Network backed by Koch brothers raised $400 million in 2012 elections outside the campaign finance system
01/06/2014 2:48 PM
01/06/2014 2:49 PM
The political network spearheaded by conservative billionaires Charles and David Koch has expanded into a far-reaching operation of unrivaled complexity, built around a maze of groups that cloaks its donors, according to an analysis of new tax returns and other documents.
The filings show that the network of politically active nonprofit groups backed by the Kochs and fellow donors in the 2012 elections financially outpaced other independent groups on the right and, on its own, matched the long-established national coalition of labor unions that serves as one of the biggest sources of support for Democrats.
The resources and the breadth of the organization make it singular in American politics: an operation conducted outside the campaign finance system, employing an array of groups aimed at stopping what its financiers view as government overreach. Members of the coalition target different constituencies but together have mounted attacks on the new health-care law, federal spending and environmental regulations.
Key players in the Koch-backed network have already begun engaging in the 2014 midterm elections, hiring new staff members to expand operations and strafing House and Senate Democrats with hard-hitting ads over their support for the Affordable Care Act.
Its funders remain largely unknown; the coalition was carefully constructed with extensive legal barriers to shield its donors.
But they have substantial firepower. Together, the 17 conservative groups that made up the network raised at least $407 million during the 2012 campaign, according to the analysis of tax returns by The Washington Post and the Center for Responsive Politics, a nonpartisan group that tracks money in politics.
A labyrinth of tax-exempt groups and limited-liability companies helps mask the sources of the money, much of which went to voter mobilization and television ads attacking President Barack Obama and congressional Democrats, according to tax filings and campaign finance reports.
The coalition surpassed the revenue of the Crossroads organizations, a super PAC and nonprofit group co-founded by GOP strategist Karl Rove that together brought in $325 million in the last cycle.
The left has its own financial muscle, of course; unions plowed roughly $400 million into national, state and local elections in 2012. A network of wealthy liberal donors organized by the group Democracy Alliance mustered about $100 million for progressive groups and super PACs in the last election cycle, according to a source familiar with the totals.
The donor network organized by the Kochs – along with funding an array of longtime pro-Republican groups such as the U.S. Chamber of Commerce, the National Rifle Association and Americans for Tax Reform – distributed money to a coalition of allied groups that share the brothers’ libertarian, free-market perspective. Each group is charged with a specialized task such as youth outreach, Latino engagement or data crunching.
The system involved roughly a dozen limited-liability companies with cryptic, alphabet-soup names such as SLAH LLC and ORRA LLC, and entities that dissolved and reappeared under different monikers.
Lloyd Hitoshi Mayer, a University of Notre Dame Law School professor who studies the tax issues of politically active nonprofits, said he has never seen a network with a similar design in the tax-exempt world.
“It is a very sophisticated and complicated structure,” said Mayer, who examined some of the groups’ tax filings. “It’s designed to make it opaque as to where the money is coming from and where the money is going. No layperson thought this up. It would only be worth it if you were spending the kind of dollars the Koch brothers are, because this was not cheap.”
Tracing the flow of the money is particularly challenging because many of the advocacy groups swapped funds back and forth. The tactic not only provides multiple layers of protection for the original donors but also allows the groups to claim they are spending the money on “social welfare” activities to qualify for 501©(4) tax-exempt status.
Such maneuvers could be sharply restricted under new regulations proposed by the Internal Revenue Service in November. The new rules seek to rein in nonprofit groups that have increasingly engaged in elections while avoiding the donor disclosure required of political committees.
It is unclear how much of the network’s funds came directly from the Kochs, who head Koch Industries, one of the largest privately held companies in the country. The brothers, who fund a host of libertarian think tanks and advocacy groups, are heralded on the right and pilloried on the left for their largess.
While the “Koch network” term has become a shorthand in political circles, the coalition is financed by a large pool of other conservative donors as well, according to people who participate in the organization.
