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By Michael Feinstein. Inside/Outside. June 20, 2016

Most Santa Monicans and most Americans favor full disclosure of campaign donations for all elections. But there is a gaping loophole in the law that allows some political contributions to be hidden — and it’s being used in Santa Monica.

How does this loophole work, who is using it locally and how can it be fixed?

Under two sections of the Internal Revenue Code — 501(c)(4) and 501(c)(6) — certain politically active tax-exempt nonprofit organizations are not required to publicly disclose their donors. These non-profits can then take money from undisclosed donors and give it to a candidate committee or issue committee. However, the only thing that shows up on these committee’s campaign disclosure forms is the name of the non-profit that made the donation – not where that money originally came from.

There have been at least three recent cases where this has occurred in Santa Monica:

— Residocracy LUVE Initiative reports receiving on May 19 $5,000 from “Coalition to preserve LA  Sponsored by AIDS Healthcare Foundation” (Los Angeles, CA 90024) — whose donors have not been revealed. This funding went towards qualifying a ballot measure that will be on the Santa Monica November 2016 general election ballot.

— Save our Town sponsored by Residocracy reported receiving on Feb. 24, 2014, $4,000 from Santa Monica Coalition for a Livable City (SMCLC), a 501(c)(4), whose donors have not been revealed. This funding went towards qualifying an early 2014 referendum on a local development project, after which the City Council rescinded its approval of the project.

— Santa Monica Coalition for a Livable City Political Action Committee (not the non-profit) in filing for period July 1, 2014, to Oct. 18, 2014, reports receiving $12,500 on Sept. 22, 2014, from Santa Monica Coalition for a Livable City (the non-profit.) This money was then included with other funds and to spend $9,183 to support three Council candidates (two were elected) and $9,408 to oppose another (who was elected nevertheless).

That means the public’s right-to-know is being circumvented, and incredibly, it’s legal. But is it ethical? And how did we get this loophole?

Should hidden political donations be tax-exempt?

As far back as 1913, there has been a “social-welfare non-profit” exemption in the Internal Revenue Service (IRS) tax code. The Tariff Act of 1913 exempted “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.”

In 1954, Congress kept this definition as is, while undertaking a major revision to much of the rest of the Internal Revenue Code.

But then a strange thing happened. Without any amendment by Congress, in 1959 upon an administrative basis, the Internal Revenue Service (IRS) decided to interpret “exclusively” to mean “primarily.” Really.

As a result of that decision, our tax code gives donor anonymity (and tax-exempt status!) to organizations that engage directly in electoral politics. That means donors who want to make secret contributions to a political campaign without disclosing their identity or contribution can get a tax break – as if they had donated to a charity – while at the same time their money is secretly funneled into supporting or opposing a candidate or ballot measure. In other words, not only are these donors able to hide their donations from the rest of us and avoid all transparency, but we have to pay for it with our own taxes, to make up for the tax break they get rewarding their secret donations.

During the 2012 election cycle — the last time the presidency was at stake — dark money groups pumped approximately $300 million into political messages that called for the election or defeat of federal candidates, according to the Center for Responsive Politics; with hundreds of millions more spent on political advertisements that focused more on issues. The most notable example? Americans for Prosperity, the nonprofit of the conservative billionaire brothers Charles and David Koch.

A federal fix to dark money in politics

What would happen if the IRS just reversed their decision? Virtually all current 501(c)(4) organizations would become taxable, and be required to disclose their donors. It would instantly cleanup much of the dark money most Americans oppose.

Why then doesn’t the IRS reverse its decision? The IRS Commissioner reports to the Deputy Secretary of the Treasury. Hence, the President, the Treasury Secretary or the Deputy Secretary all have the authority to instruct the Commissioner on matters of policy. Yet the Obama administration has done nothing to address this issue in its seven and a half years in office. The reality is that there are deep and powerful vested interests that benefit from this status quo, as it enables them to make dark money contributions to support candidates in both ‘major’ parties – and those parties then benefit in return.

Here in California, the Green Party is updating its campaign finance reform platform to address this issue. The party’s proposed new plank calls for Congress to amend the Internal Revenue Code “to unequivocally define that such organizations must operate exclusively for the promotion of social welfare and that no Federal agency, including the IRS, may interpret this to mean otherwise, including by redefining ‘exclusively’ as ‘primarily’, and that any such past interpretations be rendered invalid and void going forward.”

Wouldn’t it be refreshing if we heard this debate in Washington, D.C.? We would, if we had a true multi-party democracy (with elections from multi-seat districts by proportional representation), because in that scenario there would already likely be Greens elected in Congress who would have already introduced said legislation. And what if we had publicly-funded and operated presidential debates that included all candidates appearing on enough ballots to win the presidency — instead of the tax-exempt Commission on Presidential Debates (run by nationally prominent Democrats and Republicans and designed to exclude independent voices)? Then presumptive Green presidential nominee Jill Stein could directly challenge Hillary Clinton and Donald Trump on this question this fall, in front of a national television audience.

Taking a local ‘No Dark Money’ pledge

But back here on the ranch in Santa Monica — we don’t have to wait for Congress or the IRS to act. We could voluntarily commit to not taking dark money in our own local elections.

With all the recent local desire for more transparency — lobbyist disclosure reform, potentially updating the local Oaks Initiative (to more clearly address potential conflicts of interest by public officials) — shouldn’t we also be asking the same of organizations seeking to influence our local elections?

We can ask, we should — and I’m doing that here. I’m asking that any organization that could legally accept dark money to influence our local elections this fall, to publicly declare now that they will not do so — and any that has already taken such money, to give it back.

If your organization will take this No Dark Money Pledge, you can email me at — or make such a declaration publicly — and I’ll publicize it here.

I will also be publicizing all such organizations that do take such dark money donations this fall. It’s the voters right to know.

Michael Feinstein is a former Santa Monica Mayor (2000-2002) and City Councilmember (1996-2004) .  He can be reached via Twitter @mikefeinstein

Inside/Outside‘ is a periodic column about civic affairs Feinstein writes for the Daily Press, that takes advantage of his experience inside and outside of government.