by Kim Barker,ProPublica.

The IRS and Treasury Department announced proposed guidelines clarifying the definition of political activities for social welfare nonprofits Tuesday afternoon, a move that could restrict the spending of the dark money groups that dumped more than $254 million of anonymous money into the 2012 elections. Read the guidelines here.

However, the guidelines, which finally define what constitutes “candidate-related political activity,” aren’t a done deal. They will take some time for public comment and debate, and more time to finalize. (The IRS asks that all comments and requests for a public hearing be submitted by Feb. 27.) Experts also cautioned that the real test of oversight on the political spending by nonprofits will be how these regulations are enforced, something that the IRS has been so far reticent to do.

The proposed regulations “are only as good as the extent of compliance with them, which history would indicate requires a realistic threat of enforcement and significant sanctions on the groups involved and probably the individuals running those groups,” said Lloyd Hitoshi Mayer, a law professor and associate dean at the University of Notre Dame who specializes in nonprofits and campaign finance.

Social welfare nonprofits are allowed to spend money on election ads without reporting their donors, as long as they can prove that social welfare — and not politics —  is their primary purpose. But the IRS guidelines for political spending have been vague. They state that the agency will apply a “facts and circumstances” test to each ad, meaning that if an ad walks and talks like a political ad, it’s a political ad.

ProPublica and others have written extensively about how many social welfare nonprofits have exploited loopholes in Federal Election Commission and IRS rules since the Supreme Court’s 2010 Citizens United ruling opened the door to unlimited election spending by corporations and nonprofits.

Some of the groups spend more than political action committees. GOP strategist Karl Rove’s group Crossroads GPS, for example, told the IRS it spent more than $74.5 million on election activities in 2012, more than any other dark money group and all but two SuperPACs, which are allowed to raise and spend unlimited amounts of money from reported donors.

The proposed regulations could dramatically change how the nonprofits spend money. The proposal defines political activity as including any expenditures reported to the FEC and any grants to other tax-exempt organizations that do candidate-related political activity. (We wrote yesterday about one such grant from Rove’s group.) Political activity would also include voter-registration drives and “get out the vote” drives  — even for nonpartisan groups. It would also include holding events featuring candidates within two months of a general election.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Mark Mazur, Treasury’s assistant secretary for tax policy, in a statement. “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

Until now, many groups have counted some ads reported to the FEC — those that stop short of telling people how to vote — toward their education mission. Some groups have also counted direct political spending reported to the FEC as part of their social welfare mission. Most nonprofits have counted grants to politically active social welfare nonprofits as part of their social welfare mission.

The regulations represent the first time the IRS has pushed back against political activity by these groups since revealing that the agency targeted the applications of conservative groups for extra review in May, kicking off a political firestorm. (Conservative groups accounted for about 85 percent of the spending by social welfare nonprofits in 2012.)

The proposed regulations appear similar to ones used by the IRS last summer for groups that wanted to expedite approval of their applications. However, the new regulations don’t propose a limit on spending, unlike last summer’s rules, which said no more than 40 percent of a group’s expenditures could be made on political activities.

If adopted, the rules would also make social welfare nonprofits operate much differently from unions and trade associations, nonprofits that are also allowed to spend money on political activity. If that happens, it’s likely trade associations like the U.S. Chamber of Commerce will become the vehicle of choice for anonymous money in politics, experts said.

Photo via Wikimedia Commons

by Kim Barker,ProPublica.

On its 2012 tax return, GOP strategist Karl Rove’s dark money behemoth Crossroads GPS justified its status as a tax-exempt social welfare group in part by citing its grants of $35 million to other similarly aligned nonprofits. (Here’s the tax return itself, which we detailed last week.)

The return, signed under penalty of perjury, specified that the grants would be used for social welfare purposes, “and not for political expenditures, consistent with the organization’s tax-exempt mission.”

But that’s not what happened.

New tax documents, made public last Tuesday, indicate that at least $11.2 million of the grant money given to the group Americans for Tax Reform was spent on political activities expressly advocating for or against candidates. This means Crossroads spent at least $85.7 million on political activities in 2012, not the $74.5 million reported to the Internal Revenue Service. That’s about 45 percent of its total expenditures.

The transaction also provides a window into one way social welfare nonprofits work around the tax code’s dictate that their primary purpose cannot be influencing elections. Grants sent from one nonprofit to another may be earmarked for social welfare purposes, but sometimes end up being used to slam or praise candidates running for office.

“They have a bad grantee here,” said Marcus Owens, the former head of the IRS’ Exempt Organizations division, who looked at the documents at ProPublica’s request. “My question would be, ‘What has Crossroads done to recover that money?’ That’s what the IRS would expect.”

Crossroads spokesman Jonathan Collegio did not respond to questions from ProPublica about Americans for Tax Reform’s use of the grant or whether Crossroads would ask for it to be refunded.

Instead, Collegio wondered whether Americans for Tax Reform could have used resources carried over from 2011 to fund the 2012 election spending, rather than money from Crossroads. “Were resources carried over from 2011?”  he asked in an email to ProPublica.

But after consulting with tax experts, ProPublica determined Americans for Tax Reform couldn’t have used resources from 2011 for the political spending.

“That’s called bullshit with a serving of horseshit on the side,” Owens said.

Americans for Tax Reform reported a total of $10.3 million in assets in the beginning of 2012. Of those assets, $8.2 million was only available on paper, an amount due from a related charity, the Americans for Tax Reform Foundation. The rest — $2.1 million — was a combination of equipment, leasehold improvements, cash holdings, net accounts receivable, prepaid expenses and deferred charges. None of those amounts changed significantly by the end of 2012. In other words, the only known source for the money Americans for Tax Reform spent on politics was donations from Crossroads and others.

Collegio didn’t respond to an email from ProPublica last Wednesday outlining how some of the Crossroads’ grant had to have been spent on election activities.

John Kartch, the spokesman for Americans for Tax Reform, also didn’t respond to ProPublica questions about the use of the Crossroads grant for politics.

Social welfare nonprofits, also known as dark money groups because they don’t have to report their donors, are allowed to spend money on politics as long as their primary purpose is social welfare. The groups often count so-called issue ads that stop short of advocating for or against a candidate and grants toward that social welfare mission. Since the Supreme Court’s 2010 Citizens United decision allowed corporations and unions to spend directly on election ads, these nonprofits have turned into the vehicle of choice for anonymous spending, dumping more than $254 million into the 2012 elections.

Of the 150 or so social welfare nonprofits that reported spending to the Federal Election Commission during the 2012 election cycle, Crossroads was king, the biggest anonymous spender by far. Americans for Tax Reform came in fourth, with $15.8 million.

On its 2012 tax return, made public last week, Crossroads said it gave its biggest grant, $26.4 million, to Americans for Tax Reform for “social welfare.”

In the last part of 2012, Americans for Tax Reform told the FEC it spent repeatedly on ads and mailers, $15.8 million altogether on so-called “independent expenditures,” mostly in the month before the election, opposing Democrats and supporting Republicans running for Congress. (Independent expenditures tell people they should vote for or against a certain candidate.) Most of that money, more than $10.7 million, was for media buys, to purchase air time on TV and radio for various ads. More than $1.6 million went to designing, producing and sending mailers. Most of the rest of the money went to ad production and phone banks. (Here are some examples of those ads.)

Americans for Tax Reform told the IRS in its tax return, obtained and made public by the watchdog group Citizens for Responsibility and Ethics in Washington (CREW), that it raised and spent about $31 million in 2012. Since the group got $26.4 million from Crossroads, only $4.6 million of its revenue came from other donors. At least $11.2 million of Crossroads money had to go toward the political ads reported to the FEC.

That means Americans for Tax Reform spent about 51 percent of its money on political ads reported to the FEC in 2012.

But the group also told the IRS on its tax return, signed under penalty of perjury, that it spent only $9.8 million on direct and indirect campaign activity in 2012, defining that spending as “engaged solely in the making of independent expenditures supporting and opposing candidates for federal office.”

