Organization's Election-Related Activities Raise Questions

by Lateefah Williams*, 9/23/2008

The American Issues Project (AIP) has aired an ad in several swing states questioning Democratic presidential nominee Barack Obama's ties to a controversial professor. The group claims a single $2.9 million donation for the ad does not violate federal campaign finance laws, but many legal experts have questioned this logic and AIP's claimed status as an issue advocacy organization. The AIP ad, aired in Michigan, Ohio, Pennsylvania, and Virginia, links Obama to University of Illinois at Chicago professor William Ayers, co-founder of the Weather Underground Organization, which bombed government buildings in the 1970s. The ad is the only activity thus far by the previously unknown AIP. The ad is funded by a single donor, Harold Simmons, the Texas billionaire who funded the "Swift Boat" ads against 2004 Democratic presidential nominee John Kerry.

AIP is tax-exempt under Section 501(c)(4) of the Internal Revenue Code (IRC). According to National Public Radio, it was incorporated as Citizens for the Republic (CFTR) (also as a 501(c)(4) organization) in May 2007. CFTR changed its name to Avenger Inc. earlier in 2008. The group again changed its name, this time to the current American Issues Project, when different leadership took over. AIP assumed CFTR's 501(c)(4) tax-exempt status at that time.

Legal experts question whether the ads violate federal campaign finance law. As a 501(c)(4) organization, AIP cannot make influencing elections its "primary" purpose. Since it does not appear that AIP has engaged in any activities other than the Obama ad, it seems the group may be operating outside proper activities for a 501(c)(4) organization and be acting more like a 527 organization (where influencing elections can be the major or primary purpose of a group's activities). Ed Martin, president of AIP, told the Wall Street Journal that the group plans to engage in issue advocacy, such as lobbying or other non-electoral activities, in the future and that "part of our plan is that the issue advocacy will better fit around the time when the new Congress is coming in."

Many experts argue that the AIP ad is aimed at influencing a federal election and, as a result, Federal Election Commission (FEC) rules that apply to 527 organizations should also apply to AIP. Those rules limit contributions to $5,000 annually per contributor. If the 527 rules are enforced against AIP, Simmons' $2.9 million contribution would appear to violate that limit.

Former FEC attorney Larry Noble told the Huffington Post that "there's a question about how it's funded." However, there is an exception to this rule for "qualified nonprofit corporations" (QNCs). The U.S. Supreme Court decision in FEC v. Massachusetts Citizens for Life Inc. (MCFL) held that organizations that expressly promote "political ideas" and do not take corporate money are exempt from campaign finance contribution limits. The FEC adopted an exemption to its rules to comply with the Supreme Court decision.

AIP claims that it is a QNC and is thus exempt from the $5,000 contribution limit. However, the MCFL decision also notes that if the "major purpose" of an organization is to influence federal elections, it should be considered a political committee subject to FEC rules.

In a letter to the U.S. Department of Justice, AIP compared itself to NARAL Pro-Choice America, a 501(c)(4) organization and QNC that engages in political activities. "NARAL reported spending more than $3 million on political activities related to federal elections in 2006, more than any other of its program areas, but presumably not a majority of its expenditures," the letter said. Although the IRS has not ruled specifically on percentages, a general rule of thumb is that 501(c)(4) organizations should use at least 60 percent of their funding on issue advocacy, with the remaining 40 percent on other activities, including advocating for or against a candidate.

Allison Hayward, an Assistant Professor of Law at George Mason University, argued in a Weekly Standard article that the issue is not as clear as many believe. "AIP is a new name for an older tax-exempt group. Do the activities of its former incarnation count when assessing its present purpose? You might argue that new name equals new group. Or you might argue that the name change is immaterial." Hayward goes on to say that "[t]he FEC has attempted several times to write a 'major purpose' rule, but has never produced language that would satisfy a majority on the commission."

Any FEC investigation of AIP is not likely to be completed before the November election.