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Crossroads memo - 10/8/10

Crossroads memo - 10/8/10

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10/08/2010

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October 7, 2010

ME MORANDUM

T O: I nterested Parties

FROM: Tom Josefiak

SUBJE CT: Letters to I RS Regardi ng 501(c)(4) Compliance


Within the space of a week, two letters were sent to the Internal Revenue Service urging
the agency to investigate the activities of Section 501(c)(4) organizations and other groups,
including Crossroads Grassroots Policy Strategies (GPS). We view both letters as part of a
coordinated campaign by Democrats and their allies to create a hostile environment to dissuade
potential donors from supporting independent conservative non-profit advocacy organizations in
general, and Crossroads GPS in particular.

We are following these developments closely, and are well-aware of the IRS rules and
regulations regarding permissible political activities of Section 501(c)(4) organizations. And, as
explained in greater detail below, we are confident that Crossroads GPS is operating in complete
compliance with all applicable laws and regulations.

A Coordinated Left-of-Center Campaign

Last week, the Chairman of the Senate Finance Committee, Senator Max Baucus, sent a
letter to IRS Commissioner Doug Shulman 'request|ing| that you and your agency survey maior
501(c)(4), (c)(5), and (c)(6) organizations involved in political campaign activity to examine
whether they are operated Ior the organization`s intended tax exempt purpose and to ensure that
political campaign activity is not the organization`s primary activity.¨ The Baucus letter cited a
September 16 Time magazine article that mentioned Crossroads GPS, and media reports noted
that Crossroads GPS was among the likely targets of the letter.

Senator Baucus` letter was followed this week by a second, largely duplicative letter sent
by two pro-Democrat groups that routinely support unconstitutional restrictions on independent
political speech, Democracy 21 and the Campaign Legal Center. This second letter 'calls on the
IRS to conduct an investigation into whether Crossroads GPS . . . is operating in violation of its
tax status because it has a primary purpose of participating in political campaigns in support of,
or in opposition to, candidates for public office.¨

On the very same day that Democracy 21 and the Campaign Legal Center sent its letter to
the IRS, the liberal Center for American Progress blog ThinkProgress accused the U.S. Chamber
oI Commerce oI using 'Ioreign corporate money¨ to Iund its political advocacy a charge that
was immediately echoed by MoveOn.org, which called for a criminal investigation against the
Chamber (joined by the New York Times editorial page and Senator Al Franken). Also on the
same day, the Democratic Congressional Campaign Committee filed a complaint against a third
center-right independent advocacy group, the Commission on Hope, Growth and Opportunity,
alleging that it had violated federal election laws. And in the same week, New York City Public
Advocate Bill de Blasio announced he would continue to use his government position to conduct
a pressure campaign to deter companies from supporting political advocacy efforts.

These clearly coordinated efforts and others that are likely to follow appear to have
little to do with ensuring compliance with our tax and election laws. If they did, the individuals
and groups sponsoring them would likely have expressed concern about the hundreds of millions
of dollars spent by liberal advocacy groups to help elect Democrats in 2004, 2006 and 2008.

Yesterday, Senators Hatch and Kyl sent a letter to IRS Commissioner Shulman
expressing concern that the 'sole purpose¨ oI Senator Baucus` requested 'survey¨ 'is to chill the
legitimate exercise of First Amendment rights and intimidate Americans who wish to be part of
petitioning the government Ior redress oI their grievances.¨ Senators Hatch and Kyl requested
that the IRS develop a Iramework Ior undertaking their 'survey¨ and report back to the Senate
Finance Committee 'beIore proceeding.¨
1


Legal Background

Crossroads GPS is organized under Internal Revenue Code Section 501(c)(4) as a social
welIare organization. Accordingly. the 'primary purpose¨ oI Crossroads GPS must be activity
that advances its tax exempt function. Crossroads GPS properly serves its tax exempt social
welfare function by educating the public on, and advocating for, various legislative and policy
positions.


