Update, Oct. 27: See the Center for Responsive Politics’ op-ed in the New York Times about how the case of Carolina Rising challenges the IRS and the FEC to enforce the law.

A social welfare group called Carolina Rising spent 97 percent of the money it raised in the 2014 midterm elections — nearly $5 million — running ads that helped Sen. Thom Tillis (R-N.C.) defeat the incumbent Democrat that cycle.

The group, formed by political operative Dallas Woodhouse in late March 2014, did virtually nothing else. Its first tax filing, obtained by the Center for Responsive Politics, shows that the organization raised nearly $4.9 million in its first year — $4.8 million of it from a single donor; nearly all of that went out the door to a prominent political media firm in Virginia for ads mentioning Tillis, while the rest was spent on payments to an LLC started by Woodhouse only months earlier.

The stark set of facts raises questions not only about whether the group spent the majority of its funds on political activity — verboten for nonprofits claiming 501(c)(4) status under the tax code — but about whether Carolina Rising was devoted to helping a single individual. That would violate an IRS rule barring social welfare organizations from benefiting one person — the so-called “private benefit” prohibition.

As OpenSecrets Blog prepared to publish this post, the group Citizens for Responsibility and Ethics in Washington (with which this blog has no affiliation) filed complaints with the IRS accusing Carolina Rising and a 501(c)(4) group working to help elect GOP presidential candidate Marco Rubio of spending the vast majority of their money on behalf of a single candidate, in violation of the agency’s rules.

Tarheel Tussle

The race between Republican Thom Tillis and then-Sen. Kay Hagan, a Democrat, was one of the most contentious of the 2014 cycle, and, as a key piece of the successful GOP strategy to retake the Senate, it attracted unprecedented amounts of money. Much of that cash was spent by so-called outside groups — super PACs and politically-active nonprofits — that are supposed to operate independently from the campaigns themselves.

Carolina Rising was one of those groups. It reported to the Federal Election Commission that it spent $3.3 million in the race, making it the fifth most active nonparty group in that faceoff. And that’s not counting the $1.3 million more the nonprofit spent on ads that didn’t have to be logged with the agency.

Carolina Rising was one of just three examples of a new a breed of outside group that popped up in 2014 — candidate-specific nonprofits that served as nominally independent arms of the campaigns themselves with one key difference: The ability to raise and spend unlimited amounts of money without revealing their donors to the public.

Carolina Rising raised nearly all of its funds from a single $4.8 million contribution. It’s not known who provided the contribution, but a 2014 report in the Washington Post suggests that Art Pope, the wealthy, conservative retail magnate who wields considerable influence in North Carolina, is a supporter of the group.

While politics is not supposed to be the primary purpose of 501(c)(4) social welfare organizations like Carolina Rising, lax oversight by agencies like the FEC and the IRS, coupled with the fact that such organizations do not have to disclose their donors, has made them increasingly popular vehicles for political money.

IRS rules are supposed to hold 501(c)(4) groups to spending less than half their resources on politics. But to get around these limits on political activity, groups often hire lawyers who help them churn money to other groups and divvy up their spending to make it difficult for the IRS to prove that they primarily were devoted to influencing elections.

Carolina Rising is novel, though, in that it doesn’t appear to have made much effort to hide the nature of its activities.

Next-Level Sham

Despite raising millions of dollars in its first year, Carolina Rising hired no employees and had no volunteers, according to its tax form. It’s run by a known political operative, Dallas Woodhouse, who didn’t take a salary from the organization; instead, Carolina Rising paid $72,000 to Solutions NC, an LLC incorporated in North Carolina only weeks before Carolina Rising was founded. Woodhouse, according to Carolina Rising’s filing, is the sole owner of Solutions NC.

The group does not appear to have office space. The “Carolina Rising Headquarters,” as it is described on its website, is actually a rented mailbox at a Custom Postal store next to a GNC in a small north Raleigh strip mall.

Carolina Rising did have an office at one point, but didn’t spend more than six or seven months there. The office’s subsequent occupant, an attorney, moved in around early November 2014. Other tenants on that floor, when contacted by OpenSecrets Blog, said they could not recall a nonprofit organization operating there.

