Skip to main content

I'm an official IRS whistleblower.  For the last five years I have investigated the perverse use of the US Tax Code to defeat public inquiry regarding so-called "tax-exempt, charitable organizations" created for political purposes.  

My investigation became critical this year as the most extreme version of these faux "tax-exempt charities" -- the cynically purposed 501(c)(4) "social welfare" superpacs
-- are now poised to spend hundreds of millions or even billions of right-wing dollars in an attempt to buy the 2012 general elections.

I may not have all the answers to the demise of the "social welfare" superpacs, but events are leading to disclosures and exposures that may give us some idea of how to take on these aberrations. -- Bob Jacobson

Two years ago I published in the Daily Kos and Huffington Post (see bottom of list of articles) a series of investigative exposés regarding the strange case of the USA Pavilion at the 2010 Shanghai World Expo, a little-known event literally over the horizon, beyond the ken of most Americans and the press.

I related how, through a series of schemes and collusions dating back to a 2006 Bush Cabinet meeting, a shell company -- Shanghai Expo 2010, Inc. (SE 2010 Inc.) -- was organized in 2008 by the Shanghai Consulate, the American Chamber of Commerce in Shanghai (Amcham Shanghai, a franchisee of the US Chamber of Commerce), and the giant Covington & Burling law firm.  

Funded with Chinese seed capital supplied by a Connecticut-based front business, SE 2010 Inc. was secretly authorized by the State Department to develop the USA Pavilion.  

In my complaint to the IRS, I contend that SE 2010 Inc. was in fact a money-laundering front  whose real purpose was to create a multimillion-dollar slush fund available for use in the 2010 midterm elections.  When in 2009 the real money started pouring in (ironically, raised by a naive Secretary of State Clinton), SE 2010 Inc. was hastily designated by IRS examiners -- pressured by Covington & Burlng -- as a private, tax-exempt "charitable organization."  Once that happened, SE 2010 Inc. became a black hole.  Money streamed in but no information ever came out.

The Bush Administation created SE 2010 Inc. as a so-called "501(c)(3)" tax-exempt organization to avoid Congressional and public oversight that would accompany a traditional appropriation of public funds.  Tax-exempt organizations are virtually impossible to track given the stark taxpayer-privacy provisions in the Tax Code.  I contend that the for the $70 million-plus that 75 American and Chinese multinational corporations contributed, ostensibly to build the USA Pavilion but actually destined for less savory, possibly illegal purposes.

Four years later, emboldened by the Supreme Court's infamous Citizens United decision, primarily Republican political interests are using a stripped-down version of the IRS tax-exempt charitable organization to create "social welfare" tax-exempt organizations that avoid public oversight misapplying the same IRS rules that shielded SE 2010 Inc. from public scrutiny.  My hope is that the process now bringing down SE 2010 Inc. can be applied to bring down the "social welfare" superpacs.

SE 2010 Inc. faltered almost immediately due to the unsavory personalities of the individuals chosen to run it.  So the Chinese Government stepped in, in 2009, to fund, design, and construct the USA Pavilion at a cost that may have exceeded $30 million.  (Like the initial startup gift to SE 2010 Inc., this considerably larger gift from the Chinese was never declared, a second felony violation of the Foreign Agent Registration Act, or FARA).  That was the first of many illegal activities that required the protection of the misapplied privacy protections in the Tax Code.

The bizarre pavilion that resulted resembled an auto-mall showroom.  It featured a fastfood center selling unhealthy fare, a meaningless 15-minute film extravaganza costing over $23 million to make, and an over-the-top exhibition hall stuffed to the rafters with corporate commercials.  The USA Pavilion was widely panned by critics and according to Mandarin-speaking observers, resented by millions of Chinese visitors. The disappointing aesthetics of the USA Pavilion and the blow it delivered to American public diplomacy has been documented in an acclaimed, soon to be released film by USC architecture professor and filmmaker Mina Chow, Face of a Nation.  

Of course, entertaining the Chinese masses was not what the USA Pavilion was all about.  Hosting Chinese and corporate VIPs -- a function turned over to Amcham Shanghai, a subsidiary of the US Chamber of Commerce -- was far more important to the State Department, and a great way to transfer tens of millions of dollars for that purpose without public or press oversight.  For Amcham Shanghai, the stakes were even higher:  I believe it's most important task was repatriating the tens of millions to the USA for use by its US Chamber of Commerce parent in the 2010 midterm elections, thus winning the House for the Republicans.

I'm guessing it didn't take long for Karl Rove, whose best friend Frank Lavin was de facto running the USA Pavilion, to realize that SE 2010 Inc. was a perfect prototype for 501(c)(4) "social welfare" superpacs -- unbridled, super-secret political action committees organized by billionaires.  A convenient coincidence was the US Supreme Court's decison in Citizens United authorizing the formation of superpacs.  Rove's Crossroads GPS tax-exempt superpac appeared simultaneously with these fortuitous events; others followed.

("Conventional" superpacs and tax-exempt "social welfare" organizations legally are different breeds of animal.  Superpacs are campaign funds on steroids that must report membership and other information to the Federal Election Commission; tax-exempts do all their campaign-finance raising and spending in secret.  But the press and public have conflated the terms.  Public opporbrium for "superpacs" is actually directed at the tax-exempt organizations more than the traditional superpacs so for the purposes of this article, I have expropriated the term "superpacs" and applied it to the 501(c)(4) "social welfare" tax-exempt organizations that pose the greater threat to our democracy, resulting in the label, "social welfare" superpacs.)

Americans of all political persuasions have expressed dismay at the existence of the superpacs and the threat they pose to our democracy.  So far, no one has found a way to curtail them.  