Last Tuesday, CREW filed a complaint with the IRS and the tax division of the Department of Justice against Americans for Tax Reform and its president, Grover Norquist, alleging they deliberately provided false information to the IRS in the tax filing.

ProPublica and others have documented how such groups often minimize their political spending to the IRS. Although the IRS has been hesitant to establish any so-called “bright lines” for campaign activity, campaign finance and tax lawyers say independent expenditures reported to the FEC definitely qualify as political spending under the tax code.

Crossroads GPS itself counted all of its independent expenditures reported to the FEC in both 2010 and 2012 as part of its political spending reported to the IRS.

“Clearly, ads that tell people who to vote for or against are campaign intervention,” said a Congressional Research Service report on IRS rules on political ads prepared for Congress in August 2012. Last summer, the IRS told social welfare nonprofits that wanted to expedite their approval that political expenditures included administrative and overhead costs, and any expenditure on printed, electronic or oral statements supporting or opposing the election or nomination of any candidate for public office.

Lloyd Hitoshi Mayer, a law professor and associate dean at the University of Notre Dame who specializes in nonprofits and campaign finance, reviewed the Americans for Tax Reform documents at the request of ProPublica and said it was possible that the group was allocating overhead or other costs differently in its tax return than in its FEC filings.

“I do not see how any reasonable allocation differences could result in such a large disparity, however,” Mayer said.

Owens, the former IRS official, said it was possible that some of the media buy money reported to the FEC was later refunded by the TV stations. But even that money wouldn’t account for such a large gap, he said. Owens speculated that Americans for Tax Reform might have determined that some of its ads wouldn’t qualify for reporting to the IRS.

“There’s just no way that could withstand scrutiny under the laws that exist,” Owens said. “What you have is two documents from the same group, one for the FEC and one for the IRS, both submitted under penalty of perjury. At least one is incorrect.”

Still, on Tuesday, Kartch insisted the $9.8 million figure on Americans for Tax Reform’s tax form, known as a 990, was correct, while ignoring requests from ProPublica to explain how it was derived.

“The correct number to use here is the $9.8 million figure as reported on our 2012 990, not the number you cite from an FEC report,” Kartch wrote. “ATR meets or exceeds the requirements of the FEC and the IRS according to their standards.”

He also scoffed at the CREW complaint, saying, “This attack is political and CREW knows it is nonsense.”

It’s not clear how the IRS might respond to the apparent misuse of the Crossroads grant or to the fact that Americans for Tax Reform seems to have underreported its political spending.

Complaints to the IRS about the tax-exempt status of Crossroads and other political social welfare nonprofits have been made since 2010, but they are still pending. So is an earlier CREW complaint against Americans for Tax Reform for its spending in 2010. A scandal that erupted in May over the IRS targeting the applications of Tea Party and other conservative social welfare nonprofits may have also made the IRS more likely to take a hands-off approach to the groups, experts say.

“They’re going to keep their heads down,” Owens said.

Photo: National Constitution Center via Flickr

by Kim Barker ProPublica.

Two dark money groups linked to conservative billionaire brothers Charles and David Koch have paid a record $1 million in fines to California to settle allegations that the combined $15 million they spent on two ballot proposals in the state was not properly disclosed.

The civil settlement, announced Thursday afternoon in Sacramento, caps a year of investigation into the activities of the two Arizona groups, Americans for Responsible Leadership and the Center to Protect Patient Rights.

The settlement disclosed new details in the case, including how the money was raised and how the Center to Protect Patient Rights disguised its two contributions to two California political committees. As part of the settlement, the Center to Protect Patient Rights conceded it was responsible for funneling $11 million through Americans for Responsible Leadership to a political committee spending money to fight a tax-hike measure and to support a proposition restricting unions’ political power.

The Center to Protect Patient Rights also gave an additional $4 million to another dark money group, the American Future Fund, which gave the money to another political committee spending on the anti-union measure.

“What is the takeaway from this trail of dark money?” asked Ann Ravel, the outgoing head of California’s Fair Political Practices Commission, which investigated the groups along with the state attorney general’s office. “This is a nationwide issue. These groups exploit loopholes in the law to undermine the clear purpose of the law, to give essential information to the public.”

The state assessed one $500,000 fine to the Center to Protect Patient Rights only, and another $500,000 fine to the two groups jointly. The state is also demanding that the two political committees “disgorge,” or hand over, the $15 million they received in improper donations through the Center to Protect Patient Rights before the end of November. All of the money would go to California’s general fund.

In an interview, Gary Winuk, the chief of enforcement for the California Fair Political Practices Commission, acknowledged that the state may have to go to court to recover that $15 million. One of the political committees has already closed down.

The settlement says California authorities determined that the Center to Protect Patient Rights “inadvertently, or at worst negligently,” did not report itself as a donor to the American Future Fund. A similar decision was made on the group’s lack of disclosure to Americans for Responsible Leadership.

In a statement sent through its lawyer, the Center to Protect Patient Rights said the commission recognized it erred largely because it had never before made contributions in California and that it had no intention to violate campaign reporting rules.

“Also, the California Attorney General conducted a complete and thorough investigation and agreed that the conduct was unintentional and inadvertent,” said the lawyer, Malcolm Segal.

Americans for Responsible Leadership did not return a message seeking comment.

Anonymous money funneled through social welfare nonprofits and trade associations has become a major factor in federal elections since the Supreme Court’s Citizens United decision in early 2010 opened up the door to unlimited corporate and union spending on outside ads, as documented by ProPublica. In the past two election cycles, social welfare nonprofits have spent more than $350 million, mostly from unknown donors, on election ads telling people to vote for or against federal candidates.

Some national groups have also started playing on the state level, particularly with ballot proposals.

The California agreement, reached on Oct. 17, underscored how some states, such as California, Idaho and Montana, have actually done more to identify anonymous donors than the Federal Election Commission. In June, New York Attorney General Eric Schneiderman imposed regulations attempting to require disclosure for money spent on state elections. A new disclosure bill has been introduced in California. This month, after a push by California’s Ravel, regulators from 10 states announced the launch of a nationwide effort to encourage the disclosure of donors.

But the settlement also highlights the limitations of investigations into who’s behind dark money groups: Instead of unmasking some reclusive billionaire or shy corporation, regulators often uncover yet another nonprofit, like a set of Russian nesting dolls. The original sources of the money spent in California were not publicly identified, nor will they be.

“A number of donors did not want to be identified,” said Winuk, the enforcement chief for California’s campaign finance regulator, who received only a redacted list of donors for the original contributions.

And while the groups have been linked to the Koch brothers, it’s not clear how exactly they’re connected. The Center to Protect Patient Rights, which operates out of a post office box in Arizona and doesn’t even have a website, has been described practically like an ATM machine for various groups affiliated with the Koch brothers. The press release issued by California authorities says the Center and Americans for Responsible Leadership “operated as part of the ‘Koch Brothers Network’ of dark money political nonprofit corporations.”

The Kochs have long been known for spending millions to influence elections behind the scenes, through a complex network of groups that critics have nicknamed “the Kochtopus.” The Kochs themselves have remained determinedly in the background.

One link between these two groups and the Koch network is Sean Noble, a GOP strategist who runs two political consulting firms and is the sole employee of the Center to Protect Patient Rights, which was launched in 2009. In 2010, he spoke on a panel at a Koch brothers’ secretive retreat, small semiannual affairs that are invitation-only and closed to the media. In 2010 and 2011, the Center to Protect Patient Rights handed out almost $60 million to conservative groups that spent tens of millions on election ads. The Huffington Post recently quoted a GOP operative describing Noble as “the wizard behind the screen” for the Koch network’s election efforts in 2012.

Noble did not return a call for comment.

Another link is Wayne Gable, a former top official at Koch Industries who has also served in leadership roles in several nonprofits formed by the Kochs. In 2011, Gable launched a new trade association that gave almost $115 million to the Center to Protect Patient Rights over the following year. It’s not yet clear how the Center doled out its money, as its tax return for 2012 isn’t yet available.