Other than the payments to Woodhouse’s own LLC, nearly all of the remaining funds — $4.7 million, or about 97 percent of total spending — went to Crossroads Media, one of the largest political advertising firms in the country, for a purpose described as “TV & cable ad.”

Based on Carolina Rising’s own press releases at the time, the entirety of the Crossroads Media payments became television ads that touted Tillis’ achievements in North Carolina. While some of the ads also mentioned Republican Gov. Pat McCrory — who wasn’t up for re-election in 2014 — all of the ads prominently featured Thom Tillis.

One other ad and a robocall mentioned in separate press releases were directed at Attorney General Roy Cooper. The ad is on YouTube, but there is no evidence — either in Federal Communications Commission data or reports at the time — that it ever saw airtime. Based on the amounts Carolina Rising spent on its Tillis ads, the group couldn’t have spent more than $20,000 or so on the robocall — or about 0.4 percent of its overall budget.

The “Issue” is Tillis

Carolina Rising started spending on ads in earnest in mid-August, 2014, less than three months before the election. The first ad the group bought cost $1.5 million and ran in “all of North Carolina’s major media markets for two weeks,” according to the group’s press release.

According to Kantar Media tracking data reported by the Wesleyan Media Project in partnership with the Center for Responsive Politics, Carolina Rising had already run the ad 1,431 times by early September. The expenditures for this ad were never reported to the FEC, though, because it was framed as an “issue ad.” Those are ads that don’t explicitly ask viewers to vote for or against a candidate and are presumably concerned with a pending policy issue; as a result, they don’t have to be reported to the FEC unless they run within 30 days before a primary or 60 days before a general election.

The ad said that McCrory and and then-North Carolina House Speaker Tillis were responsible for the “largest teacher pay raises in North Carolina history.” It applauded the two for improving starting teachers’ salaries and hi-tech learning in the state. Unlike most other issue ads, no action was requested on the part of the viewer — no calls or emails to the politicians to thank them for supporting certain policies or asking them to vote for legislation.

The ad run made Carolina Rising one of the most active groups in the state at the time, bolstering the work already being done by larger groups like Americans for Prosperity — the politically active nonprofit backed by the Koch donor network, for which Woodhouse had previously served as a state director. AFP began running “issue ads” denouncing Hagan as much as a year before votes were cast.

The remaining ads highlighted in Carolina Rising’s press releases and featured on its Youtube page include one released in early September at a cost of nearly $1.4 million. It featured that a “veteran North Carolina educator” from Yadkin, N.C. (The educator, Judy Wilburn, was arrested five months later and charged with assaulting a handicapped student and obstruction of justice.) A few weeks later, the group dropped another $2 million on an ad featuring a young couple and their autistic son discussing “Thom Tillis’s efforts to pass an autism insurance measure.”

Both of those ads fell within the “windows” that required them to be reported to the FEC as electioneering communications, and they were, to the tune of $3.3 million. But although the outlays for those spots amounted to 68 percent of the group’s total expenditures, Carolina Rising told the IRS on its Form 990 tax filing that it had conducted no political activity in that time period. As early as late November, 2014, Woodhouse was making the claim, in an interview with the Center for Public Integrity, that the ads were “not political ads,” but “issue ads.”

“A Private Benefit Slam Dunk”

The issue of whether a nonprofit spent more than 49 percent of its resources on political activity is usually the focus of examinations of groups that claim (c)(4) status. But there’s a larger issue, according to attorneys who specialize in tax law. These organizations are supposed to exist for a social welfare purpose to benefit the public — not to benefit individuals, like a single politician, or select groups, like the Republican or Democratic parties.

Marcus Owens, a tax lawyer and former director of the IRS exempt organizations division, calls the case of Carolina Rising “a perfect example of the private benefit that is inherent in the modern politically active nonprofit.”

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“More and more, 501(c)s are being started to benefit one party or one candidate,” Owens said, “and that is a private benefit.” Beyond parsing whether ads paid for by Carolina Rising should count as political activity or not, Owens said, regulators should consider the fact that the group spent all of its money casting a single person — particularly one running for public office — in a positive light.

“This seems like a private benefit slam dunk,” Owens said. “This organization was formed to support Mr. Tillis, and they did that.”

