CREW citizens for responsibility and ethics in washington March 8, 2011 Douglas H. Shulman Commissioner Internal Revenue Service 1111 Constitution Ave., N.W. Washington, DC 20224 Re: Complaint Against American Action Network, Ine, Dear Commissioner Shulman: Citizens for Responsibility and Ethics in Washington (“CREW”) respectfully requests an Internal Revenue Service (“IRS”) investigation into whether the American Action Network, Inc., (“AAN”), a non-profit organization exempt from taxation pursuant to section 501(¢)(4) of the Internal Revenue Code (“Code”), is operating with the primary purpose of influencing political campaigns in violation of the Code.! Despite the fact that AAN told the IRS only a minor portion of its activities would be political, AAN extensively participated in political campaigns throughout the 2010 campaign cycle, Because of the serious nature of the tax law violations, the IRS should consider revoking AAN’s tax-exempt status and/or impose appropriate excise taxes and penalties on the organization Under the law, section 501(c)(4) organizations such as AAN must be primari in the promotion of social welfare,’ which does not include “direct or indirect pa intervention in political campaigns on behalf of or in opposition to any candidate for public office.”? The Code does not state precisely what constitutes political activity, but some activities unquestionably are political, such as explicitly advocating the election or defeat of a candidate for public office.’ For other activities, the IRS currently applies a facts and circumstances test to determine whether an organization has intervened in a political campaign.’ " CREW submits this letter in licu of Form 13909; a copy is being sent to the Dallas office. 726 U.S.C. § 501(0)(4); Treas. Reg. § 1.501(¢)(4)-1(a)(2)(i) (“an organization is operated exclusively for the promotion of social welfare if itis primarily engaged in promoting in some way the common good and general welfare of the people of the community”), > Treas. Reg. § 1.501(¢)(4)-1(a)(2)(ii). While the Supreme Court’s landmark decision in Citizens United v. FEC, 130 S. Ct. 876 (2010) greatly expanded the types of political activities in which section 501(c)(4) organizations could engage, it did not alter the requirement that political activity may not be the primary activity of these organizations. * See Election Year Issues, 2002 EO CPE Text at 349, 388; see also Rev. Rul. 2004-6. 5 Rev, Rul. 2007-41 1400 Eye Street, N.W., Suite 450, Washington, D.C. 20005 | 202.408.5565 phone | 202.588.5020 fax | www.citizensforethics.org <>Douglas H. Shulman March 8, 2011 Page 2 AAN was aware that, as a section $01(¢)(4) organization, its primary activity could not be participation in political campaigns. Nevertheless, a review of AAN’s activities demonstrates that the organization’s primary activity in 2010 was sponsoring express advocacy independent expenditures and clearly political electioneering communications. AAN was established in 2009, and submitted under penalty of perjury an application for recognition under section 501(c)(4) in February 2010.° Ina lengthy statement in support of its application, AN claimed its primary purpose was to promote social welfare by advocating for a range of economic and national security policies, and that only a “minor portion” of its planned activities would be political.” Specifically, AAN identified several activities through which it planned to pursue its purported mission, including policy advocacy, citizen forums, town hall meetings, college tours, policy conferences, training programs, new media, direct lobbying, and press and public outreach.* AAN represented that while it planned to “primarily focus” on lobbying and educational efforts, a “minor portion” of its activities might be classified as political campaign intervention.’ These political activities included endorsing or criticizing proposals advanced by public officials, providing training and materials to candidates for office, and “in unusual cases” distributing candidate surveys, voter guides, and voting records of officials and candidates." AAN further told the IRS that “[iJn certain cases, and within the limits allowed by federal tax law and federal and state election laws, it may also run advertisements in support of candidates.” AAN promised to adopt appropriate internal controls to guarantee that its political activity “remains a minor activity, and does not become its primary activity.”"” AAN represented that it expected its political campaign activity to be 20 percent or less of it activity, and claimed the amount might vary from year to year."” © See Form 1024, Application for Recognition Under Section 501(a) (“AAN Form 1024”) (attached as Exhibit A). 7 See Statement in Support of Application for Tax-Exempt Status (Exhibit A to AAN Form 1024) at 1-2, 4, "Id at 2-4, ° Id. at 4. Id. "' See Statement in Support of Application for Tax-Exempt Status (Exhibit A to AN Form, 1024) at 4. "Id. at 5, 8-9. 