Journalism in the Public Interest

Could Corporations Take Tax Breaks on Political ‘Dark Money’?

Businesses may be able to use undisclosed, unlimited donations to save on their taxes.

BRENDAN SMIALOWSKI/AFP/Getty Images file photo

The Supreme Court’s 2010 Citizens United decision opened the way for unlimited corporate spending on politics and has led to the proliferation of nonprofit political groups that do not have to disclose the identities of their donors. But corporations may be getting another benefit from anonymous donations to these groups: a break on their taxes.

It all starts with the so-called social welfare groups that have become bigger players in the political world in the wake of Citizens United, which knocked down restrictions on campaign activity by such groups.

Tax experts say it's possible that businesses are using an aggressive interpretation of the law to wring a tax advantage out of their donations to these groups.

It’s almost impossible to know whether that’s happening, partly because the groups — also known by their IRS designation as 501(c)(4)s — aren’t required to disclose their donors. (That’s why the contributions have been dubbed “dark money.”)

This state of affairs is not entirely new; social welfare groups have long been involved in politics. In 2000, for example, the NAACP National Voter Fund, which is a social welfare group, ran hard-hitting ads just days before the election criticizing George W. Bush for his opposition to hate-crime legislation. What’s new is the scale of such groups' election involvement, which has expanded dramatically in the wake of Citizens United and helped feed the increasing flood of money in elections.

The most prominent of a new crop of these groups is the Karl Rove-affiliated Crossroads GPS, which raised $43 million for the 2010 midterm elections and is expected to become an even bigger force this year. It has pledged to raise and spend $300 million with its sister super PAC, American Crossroads. Democrats also are expanding their use of these groups, led by the pro-Obama Priorities USA, which raised $2 million last year.

Precisely because they offer anonymity, such groups may be attractive vehicles for companies that want to spend money electing a favored candidate or pushing an issue. In 2010, Target generated a national backlash after giving $100,000 to a Minnesota group that ran ads supporting a candidate who opposed gay marriage. Liberal activists seized on the donation after it was revealed in state filings. If Target — or any other public or private corporation — gave to Crossroads GPS or Priorities USA, the public would never know.

Companies also may be deducting from their taxes the undisclosed donations to these groups.

"There has always been this suspicion, but I can't prove it," says Frances Hill, a tax law professor at the University of Miami who first floated the concept in a brief mention in The New York Times earlier this month. “It could be put into the advertising budgets, which for many companies are very large dollar amounts."

This is where the aggressive interpretation of the tax code would come into play.

Corporations are allowed wide latitude in deducting business expenses from their taxes — everything from workers’ salaries to marketing expenses of all kinds. But one thing they’re explicitly barred from deducting is political expenditures.

As the law puts it, companies are not allowed to deduct money spent on “intervention in any political campaign” or “any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums.”

But tax experts say a company could argue that money given to “social welfare” groups isn’t political spending at all and that the donations are instead “ordinary and necessary” business expenses.

The company might argue, for example, that ads by a social welfare group would favorably influence opinion on a public policy issue that affects the company’s business. Thus, say, an oil company would claim a business expense deduction on a donation to a social welfare group that was running ads criticizing President Obama’s policies on domestic drilling.

The company also would have to argue that the money wasn’t being used by the groups on political expenditures. So, it comes down to where the IRS draws the line on defining a political expenditure, and whether ads run by such groups as Crossroads GPS or Priorities USA cross the line.

Defining a political expenditure is a matter of intense dispute. The IRS has historically looked at various factors in assessing nonprofit spending, such as whether an ad mentions a candidate for public office or is aired close to an election. But wiggle room remains.

"It's a smell test,” says Lloyd Hitoshi Mayer, a Notre Dame professor who specializes in election and tax law. Donor corporations’ lawyers “could take the position that unless an ad is express advocacy, it's not across the line for tax purposes." Under this argument, an ad praising Obama’s stance on foreign policy wouldn’t be classified as political unless it explicitly told viewers to “vote for Obama.”

The social welfare groups themselves also have an interest in classifying their work as issue-based or educational since they risk losing their tax status if their primary purpose is political campaign activity. Campaign-finance reformers have been pressing the IRS to crack down on the new social welfare groups that, they argue, are abusing their tax status.

"The organizations themselves may be arguing that their expenditures are not political, they are issue advocacy. If you accept that characterization, you would get a deduction,” says Marcus Owens, a partner at Caplin & Drysdale and former director of the IRS’ Exempt Organizations Division.

Crossroads GPS and Priorities USA did not respond to requests for comment about the proportion of their work that they classify as political. The proportion matters because if corporations are, in fact, deducting donations as business expenses, they cannot deduct the part of the donation that was used for political purposes.

So, where does all this leave us? If a company gave $1 million to Crossroads GPS or Priorities USA and claimed the donation was a business expense, that would be $1 million of the company’s revenue not subject to taxes. If the company was paying a 30 percent tax rate, that would mean savings of $300,000.

But this is entirely hypothetical because we can’t be sure whether this tax strategy is occurring. First, the social welfare groups don’t reveal their donors. So, we don’t know which companies to ask about the deduction issue. And if companies are taking the deduction, it would be detailed in tax returns that are confidential.