Through a corporate spokesman, the Kochs declined to comment on what support they give.
“Koch’s involvement in political and public policy activities is at the core of fundamental liberties protected by the First Amendment to the United States Constitution,” Koch Industries spokesman Robert Tappan said in an emailed statement. “This type of activity is undertaken by individual donors and organizations on all ends of the political spectrum – on the left, the middle, and the right. In many situations, the law does not compel disclosure of donors to various causes and organizations.”
Tappan added that “Koch has been targeted repeatedly in the past by the Administration and its allies because of our real (or, in some cases, perceived) beliefs and activities concerning public policy and political issues.”
In a rare in-person interview with Forbes in late 2012, Charles Koch defended the need for venues that allow donors to give money without public disclosure, saying such groups provide protection from the kind of attacks his family and company have weathered.
“We get death threats, threats to blow up our facilities, kill our people. We get Anonymous and other groups trying to crash our IT systems,” he said, referring to the computer hacking collective. “So long as we’re in a society like that, where the president attacks us and we get threats from people in Congress, and this is pushed out and becomes part of the culture – that we are evil, so we need to be destroyed, or killed – then why force people to disclose?”
Since 2003, the Kochs have hosted twice-annual seminars with like-minded donors at which they collect pledges for groups that share their commitment to deregulation and free markets.
Jack Schuler, a Chicago health-care entrepreneur, attended one of the Kochs’ donor meetings in Beaver Creek, Colo., several years ago and has contributed about $100,000 a year to their efforts since then.
“They came across as guys who are putting a lot of their own money into it,” Schuler said. “They are pretty soft-spoken, not screamers or screechers. They provide the leadership, the staff – without the framework, I wouldn’t do it on my own.”
Many donors get involved because they “value the privacy afforded to them by giving to these entities,” said Phil Kerpen, president of American Commitment, a nonprofit free-market advocacy group that is part of the network.
“There are hundreds and hundreds of very successful and patriotic Americans that take part in the seminars,” Kerpen added. “To suggest that anything that goes through any of these entities is Charles and David Koch is very misleading. There are a significant number of donors involved.”
Much of the money that flowed through the network in the last election cycle originated with two nonprofit groups that served as de facto banks, feeding money to groups downstream, according to analysis by Center for Responsive Politics researcher Robert Maguire, who investigates politically active nonprofits.
The biggest was the Freedom Partners Chamber of Commerce, an Arlington County, Va.-based group set up in November 2011 that now functions as the major funding arm of the network, according to people familiar with the operation. The organization, whose board includes current and former Koch Industries officials, brought in nearly $256 million in its first year, “significantly more revenue than was expected,” according to its tax filing.
Nearly $150 million was in the form of dues paid by more than 200 members that belong to the organization, which is structured as a business league. An additional $105.8 million came from something called “SA Fund.”
James Davis, a spokesman for Freedom Partners, said the organization funds groups “based on whether or not they advance the common business interests of our members in promoting economic opportunity and free-market principles.”
Davis said the group has been upfront about its spending and made its tax return available online as soon as it was filed in September.
“Our members are free to disclose their affiliation if they wish,” he said. “We leave that decision with them. Unfortunately, recent IRS and other instances of intimidation and harassment of individuals and groups because of their policy beliefs and activities demonstrate why it’s important to keep such information confidential.”
According to people familiar with the network, Freedom Partners took the place of a now-defunct group based in Alexandria, Va., called TC4 Trust, which raised more than $66 million in three years before it was shuttered in June 2012, according to tax filings.
The same tax preparer – a Kansas City, Mo.-based partner in the accounting firm BKD – did the returns for Freedom Partners and TC4 Trust, as well as for nearly half the other groups in the network and for the nonprofit Charles Koch Institute.
In all, the feeder funds and the groups they financed raised an estimated $407 million in the last election cycle. That figure is a conservative one, since it does not account for the complete revenue of eight groups that have not yet filed their tax returns for the latter half of 2012.
