Group: IRS should probe pro-Schuette spending

• Citizens for Responsibility and Ethics in Washington says group didn't report spending, donors.
• Richard McLellan, who founded group, says it's on firm legal footing but won't disclose details.

WASHINGTON — A national watchdog group is calling for an investigation into a tax-exempt Michigan political organization, saying it has spent millions on TV ads featuring Michigan Attorney General Bill Schuette, targeting his opponents, but failing to disclose any of its donors as required by law.

In a complaint sent Wednesday to IRS Commissioner John Koskinen, Citizens for Responsibility and Ethics in Washington (CREW) claims the Michigan Advocacy Trust has violated federal law by not telling the IRS or the Michigan Secretary of State how much it has spent on political ads or who its contributors are.

Groups "that spend most of their time and money on politics must disclose their activities and donors,” CREW Executive Director Noah Bookbinder wrote in the complaint, which was shared exclusively with the Free Press. Michigan Advocacy Trust "is trying to elude the law’s disclosure requirements.”

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But while CREW and its supporters, including Rich Robinson at the Michigan Campaign Finance Network, argue that the Michigan Advocacy Trust, or MAT, appears to be skirting the law, MAT’s founder, Lansing lawyer Richard McLellan, insists it is on firm legal footing, even if he won’t explain specifically how.

“The answer is we make no contributions and we make no expenditures,” said McLellan, who has served in various posts for Republican presidents and governors, acted as senior counsel for Schuette’s 2010 transition team and has a reputation as a campaign legal expert.

“I’ve been doing this for 40 years and I know the lawyers for the Michigan Advocacy Trust have given us good legal advice and we have filed all the (required) reports,” he said. He added cryptically that, in the “subtleties” between federal and state law “what the Michigan Advocacy Trust is doing is lawful.”

As an independent group,  MAT has no direct ties to Schuette or any other candidate, and Schuette declined to comment on its activities. Little is known of its structure. But  MAT, which spent at least $3.7 million on TV ads in 2010 and 2014 favorably portraying Schuette and criticizing his opponents, is part of what critics say is a surge in “dark money” seeking to influence elections anonymously across the U.S.

But CREW and Robinson argue that while Michigan and federal law have loopholes that in some cases allow groups engaging in politics to mask their contributions and expenditures, what  MAT is doing may be something altogether different — and possibly illegal.

"There aren't supposed to be cases where groups are running these ads and not disclosing to anybody," Bookbinder said.

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A loophole

MAT was founded in 2010 by McLellan, who 25 years ago unsuccessfully argued before the U.S. Supreme Court against a state law limiting corporate donations to political campaigns in a decision, Austin vs. Michigan Chamber of Commerce, which was reversed by the court in Citizens United five years ago.

Filing with the IRS as a tax-exempt organization under Section 527 of the tax code,  MAT claimed an exemption to filing regular reports with the IRS, saying it was, and remains, a “qualified state or local political organization.” As such, it is required to follow state law regarding reporting requirements.

And that may be where the MAT’s lawyers found a loophole regarding disclosure: Under Michigan law, only “express advocacy” — ads or other material that expressly urge people to vote for or against a specific candidate — qualify as campaign speech and trigger reporting requirements.

In its ads featuring Schuette and targeting his opponents in the last two attorney general elections, MAT avoided such direct language, instead urging viewers to tell Schuette to “keep fighting for justice” or asking of Democratic candidate Mark Totten last year “is there anything he won’t lie about?”

“The way the game is being played, if you don’t have the magic words (saying vote or don’t vote for someone), there’s no reporting,” said Robinson, whose Lansing-based group combed through records on ad buys at TV stations across the state to find at least a portion of MAT’s expenditures, which weren’t reported elsewhere.

But CREW, in its complaint to the IRS, argues that  MAT — which also may have played a role in the effort to help Lt. Gov. Brian Calley retain his nomination in 2014 — may be relying too much on the state reporting exception, saying that under federal tax rules it is still required to report.

Specifically, CREW claims that  MAT can’t skirt reporting rules because federal law doesn’t allow it: In order to be a “qualified state or local political organization” exempt from reporting to the IRS in the first place, a group has to be subject to a state law requiring it to report the same information it “would otherwise be required” to report to the IRS.

Under CREW's reading of the law, in other words, if Michigan doesn't require  MAT to report contributions and expenditures for what would be considered political advocacy under IRS statutes it can't — by definition — be exempted from reporting that to the federal government.

“You’ve got to be telling the state or the federal government,” Bookbinder said. “They’re not disclosing to anybody.”

Other questions

There are other questions regarding  MAT’s structure that McLellan also declined to discuss, including how it can even qualify under Michigan law as a state or local political organization, since those appear to be limited to state, county or congressional district party groups and there can only be one each of those per party, per jurisdiction.

On its filings with the IRS,  MAT says it is an administrative account of the “23rd Michigan State Senate Republican District Political Party Committee of Ingham County,” which pays for expenses of the committee and engages in “other exempt functions permitted but not reported under the Michigan Campaign Finance Act.”

But CREW says that can’t be permitted because state Senate party committees don’t meet the state’s definition of a qualified local political organization and there is already another Ingham County Republican Party.

While McLellan won’t talk specifics about the legal underpinnings of the group, he did say where he got the idea for the Michigan Advocacy Trust, however: the state Democratic Party.

He said that some time ago, Republicans took notice of an administrative account linked to a Democratic Party organization in Kalamazoo County that appeared to be able to collect and expend contributions without making disclosures. The state Democratic Party even sent him a memo, he said, explaining how it had been set up.

McLellan said he couldn’t remember the name, but it appears to have been a group called Partners for Progress, a short-lived administrative account of the Kalamazoo County Democratic Party, which served as a “soft money drop-box,” as Robinson put it at the time in 2006, for then-Gov. Jennifer Granholm.

If nothing else, it shows that both parties have been engaged in such efforts, where CREW and Robinson have called for transparency. But Robinson said there is a key difference: the Kalamazoo County Democrats qualified as a local political party under state law. The Michigan Advocacy Trust, as best he can determine, does not.

Meanwhile, it’s unclear what, if anything, the IRS will do with CREW’s complaint: The agency is notoriously close-mouthed about investigations, as well as its finding. The IRS also was stung deeply by assertions made in 2013 that it may have targeted conservative tax-exempt groups for scrutiny.

Some aspects of  MAT’s donors to date are known, however, thanks to CREW. Adam Rappaport, a lawyer for the group, revealed in a blog post in June that Dow Chemical, a worldwide firm based in Schuette’s hometown of Midland, gave MAT $400,000 in 2010 and another $200,000 in 2014, according to its corporate records.

Another $1.5 million in 2014 came from the Republican Attorneys General Association, a politically active group which Schuette serves as chairman of this year and next.

As for what's next for  MAT, McLellan said he doubts it will become involved in any federal races next year, believing that could lead to harassment suits which could cost it “hundreds of thousands of dollars” it doesn't have to defend. But he said he thinks the group will remain active on “state policy issues.”

“I suspect in 2018 the (Gov. Rick) Snyder era will be coming to a conclusion and there will be whole new set of issues,” he said.

Editor's note: In previous versions of this story, Lansing attorney Richard McLellan's name was inadvertently misspelled. This version is correct.

Contact Todd Spangler: 703-854-8947 or at tspangler@freepress.com. Follow him on Twitter at @tsspangler.