In past cycles, groups have often spent well over half of their overall funds on the kinds of issue ads that Carolina Rising made, but they directed them at a large set of candidates in different states, rather than just one.

“If a 501(c)(4) spends on a number of different candidates,” says Jessica Levinson, professor at Loyola School of Law in Los Angeles, “then it may be easier to argue with a straight face that they are touting an agenda, not a particular candidate.”

It doesn’t help Carolina Rising’s case that on ad contracts it signed with broadcast and cable channels, which are filed with the FCC, the group repeatedly characterized the “issue” in its ads as being some variation of “Pro-Tillis” — belying the idea that the ads were about policies, not politics.

In some cases, the forms included McCrory’s name, but clearly listed the U.S. Senate race and the date of the election. McCrory wasn’t running for any office in 2014.

Still others came right out and explained that the ad wasn’t about anything more than getting Tillis elected.

This, Owens told the OpenSecrets Blog, raises more serious questions of perjury.

“The fact that they were candid with another federal agency [the FCC] suggests that they may have knowingly lied to the IRS” in saying the group was not active politically.

“$4.7 million. We did it.”

Thanks to Dallas Woodhouse, it will be hard to claim the wording was an error. That’s not just because Woodhouse tweeted pictures of himself “putting up signs for the next US Senator @ThomTillis” the day before the election — one of his many tweets supporting Tillis or opposing Hagan in the final months of the campaign.

Beyond that, it’s because Woodhouse went to Tillis’ victory celebration on Election Day and was interviewed on live TV saying that his organization spent $4.7 million to support the Republican’s candidacy.

In the interview, local WNCN reporter Derick Waller introduces Woodhouse as representing Carolina Rising, and then immediately says “You just mentioned, you spent a whole lot of money to get this man elected, right?”

Donning a red “Thom Tillis” hat — and looking like he might have had a few celebratory cocktails — Woodhouse responds “$4.7 million. We did it.”

A screenshot of a tweet from Dallas Woodhouse the next day shows him asking the reporter to take the video down “due to copyright.” Perhaps that was the real issue, though some commented at the time that he might want the footage to go away because he appeared intoxicated. Given his quote to the reporter, though, it’s also possible he’d received a call from an angry lawyer for his group or Tillis’ campaign.

Woodhouse did not respond to calls or emails seeking comment.

Watchdogs Without Traction

Owens and other lawyers contacted by OpenSecrets Blog suggested groups like Carolina Rising that are pushing the limits of nonprofit status “are betting that the IRS won’t come looking.”

Levinson said that groups like Carolina Rising “can rest assured in the belief that the IRS and the FEC are unlikely to take any action.”

Indeed, data from four election cycles shows a growing amount of spending by these politically active organizations, and the IRS gives them a pass far more often than it takes decisive action.

Both of the agencies responsible for overseeing the political activities of 501(c)s, the FEC and the IRS, are either mired in partisan deadlock or have promised not to change the way they regulate the groups until after the 2016 elections.

Congress is another major factor. Any action by the IRS against these kinds of groups has in the past raised hackles there, and accusations that the agency is on a witch hunt.

“The IRS has been bullied into inaction by Republicans in Congress,” Paul S. Ryan, senior counsel at the Campaign Legal Center, said. “501(c)(4) groups like Carolina Rising are likely violating federal law with full confidence that there will be no consequences or penalties for their actions.”

The upshot: Use of single-candidate nonprofits is clearly on the rise. Most presidential hopefuls in the 2016 cycle have one either waiting on the sidelines or, as the Associated Press reported recently, already spending millions of dollars from unknown sources to support one candidate, just like Carolina Rising.

Update, Oct. 20: Dallas Woodhouse responded to our post with this: “Carolina Rising operations were always fully reviewed by the by the best legal minds in the business and was 100% compliant within the law and IRS Code,” Woodhouse said. “[CREW and other] organizations file these worthless complaints as publicity stunts, based on what they wish the law was, not what it is.”

Update, Oct. 20: This post has been updated to reflect the fact that OpenSecrets Blog has no connection with a separate group, Citizens for Responsibility and Ethics in Washington (CREW).

Political Nonprofits Researcher Anna Massoglia contributed to this report



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