Karl Rove's dark money group spent more on politics than it reported to the IRS

On its 2012 tax return, GOP strategist Karl Rove's dark money behemoth Crossroads GPS justified its status as a tax-exempt social welfare group in part by citing its grants of $35 million to other similarly aligned nonprofits. (Here's the tax return itself, which we detailed last week.)

The return, signed under penalty of perjury, specified that the grants would be used for social welfare purposes, "and not for political expenditures, consistent with the organization's tax-exempt mission."

But that's not what happened.

New tax documents, made public last Tuesday, indicate that at least $11.2 million of the grant money given to the group Americans for Tax Reform was spent on political activities expressly advocating for or against candidates. This means Crossroads spent at least $85.7 million on political activities in 2012, not the $74.5 million reported to the Internal Revenue Service. That's about 45 percent of its total expenditures.

The transaction also provides a window into one way social welfare nonprofits work around the tax code's dictate that their primary purpose cannot be influencing elections.  Grants sent from one nonprofit to another may be earmarked for social welfare purposes, but sometimes end up being used to slam or praise candidates running for office.

"They have a bad grantee here," said Marcus Owens, the former head of the IRS' Exempt Organizations division, who looked at the documents at ProPublica's request. "My question would be, 'What has Crossroads done to recover that money?' That's what the IRS would expect."

Crossroads spokesman Jonathan Collegio did not respond to questions from ProPublica about Americans for Tax Reform's use of the grant or whether Crossroads would ask for it to be refunded.

Instead, Collegio wondered whether Americans for Tax Reform could have used resources carried over from 2011 to fund the 2012 election spending, rather than money from Crossroads. "Were resources carried over from 2011?"  he asked in an email to ProPublica.

But after consulting with tax experts, ProPublica determined Americans for Tax Reform couldn't have used resources from 2011 for the political spending.

"That's called bullshit with a serving of horseshit on the side," Owens said.

Americans for Tax Reform reported a total of $10.3 million in assets in the beginning of 2012. Of those assets, $8.2 million was only available on paper, an amount due from a related charity, the Americans for Tax Reform Foundation. The rest -- $2.1 million -- was a combination of equipment, leasehold improvements, cash holdings, net accounts receivable, prepaid expenses and deferred charges. None of those amounts changed significantly by the end of 2012. In other words, the only known source for the money Americans for Tax Reform spent on politics was donations from Crossroads and others.

Collegio didn't respond to an email from ProPublica last Wednesday outlining how some of the Crossroads' grant had to have been spent on election activities.

John Kartch, the spokesman for Americans for Tax Reform, also didn't respond to ProPublica questions about the use of the Crossroads grant for politics.

Social welfare nonprofits, also known as dark money groups because they don't have to report their donors, are allowed to spend money on politics as long as their primary purpose is social welfare. The groups often count so-called issue ads that stop short of advocating for or against a candidate and grants toward that social welfare mission. Since the Supreme Court's 2010 Citizens United decision allowed corporations and unions to spend directly on election ads, these nonprofits have turned into the vehicle of choice for anonymous spending, dumping more than $254 million into the 2012 elections.

Of the 150 or so social welfare nonprofits that reported spending to the Federal Election Commission during the 2012 election cycle, Crossroads was king, the biggest anonymous spender by far. Americans for Tax Reform came in fourth, with $15.8 million.

On its 2012 tax return, made public last week, Crossroads said it gave its biggest grant, $26.4 million, to Americans for Tax Reform for "social welfare."

In the last part of 2012, Americans for Tax Reform told the FEC it spent repeatedly on ads and mailers, $15.8 million altogether on so-called "independent expenditures," mostly in the month before the election, opposing Democrats and supporting Republicans running for Congress. (Independent expenditures tell people they should vote for or against a certain candidate.) Most of that money, more than $10.7 million, was for media buys, to purchase air time on TV and radio for various ads. More than $1.6 million went to designing, producing and sending mailers. Most of the rest of the money went to ad production and phone banks. (Hereare some examples of those ads.)

Americans for Tax Reform told the IRS in its tax return, obtained and made public by the watchdog group Citizens for Responsibility and Ethics in Washington (CREW), that it raised and spent about $31 million in 2012. Since the group got $26.4 million from Crossroads, only $4.6 million of its revenue came from other donors. At least $11.2 million of Crossroads money had to go toward the political ads reported to the FEC.

That means Americans for Tax Reform spent about 51 percent of its money on political ads reported to the FEC in 2012.

But the group also told the IRS on its tax return, signed under penalty of perjury, that it spent only $9.8 million on direct and indirect campaign activity in 2012, defining that spending as "engaged solely in the making of independent expenditures supporting and opposing candidates for federal office."

Last Tuesday, CREW filed a complaint with the IRS and the tax division of the Department of Justice against Americans for Tax Reform and its president, Grover Norquist, alleging they deliberately provided false information to the IRS in the tax filing.

ProPublica and others have documented how such groups often minimize their political spending to the IRS. Although the IRS has been hesitant to establish any so-called "bright lines" for campaign activity, campaign finance and tax lawyers say independent expenditures reported to the FEC definitely qualify as political spending under the tax code.

Crossroads GPS itself counted all of its independent expenditures reported to the FEC in both 2010 and 2012 as part of its political spending reported to the IRS.

"Clearly, ads that tell people who to vote for or against are campaign intervention," said a Congressional Research Service report on IRS rules on political ads prepared for Congress in August 2012. Last summer, the IRS told social welfare nonprofits that wanted to expedite their approval that political expenditures included administrative and overhead costs, and any expenditure on printed, electronic or oral statements supporting or opposing the election or nomination of any candidate for public office.

Lloyd Hitoshi Mayer, a law professor and associate dean at the University of Notre Dame who specializes in nonprofits and campaign finance, reviewed the Americans for Tax Reform documents at the request of ProPublica and said it was possible that the group was allocating overhead or other costs differently in its tax return than in its FEC filings.

"I do not see how any reasonable allocation differences could result in such a large disparity, however," Mayer said.

Owens, the former IRS official, said it was possible that some of the media buy money reported to the FEC was later refunded by the TV stations. But even that money wouldn't account for such a large gap, he said. Owens speculated that Americans for Tax Reform might have determined that some of its ads wouldn't qualify for reporting to the IRS.

"There's just no way that could withstand scrutiny under the laws that exist," Owens said. "What you have is two documents from the same group, one for the FEC and one for the IRS, both submitted under penalty of perjury. At least one is incorrect."

Still, on Tuesday, Kartch insisted the $9.8 million figure on Americans for Tax Reform's tax form, known as a 990, was correct, while ignoring requests from ProPublica to explain how it was derived.

"The correct number to use here is the $9.8 million figure as reported on our 2012 990, not the number you cite from an FEC report," Kartch wrote. "ATR meets or exceeds the requirements of the FEC and the IRS according to their standards."

He also scoffed at the CREW complaint, saying, "This attack is political and CREW knows it is nonsense."

It's not clear how the IRS might respond to the apparent misuse of the Crossroads grant or to the fact that Americans for Tax Reform seems to have underreported its political spending.

Complaints to the IRS about the tax-exempt status of Crossroads and other political social welfare nonprofits have been made since 2010, but they are still pending. So is an earlier CREW complaint against Americans for Tax Reform for its spending in 2010. A scandal that erupted in May over the IRS targeting the applications of Tea Party and other conservative social welfare nonprofits may have also made the IRS more likely to take a hands-off approach to the groups, experts say.

"They're going to keep their heads down," Owens said.