The story of SE 2010 Inc., however, reveals a critical weakness in their formation that can be exploited to kill the superpacs or at least reduce their viability and striking power.  

SE 2010 Inc. and the "social welfare" tax-exempts are very much alike.  Both are "501(c)" tax-exempt corporations within the purview of the IRS' Exempt Organizations Division.

SE 2010 Inc. is (or was -- its current whereabouts are unknown) a so-called 501(c)(3) tax-exempt corporation.  501(c)(3) tax-exempts are organized to provide specific public benefits described in the Tax Code.  These benefits can be educational, social, charitable, and so forth.  Their income is not taxable and contributions to them are tax-deductible.  Their contributors may remain anonymous.  

501(c)s they are required to file tax returns -- IRS Form 990s -- each tax year, though the penalty for not doing so is a mere $100 a day, a pittance.  SE 2010 Inc. never filed a timely or complete tax return.  Its most recent Form 990 for the tax year that would have covered its apparent roll-up and dissolution -- including the disposition of tens of millions in unspent assets -- apparently was never submitted at all.  Until recently, this was not enough to trigger an IRS examination.

What then would trigger an examination?

The "social welfare" superpacs are (501)(c)(4) tax-exempt corporations, a streamlined version of the 501(c)(3)s.   They are organized to promote "social welfare," a term virtually undefined in the Tax Code.  No messy pavilions or cookie sales for them!  Whereas 501(c)(3) tax-exempts may not participate in political advocacy (more than 20 percent of their effort), 501(c)(4) tax-exempts can and do participate without limitation in political campaigns and elections.  So long as 501(c)(4) tax-exempts stick to "causes" and partisan advocacy and do not endorse indvidual political candidates, their contributions are not limited.  Hence their ability to collect and dispense billions of dollars in pursuit of their political goals.  And while superpacs must declare their contributors, the contributors themselves can adopt fictitious names that cloak their identities.

However, with all these potential advantages, 501(c)s must receive "determinations" from the IRS that they do in fact qualify as tax-exempt and charitable organizations.  The IRS does not grant tax-exempt or "charitable organization" status.  An organization "earns" the appellation by its activities.  The IRS then determines if it fits the requirements of the Tax Code.  When it requests a determination, the organization must declare its purpose.  And it must live up to it this purpose, however strained it may be to fit the requirements of the Tax Code.

501(c)(4)s are expressly "Civic Leagues, Social Welfare Organizations, and Local Associations of Employees."  They must be engaged in "social welfare" activities primarily although they can conduct business under different rules.  The term is loosey-goosey and requires judicial review.  How about now?  

SE 2010 Inc. may have hung itself on its own petard by first pressuring IRS examiners to provide it with a determination letter when in fact it was not eligible for one and then operating in ways not in accordance with its stated purpose -- which is perjury and a felony.  Right now, the situation of those who perpetrated the SE 2010 Inc. racket (as in RICO) is very precarious.  And if it is precarious for them, there is very little to protect current "social welfare" tax-exempt abusers from retribution.  I believe that a number of forces are lining up to accomplish this very purpose, about which Citizens United has little to say.

The IRS determination process for 501(c)(4)s and the enforcement of the "social welfare" purpose declared by most to shield their campaign largesse from public scrutiny are ripe for reform -- reform that will be good for the IRS and good for the nation.  Even the Supreme Court cannot deny that the misuse of the "social welfare" appellation as it appears in the Tax Code and the IRS Tax Guide is egregious and rampant.  

Fortunately, given the rapid pace of politics, an attack on the "social welfare" tax-exempts needn't occur only at the time of their filing for determination letters.  It can occur anytime thereafter.  And should.  That the IRS has not thoroughly explicated the rules for "social welfare" activities and hasn't at this moment the resources to examine controversial activities are momentary problems.  A Democratic victory might not result in necessary reforms, but for the American social contract to be upheld, something must and I believe, will be done.  We may thank Rove and the 501(c)(4)s for stretching things so far that finally it registers with the American people how much the law -- tax law, criminal law, etc. -- benefits social criminals and not law-abiding citizens.  Then things will get interesting.

However, without waiting for reform, an immediate attack on the "social welfare" superpacs is possible now.  The method is to challenge the initial determinations provided to the 501(c)(4)s before the IRS and eventually, in the courts by filing a Form 13909 Complaint with the IRS.  Every so-called "social welfare" superpac must state its purpose to the IRS and then fulfill it.  A weak statement or one that is not lived up to in the actual operations of the "social welfare" superpac is possible grounds for a perjury conviction, the penalty for a false statement made to the IRS by the applicant superpac.

While it's unlikely that such a complaint will be considered by the IRS before the elections, let alone ruled on, the possibility that it will be ruled on, resulting in the superpac being found fraudulent and the applicants found guilty of perjury, should definitely put the brakes on the billionaires' enthusiasm to involve themselves in this potentially criminal activity.

This is the step over which SE 2010 Inc. tripped, with possibly disastrous results.  It could happen to every "social welfare" superpac.  And should.  

As for SE 2010 Inc., it seems to have disappeared from the face of the earth with tax returns unfiled and tens of millions unaccounted for.  But that's not the end of its story.  I can't identify my source, who must remain anonymous, but the SE 2010 Inc. racket and its mechanisms will soon be revealed in detail. And from that outcome we may be able to discern how best to dissemble the "social welfare" superpacs.

For an excellent recounting of the entire 501(c)(4) peril and dilemma, readers are referred to Kim Barker's excellent investigative article for ProPublica, "How Nonprofits Spend Millions on Elections and Call It Public Welfare," August 19, 2012 (updated August 24). This battle has only just begun.

Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags


More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site