Who Controls the Kochs’ Political Network? ASMI, SLAH and TOHE

Libertarian
billionaire brothers Charles and David Koch were among the first to grasp the
political potential of social welfare groups and trade associations — nonprofits
that can spend money to influence elections but don’t have to name their
donors.

The
Kochs and their allies have built up a complex network of such organizations,
which spent more than $383 million in the run-up to the 2012 election alone.

Documents
released in recent months show the Kochs have added wrinkles to their network that
even experts well versed in tax law and campaign finance say they’ve never seen
before — wrinkles that could make it harder to discern who controls each
nonprofit in the web and how it disperses its money.

A review of 2012 tax returns filed by Koch network groups shows that most have been set up as nonprofit trusts rather than not-for-profit corporations, an unusual step that reduces their public reporting requirements.

It sounds complicated and
arcane because it is. Some of the nation’s top nonprofit experts said they
could only speculate on the reasons for the network’s increasingly elaborate
setup.

“My guess is that we’re
looking at various forms of disguise — to disguise control, to disguise the flow of funds from one
entity to another,” said Gregory Colvin, a tax lawyer and campaign-finance
specialist in San Francisco who reviewed all the documents for ProPublica.

Four
other leading nonprofit experts and three conservative operatives with
knowledge of the Koch network said the most likely reason that the Kochs and
their inner circle are using this arrangement was to exert control over the
groups without saying publicly who was in charge. In particular, they said, the
Kochs likely wanted to prevent any of the groups that they help fund from going
against their wishes — as happened with the
Cato Institute, the libertarian think tank the Kochs had long supported before
they got into a dispute with its president, Ed Crane.

After
a top Cato official ridiculed Charles Koch in a 2010 New Yorker
article,
the brothers pushed to put allies on the think tank’s board. The following
year, they pressed Cato to
provide “intellectual ammunition” for their oldest politically active
nonprofit, Americans for Prosperity, Cato officials later alleged. The dispute
was settled in 2012, with the
departure of Crane and the installation of a traditional board. (Cato
previously was controlled by four private shareholders, including the Kochs, an
unusual setup for a nonprofit.)

Robert Levy, Cato’s board chairman, told
ProPublica that while he didn’t disagree with the Kochs’ aims, Cato’s leaders
were uncomfortable with serving as advocates for their political agenda.

“The Kochs had their notions about
what they wanted to focus on, and those tended to focus on intellectual
ammunition for what their political ambitions were,” Levy said in an interview
last fall. “We didn’t disagree with that, but we didn’t want to operate at the
direction of the Kochs. We’re not involved in electoral politics. We are
strictly nonpartisan.”

The Kochs have disputed the allegation that
they tried to force Cato to do their political bidding.

In this story, we define the Koch network as
including 12 nonprofits active in 2012 — 11 social welfare nonprofits and one
trade association. These nonprofits all shared the same attributes: They used
LLCs, installed Koch allies at the helm and hired the same set of lawyers. (We
did not include think tanks, foundations or other charities, nor the
like-minded groups that are funded by the Kochs.)

Officials
with Koch Industries and groups in the Koch network did not respond to calls or
written questions from ProPublica.

When
asked about his involvement with Americans for Prosperity in a rare interview
with the Wichita Business Journal last month, Charles Koch downplayed his political
activity, saying he and his brother did not have day-to-day involvement with
the group.

“Listen, if I could do
everything that’s attributed to me, I would be a very busy boy,” he told the
Journal.

Here’s what we know so far about how the Koch
network uses trusts and LLCs, as well as the advantages they may offer.

Disregarded Entities

As
of 2012,all 12 Koch network groups had offshoots known
as “disregarded entities” — LLCs that are “owned” by their parent
nonprofits and are considered part of them for tax purposes.

The
first such LLC sprang up in February 2010, when Sean Noble, the head of a Koch
network nonprofit called the Center to Protect Patient Rights, formed SDN LLC, using the
initials of his own name. (ProPublica wrote a story last
month about Noble, the Koch network’s money man in 2010 and 2012.)

Koch
network groups came to have a total of 19 disregarded entities, tax records
show; Freedom Partners Chamber of Commerce, a trade association that
distributed almost $236 million to other nonprofits in the year before the 2012
election, led the way with
five.

Unlike corporations, LLCs set
up in Delaware are not required to disclose who runs them. The only
documentation available is the name of the person who creates them. In the Koch
network, 11 of the disregarded entities were formed by the
same Chicago trust lawyer, Jonathan Graber. Most had
nonsensical strings of letters for names, like SLAH, ORRA or DAS MGR. All were set up in
Delaware.

Charities
typically use disregarded entities to protect themselves from liability. For
instance, they’ll hold property in a disregarded entity to shield the nonprofit
from lawsuits over anything from environmental pollution to slip-and-falls.

But
these LLCs appear to serve different purposes for the Koch network, experts
said.

Before
the 2012 election, two groups sat at the top of the Koch money spigot. TC4
Trust, which has since folded, and Freedom Partners, which remains on top of
the Koch pyramid, shelled out more than $204 million to the network’s 10 other
nonprofits. But instead of giving the
money directly to the nonprofits, TC4 and Freedom Partners gave those millions
to the groups’ disregarded entities.

That
made the money more difficult
to follow.

Consider
the case of the LLC with the inscrutable name of TOHE. (No, that’s not a typo.)
Records for TC4 Trust show that it gave a $1,968,500 grant to TOHE between July 2011 and June 2012.

So what’s a TOHE?