8 Id ats.Douglas H. Shulman March 8, 2011 Page 3 In further support of its application, AAN submitted a budget for three fiscal years between July 2009 and June 2012." AAN represented its total expenses for the 2010 elect cycle would be no more than $2.4 million - $715,640 for July 2009-June 2010 and $1.68 mil for July 2010-June 2011.'* Although AAN asserted in its application that it might run political advertisements, the budget it submitted did not identify any expected expenses related to television, radio, or internet advertising.'® Based on these submissions, the IRS granted AAN’s application for section 501(c)(4) status on April 3, 2010."” The American Action Network’s Political Activity Contrary to its sworn application for tax-exempt status, AAN extensively participated in political campaigns in 2010, making political activity its major purpose, not just a minor one. As aresult, AAN violated its tax-exempt status under section 501(c)(4). While the exact amount of AAN’s total spending on political activity in 2010 cannot be ascertained from public data, it unquestionably dwarfed the organization’ total planned expenditures of $2.4 million for the entire 2010 campaign cycle. In fact, within days of receiving the IRS’s approval of AAN’s section 501(c)(4) status, the organization acknowledged it planned far greater political activity in 2010 than it represented on its application. AN Chief Executive Officer (and former Minnesota Republican Senator) Norm Coleman publicly announced the group hoped to be active in 8-10 Senate races and 25 House races in 2010, and AAN reportedly sought to raise $25 million to fund a political advertising “blitz.”"* Days before the November ¥ See Statement of Revenue and Expenses (Exhibit C to AN Form 1024). 'S Jd. AAN further projected its total expenditures for July 2011 through June 2012 would be $1.73 million, 1d ' Jd. For each of these three years, more than half of AAN’s expenses were to be consumed by compensation of officers and directors, and other salaries. Jd. AAN further represented that the bulk of this compensation was to be paid to chief executive officer Norm Coleman ($250,000 per year) and president Rob Collins ($200,000 per year). See Officers and Directors (Exhibit B to ‘AN Form 1024), 7 See Letter from the IRS to AAN, April 3, 2010 (attached as Exhibit B). ' See Peter H. Stone, Party Allies Raising Millions, National Journal, April 16, 2010 (attached as Exhibit C).Douglas H. Shulman Match 8, 2011 Page 4 2010 election AN president Rob Collins predicted the organization would meet its $25 million fundraising goal.” Based on reports submitted to the Federal Election Commission (“FEC”) of its independent expenditures and electioneering communications, AAN spent at least $18 million on political campaigns in 2010. Specifically, AN spent more than $4 million on independent expenditures expressly advocating the election or defeat of candidates for public office, and at least $14 million on electioneering communications - advertisements that mention a candidate by name close to an election.*® AAN’s independent expenditures included $850,000 to broadcast advertisements against Bill Keating, a Democrat running for a House seat in Massachusetts, and millions more for advertisements against Sen. Russ Feingold (D-WN, and congressional candidates Bryan Lentz, (D-PA), Dan Seals (D-IL), and Chad Causey (D-AR)." AAN also intervened in the New Hampshire Senate race between Democrat Paul Hodes and Republican Kelly Ayotte, sponsoring a website that asked for signatures on a petition to “help send Hodes packing” and spending more than half a million dollars on television, radio, and internet advertisements calling Hodes “unaffordable.” As independent expenditures reported to the FEC, these activities unquestionably represent participation in political campaigns. ‘The more than $14 million AAN spent on electioneering communications reported to the FEC also constitutes political activity. While these advertisements stop short of expressly advocating the election or defeat of candidates, they represent political campaign intervention under IRS authority. In Revenue Ruling 2007-41, the IRS promulgated guidance on the ° See Jason Horowitz, Money Makes his World Go Round, Washington Post, October 25, 2010 (attached as Exhibit D) » See ltip://query.nictusa.com/cgi-bin/fecimg/?C90011230 (FEC reports of independent expenditures); http://query.nictusa,comyegi-bin/fecimg/?C30001648 (FEC reports of electioneering communications). See also Sunlight Foundation, Follow the Unlimited Money, American Action Network, Inc. (summarizing independent expenditures) (attached as Exhibit E); Sunlight Foundation, Follow the Unlimited Money, American Action Network (summarizing electioneering communications) (attached as Exhibit F). 