1
CREW responded by urging Senator Baucus to simply undertake the investigation himself. CREW Executive
Director Melanie Sloan said. 'as Chairman oI the Finance Committee. Senator Baucus can do something about this.
He does not need to punt the matter to the IRS; rather, the Finance Committee can and should immediately begin its
own investigation. The committee has the jurisdiction and authority to subpoena witnesses and documents to get a
handle on the extent of the abuse of the tax code and begin working towards a legislative solution.¨
Under IRS rules, the 'primary purpose¨ oI Crossroads GPS may not be the 'direct or
indirect participation or intervention in political campaigns on behalf of or in opposition to any
candidate Ior public oIIice.¨ II intervention in political campaigns were the primary purpose oI a
Section 501(c)(4) organization. the IRS could revoke the organization`s tax-exempt status and
impose tax penalties. However, the IRS has long recognized that the law ~does not impose a
complete ban on [political campaign] activities for section 501(c)(4) organizations¨ and that
~an organization may carry on lawful political activities and remain exempt under section
501(c)(4) as long as it is primarily engaged in activities that promote social welfare.¨ IRS
Rev. Rul. 81-95, 1981-1 C.B. 332.

The IRS has never clearly deIined how the 'primary purpose¨ oI a Section 501(c)(4)
organization should be measured. Most practitioners presume that the determination is made by
examining the percentage of spending allocated by the organization to its exempt function (i.e.,
social welfare). The most liberal approach is to require that more than half oI an organization`s
resources be allocated to its 'social welIare¨ purpose. Crossroads GPS. however. pursues a more
conservative approach, allocating much more of its 2010 resources toward its 'social welIare¨
purpose and planning a sustained advocacy eIIort in Iurtherance oI its 'social welIare¨ purpose
in 2011 and beyond.

The 'social welIare¨ activities undertaken by Crossroads GPS consist oI various Iorms oI
issue and policy advocacy, much of which does not mention candidates. The centerpiece of its
advocacy program is the '7 in `11¨ National Action Plan. a set oI legislative and policy issues
that are likely to see action as early as the post-election 'lame duck¨ session oI Congress. We
are confident that Crossroads GPS` advocacy in support of its policy agenda is not 'political
intervention.¨ The IRS deems 'political intervention¨ to consist oI 'inIluencing or attempting to
influence the selection, nomination, election, or appointment of any individual to any Federal,
State, or local public office or office in a political organization, or the election of Presidential or
Vice-Presidential electors.¨ While this phrasing borrows heavily Irom campaign Iinance law. it
does not mean 'express advocacy.¨ and the IRS uses its own ten-part 'Iacts and circumstances¨
test to determine whether a given activity is constitutes 'political intervention.¨ At the risk of
over-generalizing, the IRS test attempts to distinguish between 'campaign¨ communications and
genuine 'grassroots advocacy¨ communications.

The Democracy 21/ Campaign Legal Center Letter

While Senator Baucus` letter requested a general review oI nonproIit political activity.
the Democracy 21/Campaign Legal Center letter is aimed specifically at Crossroads GPS. We
believe it is appropriate to provide you with some preliminary responses to the charges made in
that letter.

First, some background on the submitters of the letter is necessary. Democracy 21 is not
really an organization, it is a single individual named Fred Wertheimer, a registered lobbyist who
has long been associated with liberal causes, including legal restrictions on independent political
speech, many of which have since been struck down as unconstitutional. Wertheimer previously
led Common Cause, a left-wing lobbying organization. The Campaign Legal Center (CLC) was
created for the purpose of defending the Bipartisan Campaign Reform Act of 2002 in court and
before the Federal Election Commission. In recent years, it has morphed into a general purpose
liberal campaign finance lobbying organization, and is now more or less indistinguishable from
Mr. Wertheimer`s Democracy 21 and Citizens Ior Responsibility and Ethics in Washington
(CREW). The morphing of CLC into an apparatus oI the Democratic Party`s campaign finance
agenda has occurred under the watch of Executive Director Gerry Hebert, who signed the letter
to the IRS on behalf of CLC. Mr. Hebert is a longtime Democratic Party attorney he was
general counsel to IMPAC 2000. the Democrats` national redistricting project, and represented
various Democrats in the more recent Texas redistricting litigation. Both Democracy 21 and
CLC are funded almost exclusively by private foundations, have no actual members, and claim
to be nonpartisan.