The leader of Americans for Responsible Leadership has close ties to Noble. Republican Kirk Adams hired Noble’s firm in 2011 and 2012 to help run his failed campaign to replace outgoing U.S. Rep. Jeff Flake in Arizona. Adams lost in the primary in August 2012; the next month, he was named president of Americans for Responsible Leadership.

According to the settlement, some $24.5 million of the money distributed by the Center to Protect Patient Rights was raised by GOP strategist Tony Russo for another organization, Americans for Job Security, a Virginia-based trade association. (Russo didn’t return calls for comment.)

Americans for Job Security gave the money to the Center to Protect Patient Rights. Then the Center gave about $7 million to the Iowa dark money powerhouse American Future Fund on Sept. 11, 2012; of that, the American Future Fund gave about $4 million to a new California committee, the California Future Fund for Free Markets, which supported the anti-union measure. That committee has since closed down.

The Center also gave $18 million to Americans for Responsible Leadership in October 2012, recommending that the group “should use the funds to support common social interests, including support” for the Small Business Action Committee PAC, a committee that Russo was also raising money for, the settlement said. Americans for Responsible Leadership then gave $11 million to the Small Business Action Committee PAC to spend on the two ballot proposals.

That $11 million contribution sparked a complaint, an investigation and a court battle. Just before the election, Americans for Responsible Leadership admitted that it got its money from the Center to Protect Patient Rights, which in turn got the money from Americans for Job Security.

The fine is the largest in California history in a campaign-finance case.

The manner in which the groups paid it speaks volumes about how dark their money really is.

They paid by cashier’s check, sent by a Sacramento lawyer’s office Thursday morning, betraying no clue to the money’s origin.

Photo: Phillip Taylor PT via Flickr

by Kim Barker,ProPublica.

Smart move?

The IRS has granted nonprofit status to America Is Not Stupid — a so-called dark money group best known for a 2012 election ad featuring a talking baby who compared the smell of his diaper with a Montana senator.

As ProPublica wrote in January, America Is Not Stupid and a related group, A Better America Now, applied for IRS recognition in the run-up to the 2012 election, swearing under penalty of perjury that they would not spend money on elections.

Then both groups went ahead and did exactly that, spending more than $125,000 on mailers and ads opposing Democratic candidates in Texas and Montana.

Despite these disclosures, records show, the IRS gave A Better America Now its stamp of approval as a social welfare nonprofit in April and recognized America Is Not Stupid in late June, decisions that elicited amazement among campaign finance watchdogs.

Marcus Owens, a nonprofit lawyer who ran the IRS Exempt Organizations division from 1990 to 2000, questioned whether a controversy that erupted earlier this year, over the agency subjecting certain conservative nonprofits to extra review, had damaged its ability to fulfill its regulatory functions.

“The oversight has collapsed,” Owens said. “The current people in Exempt Organizations have no tax law enforcement experience and no exempt organization experience in particular. And they’ve been charged with making this particular headache go away.”

Because of the government shutdown, the IRS could not be reached for comment. In the past, the IRS has not commented on stories about specific groups. Talking about individual taxpayers violates the law.

No one from either America Is Not Stupid or A Better America Now responded to emails and phone calls asking for comment.

In May, the IRS admitted that it had flagged the applications of Tea Party and related groups for extra review, dooming many to years of limbo. That admission turned into a firestorm, leading to the immediate resignation of the acting IRS commissioner and the eventual replacement of the top officials in the Exempt Organizations division. Senate and House committees started investigating. The Treasury Inspector General for Tax Administration expanded its initial audit. And the Justice Department announced a criminal inquiry. (Later, records were released showing that the IRS was also flagging liberal groups with “progressive” in their names.)

Since the Supreme Court’s Citizens United ruling in early 2010 opened the door to increased political spending by corporations and unions, nonprofits like America Is Not Stupid have taken on an expanding role in U.S. elections. That’s largely because they do not have to identify their donors, unlike SuperPACs, leading them to be dubbed “dark money” groups.

About 150 of these nonprofits spent more than $254 million in 2012 on ads, phone calls and mailings reported to the Federal Election Commission. Almost all the donors of that money have remained anonymous. Most of that money 2014 more than 85 percent 2014 was spent by conservative groups, according to the Center for Responsive Politics and research by ProPublica.

These groups are allowed to spend limited amounts to influence elections, as long as they can prove their primary purpose is “social welfare.” But ProPublica has shown how dozens of social welfare nonprofits have underreported their political spending, or spent money on elections despite telling the IRS they would not do so.

In its 2012 annual work plan, the IRS recognized the problem, announcing it would take a hard look at nonprofits and “serious allegations of impermissible political intervention.”

If the agency’s exchanges with America Is Not Stupid and A Better America Now are any indication, however, the augmented focus on nonprofits has been less than ferocious.

The IRS sent ProPublica the groups’ applications for recognition last November, even though they had not yet been recognized and the documents were therefore not supposed to be made public. We wrote stories about these and several other pending applications, bringing it to the IRS’ attention that these groups had pledged that they would not spend money on elections, yet did so.

According to IRS records, neither group ever amended its application to reflect its political spending.

In response to IRS questions about their applications, though, the groups acknowledged that they had spent small amounts on elections — a contradiction that apparently did not hobble their chances for recognition.

A month after receiving IRS recognition in April of this year, A Better America Now changed its story again. It filed its 2012 tax return and asserted — again, under penalty of perjury — that it had spent no money to influence elections. ProPublicareported this in July.

The group’s president, Bob Portrie, lawyer Eugene Peek, and accounting firm LBA Group, all out of Florida, did not return calls and emails for comment.

The IRS told ProPublica that the 2012 tax return for America Is Not Stupid was “unavailable” as of last month. Renae Duncan, the group’s certified public accountant in Texas, said she would pass on an inquiry from ProPublica to Miguel A. Gutierrez, the group’s president, on Monday morning. He has not yet responded.

In replying this May to IRS questions on America Is Not Stupid’s application, Gutierrez provided several examples of the group’s activities as proof that it had a bona fide social welfare mission of improving the good of a community — the critical factor in maintaining tax-exempt status.

He said the group had created a website, www.NewsEagle360.com, and had authored articles “regarding how underserved communities or minority populations and economically disadvantaged small businesses may be affected by certain U.S. federal rules and regulations in the coming years.” There’s no sign of any such articles on the website or elsewhere, however. (On Monday, one of the website’s top stories was on “CoralActives: Breakthrough Acne Skin Care.”)

To showcase the group’s “educational content,” Gutierrez pointed to the main website for America Is Not Stupid, a single page with 156 words on it.

He told the IRS that the nonprofit conducted polls in Montana, Nevada and Texas, targeting heads of households with Hispanic surnames. But the only poll included in the response didn’t mention Latinos at all. Instead, it asked Montanans about which candidates they planned to vote for in the 2012 election.

The group’s president also said the group held events, including one in San Antonio to “openly discuss topics affecting the Hispanic population in the U.S., including, but not limited to, healthcare, the housing market, jobs and the economy, and various education issues.”

Gutierrez said the event was held on Oct. 26 — just before the 2012 election. The event was free for the first 3,000 people, and billed to the public as strictly entertainment, an evening featuring comedian Paul Rodriguez and the Leslie Lugo Band playing music “to dance into the night.”

But former Bush official Hector Barreto gave the keynote address, Gutierrez told the IRS. One detail America Is Not Stupid didn’t mention: Barreto also happened to be the co-chair of Juntos Con Romney, Republican presidential candidate Mitt Romney’s Hispanic steering committee.

Nothing Gutierrez said in his May 24 response to the IRS seems to have raised any red flags with the IRS, however.

A month after receiving it, the IRS recognized America Is Not Stupid.

by Kim Barker,ProPublica.

In August 2008, as the right wing of the Republican Party grew increasingly disenchanted with the party’s direction, the men from Russo, Marsh and Associates sensed opportunity: They created a political action committee, Our Country Deserves Better, and in time launched the Tea Party Express.

Russo, Marsh — an established California outfit of Republican consultants — was just getting started. The firm formed a second political committee, this one with a pro-military agenda. And eventually, seizing on the president’s unpopularity in certain circles, they opened a third, the Campaign to Defeat Barack Obama.

