How Crossroads GPS beat the IRS and became a social welfare group

Crossroads cofounders Karl Rove and Ed Gillespie in 2007 when they worked for President George W. Bush. (AP Photo/Lawrence Jackson)

When a group called Crossroads GPS sent the IRS an application for tax-exempt status in September 2010, Nancy Pelosi was speaker of the House, Snapchat hadn’t started doing whatever it does, and Miley Cyrus was still Hannah Montana.

A lot has changed since then, including the political influence of 501(c)(4) social welfare organizations like GPS, a brainchild of Karl Rove, Ed Gillespie and other GOP political operatives that was an early player in the post-Citizens United landscape. For example, in the 10 years leading up to that date, the combined political spending by organizations, like GPS, that aren’t required to disclose their donors stood at about $100 million. That was about $30 million less than was ultimately spent by such groups in the last few months of the 2010 midterms alone, and less than one-third of what they spent in the 2012 presidential election cycle. In that cycle, GPS’ political outlays alone made up nearly one-fourth of all spending by nondisclosing groups, as reported to the Federal Election Commission. None of those totals include the many ads GPS has run outside of the FEC’s reporting windows.

In the decade prior to Crossroads GPS’ birth, combined dark money spending was only about $100 million. That total would be surpassed by more than $30 million in just the last few months of 2010, the first year GPS was in operation.

But while Crossroads GPS was, well, the elephant in the room when it came to fueling the growth of “dark money” spending in elections, it struggled more than almost any other big political spender, liberal or conservative, to convince the IRS that it was in the business of social welfare, not politics.

But as OpenSecrets Blog first reported Tuesday, that long battle with the IRS finally ended last November, assuring prospective donors that the group is operating with the IRS’ blessing.

The decision has shocked many observers, though not Crossroads GPS itself, whose president Steven Law said the group was “pleased but not surprised.”

Initial proposed denial

After filing its initial application in June 2010, GPS heard nothing from the IRS for nearly two years, until the agency asked for an extensive amount of additional information from the group in February 2012. The request included more than a dozen questions with a subset of detailed queries for everything from specifics on how much time and money GPS spent on all of its component activities to a full printout of its entire website and copies of all of its fundraising pitches.

The following May, GPS’ lawyers sent the IRS two three-inch binders filled with hundreds of pages of explanations and supporting documents. At the front was an six-page “Introductory Legal Discussion,” a prebuttal of sorts, wherein the GPS lawyers laid out their interpretation of the IRS rules and revealed how they would call those rules into question if the decision went against them. That’s an unusual step, but “certainly something that experienced tax practitioners do when they realize that they are likely to have a tough fight on their hands,” said Marcus Owens, a Washington lawyer who’s a former head of the IRS’ exempt organizations division.

GPS then waited, again for more than a year. Delays like this throughout the process would lead the group to criticize the agency’s dithering, saying repeatedly that it had turned the approval process into a “de facto audit.”

GPS wasn’t just sitting on its hands in the interim, though. It spent more than $71 million on political ads and other activity that it reported to the FEC between April 30 and Nov. 6, 2012, and gave $35 million to other 501(c)s which in turn made more than $34 million in FEC-reported expenditures. Included in that: a massive $26.4 million grant, to Americans for Tax Reform (ATR), a conservative organization that agitates for lower taxes. About $10 million of the money, if not more, went into the $15.8 million ATR spent on efforts to encourage voters to vote for or against specific candidates from August to Election Day.

Almost none of that spending factored into the IRS’ proposed “adverse determination,” which it sent to GPS in September 2013, saying it “had determined that you are not operated exclusively for the promotion of social welfare.” In a scathing assessment, the agency pointed out that all but one of the group’s television ads ran within an 11-week pre-election window in 2010. GPS claimed that some of those ads were educational, encouraging support for a particular bill in Congress — but the IRS said the spots were “focused on criticizing the identified candidate and provided no information about the legislation other than the bill number, which was provided as text (but not in audio) at the very end of the advertisement.”

The remaining ads, the IRS noted, “criticized candidates for legislation enacted earlier in [2010] — legislation that was raised as an issue distinguishing the candidates from their opponents,” and these ads weren’t timed to a “non-electoral event such as scheduled vote on specific legislation by the candidates.”

