Groups tied to the Koch brothers lied to the IRS — and they’re paying for it

Three Koch-backed groups operated so far outside the law that even the neutered FEC had no choice but to act

Published August 8, 2016 9:28PM (EDT)

David and Charles Koch   (AP/Phelan M. Ebenhack/MSNBC/Photo montage by Salon)
David and Charles Koch (AP/Phelan M. Ebenhack/MSNBC/Photo montage by Salon)

For billionaire industrialist brothers who have funded climate change denial for decades, it’s no surprise that the political groups they finance lied to the Internal Revenue Service about their election activities. But unexpectedly, the gridlocked Federal Elections Commission, which rarely enforces any campaign finance laws, slapped three groups backed by Charles and David Koch with hefty fines earlier this summer.

The Center to Protect Patient Rights (CPPR), an Arizona-based “social welfare nonprofit” established in 2009 that’s now called American Encore, was the Koch political donor network’s main conduit for distributing secret money — private donations not subject to public disclosure — to a giant web of conservative political spending groups. The nonprofit government watchdog, Citizens for Responsibility and Ethics in Washington (CREW), discovered that in 2010, three groups that received millions from CPPR failed to disclose their sources of funding earmarked for federal political ads, something required by the Federal Elections Commission (FEC).

CREW filed FEC complaints against these groups and their presidents, and now the groups have to pay a combined $233,000 in penalties.

"It is refreshing to see significant action from the Federal Election Commission at a time when gridlock and inaction has become the norm,” wrote CREW Executive Director Noah Bookbinder in a statement to Salon. “The extremely strong evidence CREW presented to the FEC in this matter, combined with additional damning evidence uncovered by the FEC’s Office of General Counsel, appears to have made this case so strong that even those Commissioners who are reluctant to enforce the law could not ignore it.”

CPPR also lied to the IRS on its 2010 tax return, attesting that the group did not “engage in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office.” It’s likely the group continued lying in 2011 and 2012, when it also claimed not to have engaged in any political activity. CREW filed an IRS complaint against CPPR and its president, Koch insider Sean Noble.

The watchdog group also filed an FBI complaint against all four political groups and their presidents.

The three groups that received millions from CPPR in 2010 spent that money on ads mostly supporting Republican U.S. House candidates and attacking Democratic candidates. That year, according to conciliation agreements between the three groups and the FEC, CPPR gave more than $25 million total to these groups, which spent a total of nearly $20 million on politics:

  • CPPR gave $11.7 million in 2010 to the Iowa-based American Future Fund (AFF), another “social welfare” nonprofit established in 2007. That number climbed to over $49 million in 2012. AFF spent $8.3 million on federal political races in 2010, mostly attacking Democratic U.S. House candidates.
  • CPPR donated $9 million to the Virginia-based 60 Plus Association, a “social welfare” group, in 2010, and 60 Plus spent $7.1 million mostly attacking Democratic U.S. House candidates that year.
  • In 2010, CPPR donated $4.8 million to Americans for Job Security (AJS), a 501c6 trade association set up in 1998. AJS made $4.5 million in elections expenditures on House races that year. Another donor to AJS is the Koch-linked Wellspring Committee, which has also funded AFF and Americans for Prosperity, the most well known Koch-funded nonprofit, and has used a consulting firm with principals who formerly worked for Koch Industries.

Noble and his consulting firm, Noble Associates, were subcontractors to the media firms that created, produced and placed the ads bought by AFF, 60 Plus and AJS. He was deeply involved in approving the content of the ads and deciding which candidates the ads would specifically target. In 2011, according to a ProPublica investigation, CPPR paid Noble Associates and another firm he owns, DC London, a total of over $6.3 million. The following year, it forked over nearly $24 million to these two firms and to one more, a company called Angler that’s run out of DC London’s office.

Noble was reportedly excommunicated from the Koch network at least in part because of scrutiny he caused CPPR by breaking California campaign finance law, a case that actually involved three of the same groups behind the recent FEC fines. In 2012, CPPR and Arizona-based Americans for Responsible Leadership (ARL), which in 2012 was “wholly funded” by CPPR, illegally routed $15 million to two California-based groups that spent on two ballot initiatives in the state, resulting in a split $1 million fine. The California groups had to pay the $15 million they illegally received to the state. Noble is still listed as president of the rebranded CPPR, American Encore.

In the fall of 2012, AJS gave nearly $25 million to CPPR to avoid disclosing its numerous donors, and then CPPR gave $7 million to AFF, which contributed $4 million to a California-based group that used the money to support an initiative that would have barred unions from using automatic payroll deductions for political campaigns. And CPPR gave $13 million to ARL, which sent $11 million to a state campaign committee that spent it in support of the union initiative and against another initiative that raised taxes on the wealthy.

