The rise of politically-active nonprofits – deemed “dark money” groups by their critics – has been a hot-button issue in the last few election cycles. Election laws generally do not require groups operating under section 501(c)(4) of the tax code, commonly referred to as social welfare organizations, to register as political committees or disclose their donors – even when they spend large amounts on election ads. Critics complain that current laws should be applied (or, if necessary, rewritten) to force these groups to be more transparent about their election-related activities, and charge that 501(c)(4)s have sometimes been used as conduits for donors who want to contribute anonymously to PACs and ballot committees.
In the last few years, some states have strengthened their disclosure laws to reach political activity by 501(c)(4) groups and others have ramped up enforcement. The latest effort comes from Massachusetts, where the election board recently settled charges with Families for Excellent Schools (FESA), alleging that the group donated millions of dollars in contributions to a registered political committee advocating for passage of a referendum on charter schools without disclosing the source of its funding. FESA paid a fine of over $425,000, agreed to dissolve, and publicly disclosed its donors. FESA’s charitable arm, a 501(c)(3), also agreed not to fundraise or participate in any Massachusetts referendum or other election-related activity for four years.
The state’s case arose from a review of the Massachusetts ballot committee’s records. In investigating FESA’s own records, auditors allegedly found a pattern of large contributions to FESA, closely followed by contributions in similar amounts from FESA to the ballot committee. The settlement also noted that contributions to FESA spiked in the run-up to the election, which the board argued showed that FESA was soliciting contributions with the intent to pass them on to the ballot committee. FESA accepted these allegations for purposes of settlement, but contended that it complied with state law, and did not earmark or take direction from donors concerning the way it would use a specific donation.
This settlement should serve as a potent warning to politically-active nonprofits and their donors, and is similar to others we have written about in California and Washington. We expect that auditors and investigators will continue to look for contribution patterns that suggest a 501(c)(4) is being used as a conduit to make contributions to Super PACs and ballot committees in a way that should require the 501(c)(4) to disclose its contributors. Couching donations as “unrestricted” or “general purpose” grants may not be enough to avoid penalties and other sanctions, or to shield the names of campaign donors from the public.