So how long are the tax returns confidential and can an IRS employee tell once they’ve left their job? Would their life be in jeopardy to be whistle blower? When I donate it clearly says NOT tax deductible. I wonder why they spend so much money to sway policy but it’s a two fold win win if saving millions with tax breaks. We gotta change this or greed will ruin this country. What if we had a law NO commercials allowed like with cigarettes no advertising Allowed. Just stump then. They’ve already got all tv news sewed up and hours and hours of pundit time of lies from Daley chatty cathys si maybe eliminating commercials the answers on grounds of causes illness of voters and harmful to children!:)

Justin Elliott

March 19, 2012, 2:40 p.m.

@Toni Tax returns are in fact confidential permanently ...

Arizona Eagletarian

March 19, 2012, 2:57 p.m.

Could they? If there’s even the remotest possibility they could come up with a rationalization for relating it to a business expense, they certainly would.

Why does ProPublica hedge on this?

Begfore you conclude on tax issue you may, with optimism, find the following root causes of problems helpful in understanding of the forth coming drastic changes.
The worshippers of non-existent kings for the greed of oil money and war weapon, drug smuggling types of businesses. Israeli leadership’s Violent policies results in more violence against innocent Israelis.
The ancient political rules for killing humans just to enjoy power in old societies, identical to the basic rules for animals in the jungles, is to change forever in the face of last few remaining dumb hereditary rulers - that are stupid enough to imagine or contemplate a war in the Middle East just for sake of clinging to the false or fake crocodile power.

Until these idiots become ousted from their safe haven the so called Royal palaces built by poors toil and money, their sponsored killers shall go unpunished because law is too lenien for heineous crimes and at the same time, minor things such as phone hacking, comments relating evaporating royal pain, insults, crown document alterations etc. or as described below matters are too big by media propaganda and highly paid idea-buying of needy law-makers with stupid certifications when so called royal tricks are about to face challenges. More stupid is the system of Prime-ministers of lands without existence of kings of uncivilized times.
It looks like idiots are making laws to control idiots for sake of protecting interests of noble idiots’ or so called Royal opportunists’ ambitions only for which the secretly style of unscrupulous trick is being carried over for thousands of years and newly emerged smaller thugs all over are following the same old trend in order to manipulate ordinary folks or average human-minds elsewhere in the global streets.

The (freedom of) Internet technology is something like a so called divine thing or evidentiary device such as one of the most reliable witness at so imagined doomsday trial (which will never take place outside this earth).


Most importantly, if there were enough selfless or financially less greedy guys in control of governments of the world, just like current US president, the truly honourable Mr. Barack Obama; they would simply pave the ways of making new laws that will allow all the legal authorities access to electronic records of any kind of each and every modern-day’s global citizens.

All the governments should have clear knowledge of the mentalities of each and everyone of global citizens.

Rude or racial Comments made out to someone are not necessarily criminal matters but definitely they reflect some ugly or racial minds.

The New generation folks understand that the Old Word: royal has a connection with old politics or religions and is one of the most racist word in the English dictionary and the attachment of the word: honour beside the names of secret manipulators or hereditary opportunists is nothing but an out of date trick that has been being used for centuries after centuries to fool the belief blind ordinary folks and create endless confusions in their minds, in the same way as the founders of religions or greatest liars of the old did. When awakened one closely looks at the deeds of those so named royals in the East or middle East,the fogs of confusion in the belief system begins to clear.

That’s why, unlike past, no assassinator like Semitic killer of Iranian scientists or similar style killers of journalists in Bangladesh or Pakistan will get their way through the loopholes of laws made by master planner: the original perpitrators that are still protected by the worn or soon to be expired Royal shields elsewhere in the world.

Solution:  “I hear al-Qaeda is spending money through large companies to influence political races.”  You’re welcome.

Toni, you’re absolutely right.  In an era of perpetual news shows that’ll cover anything remotely political and pervasive Internet, attrition-oriented campaigning (outspending your competitors) should be stopped.

You could not make up a better hypocracy/irony than this - Companies contributing to superpac/501(c)(4) with antigovernment spending message taking tax deduction/break for such contribution.  I think do as I say, not as I do is becoming an American anthem.

Even if you could access a company’s tax return, they may not accurately disclose exactly who they gave the money to in detail. 

But there may be a way to find out what corporations are deducting - or at least publicly traded corporations.  Publicly traded corps are required to submit their audited annual financial statements to the SEC.  These statements are public information and can be accessed online on the EDGAR system. 

Technically, under a relatively new accounting rule called FIN 48, corps are required to calculate an allowance amount for controversial tax positions, and to disclose what those positions are along with the related dollar amounts.  Deducting a contribution that could potentially be deemed nondeductible would definately fall under FIN 48. 

Of course that presupposes that the public accountants conducting the audit aren’t totally in their pocket, but that is the rule.

Of course the data mining effort would be monstrous, but randomly pulling a few of the usual suspects may yield something.  Happy hunting!

This article is part of an ongoing investigation:
Buying Your Vote

Buying Your Vote: Dark Money and Big Data

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