Throughout the 2012 election cycle, the committees were relentless. In email after email, they pleaded for small donations to run ads supporting candidates who would defeat President Obama’s “socialist” agenda. And it worked: They collected more than $14 million in donations — from all over the country, and from donors who gave as little as $10 to elect Ted Cruz as a Republican senator from Texas or to put Mitt Romney in the White House.

Yet an examination of the PACs’ expenditures shows they spent a small percentage of the money they raised on work directly aimed at getting candidates elected — paid ads, say, or contributions to other political committees. Mainly, they paid consultants. And the biggest chunk of that consultant money went to Russo, Marsh and Associates, and people connected to the firm.

Of the $9.3 million spent by Our Country Deserves Better, more than $3.8 million went to Russo, Marsh and Associates, employees or others connected to the firm. Of the $3.9 million spent by the Campaign to Defeat Barack Obama, $2.4 million went to the firm and its associates. The pro-military Move America Forward Freedom PAC spent almost $143,000. Of that, $92,000 went to the firm and people connected to it.

Some of that money went for travel, or for ads funneled through the consultants. But most was for consulting, fundraising fees and administrative help.

It’s rare for the people who form PACs to pay and treat themselves quite so generously. In addition to paying Russo, Marsh an assortment of fees, the PACs spent money so its principals could travel well: from almost $1,300 for meals at a fondue restaurant in Ohio on Oct. 18, to more than $50,000 for consultants and staff to occasionally stay at a golf resort on Lake Michigan last fall.

Meanwhile, the people who gave money had no idea that such amounts would go to consultants, not to the nuts-and-bolts efforts to get preferred candidates elected and their opponents defeated.

“How does Joe Average know this?” asked Linda Knox, 73 — who with her husband gave $585 to the Campaign to Defeat Barack Obama, mainly in $10 and $15 increments — after learning of the PAC’s spending habits. “Of course I want the money to go to elect people who share my values, not to consultants.”

No one from Russo, Marsh and Associates returned calls asking for comment. The two largest PACs didn’t respond to emails and calls. Danny Gonzalez, a spokesman at the pro-military PAC, said: “I was not aware of what the particular numbers are.” He said he would prepare a more detailed response.

Shawn Callahan, who’s worked for Russo, Marsh and now does consulting for the PACs, said Our Country Deserves Better did much more than just contribute to campaigns “in a traditional sense.” He said the PAC focused on coordinating unpaid grassroots activists, and spent much of its money on political organizing. He said the Tea Party Express held more than 400 rallies over the past three years, adding that the group had been credited with making the difference in dozens of House races.

“What looks like overhead is not overhead, but the costs of performing the mission of rallying citizens to get involved in conservative politics,” he wrote in an email. At a later point, he added: “As a political activist and donor myself, I hope that donors are proud of all that we have accomplished together. I know I am.”

While many watchdog organizations track how political committees raise money, few look at how the money is ultimately disbursed. PACs can spend their money as they want — on legal fees, on big meals, on trips to Dubai. But while PACs often devote some money to fundraising, most spend the bulk of contributions on efforts clearly aimed at electing specific candidates.

This last election, more than 3,000 PACs like the Russo, Marsh ones — independent committees supporting more than one candidate and not officially run by a lobbying group — spent almost half a billion dollars. Two-thirds of those committees spent most of their money directly supporting candidates.

PACs like these are allowed to donate money to a candidate or candidate committee — up to $5,000 per election. They can also donate up to $15,000 to a national political party committee and $5,000 to local parties or other political committees every year. But PACs also often spend money on what are known as independent expenditures, such as TV ads and phone calls supporting or opposing candidates. This spending can be unlimited, but it must be done independent of the candidates, meaning that the candidates often aren’t even aware it’s happening — especially with PACs that don’t spend much on ads.

Longtime conservative activist Sal Russo, who helped found the consulting firm that became Russo, Marsh and Associates in Sacramento, CA, in 1976, has a long history with mainstream Republicans. He got his big break as an aide to Ronald Reagan, when the late president was California’s governor. Russo developed longtime ties with several conservative politicians, including Utah senator Orrin Hatch. He worked on the campaigns of former presidential candidate Jack Kemp and former New York governor George Pataki.

Questions about the role of Russo, Marsh and Associates with political committees are not entirely new. The New York Times and Talking Points Memo detailed how one of the committees, Our Country Deserves Better, had paid out a substantial amount of money to the Russo, Marsh firm in 2009 and 2010. Sal Russo told The New York Times his firm did nothing wrong.

One Republican consultant, who would not be identified, said that PACs that raise and spend money like Russo, Marsh in the end hurt the efforts and reputation of conservatives, while often failing to have any truly reliable influence on election night.

After the 2012 elections — and despite critical news stories in several publications — the PACs got back to work. The Campaign to Defeat Barack Obama changed its name to the Conservative Campaign Committee just after the election, and emails this week from the group have asked people to send money for ads supporting Larry Grooms, who is running in a Republican primary for a U.S. House seat in South Carolina.

“Any entity that raises money under the banner of a certain cause and then doesn’t spend money on that cause raises serious questions,” said Hogan Gidley, a consultant with Grooms’ campaign, adding that the campaign wasn’t affiliated with the Conservative Campaign Committee and that he wasn’t familiar with the inner workings of the group.

Of the donors who give to such committees, Gidley said, “They should hold the groups’ collective feet to the fire and make sure the money is going to its stated purpose.”

The Our Country Deserves Better PAC, which created the Tea Party Express, “the most aggressive and influential national Tea Party group in the political arena,” according to its website, spent some of the $9.3 million it ran through in this election cycle on bus tours and rallies.

But it spent only 10 percent of its money directly on elections — $259,500 in contributions to political committees and candidates, and $681,000 on independent expenditures, most of which were funneled through Russo, Marsh and Associates.

The PAC spent almost half its money on fundraising, often using the Russo, Marsh firm or affiliated consultants. That fundraising ratio — spending almost $1 to earn $2 — is very high in the world of political action committees.

And the PAC also let its consultants live rather large: $3,500 for “PAC Election Night Headquarters” at a casino-resort in Las Vegas, $3,200 for meals and a meeting at a Mediterranean restaurant in Boston in February, 2011, more than $1,000 for parking at LaGuardia Airport in New York in May, 2011.

Barely one-third of the $3.9 million spent by The Campaign to Defeat Barack Obama went to truly focused efforts at electing candidates, but its consultants traveled comfortably: more than $4,500 to stay at Caesars Palace in Las Vegas in June, more than $8,200 to stay at the Paris Las Vegas Hotel in July.

Individual consultants, including current or former Russo, Marsh employees, did very well.

Joe Wierzbicki, who works at Russo, Marsh and Associates, pulled in almost $528,000 from two of the PACs. Most of that came from the Our Country Deserves Better PAC, which describes Wierzbicki on its website as “PAC coordinator,” but neglects to mention he is a senior account executive at the Russo, Marsh firm.

Ryan Gill, who has also worked for the pro-military PAC and a related charity, was paid almost $592,000 from the two PACs, mostly from the Campaign to Defeat Barack Obama, for strategic consulting, fundraising commissions, travel reimbursement and online ads supporting several candidates.

In one month alone, the Campaign to Defeat Barack Obama paid Gill about $5,300 on July 2, $2,300 on July 3, $4,100 on July 6, and $12,000 on July 9, calling the payments “fundraising salary.” Then he was paid $5,000 for “PAC strategy consulting” on July 20. He was also paid $7,400 for online advertising to promote certain candidates. And he was reimbursed almost $12,300 for travel.

Until last year, Callahan, the former Russo, Marsh employee, was the executive director of the pro-military charity. Callahan helped form a business called Frontline Strategies & Media.

Two of the PACs paid Frontline Strategies about $386,000 for fundraising commissions, consulting and website maintenance.

Callahan is also the founding chief executive officer of a company called DonationSafe, which the three PACs paid $450,000 for credit-card processing fees.

In responses to emailed questions, Callahan said he had to pay multiple employees for Frontline who “are dedicated full-time to those accounts.” He said the PAC payments help cover his employees’ salaries, “along with all the other costs that come from running a business.”

