Ever since news broke in 2013 that the IRS had targeted the exemption applications of tea party and some other politically-oriented groups for extra scrutiny, conventional wisdom had it that the agency throws up roadblocks for organizations trying to obtain its seal of approval.

But much evidence indicates the IRS backs down without much fuss when groups seeking 501(c)(4) “social welfare” status come calling.

That was certainly true in the case of Rosebush Corp., OpenSecrets Blog has learned. The Pennsylvania-based nonprofit has been a conduit for large sums of money destined for other, more politically active, groups — including Americans for Job Security (AJS), which spent more than $15 million attacking President Obama in his 2012 re-election bid.

In what appears to have been a highly unusual move, in 2013 the IRS initially denied Rosebush’s application for exempt status. Rarer still, though, the agency largely reversed its decision in August 2014, when it recognized the group as a 501(c)(4) organization.

Out of the bush, into the spring



OpenSecrets Blog obtained Rosebush’s denial letter only because it is part of the group’s 1024 application materials that must be made available once a group’s exemption is approved. (Normally, only heavily redacted denial letters are released, with all identifying information removed.) The documents offer a rare glimpse at the applicant’s interaction with the IRS, and the agency’s reasoning for denying the exemption.

Rosebush is the largest of the few donors known to have boosted the coffers of a 501(c)(4) social welfare organization called the Wellspring Committee, the hub of a complex dark money network that OpenSecrets Blog, in partnership with NPR, wrote about in 2013. The report showed that, for years, money flowed into Wellspring before being doled out to a set of politically active nonprofits, many of which engaged in direct or indirect electioneering in races on the state and federal levels.

At the time, Rosebush was not recognized by the IRS. But the documents show it had been seeking an exemption since April 2012; in December 2013, the agency rejected the request.

In doing so, the IRS raised a number of concerns about the group. Foremost was the fact that Rosebush described its social welfare function as “making contributions to other like-minded Section 501(c)(4) organizations.” As the IRS pointed out, “making a grant only promotes social welfare if the recipient of the funds uses the proceeds to promote social welfare.” The IRS said it was “unable to determine” whether the funds Rosebush distributed were used for social welfare purposes, in part because Rosebush didn’t present any documentation to that effect.

The question was particularly relevant in Rosebush’s case because of the AJS grant, reported here for the first time. AJS is a 501(c)(6) trade association, not a social welfare group. The grant — which left Rosebush tied with Crossroads GPS as AJS’ most generous known benefactors in 2012 — made up 78 percent of Rosebush’s 2012 expenditures and 56 percent of its total $3.6 million expenditures over three years.

Trade associations like AJS, the IRS pointed out, “have the exempt purpose of promoting common business interests for their members; they do not have the exempt purpose of promoting social welfare.” It’s not impossible for a trade group to use funds received from a social welfare organization for activities that fit both missions, but the IRS was concerned that Rosebush “had no formal written grant agreement with [AJS] requiring it use the grant proceeds for specific activities or projects that promote social welfare” nor did Rosebush “receive any reports from [AJS] describing how it used the proceeds.”

The questions seemed apt, since AJS has been one of the most politically active nonprofits in the country, and politics does not qualify as social welfare. For more than 17 years, it has spent heavily in elections around the country, leading to scandals in Alaska and California, all without revealing its donors. AJS’ revenues ebb and flow from election year to off year, and those gyrations have grown more marked in the post-Citizens United era.

Other substantial Rosebush grantees aren’t strangers to the political arena, either. In 2011, Rosebush directed $750,000 — 67 percent of its total expenditures that year — to Americans for Limited Government, a 501(c)(4) linked to the libertarian real estate developer Howard Rich in Rosebush’s home city of Philadelphia. The Rosebush grant amounted to more than 90 percent of ALG’s revenues that year.

In a letter, ALG explained that the funds were used for “choice in education options,” mostly in 2012. Another Rosebush grantee, Legislative Education Action Drive or LEAD, is also headed by Howard Rich and focuses on “the debate on choice in education by providing citizens the information and resources to advocate for meaningful reform.” LEAD got $300,000 from Rosebush and $170,000 from ALG in 2012 — the two grants making up 89 percent of the group’s revenues that year. Most of LEAD’s expenditures that year went towards grants to two other groups, one of which, Young Conservatives of Pennsylvania, was also a Rosebush grantee. The other grantee, which received $200,000 from LEAD, was a group called Citizens in Charge, run by operatives who sit on the boards of Rich’s other organizations.

The IRS made no mention of this churning of funds — a signature of Howard Rich’s operations — or Rosebush’s role in it.

In 2010, ALG spent more than $1 million on that year’s midterm elections — all against Democrats — and the year following Rosebush’s contribution, ALG would go on to be the largest donor to a conservative super PAC called Now or Never PAC.

In fact, Rosebush itself gave $200,000 to super PACs. That was something the IRS did raise concerns about, since super PACs are by their nature political.

The tax agency also had questions about the fact that Rosebush is “governed by a single individual who is both your director and treasurer.” That would be Brian Sullivan, the only human linked directly to Rosebush by name. The IRS pointed out that Rosebush doesn’t “have a paid staff” and its “governing body has no other formal members.”