7! See Sunlight Foundation, Follow the Unlimited Money, American Action Network. Inc, The advertisements AN broadcast can be seen on the YouTube Channel the organization established. See hitp://www.youtube.com/user/AmericanActNet ® See www hodesmustgo.com. ® See hitp://www.youtube.com/user/AmericanActNet#p/u/5S/wao0p8ugflE.Douglas H. Shulman March 8, 2011 Page 5 distinction between issue advocacy and political campaign intervention.” The IRS takes into consideration all the facts and circumstances of a particular communication, and identified the key factors as: (1) whether the statement identifies one or more candidates; (2) whether the statement expresses approval or disapproval for a candidate’s position; (3) whether the statement is delivered close to an election; (4) whether the statement makes reference to voting or an election; (5) whether the issue addressed has been raised as an issue distinguishing candidates for an office; (6) whether the communication is part of an ongoing series of communications by the organization on the issue that are made independent of the timing of any election; and (7) whether the timing of the communication is related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder running in an election.”* Applying these factors, nearly all of the advertisements AN broadcast in 2010 constitute political campaign participation. For example, starting on October 22, 2010, AAN spent $725,000 broadcasting an advertisement against Rep. Ed Perlmutter (D-CO) expressing disbelief that “convicted rapists can get Viagra paid for by the new health care bill.” Noting Rep. Perlmutter had voted for the legislation, the advertisement encouraged viewers to “tell Congressman Perlmutter vote for repeal in November” and to “vote yes on H.R. 4903.”"” ‘The advertisement identified Rep. Perlmutter, expressed disapproval for his position on the health care bill, was broadcast very close to the election, does not appear to have been part of any ongoing series of communications by AAN independent of the election, and addressed an issue that distinguished Rep. Perlmutter fiom his opponent.* Moreover, the timing of the advertisements was not related to any scheduled vote on repealing health care legislation. The House went into recess at the end of September,” and no votes were scheduled on H.R. 4903 or any other bill repealing the health ® While Revenue Ruling 2007-41 addresses political activity by section 501(€)(3) organizations (which may not participate at all in political campaigns), the IRS applies the ruling’s analysis to determin ifthe activities ofa section 501(c)4) organization ae politcal, See. Franoes R Hill, Exempt Organizations in the 2008 Election: Will Wisconsin Right to Life Bring Changes?. 19 U, Fla. J.L. & Pub. Pol'y 271, 284 (2008). 5 Rev. Rul. 2007-41. ° See http://query.nictusa.com/pdt/'181/10931759181/10931759181_pdfinavpanes=0; http://www. youtube.con/user/AmericanActNet#p/u/25/V3nnl9P8eNc Id. See Ryan Frazier for Congress, Healthcare page (stating his position supporting an “Immediate Repeal of ObamaCare” which must be “a top priority” of the incoming Congress) (available at hutp://www. frazierforeolorado.com/2q=healtheareissue). ” See David M. Herszenhorn, Congress Wraps Up Session Early as Midterm Races Loom, New York Times, September 30, 2010 (attached as Exhibit G).Douglas H. Shulman March 8, 2011 Page 6 care law during November 2010 or in the remainder of the 11 1th Congress.” AAN’s reference to a vote “in November,” while ostensibly related to the legislation, appears to be a furtive reference to the upcoming election in which viewers could vote. AAN spent another $705,000 broadeasting an identical advertisement against Rep. Dina Titus (D-NV),”' $725,000 on a different advertisement also encouraging viewers to call Rep. Perlmutter “in November” and tell him to vote to repeal the health care law,” and nearly $2 million on similar electioneering communications advertisements directed at Reps. Mark Critz, (D-PA), Stephanie Herseth Sandlin (D-SD), Chris Murphy (D-CT), Mark Schauer (D-MI), and Charlie Wilson (D-OH).* Alll of these advertisements are similar to the hypothetical situation analyzed in Situation 15 of Revenue Ruling 2007-41, in which an organization broadcast an advertisement identifying an officeholder shortly before an election that was not part of an ongoing series of similar communications on the same issue, was not timed to coincide with a non-election event, and took a position on an issue that distinguished the officeholder from his or her opponent. Such advertisements, the IRS concluded, constitute political campaign intervention.” © See Library of Congress, Bill Summary and Status, 111th Congress, H.R. 4903 (attached as Exhibit H). + See http://query.nictusa.com/pdf/518/109315205 18/1093 152 http:/swww. youtube.com/user/AmericanActNetip/w4: wIQOxe. ® See hitp://query nictusa.com/pdf/170/10931541170/10931541170. wpanes=0; http://www. youtube.com/user/ American