The IRS deemed that only one ad run by GPS was true “issue advocacy rather than political campaign intervention” and accounted for just 2 percent of GPS’ expenditures in its first year. The agency made a similarly critical assessment of GPS’ mailers and radio ads, concluding that only a small percentage of them actually amounted to issue advocacy.

Then there were the grants GPS made to other groups. The IRS noted that “a number of your grantees have reported significant political expenditures” and also remarked on the “circular flow of funds” between GPS and other organizations. That money churn, which has been a practice of some of the largest politically active (c)(4)s, allows nonprofits to boost their overall social welfare expenditures simply by passing money through their coffers to offset their political spending. The IRS suggested that such a grantor-grantee relationship didn’t “actually promote social welfare.”

At this point, the ball was back in GPS’ court. Two months later in November 2013, it filed a protest with the IRS — revised in February 2014 — building on the arguments made in its February 2012  “Introductory Legal Discussion.”

And developments over the years, particularly the IRS scandal — which revealed that the agency had been using superficial criteria to single out Tea Party and other groups for extra scrutiny during the application process — had lent fuel to GPS’ position. Not only did the group note how its application was “mishandled” — pointing to the fact that its documents were improperly provided to ProPublica, for example — but it also used the IRS’ own admissions, in the aftermath of the scandal, that its procedures were faulty to question the agency’s handling of GPS’ case.

No bright lines

The documents that were drawn up by GPS’ lawyers to counter the proposed denial, like the mountain of paper they’d submitted previously, are a testament to the huge challenge facing not only the IRS, but also pro-transparency groups and those favoring an overhaul of the campaign finance system, who would like to see political activity by these groups regulated like that of most other organizations involved in politics, including super PACs.

They will likely become required reading for lawyers in the business of protecting nonprofits from scrutiny.

In hundreds of pages of arguments and supporting documents, GPS systematically and aggressively dismantled the IRS’s proposed adverse determination by pointing out how the agency’s somewhat subjective test to determine whether or not a group qualified as a social welfare organization — the so-called “facts and circumstances” test — could reasonably have come to alternate conclusions about GPS’ activities.

GPS was quick to pounce when the IRS held the group to standards that were, in fact, not hard and fast rules. For example, the 11-week pre-election time frame the IRS relied on to asses GPS’ television and radio ads were not selected according to any IRS rule; thus, said GPS, the agency “misapplied or disregarded its own facts and circumstances test.”

Likewise, GPS criticized the IRS for applying “ad hoc” parameters that, in their view, held the group to a standard that had never before been required of any other group — in particular, the suggestion that “issue advocacy advertisements…describe or discuss the issue in a particular amount of detail.”

Much of the heavy lifting in GPS’ defense was done by the IRS itself. In a move sure to anger supporters of clearer IRS rules pertaining to 501(c) political activity — so-called “bright lines” — GPS lamented, at length and multiple times, that the IRS “facts and circumstances test” lacked clarity, and therefore the group could not reasonably be punished for interpreting the law as it had.

GPS even attacked one of the most fundamental metrics used by the IRS for determining whether to grant a group (c)(4) status: whether more than half of its activities constitute social welfare. The agency had flunked GPS on that one, concluding that more than 54 percent of what the group didn’t meet the definition. But GPS responded that the IRS has never established the basis for measuring such activity.

GPS pointed repeatedly to the IRS’ own acknowledgment that the rules lacked crisp borders, referring to the agency’s 2014 proposed rulemaking aimed at addressing that very issue and maintaining that the IRS’ admittedly faulty oversight procedures had led to inconsistent enforcement. The procedures the agency had used to make its determination regarding Crossroads GPS were “void for vagueness,” GPS argued, and thus unconstitutional. “Ironically,” GPS said in a footnote, “the Service itself is currently seeking to adopt new regulations that reject the facts and circumstances test.”

A further irony is that Crossroads GPS has never been a vocal supporter of clearer rules. Its chairman, Bobby Burchfield, submitted a comment during the rulemaking process saying the proposed changes were part of a “partisan agenda” and “targeted core political speech and association.”

“Even if the proposed rule provided clarity,” Burchfield wrote in 2014, the cost of this clarity is far too high. ‘Shut up’ is, after all, clear.”

GPS president Law is a former employee and close confidant of Senate Majority Leader Mitch McConnell (R-Ky.), Congress’ single most vocal opponent of a tighter campaign finance and disclosure regime. Under his leadership, the Senate recently passed a budget that included a rider explicitly prohibiting the IRS from pursuing clearer rules. The IRS earlier had withdrawn its proposed regs, which were criticized by both left and right, but had been anticipated to try again.