You would think you could
go to the Internal Revenue Service web site, punch in the magic letters, and
get an answer. But that’s not how it works.

Disregarded entities
cannot be searched by name because their tax returns are filed as part of their
parent nonprofit, which of course is exactly what you don’t know.

To solve the mystery, we searched
IRS databases of recognized nonprofits by the names of lawyers known to work
for the Koch network. We found one, Vets for Economic Freedom Trust, that
seemed like a possible match for TOHE. Then we requested the group’s
application from the IRS, which showed a leader, Wayne Gable, who had deep ties
to the Koch brothers, earlier serving as a managing director at Koch
Industries. But still, the application didn’t mention TOHE.

We had to wait for the
group’s tax return, filed in August 2013, to become public, which took a couple
of months. The return showed that Vets for Economic Freedom Trust was using a
different name: Concerned Veterans for America. And it showed the group’s disregarded entity: TOHE. Concerned Veterans spent most of its money on
ads criticizing the government for not doing more to help veterans vote and for the rising national debt.  

A
more recent tax filing by Freedom Partners gave the names of the
disregarded entities and their parent nonprofits when listing
grants, dispelling some of the confusion.

The Center for
Responsive Politics and The Washington Post have also written
about how the Koch network has used disregarded entities to hide the money
trail. But disregarded entities offer other advantages.

Donors
to social welfare groups and trade associations have only become public in a
handful of cases, but some corporate and individual donors still worry about
scrutiny from stockholders or the IRS. One operative told ProPublica he’d heard
a Koch network official suggest that a donor with such concerns write checks to
disregarded entities rather than to better-known nonprofits.  

“You don’t want to just create one layer of anonymity, because
that layer could be breached, maybe just by accident — you know, the memo
that’s left lying around kind of situation,” said Lloyd Hitoshi Mayer, a law professor and associate dean at the
University of Notre Dame who specializes in nonprofits and campaign finance and
who reviewed the groups’ available documents for ProPublica.

Further, while nonprofits are
required to disclose their top administrators and boards in tax filings,
disregarded entities can have separate managers who are not identified
anywhere, said Ellen Aprill, a professor at Loyola Law School in Los Angeles
who has studied politically active nonprofits. Such a manager would be able to control
how the money received by the LLC was spent.

Seven
disregarded entities in the Koch network took in more than three-quarters of the
money received by their parent nonprofits. POFN, the disregarded
entity of a nonprofit called Public Notice, for instance, brought in more than
75 percent of its parent’s $6 million in revenue from May 2011 through April
2012. POFN’s manager — whoever that may be — would control how that
money was spent, nonprofit experts said.

So
far, the Koch network’s use of disregarded entities has been unique. ProPublica
reviewed tax returns filed by more than 100 liberal and conservative nonprofits
that reported spending money on elections in 2010 and 2012. No group
unaffiliated with the Kochs had such offshoots.

Their
use might be catching on: In July 2012, the American Future Fund, a dark money
behemoth that received most of its money through the Koch network but is not
part of it, formedits own disregarded
entity, Franklin Squared.

Trusts

Social
welfare nonprofits are typically formed as not-for-profit corporations, with
boards that set their policies.

But
nine of the 12 nonprofits in the Koch network were formed as trusts — an
approach several tax experts said they had rarely, if ever, encountered. The
first was TC4 Trust, which was established in August 2009 and folded in 2012.
Eight more Koch-affiliated groups were set up as trusts in 2010 and 2011.

Trusts
are subject to little outside oversight. They don’t have to file incorporation
papers or annual reports to the state. Any documents filed with the IRS take
effort and time to get. “It
keeps it out of the public eye a little longer,” said Lawrence Katzenstein, a
lawyer in St. Louis who has formed charitable trusts.

Trust
agreements rarely have to be filed publicly, but since most of the Koch-connected
trusts have been recognized by the IRS as social welfare nonprofits, their
trust agreements are available from the agency. ProPublica examined six trust
agreements for groups that are still active.

The
trust agreements are all “irrevocable,” meaning the trustee cannot change them,
except for changing the trust’s name or anything necessary to maintain the
group’s tax-exempt status. Two of the trustees are longtime Koch insiders; a
third used to be a lawyer for the Charles G. Koch Charitable Foundation. Two other
trustees are relatively new to the Koch fold but have long conservative
pedigrees.

Despite
those credentials, the trustees can be axed at any time. Each trust agreement gives
an LLC — not a disregarded entity, but a different one with a similarly nonsensical
string of four letters for a name — power to remove the trustee for any
reason. For instance, Daniel Garza, the trustee for the LIBRE Initiative Trust, can be removed by an LLC
called THGI.

Tax
experts say that this means that someone behind that LLC can actually control
the nonprofit. “It’s someone having control, and it’s that someone going to
great lengths to avoid being known,” said lawyer Marcus Owens, who used to run
the Exempt Organizations division of the IRS.

Little
else is known about these LLCs except that they, too, were formed by Graber in
2010 and 2011 in Delaware, a state that requires virtually no disclosure.

Giving someone the power to
remove the trustee is increasingly common, said Charles Durante, a Delaware
lawyer who does work with trusts, nonprofits and LLCs. But it’s typically a
named individual, he said, not an anonymous LLC.

“That is not customarily how
people structure their trusts,” he said.

One employee of a nonprofit
with ties to the Kochs, who spoke on condition of anonymity because he feared
retribution, said the LLC arrangement fit in with the brothers’ desire to keep
a tight grip on their organizations.

“Their level of degree to
which they insist on control is truly spectacular,” he said.