The PACs linked with Russo, Marsh and Associates frequently attach themselves to popular causes or candidates or topics in the news. In past weeks, for example, they’ve sent emails praising Republican senators Rand Paul and Ted Cruz, while asking for donations.

This month, the Conservative Campaign Committee — formerly the Campaign to Defeat Barack Obama — has sent out emails, asking supporters to pony up $35,000 for a radio ad campaign backing Grooms in South Carolina. One email urged supporters to volunteer for Grooms and to give money to support him — not to Grooms’ actual campaign, but to the PAC. That email also linked to the proposed radio ad and to two TV ads that were actually put out by Grooms’ campaign — a nuance that would likely be lost on many supporters, who would probably think that the PAC was somehow involved in the TV ads.

“So many of you have told us how much you want to see real action taken to stop Barack Obama’s radical agenda,” said another email, sent March 6, with the subject line of “Time Sensitive: Your attention required.” “That’s why it’s so important for Larry Grooms to win this election — we need his voice and his vote in Congress to defeat Obama’s aggressive push for socialism.”

It won’t be clear until July how much the PAC raised. But it’s already reporting some of what it spent. The cost of sending out the  two emails was $1,670, and it was paid to Russo, Marsh and Associates.

by Kim Barker, ProPublica.

Five conservative dark money groups active in 2012 elections previously told tax regulators that they would not engage in politics, filings obtained from the IRS show.

The best known and most controversial of the groups is Americans for Responsible Leadership, an Arizona-based organization. Not long after filing an application to the IRS pledging — under penalty of perjury — that it would not attempt to sway elections, the group spent more than $5.2 million, mainly to support Republican presidential candidate Mitt Romney.

The California Fair Political Practices Commission has accused Americans for Responsible Leadership of “campaign money laundering” for failing to disclose the origin of $11 million it funneled to a group trying to influence two state ballot propositions.

The other groups that filed applications for IRS recognition of tax-exempt status saying they wouldn’t engage in politics are Freedom Path, Rightchange.com II, America Is Not Stupid and A Better America Now.

Much hangs on these applications, all of which are still pending. The tax code allows social welfare nonprofits to engage in political activities as long as public welfare, not politics, is their primary purpose. If the IRS ultimately decides not to recognize these groups, they could have to disclose their donors.

Such decisions, along with IRS’ oversight of social welfare nonprofits overall, have come under increasing scrutiny as these groups have assumed an ever larger role in elections, pouring an unprecedented $322 million into the 2012 cycle.

ProPublica has documented how some social welfare nonprofits underreport their political activities, characterizing them to the IRS as “education” or “issue advocacy.” Other groups have popped up, spent money on elections and then folded before tax regulators could catch up with them.

The IRS sent the applications submitted by the five groups to ProPublica in response to a public records request, although the agency is only required to supply these records after groups are recognized as tax-exempt. (ProPublica also obtained the pending application of Crossroads GPS, the dark money group launched by GOP strategist Karl Rove that spent more than $70 million on the 2012 elections, which we wrote about separately.)

The IRS confirmed that none of the groups had been recognized as tax-exempt and referred ProPublica to its earlier response about Crossroads’ application. In that email, the IRS cited a law that says publishing unauthorized tax returns or return information is a felony punishable by up to five years in prison or a fine of up to $5,000, or both.

A lawyer for Americans for Responsible Leadership, Jason Torchinsky, cited the same law in an email.

“If you willfully to (sic) print or publish in any manner any information about Americans for Responsible Leadership that you do not lawfully possess — and which may or may not be complete — you will be doing so in violation of (the law) and we will not hesitate to report such unlawful publication to the appropriate law enforcement officials,” Torchinsky wrote.

The other groups for which ProPublica obtained IRS applications did not respond to calls or emails for comment.

ProPublica has published the applications of all five groups, but redacted parts to omit financial information.

“As we said when we published our story on the Crossroads application, ProPublica believes that the information we are publishing is not barred by the statute cited by the IRS, and it is clear to us that there is a strong First Amendment interest in its publication,” said Richard Tofel, ProPublica‘s president.

Social welfare nonprofits do not need IRS recognition, though most opt to apply for it. They can operate, and spend money on politics, while their applications are under consideration.

Americans for Responsible Leadership incorporated in Arizona in July 2011 and applied for IRS recognition last September.

By that time, the group had already spent $5,300 on get-out-the-vote efforts for Sen. Orrin Hatch (R-UT), and given $57,500 to two Republican political committees in Arizona.

Nonetheless, its IRS application said the group hadn’t spent any money to influence elections, nor would it. It also said the group planned to split its efforts between influencing policy and educating the public, in part by “promoting a more ethical and transparent government.”

According to Federal Election Commission filings, the group spent more than $5.2 million on campaign activities in October and early November, mostly on phone calls urging the defeat of President Barack Obama. In addition to the millions it pumped into California ballot measures, the group also spent $1.5 million on two Arizona propositions.

While the IRS doesn’t classify spending on ballot measures as political, California election authorities do.

When ProPublica read the group’s description of its activities on its IRS application to Ann Ravel, the chairwoman of the California Fair Political Practices Commission, she laughed.

“Wow,” she said, upon hearing that the group said it would not try to influence elections. “That’s simply false.”

The California commission pressed Americans for Responsible Leadership to identify who contributed the funds it aimed at the California ballot measures, a battle that reached the state Supreme Court. Just before Election Day, the court ordered the group to reveal its donors.

So, who were they? Another Arizona social welfare nonprofit, which got its money from a Virginia trade association, which also didn’t have to report its donors. California regulators are still trying to peel back the group’s layers, to see who’s behind the money.

Photo credit: AP/J Pat Carter, File

by Kim Barker, ProPublica

Dec. 27: This post has been corrected.

In the waning days of Montana’s hotly contested Senate race, a small outfit called Montana Hunters and Anglers, launched by liberal activists, tried something drastic.

It didn’t buy ads supporting the incumbent Democrat, Sen. Jon Tester. Instead, it put up radio and TV commercials that urged voters to choose the third-party candidate, libertarian Dan Cox, describing Cox as the “real conservative” or the “true conservative.”

Where did the group’s money come from? Nobody knows.

The pro-Cox ads were part of a national pattern in which groups that did not disclose their donors, including social welfare nonprofits and trade associations, played a larger role than ever before in trying to sway U.S. elections. Throughout the 2012 election, ProPublica has focused on the growing importance of this so-called dark money in national and local races.

Such spending played a greater role in the Montana Senate race than almost any other. With control of the U.S. Senate potentially at stake, candidates, parties and independent groups spent more than $51 million on this contest, all to win over fewer than 500,000 voters. That’s twice as much as was spent when Tester was elected in 2006.

Almost one quarter of that was dark money, donated secretly to nonprofits.

“It just seems so out of place here,” said Democrat Brian Schweitzer, the governor of Montana who leaves office at the end of this year. “About one hundred dollars spent for every person who cast a vote. Pretty spectacular, huh? And most of it, we don’t have any idea where it came from. Day after the election, they closed up shop and disappeared into the dark.”

Political insiders say the Montana Senate race provided a particularly telling glimpse at how campaigns are run in the no-holds-barred climate created by the Supreme Court’s 2010 Citizens United decision, giving a real-world counterpoint to the court’s assertion that voters could learn all they needed to know about campaign funding from disclosure.

In many ways, Montana was a microcosm of how outside spending worked nationally, but it also points to the future. Candidates will be forced to start raising money earlier to compete in an arms race with outside groups. Voters will be bombarded with TV ads, mailers and phone calls. And then on Election Day, they will be largely left in the dark, unable to determine who’s behind which message.

All told, 64 outside groups poured $21 million into the Montana Senate election, almost as much as the candidates. Party committees spent another $8.9 million on the race.

The groups started spending money a year before either candidate put up a TV ad, defining the issues and marginalizing the role of political parties. In a state where ads were cheap, they took to the airwaves. More TV commercials ran in the Montana race between June and the election than in any other Senate contest nationwide.