Keying off the imperfections of the “facts and circumstances” test, GPS provided pages of detailed analysis of its own ads. The first one highlighted, called “Calendar,” ran in August 2010 in Colorado.

GPS admitted to the IRS that “certain aspects of its advertisements implicate Campaign Intervention Factors.” “Calendar,” GPS conceded, ran soon before an election and discussed the record of an incumbent senator up for re-election.

“However,” GPS continued, “GPS’s advertisements include countervailing Social Welfare Factors that, under all of the facts and circumstances, warrant classifying GPS’s advertisements as social welfare activities.” The ads, the group maintained:

• Made no reference to any election, campaign, or opposing candidate;
• Contained no advocacy for or against the election of any candidate;
• Didn’t encourage action in connection with a campaign or election;
• Were part of an ongoing series of substantially similar GPS communications on the same issue of government spending and pending legislation (Senate Amendment 4594);
• Identified an event — a vote on Senate Amendment 4596 — that GPS hoped to influence but did not control;
• Ran close in time to a scheduled floor vote on Senate Amendment 4594;
• Referred to Sen. Michael Bennet (D-Colo.) only as an incumbent government official who was in a position to vote against that legislation; and
• Provided Senator Bennet’s office phone number and encouraged viewers to contact him and urge him to vote against the identified bill.

One thing not discussed, either by GPS or the IRS: Whether or not the statements were accurate. GPS in 2010, and since, has not fared well with fact checkers, but the group’s handling of demonstrable facts — and whether its repeated falsehoods belied its stated aim to educate viewers on issues — didn’t play a role in the determination.

This and less philosophical questions weren’t discussed in the thousands of pages of documents.

Not considered

Even in the later stages of its long-running discussions with GPS — interactions that included multiple meetings between teams of the group’s lawyers, led by Jeffery Yablon of Pillsbury Winthrop Shaw Pittman, and IRS staff — the agency didn’t examine some of the group’s most questionable activities. There was, for instance, its 2012 grant to ATR (which occurred even before the agency’s proposed denial of the group’s status) and its 2014 grant to a new 501(c)(4) called Carolina Rising (made after the proposed denial but before the IRS’ final determination); the latter group devoted nearly all of its spending, totaling $4.7 million, to electing GOP Sen. Thom Tillis (N.C.).

IRS officials considering appeals of proposed denials don’t typically look beyond the scope of what the agency’s initial reviewers considered potentially adverse in their assessments, said Owens, the former exempt organization’s division head. But the agency did have information that could have helped it understand how GPS’ gifts to other organizations might have been channeled directly into political spending.

For instance, it has long been known that Crossroads GPS gave a large grant to ATR in 2010, a fact that was reported on GPS’ annual Form 990 tax filing. But because GPS’ fiscal year at the time ran from June 2010 to May 2011, even the calendar year of the transmittal, much less the exact date, was unclear; that detail isn’t required on 990s.

The GPS documents provided to the IRS, however, show that the $4 million the group gave to ATR was sent in three chunks:

• September 29, 2010: $1.3 million
• October 12, 2010: $2.5 million
• October 21, 2010: $200,000

That corresponds almost exactly with the period — Sept. 14-Nov. 1, 2010 — during which ATR told the FEC it spent more than $4 million trying to sway voters. On the day of and the day after GPS gave its largest grant of $2.5 million, ATR reported spending $2.7 million on ads in nine House races; in three of those, GPS or its sister super PAC American Crossroads also were spending money to influence the vote.

Crossroads GPS provided nearly all the funds used by a group called Carolina Rising to help elect Sen. Thom Tillis (R-N.C.). (Photo By Bill Clark/CQ Roll Call) (CQ Roll Call via AP Images)

Similarly, the $2.8 million that GPS gave to the Center for Individual Freedom on Oct. 8 directly preceded that group’s $2.5 million in spending on ads from Oct. 14-24. The Center focused on candidates in 10 races, eight of which also were targets for either GPS, American Crossroads or GPS grantee ATR.

While the IRS considered, and questioned GPS about, the group’s sizable grants to other organizations that engaged in significant politicking, it does not appear to have considered timing. That information might have helped blunt GPS’ argument that “every grant that GPS has made since its inception was subject to an explicit agreement” banning the use of funds on politics, which was true. GPS repeatedly stressed that “the fact that some grantees may have engaged in direct or indirect campaign intervention activities using other sources of funding is irrelevant” [emphasis in original]. But had the IRS actually matched up the grants and the political activity, it might have been harder for GPS to claim that funds were, in actuality, from other sources.