In September 2012, former Republican speaker of the Arizona House Kirk Adams became director and president of ARL, which received funding from CPPR and spent much of it supporting a policy initiative of then-Arizona state treasurer, Republican Doug Ducey, a Koch favorite. Adams went on to found two linked groups, Prosper Inc. and the Prosper Foundation, that have spent money backing Ducey’s initiatives after he became governor in 2014. American Encore has funded the Prosper groups. Adams is now Ducey’s chief of staff.

In all, CPPR dished out $45 million in grants in 2010. But how did CPPR get all of its money? One major source is TC4 Trust, a now defunct 501c4 nonprofit linked to the Kochs that was also allowed to shield its donors and was set up in the same year, 2009, as CPPR. TC4 Trust further shrouded its wealthy contributors by running the money first through limited liability corporations, which don’t file public tax records at all, and then to CPPR. The LLCs, some that have changed their names from year to year, are considered “disregarded entities” of CPPR, groups run by CPPR but with different names and tax statuses. In 2010, TC4 gave $5.5 million to American Commitment LLC and $4.3 million to Eleventh Edition LLC, entities that then routed the money to CPPR. Noble also founded American Commitment, which is now run by Phil Kerpen, former vice president of policy at Americans for Prosperity.

TC4 Trust also directly funded 60 Plus with millions of dollars in between July 2010 and June 2011. In the following tax year, TC4 gave out almost $28 million in grants, all to LLCs.

David Dziok, director of advocacy communications at Koch Industries and at Koch Public Sector LLC, which spends millions on lobbying and political donations, said that he and Kenneth Spain, managing director of corporate communications and external affairs at Koch Industries — both with conservative political positions in their past — "represent Koch Industries and we don’t have any insight into the political spending of groups like this that are completely unrelated to and independent of the business." However, Spain has spoken for the Kochs' political interests, informing the media that the Kochs refused to fund the Republican National Convention.
Requests for comment were not returned from Charles and David Koch; Mark Holden, senior vice president and general counsel of Koch Industries, president and COO of the legal division of Koch Public Sector, LLC, board member of AFP and board chairman of Freedom Partners Chamber of Commerce; Gerry Scimeca, spokesman of 60 Plus; and from Sean Noble through his consulting firm, DC London.

The $233,000 fine is the largest collected by the FEC since the Supreme Court’s 2010 Citizens United decision opened up elections to unlimited spending by corporations and unions, although it’s a pittance compared to the revenue these groups receive. The fine is also the second-highest penalty given in a case brought by CREW.

“While we would of course like to see larger fines which could be more of a deterrent to groups backed by deep-pocketed donors like the Kochs, these are huge fines by FEC standards,” said Bookbinder. “They have enormous symbolic value, are embarrassing to the groups that receive them, and are large enough to get the attention of violators.”

And CREW isn’t stopping there, as it has “found wrongdoing by Koch-backed groups in a number of cases,” said Bookbinder. Besides its open complaints with the IRS and FBI, it has already filed another IRS complaint, this time against AJS and the Freedom Partners Chamber of Commerce, a trade association that’s now the “central bank” of the Koch network. Both groups appear to have misclassified, most likely intentionally, their private donations as “membership dues,” further shielding their donors. Organizations are required to disclose privately to the IRS the identities of their donors who give over $5,000 but don’t need to disclose who paid membership dues. The groups, which reported a combined total of hundreds of millions of dollars over several years, don’t appear to offer any membership benefits.

James Davis, executive vice president of marketing and communications for Freedom Partners, called the allegations false, writing that "CREW has no credibility because it is a partisan organization led by [Clinton insider] David Brock."

On June 15, CREW filed an IRS complaint against the Koch-funded Legacy Action Fund, a “social welfare” nonprofit it alleges spent nearly 70 percent of its revenue on political activities from 2013 to 2014; such nonprofits are prohibited from spending half or more of their resources on politics. The Legacy Action Fund has received donations from American Encore. CREW filed complaints, some criminal, against nine other nonprofits, including some others funded in part by the Wellspring Committee.

As they break campaign finance laws, the Kochs continue to launch new secret-money groups around the country, including in the South. And generally, the FEC, the IRS and Congress have resisted enforcing or fixing the laws.

“Overall, campaign finance enforcement has been weak at best recently,” said Bookbinder. “Citizens United and related cases have greatly weakened campaign finance laws, and Congress has not been willing or able to step in. The FEC has too often been paralyzed by gridlock … the evidence that we see is that [the IRS] has not been actively enforcing the law, likely at least in part as a result of intimidation from Congress.”

CREW is even going after an enforcement agency itself. “…We currently are suing the FEC over its deadlock and failure to take action against [major secret-money group] Crossroads GPS for this kind of violation.”

By Alex Kotch

Alex Kotch is an investigative reporter based in Brooklyn, New York, and a contributor to the Center for Media and Democracy. A campaign finance expert, Alex helped launch the money-in-politics website Sludge, and his work has been published by more than two dozen media outlets, including International Business Times, The American Prospect, The Nation and

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