The Montana Senate race also shows how liberal groups have learned to play the outside money game — despite griping by Democratic officials about the influence of such organizations.

Liberal outside groups spent $10.2 million on the race, almost as much as conservatives. Conservatives spent almost twice as much from anonymous donors, but the $4.2 million in dark money that liberal groups pumped into Montana significantly outstripped the left’s spending in many other races nationwide.

As in other key states, conservative groups devoted the bulk of their money in Montana to TV and radio ads. But sometimes the ads came across as generic and missed their mark.

Liberal groups set up field offices, knocked on doors, featured “Montana” in their names or put horses in their TV ads. Many of them, including Montana Hunters and Anglers, were tied to a consultancy firm where a good friend of Jim Messina, President Barack Obama’s campaign manager, is a partner.

The end result? Tester beat Republican Rep. Denny Rehberg by a narrow margin. And the libertarian Cox, who had so little money he didn’t even have to report to federal election authorities, picked up more votes than any other libertarian in a competitive race on the Montana ballot.

Montana Republicans blamed Montana Hunters and Anglers, made up of a Super PAC and a sister dark money nonprofit, for tipping the race. Even though Super PACs have to report their donors, the Montana Hunters and Anglers Super PAC functioned almost like a dark money group. Records show its major donors included an environmentalist group that didn’t report its donors and two Super PACs that in turn raised the bulk of their money from the environmentalist group, other dark money groups and unions.

“Part of what’s frustrating to me is I look at Montana Hunters and Anglers and say, ‘That is not fair,'” said Bowen Greenwood, executive director for the Montana Republican Party. “I am a hunter. I know plenty of hunters. And Montana hunters don’t have their positions. It would be fairer if it was called Montana Environmental Activists. That would change the effect of their ads.”

Cox and Tester deny the group’s efforts swung the race. No one from Montana Hunters and Anglers returned calls for comment.

Tester, who’s argued that all groups spending on elections should disclose their donors and also pushed against Super PACs, said he wasn’t familiar with any of the outside groups running ads. By law, candidates are not allowed to coordinate with outside spending groups, which are supposed to be independent.

Despite his ambivalence, he said he was glad the outside groups jumped in.

“If we wouldn’t have had folks come in on our side, it would have been much tougher to keep a message out there,” Tester said. “We had no control over what they were saying. But by the same token, I think probably in the end if you look at it, they were helpful.”

* * *

Montana has long prided itself on a refusal to be pigeonholed. It’s the kind of place that votes Republican for president but elects Democrats to state office. Politicians wear bolo ties, tout their Montana credentials and use words like “hell” and “crap.” People introduce themselves by saying what generation Montanan they are.

Consistently, the state fights against any mandate that smacks of Washington meddling, from the federal speed limit to the Citizens United ruling in early 2010, which opened the door to corporations and unions spending unlimited money on independent ads, echoing an earlier court ruling that equated money with free speech.

Before that, Montana had one of the country’s toughest campaign finance laws, dating back 100 years, to the time of the copper kings. After one of those kings bribed state lawmakers to back him as senator, the state banned corporate political spending.

Even after Citizens United, the Montana Supreme Court insisted that Montana’s legacy of corruption justified keeping the ban. In June, the U.S. Supreme Court squashed that move, saying the Citizens United decision applied to every state in the nation.

By then, dark money groups were already weighing in on Montana’s Senate race.

The TV ads started in March 2011, the month after Rehberg announced. The Environmental Defense Action Fund attacked Rehberg for his stance on mercury emissions. The Electronic Payments Coalition praised Tester for his push to delay implementing new debit-card swipe fees.

“The thing that surprised me a little bit was how early they got involved,” said David Parker, an associate professor of political science at Montana State University who tracked all 160 TV commercials as part of a book he is writing on the race. “And I think that was critical, because very early on, they were able to establish the contours of this race. The candidates were just busy putting their organizations together and raising money.”

Most of the money spent in 2011 on TV ads came from groups that didn’t have to report their donors. They also didn’t have to report their ads to the Federal Election Commission, because they didn’t specifically tell voters to vote for or against a candidate. Instead of saying “Vote for Rehberg,” they said things like “Call Jon Tester. Tell him to stop supporting President Barack Obama.” Ads like that only have to be reported to the FEC if they air during the two months before an election.

The only way to compile data on such ad spending is by visiting TV stations, which Parker did. ProPublica helped him collect information on the last round of ads.

Parker’s data shows that several heavyweight conservative groups entered the fray in mid-2011 to try to cast Tester, whom they saw as vulnerable, as a big spender.

Crossroads GPS, the dark money group launched by GOP strategist Karl Rove, ran two ads in July 2011 similar to those attacking Democrats in other states for supporting excessive spending.

Also that month, a conservative group called Concerned Women for America Legislative Action Committee ran a sarcastic ad about a new miracle drug called “Spenditol,” Washington’s answer to America’s problems. “Call Sen. Jon Tester,” the ad said. “Tell him, stop spending it all.” Similar ads ran against Democratic senators up for election in tight races in Florida, Nebraska and Ohio.

Several ads run by conservative groups backfired, messing up in ways that irked Montanans.

The National Republican Senatorial Committee — a party committee that reports its donors — ran an ad that appeared to show Tester with all five digits on his left hand. (Tester is well known for having lost three fingers in a childhood accident involving a meat grinder.) The U.S. Chamber of Commerce misspelled Tester’s first name. A Montana cable operator yanked a Crossroads ad for claims the operator deemed false.

“The first one that burned me really bad was from the U.S. Chamber,” said Verner Bertelsen, a former Republican state legislator and Montana secretary of state. “I thought — you buggers! We don’t need you to come in here and tell us who to vote for.”

Starting in July 2011, three new liberal dark money groups ran ads. Patriot Majority USA criticized Republicans for allegedly planning to cut Medicare and help to seniors. The Partnership to Protect Medicare praised Tester for opposing Medicare cuts.

And in October, weeks after forming, the dark money side of Montana Hunters and Anglers, Montana Hunters and Anglers Action!, launched its first TV ad, starring Land Tawney, the group’s gap-toothed and camouflage-sporting president, who also served on the Sportsmen’s Advisory Panel for Tester. At the time, the Super PAC side of the group was basically dormant.

The new Hunters ad accused Rehberg of pushing a bill — House bill 1505 — that supposedly would give Washington politicians control of access to public lands in Montana. Rehberg, one of 60 co-sponsors, argued the legislation was necessary to help the Department of Homeland Security protect the state from illegal immigrants, drug smugglers and terrorists.

“Nobody in Montana was talking about that bill,” Greenwood said. “I’ve only heard it talked about in campaign ads. And it played a role throughout the election.”

* * *

The gusher of outside money into Montana’s Senate race was part of a larger pattern. Nationally, in addition to the $5.1 billion spent by candidates and parties, almost 700 outside spending groups dumped more than $1 billion into federal elections in the 2012 cycle, FEC filings show.

Of that, about $322 million was dark money, most of it from 153 social welfare nonprofits, groups that could spend money on politics as long as social welfare — not politics — was their primary purpose.

Relating those numbers to previous elections is a largely pointless exercise, akin to comparing statistics from baseball and lacrosse. The Citizens United ruling changed the game, opening the door to unlimited corporate donations to Super PACs and to a new breed of more politically active nonprofits.

“Instead of being in a boxing match in a ring, you’re in a dark alley being hit by four or five people, and you don’t know who they are,” said Michael Sargeant, the executive director of the Democratic Legislative Campaign Committee, which helps Democrats run for state offices.

Some of the players in the 2012 cycle were longtime activist organizations such as the liberal Sierra Club and the conservative National Right to Life Committee, with clear social welfare missions and only a limited amount of political spending. Other dark money groups were juggernauts like Crossroads GPS and Americans for Prosperity, founded years ago by conservative billionaire brothers Charles and David Koch, which crank up their fundraising during election years and devote more money to election ads than other nonprofits.

Finding out about some of the less prominent nonprofits was no easy feat. Many were formed out of post-office boxes or law firms. On their applications to the Internal Revenue Service, they minimized or even denied any political activity.