The agency also didn’t look at the more general question of “private benefit,” of which political activity is only a subset. The IRS didn’t force GPS to explain how the entirety of its activities didn’t provide disproportionate private benefit to a small group of people, namely, Republican politicians. In some previous cases, it has been established that a group can be seen to excessively aid a select group not only via financial transactions but by advancing overall a “nonexempt private purpose.” While the IRS strained to prove excess political activity, it might have had a far more compelling case had it argued that Crossroads GPS’ entire operation supported a single political party.

Just as no single weather event proves the existence of climate change, no ad analyzed individually proves that GPS was a political organization. GPS appears to have understood that, and the IRS didn’t question it.

Finally, and perhaps most obviously, the IRS appears never to have considered public statements from people affiliated with GPS itself about the organization’s role, from the very beginning, as a nondisclosing arm of the American Crossroads super PAC. For years, the two groups have been announcing fundraising totals together.

As Carl Forti, GPS’ political director, said in 2010, “You know, disclosure was very important to us, which is why the [super PAC] was created. But some donors didn’t want to be disclosed, and, therefore, the (c)(4) was created.”

Status guaranteed

Five months after GPS filed its revised protest, in July 2014, the IRS informed the group that it intended to proceed with its proposed denial. The next month, GPS requested a formal appeal, which the IRS allowed that October.

Thirteen months later, the group could declare victory.

But the Crossroads decision is less a harbinger than it is a sign that the status quo has been strengthened.

Over the years, as political spending by 501(c) organizations has ballooned, and a bevy of new organizations have sprung up pushing the bounds of IRS limits on political activity by these groups, one thing has generally been true: Those who request exempt status from the IRS will get it.

The agency might ask a thing or two about a group’s “campaign money laundering” and direct political advocacy, as it did in the case of Americans for Responsible Leadership; and it might “STRONGLY” recommend expanding the one-person board of a (c)(4) being operated out of a Des Moines mailbox and encourage it “to include non-family members,” as it did with the American Future Fund. But it will ultimately bless almost every applicant with a tax exemption.

Many with even a passing knowledge of the IRS’ recent controversies might find this hard to believe, but it is a truism that if a group has enough money to raise eyebrows based on its political activities as a 501(c)(4), it has enough to pay the right lawyers to make its case to the IRS.

Every major group in the Koch network that has sought an exemption has received it, as have liberal groups like David Brock’s American Bridge 21st Century Foundation and the Reid-allied Patriot Majority USA — which has gotten an exemption not once, but twice.

Up until this week, there were only two prominent exceptions to this rule, both founded in 2010, both politically active, but with very different fates. One was a liberal 501(c)(4) called Arkansans for Common Sense, which spent generously to support the failed re-election of Blanche Lincoln in 2010 only to fizzle out and, in 2014, be deemed too political for 501(c)(4) status.

The other had been Crossroads GPS — but the IRS dispatched that exception with this final email to GPS’s lawyer in November 2015:

“It was truly a pleasure to work with you, (but please don’t tell me that you have a similar case coming to Appeals any time soon!). ”

Anna Massoglia contributed to this report.

Crossroads GPS documents:

1. Crossroads-GPS-Index
2. Application for Recognition of Exemption and Supplementary Materials 1 of 2 A
3. Application for Recognition of Exemption and Supplementary Materials 1 of 2 B
4. Application for Recognition of Exemption and Supplementary Materials 1 of 2 C
5. Application for Recognition of Exemption and Supplementary Materials 2 of 2
6. Protest (11-8-2013)
7. Revised Protest (2-28-2014)
8. Supplemental-Submission (5-7-2014)
9. Second-Supplemental-Submission (6-20-2014)
10. Letter From IRS Describing New Interim Guidance Memorandum (7-23-2014)
11. Letter From Yablon to Thomas Requesting Appeals Review (8-18-2014)
12. Introductory-Letter-From-Mr-Wing (10-27-2014)
13. Third-Supplemental-Submission (8-28-2015)
14. Yablon-Wing Emails
15. The-Favorable-Determination-Letter (11-4-2015)
16. Second-Favorable-Determination-Letter (11-17-2015)