By Brendan Fischer on February 09, 2012

The Koch-founded Americans for Prosperity Foundation (AFP), a 501(c)(3) nonprofit "charity" prohibited from intervening in political campaigns, is spending $700,000 on ads and holding events around Wisconsin that look like appeals to re-elect Wisconsin Governor Scott Walker, who is facing a recall election. The campaigning comes as secretly-funded nonprofits are playing an increasingly important role in elections nationally.

Townhalls and "Issue" Ads

The Americans for Prosperity Foundation (AFP) says it is aiming "to help citizens separate the rhetoric from the reality on the budget reforms passed in Wisconsin last year," according to a press release from the organization. The "budget reforms" AFP is addressing include Governor Walker's limits on public sector collective bargaining as well as around $749 million in cuts from K-12 public education and other "reforms," all of which inspired months of protest in 2011 and recently led over 1 million Wisconsinites to sign petitions to recall the governor.

With a recall election almost imminent, AFP is holding "townhall" events across the state to allegedly have a "respectful discussion on why we must maintain the reforms that have saved hundreds of millions for Wisconsin taxpayers." The implication seems clear. The election of a governor other than Walker would threaten the "reforms;" his reelection would maintain them. And according to AFP, "we must maintain the reforms."

AFP is also spending $700,000 on a statewide TV ad campaign defending Walker's reforms. The minute-long ad alleges Walker ended collective bargaining "abuses" and saved the state money without any "mass layoffs." According to the National Journal, "Despite not mentioning Walker, the ad is consistent with Walker's own strategy in the lead-up to the all-but-certain recall election, which has involved launching positive TV spots that tout the results of Walker's controversial budget repair measure that curbed collective bargaining for public employees."

The current ad resembles a series AFP ran on Wisconsin TV late last year, just as Walker's opponents began collecting signatures to recall him. All of AFP's costly ad buys in the state bear a striking resemblance to Walker's "Reforms and Results" website, which itself prompted a complaint to the state elections board on grounds it was a taxpayer-funded campaign effort.

AFP Donors Kept Secret, Part of National Trend

AFP's pro-Walker activity seems to push the envelope on Internal Revenue Service (IRS) rules about nonprofit participation in elections. It also comes as nonprofit organizations -- which are not required to disclose their donors -- are playing an increasingly important role in the 2012 campaign season.

The Washington Post reports that nationally, "more than a third of the advertising tied to the presidential race has been funded by nonprofit groups that will never have to reveal their donors."

Super PACs must disclose to the Federal Elections Commission (FEC) the source of their funding by name and amount, as well as their spending on ads. Nonprofits -- groups organized under Section 501(c) of the IRS tax code -- have no such obligation. Nonprofits must file annual tax returns (which are often not available until the middle of the following year), but need not report the identities of their donors, nor do they need to get into much illuminating detail about how their funds were spent.

A narrow majority of the U.S. Supreme Court in Citizens United v. F.E.C. opened the door to unlimited donations and spending by groups other than candidate committees, and when combined with a series of other court decisions, led to a surge in secret spending beginning with the 2010 midterm elections (despite the Citizens United majority favoring disclosure).

During Wisconsin's Senate recall elections in August 2011, outside groups spent over $25 million on ads, and two-thirds of that spending escaped state and federal disclosure laws, according to the Wisconsin Democracy Campaign.*

One prominent donor to AFP is known, however: David Koch. Koch helped create and fund AFP and is the chairman of its Board of Directors. Koch is one of the richest billionaires in the world and leads the mega-corporation Koch Industries with his brother Charles. Koch Industries' PAC maxed out its donation to Walker's initial election campaign in 2010 with a total donation of $43,000. David Koch also wrote a one million dollar check to the National Governor's Association, which combined it with other funds to run ads in Wisconsin and other states to help Walker and governors like John Kasich win the state house (news that CMD helped break).

501(c)(3) vs (c)(4)

Most of the non-profits operating in the 2012 election cycle are so-called "social welfare" nonprofits organized under Section 501(c)(4) of the tax code, like the Karl Rove-affiliated Crossroads GPS. GPS raised $31.6 million in anonymous funds in 2011 and spent $20 million last summer on ads attacking President Obama, and millions more on ads criticizing members of Congress for supporting the president's programs.

501(c)(4)s can keep their donors secret but electoral politics cannot be their "primary purpose" -- which has been construed to mean that no more than half of their staff time or financial resources can be directed towards political endeavors (depending on how they report to the IRS). However, the rules on what crosses the line are murky and rarely enforced, and groups like Rove's GPS have been involved in a significant amount of activities that would ordinary people would likely consider "political."

Where 501(c)(4)s are allowed to participate in some political activity, for groups organized under Section 501(c)(3) of the tax code, there is an absolute prohibition on intervention in a candidate's campaign for political office.

The Americans for Prosperity Foundation, a 501(c)(3) "charity," is responsible for the implicitly pro-Walker ads and townhall events. Corporate or individual donations to the AFP Foundation are tax-deductible and can be written-off as charitable deductions.

In a 1983 U.S. Supreme Court case, the Court upheld restrictions on the political "speech" of a 501(c)(3) on the theory it could easily establish a 501(c)(4) and connected PAC to engage in political activity. Indeed, AFP does have a 501(c)(4) wing, Americans for Prosperity, Inc., which is allowed to participate in some political activity (and has spent $7 million running ads nationally attacking President Obama for giving loan guarantees to the solar firm Solyndra). In Wisconsin, it is unclear why AFP used its charitable 501(c)(3) arm to spread its pro-Walker message, when the 501(c)(4) arm was available to do the same in a manner that would have been slightly closer to the intent of tax laws. Conducting quasi-election activity through the 501(c)(3) may be an effort to test the limits of their tax-exempt status.

Wisconsin's recall elections, likely slated for this summer, will be closely watched and the outcome viewed as a barometer of where the country stands politically. But Wisconsin may also be a test of how far nonprofit groups like AFP groups can push the envelope on tax and election law and get away with it.

This article originally made reference to a Wisconsin campaign finance law, but upon review, that state law would not apply to the facts of this case and the reference has been deleted. 

Brendan Fischer

Brendan Fischer is CMD's General Counsel. He graduated with honors from the University of Wisconsin Law School.