Documents for pop-up nonprofits like the conservative America Is Not Stupid and A Better America Now, both of which formed in 2011, led back to a Florida law firm that offered no explanations. The Citizens for Strength and Security Action Fund, a liberal pop-up group that spent millions on elections in 2010, closed down in 2011. In its place came a new group: the Citizens for Strength and Security Fund, which earlier this year bought almost $900,000 in ads attacking Rehberg and the Republican Senate candidate in New Mexico.

Groups picked names that seemed designed to confuse: Patriot Majority USA is liberal. Patriotic Veterans is conservative. Common Sense Issues backed conservatives. Common Sense Movement backed a Democrat.

As in the 2010 midterms, the dark money spent in 2012 had a partisan tilt. Conservative groups accounted for about 84 percent of the spending reported to the FEC — mainly through Crossroads GPS, Americans for Prosperity and the U.S. Chamber of Commerce. Liberal groups spent 12 percent of the dark money. Nonpartisan groups made up the rest.

Despite shelling out hundreds of millions of dollars, conservatives lost big. Only about 14 percent of conservative dark money went to support winners.

Still, campaign-finance reformers say it’s a mistake to minimize the influence of this money.

“What these donors were buying was access and influence, not only to the candidates but to the party machine,” said Paul S. Ryan, senior counsel for the Campaign Legal Center. “And they will get that access. On the Republican side, you have people lining up to kiss the ring of (billionaire donor) Sheldon Adelson. And on the Democratic side, you have even people critical of these groups meeting with the funders of these groups. This money is not going away.”

Even though liberal groups spent far less than conservative ones, they had a higher success rate. About 70 percent backed winning candidates.

Some Democrats have shown distaste for the dark-money arts, pushing for more transparency. But liberal strategists are preparing to ramp up their efforts before the next election, unless the IRS, Congress or the courts change the rules.

“We probably have a lot less comfort with some of the existing rules that allow for the Koch brothers to write unlimited checks to these groups,” said Navin Nayak, the senior vice president for campaigns at the League of Conservation Voters, a liberal social welfare nonprofit for more than 40 years. “But as long as these are the rules, we’re certainly going do our best to make sure we’re competitive and that our candidates have a shot at winning. We’re certainly not going to cede the playing field to the Koch brothers.”

* * *

By the time Tester and Rehberg started buying TV ads, outside groups had been defining the race for a year.

Rehberg, 57, a six-term congressman and rancher often pictured wearing a cowboy hat and a plaid shirt, was portrayed as voting five times to increase his pay and charging an SUV to taxpayers. Tester, 56, a farmer with a flat top, was dinged for voting with Obama 95 percent of the time.

Tester’s campaign went up with ads in March, mainly to counter the outside messages.

“The original plans were going up 60 or 90 days later than that,” Tester said. “But it was important…We had to remind people of who I am.”

His early ads highlighted his Montana roots, depicting him riding a combine on his farm and packing up Montana beef to carry back to Washington.

Rehberg had less money, so his earliest TV ads, which mainly attacked Tester, went up in May.

Neither Rehberg nor anyone from his media staff responded to requests for an interview on his views on campaign finance. In the past, he has said he supports the Citizens United ruling.

Meanwhile, conservative groups bought TV ads that hit at Tester but stopped just short of telling people how to vote. For instance, the conservative 60 Plus Association spent almost $500,000 buying TV ads featuring crooner Pat Boone criticizing Tester over the health care law. None of that was reported to the FEC.

Over the summer, the Concerned Women for America’s legislative committee, Crossroads GPS and the U.S. Chamber of Commerce all weighed in. The TV spots were overwhelmingly negative, and many of them were cookie-cutter ads, similar to those that ran in other states against Democrats.

Liberal groups bought TV ads, too, but that was only part of their game plan. They spent their dark money on retail politics, hitting the streets and knocking on doors.

In January, the League of Conservation Voters set up two offices in Montana — one in Missoula and one in Billings. It canvassed voters and hired a full-time organizer, reaching out to 28,000 sporadic voters to urge them to vote early by mail.

Lindsay Love, the spokeswoman at Planned Parenthood Advocates of Montana, another nonprofit that doesn’t report its donors for election spending, said the group targeted 41,000 female voters. More than 1,500 people ended up knocking on 28,500 doors and making 162,000 phone calls, she said. The group sent out about 470,000 pieces of mail.

“It’s hard to unpack this,” Parker said. “But it’s fascinating to look at groups like the League, unions and Planned Parenthood. By and large, they did phones, canvassing, mail, very little TV. One of the best ways to get out the vote is personalized contact.”

Many liberal groups active in Montana, including Montana Hunters and Anglers, were connected through Hilltop Public Solutions, a Beltway consulting firm.

Barrett Kaiser, a former aide to Montana’s other Democratic senator, Max Baucus, is a partner at Hilltop and runs its office in Billings. The Hilltop website notes that Kaiser helped with Tester’s upset Senate win in 2006. Kaiser is also a good friend of Messina, the manager of Obama’s 2012 campaign, who also once worked for Baucus.

Kaiser was on the board of the Montana Hunters and Anglers dark money group. Another Hilltop employee in Billings served as the treasurer for the Montana Hunters and Anglers super PAC.

Hilltop partners in Washington also helped run two other dark money groups that spent money on the Montana race: the Citizens for Strength and Security Fund and the Partnership to Protect Medicare.

The League of Conservation Voters and Planned Parenthood Advocates of Montana paid management fees to Hilltop.

No one from Hilltop returned calls, but Nayak and Love said they worked with Hilltop independently of other groups.

Outside groups are allowed to coordinate with each other or use the same consultants — they’re just not allowed to coordinate with a candidate. By working together, groups can disguise who is actually behind an ad.

In early July, for instance, the League of Conservation Voters gave $410,000 to the Montana Hunters and Anglers Super PAC — almost all the money the group raised as of that date.

When the Super PAC spent the money on TV ads against Rehberg later that month, the spots were paid for by what appeared to be an organization of Montana hunters, not some Washington-based conservationist group. Nayak said that was not a coincidence.

“We figured having a local brand like that and partnering with them on local issues made more sense than having a D.C. brand,” he said.

Nayak said the League did not donate money for the later ads pushing Cox, the libertarian.

It’s not clear where that money came from. The dark money side of Montana Hunters and Anglers paid for the radio ads. The Super PAC bought the TV ads and had to disclose its donors, but FEC filings show its money came mainly from two other Super PACs, which in turn reported getting most of their money from unions and dark money groups, including the League.

As the Montana Senate race approached its climax, as many as five fliers landed in voters’ mailboxes daily. Robocalls, supposedly illegal in Montana, interrupted meals. Strangers knocked on doors, promising free pizza for voting. People turned off their TVs, dumped their mail without looking at it and stopped answering the phone.

“My ex and I moved in together, because he had cancer and I took care of him,” said Louise McMillin, 51, who lives in the university district in Missoula. “He kept getting polling calls as he was dying. After he died, I kept saying, ‘He’s dead, could you take his name off the list?’ And they said, ‘Sure, sure.’ And they kept calling.”

The race stayed tight. Demand for TV ad slots spiked, so the TV stations started raising their prices. The law required them to charge candidates their lowest rate. But outside groups? They could be hit up for whatever the market would bear.

Rehberg’s campaign paid $400 to run a 30-second ad during the show Blue Bloods on Oct. 19 on the CBS affiliate in Great Falls. A week later, Crossroads GPS paid $2,000 for a slot during the same show.

Anything was fair game for the ads. One, from the Super PAC Now Or Never, made fun of Tester’s buzz cut, then showed his hair growing down to his shoulders, a bizarre sequence apparently designed to signal his ties to Obama. Another ad, from the dark money group America Is Not Stupid, featured a baby with a gravelly voice saying he didn’t know what smelled worse, his diaper or Tester.

“By the middle of October, people were just so tuned out and quite frankly disgusted by all these third-party ads,” said Ted Dick, the executive director of the Montana Democratic Party. “We found that face-to-face conversations toward the end were most persuasive and effective. That’s the lesson we’re taking forward.”

