An Arizona-based political organization funded almost entirely by the conservative Koch brothers—and that was fined for laundering political contributions in California—was awarded tax-exempt status by the Internal Revenue Service (IRS).

IRS rules dictate that so-called “social welfare” groups (designation 501(c)4) are not eligible for tax exemption if they spend the majority of their money on politics.

But Americans for Responsible Leadership (ARL), which last year received nearly 98% of its money from the Koch brothers’ Center to Protect Patient Rights (now called American Encore), received this status from the IRS last October, according to OpenSecrets.org.

Furthermore, the IRS approved ARL’s application for 501(c)4 status despite knowing about the group’s involvement in funneling money into two California initiative campaigns that violated state campaign finance laws.

Nearly a year before the IRS decision, the Fair Political Practices Commission (FPPC) in California fined ARL $1 million for what it said was “the largest contribution ever disclosed as campaign money laundering in California history.”

The contribution referenced by the FPPC totaled $11 million, which ARL received from the Koch-funded Center to Protect Patient Rights and then passed it on to the Small Business Action Committee, a conservative operation run by anti-tax crusader Joel Fox.

Fox’s organization spent the money during the 2012 election to oppose Proposition 30 (which eventually won, raising taxes to support California schools). Funding also was provided to support Proposition 32, which tried to prohibit union dues from supporting political activity. That measure lost.

In addition to knowing about the shenanigans in California, the IRS “also was aware that ARL had spent almost $10 million advocating for or against candidates in the 2012 elections,” OpenSecrets.org’s Viveca Novak and Robert Maguire wrote. “In fact, it knew that 77 percent of the funds the group had spent in its short life had been used either for direct political advocacy or was connected to ‘campaign money laundering.’”

And still, the IRS approved ARL’s application—on which the group promised to work towards promoting “ethics, transparency and responsible leadership” in politics.

ARL insisted it devoted less than 40% of its budget on political activity, qualifying it for the 501(c)4 status, officials claimed.

“But if the IRS had considered the true nature of the $11 million—funds that simply washed through the group's account going from one organization to another—the money ARL spent on direct political advocacy in 2012 came to more than 60 percent of its budget,” Novak and Maguire added.

At 60%, the IRS should have rejected ARL’s application to become tax exempt. But it didn’t, ARL spokesman Barrett Marson told OpenSecrets.org, because “IRS rules treat ballot initiative activity as lobbying and not political activity.”

–Noel Brinkerhoff

To Learn More:

Nonprofit's Exemption Was Granted Despite Record Fine, Big Political Spending (by Viveca Novak and Robert Maguire, OpenSecrets.org)

Sean Noble Talks about $1 Million FPPC Fine, Ties to Kochs (by Laurel Rosenhall, Sacramento Bee)

Americans for Responsible Leadership Wholly Funded by Koch-Linked Group (by Viveca Novak, OpenSecrets.org)

What Newly Released Docs Tell Us About the IRS and How It Handles Dark Money Groups (by Kim Barker and Theodoric Meyer, ProPublica)

Record FPPC Penalties and Shoddy Redacting Inconvenience Mystery Election Donors Linked to Koch Brothers (by Ken Broder, AllGov California)

Unmasked $11 Million Mystery Political Donor Group Is No Mystery to Critics but Its Members Are (by Ken Broder, AllGov California)