Clouds of Secrecy: When Politics and Nonprofits Commingle

There are numerous nonprofit organizations throughout the U.S. doing great work. Many of us are familiar with quite a few of them and have seen their good deeds in action. When someone mentions the word "nonprofit," I think of our local beach cleanup group, or the folks who helped out after a fire ripped through part of our town.

But the classification can often be much murkier. Churches are tax-exempt. The NFL was famously classified as nonprofit until 2015; it had the same 501(c)(6) classification as organizations like the American Medical Association. IKEA (yes, that IKEA, purveyors of sensibly priced furniture and meatballs) is somehow a nonprofit.

We've talked previously about how certain portions of the population have a deep-seated mistrust of nonprofit organizations. And this distrust is exacerbated by a misunderstanding of just what exactly the term "nonprofit" means. (The National Council of Nonprofits has a nice rundown of myths about nonprofits.) And these myths help fuel distrust of the system. Another area of our lives where these trust issues lurk is with politics. So when nonprofits and politics collide, a quagmire of questions can arise.

Let's take a look at three recent stories involving politics and the nonprofit world.

The Family Research Council (FRC), a right-wing think tank that has supported the overturning of Roe v. Wade and advocated for religious exemptions to civil rights laws, applied to be classified as an "association of churches" in early 2020. The IRS approved the change shortly after.

Setting aside why the IRS would approve such a change, why would the FRC want such a change? According to ProPublica:

[T]he FRC was no longer required to file a public tax return, known as a Form 990, revealing key staffer salaries, the names of board members and related organizations, large payments to independent contractors and grants the organization has made. Unlike with other charities, IRS investigators can’t initiate an audit on a church unless a high-level Treasury Department official has approved the investigation.

Transparency has become a well-hyped buzzword in the nonprofit field, but many organizations are moving in the opposite direction. For some of these organizations, a classification as a church is a way to evade scrutiny.

Chairman of the Senate Finance Committee Sheldon Whitehouse noted that “Form 990 filings provide valuable, and often the only, insight into a tax-exempt organization's income and spending." When transparency is taken out of the equation, the system can be exploited.

These days, religion and politics are massively intertwined. While rules are in place to limit political action by nonprofits, including nonprofit churches, the IRS rarely takes action against these types of organizations. From 2010 to 2017, "the IRS examined just 226 of more than 1.5 million tax-exempt organizations for political activity . . . and took additional action in just 10% of cases." So action was taken on roughly three cases a year, on average. It's effectively a rule without bite.

Last year, a newly formed nonprofit called the Marble Freedom Trust received one of the largest donations ever made to a politically focused nonprofit: approximately $1.6 billion from Barre Seid, an electronics manufacturing mogul. The donation was structured in an odd way so that the donor and recipient were able to avoid tax repercussions.

As opposed to a cash donation, the gift took the form of stock in a company that was then sold. Organizations with a 501(c)(4) classification, such as the Marble Freedom Trust, can participate in political activities. However, donors cannot deduct cash donations from their income taxes. But there is a loophole: donors can donate assets (such as stock) which can then be sold, and capital gains taxes are avoided on the sale. “These actions by the super wealthy are actually costing the American taxpayers to support the political spending of the wealthiest Americans,” said one professor of tax law.

In 2020, the 15 most active nonprofit groups aligned with Democrats had spent a total of $1.5 billion, while the 15 most active groups aligned with Republicans had spent just $900 million. This donation may trigger a shift in that dynamic. The power of a single person's money can be immense.

These types of donations are sometimes referred to as dark money. (It took some deep investigating to discover Seid was the donor.) Political nonprofits do not have to disclose their donors. The 2010 Supreme Court case Citizens United v. Federal Election Commission ushered in an era of deregulated political spending on both sides of the aisle. As with the example of political organizations seeking church status, here we see a lack of transparency as a motivating force in the nonprofit sector.

The intermingling of politics and nonprofits brings up an interesting difference between the two areas. We often hear talk of campaign finance reform. But there isn't similar talk in the nonprofit field. People react very differently when they hear about a $1 billion donation to charity than when they hear about a $1 billion donation to a super PAC. Viscerally, we know there is a profound difference. It's why we try to increase charitable donations but talk about how we need to get money out of politics. But at this point, the two intertwine so frequently that their separation would require a great deal of legal reform.

The recent budget reconciliation package, also known as the Inflation Reduction Act, provides for historic investments in environmental justice and clean energy, and addresses other environmental factors. It is an important piece of environmental legislation. However, one supposed environmental nonprofit opposed it. The website Popular Information looked into the strange story.

While other climate advocacy groups were in favor of the legislation, an organization called United for Clean Power wanted the legislation blocked, strange for a pro-climate group. As the authors looked into the organization's website and other information, they found a weird mix of contradictory messages. When Popular Information reached out to the only person formally associated with the organization, he said the reconciliation bill "may be a good start" toward combating climate issues, a statement that is in direct conflict with the organization's publicly stated position.

The organization also focused on non-environmental topics, such as purchasing ads against a Republican member of the Ohio House who was promoting legislation in favor of payday lending reform. The organization has bought ads on Breitbart and the Daily Caller, as well as strong pushes in Politico, including a homepage takeover and sponsorship of newsletters. Its support of a Green Party candidate for Oregon Senate may have helped tip the race from the Democrat to the Republican.

As we have seen with our other examples as well, when nonprofits and politics meet, things are often not as they seem.

The nonprofit designation is generally understood to denote organizations working toward the greater good. But certain rules relating to nonprofits are often used to hide information from the public. We see this in the rise of dark money and organizations seeking the protections of a church designation. And while certain rules are in place to separate the nonprofit world from the political world, the two often collide.

Any type of meaningful reform at this intersection would be difficult, as it would require action addressing both the nonprofit field and the political finance field. And even though the nonprofit field makes up approximately 6% of our country's GDP and employed 12.5 million people prior to the COVID pandemic, the legislature has been remarkably hands off, with the last major legislation dating back to 1969. (We've previously covered one piece of legislation in the pipeline, and there are other bills out there as well, but it remains to be seen if anything will become of them.)

However, while reform at a government level may not happen, individual organizations can work to ensure that they are leading by example. While there will always be certain organizations focused intensely on obfuscation, a sector-wide push for transparency can help elevate the sector as a whole. Your individual organization may not have the power of $1.6 billion behind it, but your actions as part of a positive movement can help make a difference.