Learn more about dark money

How did Citizens United lead to an explosion of political dark money?

By a slim 5-4 margin, the Supreme Court held in Citizens United that corporations — including limited liability companies and certain nonprofit corporations — could bankroll overt political advertisements that called on people to vote for or against federal candidates.

While charities and foundations organized under Section 501(c)(3) of the U.S. tax code — the types of nonprofits to which you may make tax-deductible contributions — are still prohibited from engaging in electoral politics, the Citizens United ruling allowed certain other nonprofits — most notably 501(c)(4) “social welfare” organizations and 501(c)(6) trade associations — to spend heavily in elections.

Unlike political candidates, parties or political action committees, these nonprofits are generally not required to disclose their donors, meaning the public is frequently left in the dark about who is funding the ads that are trying to influence their votes.

Understanding the tax code: What is a 501(c)(4) vs. a 501(c)(6) vs. an LLC?

The main vehicles through which dark money enters elections are three groups that are often identified by their corporate structure and/or associated section of the U.S. tax code.

First, “social welfare” organizations, which are organized under Section 501(c)(4) of the tax code. By law, these organizations must be “operated exclusively for the promotion of social welfare.”

Second, trade associations, which are organized under Section 501(c)(6) of the tax code. This section encompasses business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues.

Third, limited liability companies (LLCs) may also be a source of political dark money. In most states, it’s easy to identify the actual human beings who are behind an LLC. But in some states — most notably Delaware and Wyoming — public records need not identify any living, breathing people associated with an LLC, making them tantamount to black boxes.

These three types of organizations may buy political advertisements or donate to other groups, such as super PACs, that may also buy political ads.

For dark money groups, what counts as political spending?

The Internal Revenue Service and Federal Election Commission have different definitions of what counts as political spending.

The IRS asks nonprofit organizations to detail their spending on “direct or indirect political campaign activities on behalf of or in opposition to candidates for public office.”

Meanwhile, dark money groups are required to submit reports to the FEC if their spending falls into one of three categories: 1) “independent expenditures,” 2) “electioneering communications” or 3) “communication costs.”

Each of these phrases is a legal term of art.

The term “independent expenditures” refers to spending that is not coordinated with a candidate that “expressly advocates the election or defeat of a clearly identified federal candidate.”

The term “electioneering communications” refers to targeted communications that are aired within 30 days of a primary election or 60 days of a general election that refer to a clearly identifiable federal candidate but fall short of explicitly urging voters to support or reject that candidate. By definition, only political advertisements on broadcast, cable or satellite qualify as electioneering communications, although the Honest Ads Act would extend this definition to paid political ads aired online as well.

The term “communication costs” refers to political spending by a corporation or labor union that is specifically targeted to its own stockholders or membership.

Voters may also see ads that look like political ads that might never be reported to the FEC or IRS. For instance: an ad that mentions a candidate that falls short of expressly advocating for that candidate’s election or defeat AND is aired at a point in time during which it does not qualify as an “electioneering communication.”

All the while, many lawyers argue that “electioneering communications” reported to the FEC do not necessarily qualify as “direct or indirect political campaign activities” that need to be reported to the IRS. And mystifyingly, some lawyers have even argued that certain “independent expenditures” that are reported to the FEC may not qualify as “direct or indirect political campaign activities” that need to be reported to the IRS.

Why is the FEC an ineffective cop on the beat?

On enforcement cases and rulemaking, the FEC is dysfunctional by design and continues to be an ineffective cop on the beat. What was originally envisioned as a watchdog in U.S. elections has become more gridlocked than Congress. It is the only agency of its kind in the federal government that is comprised of an equal number of Democratic and Republican commissioners. These commissioners frequently vote in partisan blocs due to deep ideological differences. Moreover, the six-member commission currently has two vacancies — meaning that if just one more commissioner leaves before new commissioners are confirmed, then the FEC will lose its quorum and ability to undertake enforcement matters altogether. The four sitting commissioners are also all currently serving on expired terms. To date, congressional leadership in both parties has expressed little interest in adding new blood to the FEC.