There are other lessons. Tester said the Montana race made clear that candidates will have to raise money sooner, and go up with TV ads faster. Although uncomfortable with outside money, Tester also said it’s just the way things are now, even on the liberal side.

“I mean, look, they did it,” he said. “And with as many ads that were against me, I was glad they did. But it needs to be transparent. I mean, everybody’s needs to be transparent… It’s important to know who’s spending money on who so you know why they’re doing it. And the way the system is set up right now, there is no transparency. Very little.”

Campaign finance reformers agree that knowing who is behind a message helps people assess it.

One example: Two postcards sent to thousands of Montanans just before the election didn’t include the required notice saying who paid for them. One said Rehberg had wasted “hundreds of millions of our tax dollars on pork barrel projects,” and urged people to vote for Cox, “a champion for fiscal responsibility.” The other called Rehberg “the king of pork” and told people to vote for Cox.

Cox said he didn’t send them. The bulk-mail permit on the postcards came back to a Las Vegas company called PDQ Printing, according to the U.S. Postal Service. In an online manual, PDQ describes itself as “Nevada’s preeminent Union printer.” No one there returned phone calls.

Greenwood, the head of the Montana Republican Party, filed a complaint with the FEC over the mailers. The complaint blames liberal groups and says they “engaged in a duplicitous strategy of supporting the libertarian candidate, Dan Cox, in a desperate attempt” to siphon votes from Rehberg.

More than likely, that complaint won’t be resolved for years.

Greenwood said he didn’t think disclosure was a cure-all. But he also said the current system marginalized political parties.

“Whether it’s Montana Hunters and Anglers or [the conservative Super PAC] American Crossroads, they are not responsive to the grassroots,” Greenwood said. “These are the professionals and the money men who are not responsive at all to people. The system as it is now does not reflect what people want.”

Besides picking between Tester and Rehberg, Montanans got a chance in this election to say how they want the system to work. On the ballot was an initiative — largely symbolic in light of recent court decisions — that declared that corporations are not human beings and banned corporate money in politics.

Gov. Schweitzer, a Democrat, and Bertelsen, the former Republican secretary of state, campaigned for the initiative. In a shocker for backers, almost 75 percent of voters supported it.

“I realized it absolutely didn’t have any legal basis to do anything dramatic,” said Bertelsen, who is 94. “But it’s a case of saying, ‘We don’t like it.’ I guess we could just sit down and not say a word. But the Supreme Court — I think they made a mistake. Money isn’t speech, anyhow. It’s just money.”

Correction (12/27): This story originally said that the libertarian candidate Dan Cox picked up more votes than any other libertarian on the Montana ballot. He actually picked up more votes than any other libertarian in a competitive race on the Montana ballot.

by Kim Barker, ProPublica.

In a confidential 2010 filing, Crossroads GPS — the dark money group that spent more than $70 million from anonymous donors on the 2012 election — told the Internal Revenue Service that its efforts would focus on public education, research and shaping legislation and policy.

The group’s application for recognition as a social welfare nonprofit acknowledged that it would spend money to influence elections, but said “any such activity will be limited in amount, and will not constitute the organization’s primary purpose.”

Political insiders and campaign-finance watchdogs have long questioned how Crossroads, the brainchild of GOP strategist Karl Rove, had characterized its intentions to the IRS.

Now, for the first time, ProPublica has obtained the group’s application for recognition of tax-exempt status, filed in September 2010. The IRS has not yet recognized Crossroads GPS as exempt, causing some tax experts to speculate that the agency is giving the application extra scrutiny. If Crossroads GPS is ultimately not recognized, it could be forced to reveal the identities of its donors.

The tax code allows groups like Crossroads to spend money on political campaigns — and to keep their donors private — as long as their primary purpose is enhancing social welfare.

Crossroads’ breakdown of planned activities said it would focus half its efforts on “public education,” 30 percent on “activity to influence legislation and policymaking” and 20 percent on “research,” including sponsoring “in-depth policy research on significant issues.”

This seems at odds with much of what the group has done since filing the application, experts said. Within two months of filing its application, Crossroads spent about $15.5 million on ads telling people to vote against Democrats or for Republicans in the 2010 midterm elections.

“That statement of proposed activities does not seem to align with what they actually did, which was to raise and spend hundreds of millions to influence candidate elections,” said Paul S. Ryan, senior counsel for the Campaign Legal Center, who reviewed the group’s application at ProPublica‘s request.

Officials with Crossroads GPS would not answer specific questions about the material in the application or whether the IRS had sent a response to it.

“As far as we know, the Crossroads application is still pending, in which case it seems that either you obtained whatever document you have illegally, or that it has been approved,” Jonathan Collegio, the group’s spokesman, said in an email.

The IRS sent Crossroads’ application to ProPublica in response to a public-records request. The document sent to ProPublica didn’t include an official IRS recognition letter, which is typically attached to applications of nonprofits that have been recognized. The IRS is only required to give out applications of groups recognized as tax-exempt.

In an email Thursday, an IRS spokeswoman said the agency had no record of an approved application for Crossroads GPS, meaning that the group’s application was still in limbo.

“It has come to our attention that you are in receipt of application materials of organizations that have not been recognized by the IRS as tax-exempt,” wrote the spokeswoman, Michelle Eldridge. She cited a law saying that publishing unauthorized returns or return information was a felony punishable by a fine of up to $5,000 and imprisonment of up to five years, or both. The IRS would not comment further on the Crossroads application.

“ProPublica believes that the information we are publishing is not barred by the statute cited by the IRS, and it is clear to us that there is a strong First Amendment interest in its publication,” said Richard Tofel, ProPublica‘s general manager.

ProPublica has redacted parts of the application to omit Crossroads’ financial information.

With its sister group, the super PAC American Crossroads, Crossroads GPS has helped remake how modern political campaigns are financed.

American Crossroads, which does identify its donors, spent almost $105 million on election ads in the 2012 cycle. For its part, Crossroads GPS poured more than $70 million into ads and phone calls urging voters to pick Republicans — outlays that were reported to the Federal Election Commission. It also announced spending an additional $50 million on ads critical of President Barack Obama that ran outside the FEC’s reporting window.

Based on the extent of Crossroads GPS’ campaign activities, Obama’s re-election campaign asked the FEC in June to force it to register as a political action committee and disclose its donors. The FEC has yet to rule on the request.

Politically active social welfare nonprofits like Crossroads have proliferated since the Supreme Court’s Citizens United decision in January 2010 opened the door to unlimited political spending by corporations and unions.

Earlier this year, a ProPublica report showed that many of these groups exploit gaps in regulation between the IRS and the FEC, using their social welfare status as a way to shield donors’ identities while spending millions on political campaigns. The IRS’ definition of political activity is broader than the FEC’s, yet our investigation showed many social welfare groups underreported political spending on their tax returns.

It’s impossible to know precisely how Crossroads has directed its efforts, but the breakdown of expenses on its tax returns from June 2010 to December 2011 gives some indications.

During those 19 months, Crossroads spent a total of $64.7 million, of which $1.4 million — or just 2 percent — was identified as being spent on research. That compares with the 20 percent of effort Crossroads said it would devote to research in its application.

A tax return covering this year isn’t due until November 2013.

The IRS rarely pursues criminal charges against nonprofits based on statements in their applications. It’s more common for the agency to deny recognition or revoke a group’s tax-exempt status.

In a letter to Congress in September, the IRS said it was engaged in “more than 70 ongoing examinations” of social welfare nonprofits. Earlier, in its work plan for the 2012 fiscal year, the agency said it was taking a hard look at social welfare nonprofits with “serious allegations of impermissible political intervention.”

Campaign finance watchdog Fred Wertheimer, who runs Democracy 21 and has filed several complaints to the IRS about Crossroads, said the group’s application for recognition showed why more aggressive enforcement is needed.

“When you read what they say on their application, there are a lot of words there. But I find them to be disingenuous and to have little to do with why Karl Rove founded this organization,” Wertheimer said. “If you believe this is a social welfare organization, I have a rocket that can get you to the moon very quickly and at very little cost.”

Photo credit: AP/Tony Gutierrez, File