR network were careful to abide by the 49 percent rule, at least in a technical sense. The 60 Plus Association reported to the FEC that it spent $7.1 million in 2010; that’s just under half of its total IRS-reported expenditures of $15.5 million. Former New York Gov. George Pataki’s Revere America filed expenditure reports with the FEC that came to $2.3 million, safely below half of the $6.3 million it spent that year.

Crossroads GPS’ 2010 spending may well have helped the GOP take control of the House. And the group came out with guns blazing in 2012. In that election cycle, it told the FEC it spent more than $71 million — almost as much as the entire GPS-CPPR network had spent, combined, in 2010. Crossroads likely won’t send the IRS its form 990 for 2012, in which it will reveal its total expenditures last year, until autumn of 2013 (stay tuned for Step 4 of our series for more on the lag time), but logic dictates the group will need to show a $130 million increase over its 2010 overall expenditures in order to stay under the 49.9 percent threshold for political spending in 2012 — by any measure, a staggering increase.

The shadow money mailbox

Crossroads GPS is one kind of shadow money group. But other kinds of politically active groups operate under the 501(c)(4) designation. They’re little more than glorified mailboxes

Foremost among them is the Center to Protect Patient Rights, which OpenSecrets Blog first uncovered last year. From 2009, when it was founded, until the end of 2011, CPPR raised $101 million. More than $70 million of that went out the door to other shadow money groups. CPPR has no activities of its own: It doesn’t run ads for or against candidates; it doesn’t conduct research; it doesn’t spearhead public education campaigns. It appears to be little more than a conduit funneling money to other shadow money groups that spend the money. During the 2010 cycle, CPPR made $47.9 million in grants to groups that told the FEC they spent $37.2 million on political ads.

GPS-CPPR Network FEC Spending



Crossroads GPS



Americans for Prosperity



American Future Fund



Americans for Job Security



Americans for Tax Reform



American Action Network



Americans for Responsible Leadership



NRA Institute for Legislative Action



60 Plus Assn



Republican Jewish Coalition



Susan B Anthony List



Center for Individual Freedom



American Commitment



National Fedn of Independent Business



Club for Growth



Independent Women’s Voice



Hispanic Leadership Fund



Right to Life



Common Sense Issues



Americans for Limited Government



Revere America






n one case, CPPR’s role as a pass-through for big political money was outed by the courts. Last November, California authorities demanded that another Arizona shadow money group, Americans for Responsible Leadership, to turn over its donor information. Eventually, under court order, it did so. What did the public learn? That another politically active nondisclosing group, Americans for Job Security, had passed $11 million to CPPR, which then passed it to Americans for Responsible Leadership. In a twist that is almost certainly no coincidence, Americans for Job Security itself had received $4.8 million from CPPR in 2010. None of this, of course, was very helpful. With the funds going through several 501(c)(4) groups, it was unlikely that the original source or sources of the money that wound up with Americans for Responsible Leadership — the group that California election authorities were interested in to begin with — would be revealed.

CPPR is by no means the only prominent shadow money mailbox.  Another such group: TC4, first reported by OpenSecrets Blog last December. Despite its colorless name, the organization shelled out nearly 80 percent of its $46.3 million in revenues to other groups in its first two years of operation — including some of the same ones that received money from CPPR. The two groups overlap to the tune of more than $41 million.


Cash in, cash out. And all these groups in the Crossroads-CPPR network stay on the right side of the IRS’ 49 percent “primary purpose” test. Sometimes, though, they need to use a little creativity to keep their IRS-reported numbers within bounds. For more on that, watch for Step 2 of our series tomorrow.

*Readers will note that the groups discussed in this report are conservative. They were selected not because of their political leanings, but because they are among the best-funded and biggest-spending examples of two kinds of politically active nonprofits: shadow money groups that spend heavily on political advocacy, and “shadow money mailboxes” — groups that function as little more than P.O. boxes through which millions of dollars are funneled to other shadow money groups. The closest liberal analog to Crossroads GPS in terms of money raised and money spent on FEC-reported political activity in 2010 was, founded in 2006. In terms of spending reported to the FEC, Crossroads outspent by a magnitude of five-to-one. As for shadow money mailboxes such as the Center to Protect Patient Rights, they abound on the conservative side of the spectrum but are harder to find on the left. For instance, the liberal 501(c)(4) America’s Families First also gives much of its money to other shadow money groups, but it only raised $8.6 million in 2010 and 2011 combined — $7.8 million of which went out the door in grants. Further, Crossroads GPS and CPPR are part of an informal network of conservative groups that often coordinate their work.