How this dark money liberal group is violating tax law
Ryan Ellis
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In late July, Politico reported that Third Way, a self-described centrist political group, met with Democratic chiefs of staff in the United States Senate to brief them about the danger to President Joe Biden’s reelection if a third-party presidential candidate runs from the center. The whisper candidate of choice is Sen. Joe Manchin (D-WV). Another centrist group, No Labels, is reportedly looking to spend more than $70 million on such a bid.
Third Way is partnering with the Lincoln Project and Move On to block No Labels from getting third-party ballot access for Manchin or anyone else. This means a supposedly centrist organization (Third Way) is partnering with far-left groups for purely political reasons to block another centrist group from running a presidential campaign.
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What should raise some eyebrows both politically and legally is how Third Way is getting the money to launch this quixotic political effort. There’s no question it has the legal standing to do so — as a 501(c)(4) tax-exempt corporation, Third Way can participate explicitly in both legislation and election politics. That’s because most of the time, contributions to 501(c)(4) nonprofit organizations are derived from gifts made with after-tax dollars. It’s like you or I donating to a candidate or a political party, just by proxy.
But that’s not Third Way’s business model. According to the 990 tax forms filed by Third Way with the IRS, Third Way received $57 million in grants and contributions from 2019 to 2021. However, the lion’s share of this income, $36 million, or 63%, came from the Third Way Institute. This group is the 501(c)(3) sister corporation of Third Way. Unlike a 501(c)(4), donations to the Third Way Institute are tax-deductible. The price paid for tax deductibility is that TWI cannot engage substantively in lobbying or electioneering, including launching presidential campaigns.
Of the $37 million in tax-deductible contributions raised by the Third Way Institute from 2019 to 2021, $36 million, virtually all of it, was funneled to sister group and 501(c)(4) Third Way. In other words, pre-tax dollars were laundered into political cash. That is in violation of tax law. Here’s what the IRS has to say about what 501(c)(3) groups can do with their money:
Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.
Imagine for a moment that the Heritage Foundation, a 501(c)(3) conservative think tank that devotes itself to policy research and stays out of elective politics, donated almost all its money to Heritage Action, their 501(c)(4) sister non-profit established to explicitly intervene in campaigns and lobbying. It would appear, and in fact would be true, that donors were giving to political and lobbying causes on a tax-deductible basis, merely by laundering the cash through the Heritage Foundation.
IRS statute, regulations, and case law create a wall of separation between pre-tax and after-tax non-profits for this very reason. Third Way either doesn’t know or doesn’t care that they are apparently violating the law in this case.
All this raises some interesting questions for Third Way and the Third Way Institute: What firewalls have Third Way instituted to ensure that no TWI dollars are being spent on this extensive political activity? Do TWI donors know that their tax-deductible contributions have been directly rerouted to a political entity? If they are aware of this, what checks has TWI shared with them to ensure they are not engaged in a fraudulent scheme? Has Third Way registered to lobby on any of this? Has the IRS given a private letter ruling clearing any of this, or has either the Third Way or TWI 990 tax form been subject to audit?
I reached out to several prominent and known TWI donors for their answers to these questions, including Daniel Stid of the Hewlett Foundation, John Arnold of the Laura and John Arnold Foundation, Mark Suzman from the Gates Foundation, and venture capitalist John Doerr. None of them responded to my inquiries at the time of publishing.
As someone who has represented nonprofit organizations before the IRS for two decades, I can assure Third Way and TWI that the agency’s inquiries will be less voluntary.
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Ryan Ellis is the president of the Center for a Free Economy, a conservative 501(c)(4) focused on tax, spending, healthcare, and regulatory policy. Ellis is also an IRS Enrolled Agent with a 20-year tax preparation and representation practice in the Washington, D.C., area.