ActNetitp/w33/uph2ZbxacQI. * See hitp://query.nictusa,com/egi-bin/fecimy/?C30001648; bttp://wnw.youtube.com/user/AmericanActNet. Rev, Rul. 2007-41 % Id. Several of AAN’s electioneering communications were related to bills calling for spending, cuts and extending the Bush tax cuts. See, e.g., http//www.youtube,com/user! AmericanActNetiip/w29/NfZMm6eC8wE, (encouraging viewers to call Rep. Kurt Schrader (D- OR) and tell him to vote yes on H.R. 5542, a bill that would have cut certain discretionary spending); http://hvww.youtube.com/user/AmericanActNet#p/w/38/tbpnasWBedA (encouraging viewers to call Rep. Steve Kagen (D-WI) and tell him to vote yes on H.R. 4746, a bill that would have permanently extended the Bush tax cuts). While these issues were raised in the lame duck session that followed the election, none of the bills referenced or even the broader issues they addressed were scheduled for a vote at the time AN broadcast the advertisements. Considering all the facts and circumstances, these electioneering communications also constitute political activity.Douglas H. Shulman March 8, 2011 Page 7 AAN also classified as electioneering communication millions of dollars it spent on advertisements that did little more than call candidates “extreme” and tie them to former House Speaker Nancy Pelosi. For example, AAN spent $875,000 on an advertisement claiming that Ann Kuster, the Democratic candidate for a New Hampshire House seat, supported massive tax hikes, and asserting that “Nancy Pelosi is not extreme. Compared to Annie Kuster.” Similarly, AAN spent $225,000 on an advertisement noting that Mike Oliverio, the Democratic candidate for a West Virginia House seat, supported Mrs. Pelosi and would do whatever she told him to.” ‘These advertisements also constitute political activity. AAN’s total spending figures for 2010 are not yet available, and as a new organization AAN has no Form 990 tax returns for earlier years. Based on its spending, however, it appears participation in political campaigns was AAN’s primazy activity in 2010. AAN’s total projected expenditures for the 2010 election cycle were $2.4 million, a fraction of the $18 million or more the organization spent on political activity in 2010. While AAN’s other expenditures for 2010 cannot be ascertained from public data currently available, it does not appear the organization spent a significant amount of money on non-political issue advertising. AAN has placed on its YouTube channel nearly all of the political advertisements referenced in its FEC reports.* By contrast, very few of the other videos included on its YouTube channel could be considered non- political issue advertisements, strongly suggesting AAN did not make and broadcast more of them. In sum, considering AN told the IRS it would spend less than 20 percent of its projected $2.4 million budget on political activities, the fact that it spent at least $18 million out of an unknown total budget, suggests that statement in its application likely was untrue ‘That participation in political campaigns was AAN’s primary activity in 2010 is further underscored by AAN’s coordination of political advertisements with other outside groups and by its naked political calculations in targeting specific races where it believed it could impact the outcome. Just weeks after the IRS granted AAN section 501(¢)(4) status, AAN began, at the behest of Karl Rove and former Republican National Committee Chairman Ed Gillespie, coordinating with American Crossroads, Crossroads GPS, the U.S. Chamber of Commerce, and other outside groups seeking to influence the 2010 elections.” The groups “worked together to spend millions to take down the Democratic House majority” by targeting specific races and * See hutp://query.nictusa.com/pdt/557/10931636557/1093 1636557.pdf#navpanes=0; http://www. youtube,com/user/AmericanActNetip/u/49/0GyCvH-92iE. * See http://query nictusa.com/pdf/9 19/1093 1636919/10931636919.pdf#navpanes=0; http:/Avww. youtube.com/user/ AmericanActNeti#p/w55/F4YT4BTelvU. % See http://www. youtube.com/user/AmericanActNet, ® See Peter H. Stone, GOP Fundraiser Conclave, Under the Influence blog, April 22, 2010 {attached as Exhibit 1); Jim Rutenberg, Pro-G.O.P. Groups Prepare Big Push at End of Races, New York Times, October 25, 2010 (attached as Exhibit J).Douglas H. Shulman March 8, 2011 Page 8 deciding which organization would broadcast advertisements in a particular race.” Many of the groups, including AN, traded information in regular strategy sessions and conference calls, and divided up races to avoid duplication and put as many Democrats as possible on the defensive."! AAN President Rob Collins acknowledged the unabashed political motives of these efforts in late October, noting the groups “carpet-bombed for two months in 82 races, now it's sniper time. You're looking at the battle field and saying, ‘Where can we marginally push — where can we close a few places out?”