A conservative nonprofit that paid a record-setting fine in California for its part in a campaign finance scheme might never have sought formal recognition as a tax-exempt group had it not been demanded by a key architect of the money-shuffling operation.

The exemption — the official imprimatur that gives a group status as a “social welfare” organization and lets it keep its donors identities out of public view — was granted to Americans for Responsible Leadership on Oct. 22, 2013 after lengthy exchanges between its representatives and the IRS, according to documents obtained by OpenSecrets Blog.

The approval came even though by then — about 13 months after the group put in its request — IRS officials knew of ARL’s involvement in a complicated effort by conservative groups to put big money into two California ballot initiative battles. In fact, in November 2012, ARL had reached a settlement with the state’s Fair Political Practices Commission admitting it was not the true source of millions it had poured into the fights. “At $11 million, this is the largest contribution ever disclosed as campaign money laundering in California history,” the FPPC said in a release on Nov. 5, 2012.

The IRS also was aware that ARL had spent almost $10 million advocating for or against candidates in the 2012 elections. In fact, it knew that 77 percent of the funds the group had spent in its short life had been used either for direct political advocacy or was connected to “campaign money laundering.”

But for much of the time the IRS was weighing ARL’s application, the agency itself was the focus of several investigations of the enhanced scrutiny it had given to applications from certain groups seeking exempt status — the preponderance of which were conservative.

Details, please

Almost six months earlier, in May, 2013, an exempt organizations specialist at the tax agency wrote to ARL’s lawyer at the law firm Holtzman Vogel Josefiak — which represents numerous politically active 501(c)(4) groups — requesting additional detail about ARL’s activities. ARL incorporated on July 26, 2011, but did business for more than a year before sending its application to the IRS on Sept. 14, 2012.

Most of the questions had to do with statements ARL made on its original application seeking exempt status. For instance, ARL wrote that it would work to promote “a more ethical and transparent government” through print and TV ads, phone programs and town hall meetings. It also said it planned to develop “lobbying and advocacy campaigns urging policy makers to seek solutions that promote ethics, transparency and responsible leadership” using direct mail, email, phone banking, TV and print ads. Volunteers and outside consultants would be drafted to help with the effort, the form noted, and ARL would not be involved in trying to influence the election or appointment of anyone to federal or state office. (The application was corrected in December 2012 by the group’s president, Kirk Adams, to say that ARL would, in fact, engage in “limited express advocacy” in elections — after ARL had spent millions trying to defeat President Obama in his re-election bid.)

The IRS specialist asked for considerable back-up material: details about town hall meetings the group had said it would sponsor, including agendas; hard numbers for the employee and volunteer hours that went toward phone banking, direct mail and ads, and expenses for those activities; copies of its newsletter; copies of scripts used for phone banks and ads, and more.

The agency employee attached to the letter copies of ARL’s Federal Election Commission reports showing its 2012 independent expenditures, which came to almost $10 million. It also included printouts of news reports about the California case — evidence that the IRS was fully aware of both.

ARL and the IRS had a face-to-face meeting, then the group was asked to produce additional information — including details of grants given by ARL to other organizations in 2012. ARL listed its $11 million gift to the Small Business Action Committee in California — its largest grant by far.

That’s the donation that had drawn the attention of California campaign finance authorities. The money was sent to SBAC on Oct. 15, 2012, just a month after the group first asked the IRS for tax-exempt status. It was also shortly after Anthony Russo, a Republican consultant who helped engineer the money transfer scheme, insisted to others involved in the plan that ARL — which was being used as a pass-through group — needed to look legitimate by, among other things, having “certification” from the IRS.

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The operation involved sending funds through three groups that don’t disclose their donors — multiple layers of protection for the original individual or corporate donors. One organization, called Americans for Job Security, transferred the money to another, the Center to Protect Patient Rights (a group, now called American Encore, that was at the center of a network linked to billionaire industrialist brothers Charles and David Koch), which in turn sent it to ARL, which handed it off to SBAC.

Almost immediately, the mammoth donation to SBAC, a group that was politicking on two state ballot initiatives, had been noticed. Within weeks, California’s Fair Political Practices Commission had reached a settlement with ARL, which admitted it was not the true source of the funds.

ARL told the IRS that it spent less than 40 percent of its budget on politics in 2012. But if the IRS had considered the true nature of the $11 million — funds that simply washed through the group’s account going from one organization to another — the money ARL spent on direct political advocacy in 2012 came to more than 60 percent of its budget. The IRS bars those with 501(c)(4) designation — “social welfare” groups — from spending a majority of their resources on politics.

ARL did not respond to several questions from OpenSecrets Blog.

But even as the IRS was considering ARL’s application, the agency had become the focus of intense criticism for methods it used to scrutinize such requests. In May 2013 — the same month an agency specialist wrote to ARL asking for more back-up documentation — a Treasury Department inspector general released an audit report concluding the the IRS had since 2010 used improper criteria to identify groups that might be political, including targeting those with “tea party” in their names. Multiple congressional investigations had begun, Republicans and Democrats alike decried the targeting and IRS officials were hauled up to Capitol Hill to testify. The acting IRS commissioner resigned, and the head of the exempt organizations division, Lois Lerner, retired.

Lerner’s effective retirement date was just a month before ARL was granted its exemption as a “social welfare” nonprofit.

Last week, the GOP-led House Ways and Means Committee referred Lerner to the Justice Department for criminal prosecution as a result of the targeting and its aftermath. It’s likely to have little effect, since DOJ is already investigating both the IRS and Lerner. In documents released by the committee, it said it found that four out of five named organizations — ARL and four others — had been the subject of improper scrutiny. However, it remains unclear which ones, and our queries to the committee had not been answered at the time of publication.

Meanwhile, Americans for Responsible Leadership told the IRS last July that it “ does not antiticpate that its future activities will differ substantially from those it has carried on to date .” If that’s the case, the group will continue to be highly politically active. Only now, it will act as an officially recognized social welfare organization.

Here’s a timeline of ARL’s exemption request, start to finish.

Image: Lois Lerner, former head of the IRS division on exempt organizations, testifies at a House hearing in March 2014. (AP Photo/Lauren Victoria Burke)



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