The Democracy 21/CLC letter is not a serious legal communication. Unlike the FEC, the
IRS is not obligated to respond to complaints; thus, we may never hear another word about it.
Rather, the letter was a publicity stunt provided to reporters in advance under an embargo. The
letter was then rolled out with press releases while Mr. Wertheimer was made available for
media statements. In addition to advancing the Democratic Party`s interest in disparaging
center-right independent advocacy groups like Crossroads GPS, the letter also served the
interests of both groups in maintaining their relevance and visibility after their failed efforts to
defend major provisions of BCRA in courts and to pass the so-called DISCLOSE Act. Earlier
this week, at a Common Cause conference, Wertheimer acknowledged this reality when he
'expressed hope that the explosion oI independent spending by outside groups who need not
disclose their contributions would be the scandal that triggers a public groundswell.¨
2
This letter
is clearly part oI an eIIort to Ian the Ilames oI this concocted 'scandal.¨

The essence of the 15-page Democracy 21/CLC letter is that 'the IRS needs to
investigate in this case whether the Iacts and circumstances` show that Crossroads GPS is
primarily engaged in activities which constitute political participation or intervention in political
campaigns under IRS regulations, and if it is, to find that the organization is in violation of its
section 501(c)(4) status.¨

As noted above, the 'Iacts and circumstances¨ test attempts to distinguish between
campaign communications and genuine grassroots advocacy or lobbying communications. The

2
Josh Israel. 'Campaign Finance ReIorm Advocates Face Long-Term Challenges, Center For Public Integrity,
October 6, 2010, available at http://www.publicintegrity.org/blog/entry/2501/.
Democracy 21/CLC letter refers to seven particular Crossroads GPS television advertisements,
and presumes that all seven constitute 'political intervention.¨
3
Their letter does not examine
any of the other issue related activities conducted by Crossroads GPS. Proponents of speech
restrictions, such as Democracy 21 and CLC, have insisted since the mid-1990s that there is no
such thing as a legitimate 'issue ad.¨ and that all advertisements having any reference to
candidates should be presumed to be 'Ior the purpose oI inIluencing elections.¨ Although this
extreme view has been roundly rejected by courts at every level, the Democracy 21/CLC letter
continues to rely heavily on that mindset.

The second and most significant problem with the Democracy 21/CLC letter is that it
reaches a conclusion that cannot be made, as a practical matter, at this point in time. According
to the letter, because activities of Crossroads GPS allegedly constitute 'political intervention¨
under the 'Iacts and circumstances¨ test. the 'primary purpose¨ oI Crossroads GPS is 'political
intervention.¨ which means that Crossroads GPS is in violation of its 501(c)(4) status. However,
the 'primary purpose¨ oI Crossroads GPS is not legally measurable at this point in time. As
Democracy 21 and CLC themselves write. 'The primarily engaged` test should be applied on
the basis of the activities undertaken by Crossroads GPS during calendar year 2010.¨ We agree.
However, today is October 7, which means it will be nearly three months before any external
observer could ascertain the 'primary purpose¨ oI Crossroads GPS during calendar year 2010.
Crossroads GPS anticipates being highly engaged in the issues debate during the 'lame duck¨
Session of this Congress, this year.
The Center for Competitive Politics, a highly respected campaign finance policy
organization led by former FEC chairman Brad Smith, noted. 'CLC/D21 could not possibly
know whether or not Crossroads GPS will meet the primary purpose` standard Ior this calendar
year.¨ Beth Kingsley, a well-known tax attorney who serves on an American Bar Association
exempt-organization taxation committee, echoed this view, stating yesterday that a nonprofit
organization must Iirst Iile its annual tax return (Form 990) beIore 'the IRS can really assess
what the primary purpose oI an organization was during a given tax year.¨ The Democracy
21/CLC letter should be ignored outright for this reason alone.
As noted above, Crossroads GPS is focused on advancing a specific array of legislative
and policy objectives, and although it is explicitly permitted under IRS guidance to engage in
some 'political activities.¨ it takes care to ensure that any such 'political intervention¨ does not
exceed its commitment to advocating critical national issues to promote social welfare.





3
Their letter asserts. 'The ads themselves that have been run by Crossroads GPS leave little doubt that they are
intended to influence the 2010 congressional elections and will have the eIIect oI doing so.¨
Conclusion

Both Senator Baucus` letter and the Democracy 21/CLC letter clearly appear to be part of
a larger coordinated effort to chill the First Amendment rights of center-right independent
organizations like Crossroads GPS, as well as donors who may wish to support their advocacy on
behalf of pressing national policy issues. This efIort is a crass 'Plan B¨ ironically motivated by
the Democrats` dismay over insuIIicient 'political intervention¨ activity by pro-Democrat
groups, and following in the wake of their inability to pass the DISCLOSE Act.

Since its formation, Crossroads GPS has taken its legal obligations very seriously. We
are Iully aware oI the laws and rules relevant to the organization`s operations. and are conIident
that we are, and always have been, in full compliance with our legal obligations. Please feel free
to contact me if you have any questions.

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