Some nonprofit attorneys say the nonprofit grantees could get in trouble for not following their donors’ wishes. A state attorney general, for example, could go after such groups and the IRS could follow suit, said James Joseph, a nonprofit attorney and a partner at Arnold & Porter.
“The IRS can take away tax-exempt status if a nonprofit violates a non-tax law; so here the IRS might argue the grantee is violating state law relating to donor intent,” he wrote in an email.
Representatives of several attorneys general in states where the nonprofits are based said it’s possible their offices would look into such an issue.
“Generally speaking, we’d have concerns about a grantee organization that is alleged to have clearly violated donor intent restrictions,” Geoff Greenwood, communications director for Iowa Attorney General Tom Miller’s office, said in an email, adding that he can’t comment on whether the office is investigating or will investigate a particular organization.
Arizona Attorney General Tom Horne’s office “would likely look into it” — if a complaint was made and the reason seemed valid, and the office had the jurisdiction and resources, said Stephanie Grisham, Horne’s press secretary.
A spokesman for Washington, D.C., Attorney General Irvin Nathan declined to comment. The IRS also declined to comment on whether it would take action.
Odds are the agency won’t, Rappaport said.
“Even before the IRS scandal, they weren’t particularly aggressive. Since [then], I fear they are very reluctant to take on the harder issues of enforcement,” he said, referring to reports in 2013 that IRS officials singled out tea party and other right-leaning nonprofit groups for enhanced scrutiny.
Most nonprofits err on the side of caution, said Ronald Jacobs, a partner at Venable law firm and co-chairman of its political law practice. He said he works with trade associations that are careful to use grant money from similar groups on appropriate non-political activity such as promoting “common business interests.”
No accountability for spending?
The Center to Protect Patient Rights and Freedom Partners claimed on their tax returns — under penalty of perjury — no “direct or indirect” political activity in 2012.
Yet 70 percent of the group's $112 million in grants went to four nonprofits that spent some of their social welfare grants on politics. And more than half of Freedom Partner’s grants went to two of those nonprofits and the Center combined.
“There’s not a lot [of regulation] on how grants are counted right now” said Jacobs said about nonprofits, adding that “there’s nothing that requires the [grantor] to look at how [the money] was actually spent.”
The Center to Protect Patient Rights notes in its tax return: “The organization does not currently have procedures for monitoring the use of grant funds in the United States once grants are made.” Freedom Partners says in its tax return that it reserves the right to review how grants were spent on a case-by-case basis.
That said, the IRS may have some tools to hold grantors culpable.
“If the grantor were to discover after the fact that the grant had been used in violation of the restriction, I’d argue that the grantor would have to at least look into the possibility of trying to get the funds back from the grantee. This approach echoes similar … ‘expenditure responsibility’ rules that foundations are required to use when making [certain] grants,” John Pomeranz, an attorney with Harmon, Curran, Spielberg & Eisenberg law firm, wrote in an email.
The grantors are ultimately beholden to the IRS for the privilege of not paying taxes, said Gregory Colvin, a principal of San Francisco-based law firm Adler & Colvin. Colvin, a leader on the American Bar Association’s Exempt Organizations Committee from 1991 to 2009, said regulators “can re-characterize as political what the grantor reports on its tax return as non-political, which may have tax consequences …. The grant could become taxable at 35 percent.”
Also, if the grant’s new use bumps up the grantor’s political spending to the point that it’s the primary activity, the IRS could remove the group’s tax-exempt status and make it subject to corporate income tax.
Social welfare grants allow grantors a double benefit: They can count the money as social welfare spending, legitimizing their tax-exempt status.
Meanwhile, the money could go to politically aligned groups that might very well spend the money on politics — all the while the grantor can get a tax break and shield donors’ identities under the auspices being a social welfare nonprofit.
“Grantors do this so that they don’t have to acknowledge any amount of political activity, so they can [be assured of] retaining their 501(c) status,” Rappaport said. “It’s one part of a broad scheme to keep secret who is funding hundreds of millions of dollars of political activity. CPPR and Freedom Partners act as middlemen in this scheme, yet they’re trying to say they have no part in it.”