? AAN Chairman Fred Malek similarly admitted that the organization “carefully calibrated really tight House races” in deciding where to broadcast political advertisements.” ‘The amount of money AN spent on clearly political advertisements and other political activity suggests its primary purpose in 2010 was political campaigning. The American Action Network’s Political Ti In addition to spending heavily on political advertisements against Democratic candidates and coordinating with other outside groups to target specific Democrats, AAN has extensive and strong ties to the Republican party. These include: + CEO Norm Coleman previously was a Republican senator from Minnesota and the Republican mayor of St. Paul, Minnesota. + Chairman Fred Malek previously was the national finance chairman of Senator John McCain’s presidential campaign, the campaign manager for President George H.W. Bush in 1992, and an aide and advisor to four Republican presidents.** Mr. Malek is also a significant Republican fundraiser.“ * See Jeanne Cummings, GOP Groups Coordinated Financial Firepower, Politico, November 3, 2010 (attached as Exhibit K), "' See Rutenberg, New York Times, October 25, 2010. id. ® See Kenneth P. Vogel, House is New Front for GOP Groups, Politico, October 13, 2010 (attached as Exhibit L). “ See http://americanactionnetwork.org/senator-norm-coleman-r-minn2ohpMyAdmin=yVaoFls OlaixGsCDOKevn%2Cew%2CQ9 (attached as Exhibit M) * See http://americanactionnetwork.org/frederic- Kevn%2Cgw%2CO9 (attached as Exhibit N), See Peter H. Stone, Fred Malek, Center for Public Integrity, October 4, 2010 (attached as Exhibit O). JaixGsCDiDouglas H. Shulman March 8, 2011 Page 9 + President Rob Collins previously was the chief of staff to House Majority Leader Eric Cantor (R-VA), and worked for the National Republican Senatorial Committee, the Republican National Committee (“RNC”), Sen. John Thune (R- SD), and former Sen, Chuck Hagel (R-NE).” + Board member Maria Cino previously was the president of the 2008 Republican convention, RNC deputy chairman, and executive director of the National Republican Congressional Committee.* Ms. Cino also recently ran for RNC chair.” In fact, most of AAN’s officers and directors are Republican party leaders, fundraisers, former members of Congress, and/or former aides to Republican presidents or congressional leaders.®” These close ties to Republican leaders further support the need for the IRS to conduct an investigation to confirm CREW’s conclusion that AAN’s primary purpose is political activity. Conclusion Based on the publicly available information, it appears AAN’s activities during the 2010 lection cycle were inconsistent with its tax exemption application and do no comport with its status as a section 501(c)(4) organization. Therefore, the IRS should investigate AAN and, should it find that AN has violated its tax-exempt status, take appropriate action, which may include revoking its section 501 (c)(4) status, imposing any applicable excise taxes under section 4958 for excess benefit transactions, and treating AN as a taxable corporation or as a section 527 organization. Recently, CREW and others have filed complaints with the IRS against groups that have engaged in impermissible political activity in violation of their tax exempt status.** It is VaoFlsOJaixGsCDQKevn%2 * See http://americanactionnetwork.org/president?phpMyAdmi ‘Caw%2CQ9 (attached as Exhibit P). “ See htip://americanactionnetwork.org/maria-cino?phpMyAdmin=yVaoFlsOJaixGsCD Kevn%2Cgw%2CO9 (attached as Exhibit Q). © See Jerry Zremski, Cino is Endorsed by House Speaker in her Race to Head GOP, Buffalo News, January 13, 2011 (attached as Exhibit R). * See http://americanactionnetwork.org/content/about (attached as Exhibit S); see also Officers and Directors (Exhibit B to AAN Form 1024). 5! See, e.g., Letter from CREW to the IRS, February 1, 2011 (requesting investigation of the American Future Fund, Ine. for violating its 501(c)(4) status); Letter from CREW to the IRS, October 26, 2010 (requesting investigation of Pray in Jesus Name Project for violating itsDouglas H. Shulman March 8, 2011 Page 10 imperative that the IRS investigate likely tax law violators and institute enforcement actions prior to the 2012 election season. Only vigorous enforcement by the IRS will deter other exempt organizations from violating our nation’s tax laws for political gain. ‘Thank you for your prompt attention to this matter. felanie-Sloa Executive Director Citizens for Responsibility and Ethics in Washington Enels. ce: IRS-EO Classification 501(c)() status); Letter from Campaign Legal Center and Democracy 21 to the IRS, October 5, 2010 (requesting investigation of Crossroads GPS for violating its 501(c)(4) status); Letter from ‘Americans United for Separation of Church and State to the IRS, September 30, 2010 (requesting investigation of Comerstone World Outreach for violating its 501(¢)(3) status).