In 2013, Rosebush spent no money, according to a form 990 filed last July, because it was waiting to sort out its status with the IRS. That doesn’t mean that Sullivan sat on the sidelines, though. He started another (c)(4) with precisely the same mission statement as Rosebush’s; he called the new group Green Orchard. As the Center for Public Integrity reported last October, Green Orchard has been used to convey hundreds of thousands of dollars to super PACs and 501(c) organizations since 2013, all in the name of a purpose identical to Rosebush’s.

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Lowering the bar

What are the consequences of denying exempt status to a group that’s already operating? Very little, really: The organization in question is simply required to pay taxes on its revenue. The IRS told Rosebush that it does “not qualify for exemption as an organization described in Section 501(c)(4) and…must file federal income tax returns.”

Even that doesn’t happen often. Denials are exceedingly rare: Less than 0.25 percent of 501(c)(4) applicants are denied, according to an extensive report by the Center for Public Integrity last summer. And even when a denial is imminent, the IRS often warns the applicant beforehand so it can withdraw its paperwork prior to receiving the rejection.

None of the 501(c) organizations with the most reported political spending over the last three election cycles were denied exempt status, or had their status revoked. One smaller group, a liberal 501(c)(4) called Arkansans for Common Sense, was denied in 2013 for having a primary purpose that the IRS described as “the participation in a political campaign on behalf of or in opposition to a candidate for public office.”

One of the largest political spenders over the last few elections — a conservative group that spent more than all liberal dark money organizations combined in both the 2010 and 2012 elections — is Crossroads GPS, which applied for exempt status in 2010. It has yet to receive the green light, according to IRS data, and was even slated for denial when the IRS scandal broke. However, GPS is still in operation, spending $26 million on direct political advocacy in 2014.

Most of the time, organizations’ exemption applications are approved. Even a group that had spent the majority of its funds over multiple years on direct political activity and engaged in “campaign money laundering” was granted an exemption, as we have reported, despite the fact that the group — Americans for Responsible Leadership, which is linked to then-Koch money man Sean Noble — said it had no intentions of changing its activities in the future. Another Koch-backed group, Citizens Awareness Project, was given an exemption despite having only two donors and spending a large share of its funds directly on politics. Yet another group, a liberal nonprofit called American Bridge 21st Century Foundation that specializes in doing opposition research on Republican politicians, received an exemption.

How did Rosebush turn the IRS around? In a letter, Sullivan explained that Rosebush Corp. had implemented, by decree of its sole director (himself), more stringent oversight of grantee spending. In addition, he promised to go to each organization to which the group had already given money and get assurances that the funds were used properly.

That’s how Americans for Limited Government came to write that it received its $750,000 grant from Rosebush in late September 2011 and used the money over the course of the following 12 months — that is, well into the election year — for the promotion of “choice in education options.”

ALG’s own tax filings in 2011 and 2012 made no reference to such initiatives, however. In 2012, most of ALG’s spending was in the form of grants to other 501(c) groups — many of which share board members with ALG — and to a super PAC called Now or Never PAC, which received more than $2.5 million.

Rosebush’s largest grantee, Americans for Job Security, the trade association that received well over half the money Rosebush doled out over three years, sent in a form letter that was supplemented with a short note from AJS president Stephen Demaura thanking his benefactor for its “membership and support.”

“Membership” is an important term for AJS. As a 501(c)(6), AJS technically doesn’t have donors — rather, it has dues-paying members. Donors must be reported to the IRS (though not the public) in an annual 990 filing. But dues-paying members are never reported anywhere. It’s not entirely clear how the money that AJS collects as dues is substantially different from the funds that 501(c)(4) social welfare groups collect as grants, though. The organizations paying dues to AJS are frequently social welfare organizations. In 2008, about a third of AJS’ revenue, $4 million, came from two social welfare groups, the Wellspring Committee — at the time, part of the Koch donor network — and Freedom’s Watch. In 2010, Wellspring gave $346,098, and the Center to Protect Patient Rights, the new conduit for Koch cash, gave $4.8 million; their combined grants again made up about a third of the AJS haul that year.

OpenSecrets Blog research indicates that of the $14.6 million AJS is known to have received in 13 grants from 501(c)(4) organizations since 2008, only one grant, totaling $425,000, was reported to the IRS as “membership.” None were reported as “dues.”

Demaura did not respond to requests for comment on this discrepancy.

The AJS letter in support of Rosebush’s appeal made no effort to convince the IRS that the funds it received were spent on social welfare. AJS said that 15 months after Rosebush’s “membership,” it was “unable to provide the representations you request.” The money went into AJS’ general fund that was used for “our general purposes and various projects” — including a bungled injection of funds into California ballot measures and significant direct political advocacy.

Demaura wrote that “the grant was to used solely for permissible Section 501(c)(6) activities” — which is to say, not necessarily social welfare. He went on to explain that AJS is “designed to promote the ‘common business interest’ of its members,” which is the function of a 501(c)(6) trade association.

The IRS responded last August to Rosebush’s appeal by saying that it would grant the exemption if Rosebush amended its grant agreement to make more specific the need for grantees to use the funds for social welfare.

Rosebush agreed to those conditions, and after two years of correspondence with the IRS, another dark money conduit was exempt in the eyes of the IRS.

Rosebush isn’t entirely out of the woods yet. Its exemption was effective going back to Jan. 1, 2013, which means that it has not yet been cleared for activities during the time it was granting funds to Americans for Job Security. The IRS left the appeals door open for that period, though. Sullivan — who would not comment on other aspects of this story — confirmed that Rosebush is indeed pursuing an appeal and has not paid income tax on its activities before 2013.



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