Of the $407 million, $302 million can be traced to Freedom Partners or TC4 Trust. The sources of the rest of the money remain a mystery, but many donors in the network write checks to the individual groups, according to people familiar with the system. Some of the organizations also have additional funding streams outside the network.
Freedom Partners and TC4 Trust moved a large share of their funds through an intermediary group, the Phoenix-based Center to Protect Patient Rights (CPPR), which served as a major cash turnstile for groups on the right during the past two election cycles. It is run by political operative Sean Noble, who served as a Koch consultant in 2012.
Rather than finance CPPR directly, Freedom Partners and TC4 Trust transferred $129 million to limited-liability companies with changing names that are registered in Delaware, a state that requires corporations to disclose little about their operations: Eleventh Edition (which was renamed Corner Table and then Cactus Wren) and American Commitment (which was SDN, then became Meridian Edition).
Their relationship to CPPR was unknown until May, when the Arizona group acknowledged in amended tax filings that the LLCs were its affiliates.
Such LLCs are known as “disregarded entities,” which means that, for IRS purposes, they do not exist. Their revenue is reported on the balance sheet of their parent organization.
Tax experts said disregarded entities are typically used by nonprofits to, for example, hold a piece of real estate to shield an organization from liability.
But they also can be used to make it harder to trace the movement of funds between groups. In its final tax return, TC4 reported doling out nearly $28 million to 10 organizations with names such as POFN LLC, PRDIST LLC and TRGN LLC. Those are actually the affiliates of the groups Public Notice, Americans for Prosperity and Generation Opportunity, in that order.
The Washington Post and the Center for Responsive Politics identified the groups that make up the Koch-backed network through an analysis of tax filings, which revealed their shared DNA. Most have affiliated LLCs and also received a substantial share of their revenue from the feeder funds.
The makeup of the coalition was corroborated by people familiar with the structure who said the network is ad hoc and will not necessarily remain constant.
A key player is Americans for Prosperity, the Virginia-based advocacy organization that finances activities across the country and ran an early and relentless television ad assault against Obama during the 2012 campaign. More than $44 million of the $140 million the organization raised in that election cycle came from Koch-linked feeder funds.
Other groups in the network included the American Future Fund, a Des Moines, Iowa,-based nonprofit that poured more than $25 million into ads against Obama and congressional Democrats in 2012; Concerned Women for America, a conservative Christian women’s activist group that ran a get-out-the-vote effort aimed at young women; the Libre Initiative Trust, a Texas-based group aimed at Latinos; Generation Opportunity, which seeks to engage millennials; and Themis Trust, which houses the data used by the allied groups.
The network also distributed funds to other independent political players. In the last election, Freedom Partners and CPPR doled out millions of dollars to a wide assortment of groups on the right, including the U.S. Chamber of Commerce ($3 million), the NRA ($6.6 million), the National Federation of Independent Business ($2.5 million) and Heritage Action for America ($500,000).
Obama’s reelection prompted internal reassessments in the network, as it did among many conservative groups that had worked defeat him in 2012. But there are no signs that the coalition plans to retreat.
Rather, officials are focused on creating a more effective operation aimed at bolstering the conservative movement for the long term. Freedom Partners, which now has nearly 50 employees, is expected to bring many functions in-house and expand beyond grantmaking, according to people familiar with the plans. Groups such as CPPR are expected to play a smaller role going forward.
Others are already engaged in the 2014 fight. Americans for Prosperity is in the midst of a $20-million-plus ad blitz attacking congressional Democrats for their support of the health-care law, while the Libre Initiative has targeted Latinos with similar messages.
“We raised a lot of money and mobilized an awful lot of people, and we lost, plain and simple,” David Koch told Forbes shortly after Election Day. “We’re going to study what worked, what didn’t work, and improve our efforts in the future. We’re not going to roll over and play dead.”
Alice Crites contributed to this report.
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