Politics has long wrestled with the intersection of wealth and democracy. While campaign finance reform traditionally has focused on other entities, the role of nonprofit entities has received comparatively less scrutiny. In light of today’s settlement against the Trump Foundation as well as recent comments by billionaire philanthropist Kat Taylor, it is worth considering the role of Donor Advised Funds (DAFs) and nonprofit money in politics. In particular, increased disclosure requirements for 501(c)(3) entities, including DAFs, can provide an achievable, moderate, reform.
Background Frameworks: Campaign Finance Reform
There have been numerous attempts at campaign finance reform. Following the presidency of President Richard Nixon, Congress enacted the Federal Election Campaign Act (FECA) which, following court cases and several amendments, provided incentives for so-called “soft money” to flow through political parties. See McConnell v. F.E.C, 540 U.S. 93, 122–27 (2003) (explaining the incentive structure following the FECA). As more and more money began to flow through parties, Congress responded with additional campaign finance legislation, enacting the Bipartisan Campaign Reform Act in 2002 (also known as McCain-Feingold).
However, these landmark pieces of legislation have been challenged. Most notably in Buckley v. Valeo, 424 U.S. 1 (1976), the Court considered a First Amendment framework for campaign finance regulation but upheld much of the law. Following the passage of McCain-Feingold, in McConnell, 540 U.S. at 143, the Court upheld a ban on soft money going through political parties. It reasoned that “the prevention of corruption or its appearance constitutes a sufficiently important interest” to pass strict scrutiny. Id.
However, the existing regime was undercut in Citizens United v. F.E.C, 558 U.S. 310 (2010). This decision allowed for unlimited outside spending on elections and effectively took away many limits on campaign financing. Nevertheless, it upheld disclosure requirements, reasoning that “[d]isclaimer and disclosure requirements may burden the ability to speak, but they ‘impose no ceiling on campaign-related activities’ or ‘prevent anyone from speaking.” Citizens United, 558 U.S. at 315 (2010) (quoting Buckley, 424 U.S. at 64; McConnell, 540 U.S. at 201) (internal citations omitted).
Transparency as a First Step and Half-Measure Towards Reform
While many advocates would prefer additional restrictions, a more moderate – and thus perhaps a more initial, low-hanging fruit opportunity – are adopting stricter transparency requirements for various political funds. The idea is that if one gives money to a partisan entity, they should be required to disclose that they gave that money.
501(c)(3) Entities with an Ideology: “Nonprofit” Spending Through Outside Groups
Just as after initial reforms, “soft money” began to flow through political parties, following recent reforms, ideological money has begun to flow to non-profit 501(c)(3) entities. While 501(c)(3) nonprofit organizations are prohibited from giving directly to political campaigns, 501(c)(3) organizations still have a lot of advantages. Most notably, they are exempt from taxes and thus are effectively subsidized by the American public.
Typically, when people think of 501(c)(3) entities, they think of the American Red Cross or Harvard University. But there are other policy-oriented 501(c)(3)s. Most 501(c)(4) organizations or other outside spending entities also have a 501(c)(3) arm. The 501(c)(3) arm normally focuses on education, but it can also direct its resources towards more partisan goals.
Recently, more scrutiny has been paid to 501(c)(3) entities that engage in quasi-political activity. For example, there has been an increased focus on the role of ideological foundations influencing political agendas. Most notably the Charles Koch Foundation has received significant criticism and inquiry for its work with the Antonin Scalia Law School at George Mason University, and the Bradley Foundation has been the subject of high profile news investigations into its work creating organizations such as the Federalist Society. Activist groups and journalists, including Jane Meyer, have called attention to the issue.
These organizations work to push specific ideas and frame debates around policy issues, without explicitly backing any elected candidate. Thus, while campaign finance laws have focused on elections, the more long-term goals of intensely ideological foundations also can affect political dynamics.
Existing Nonprofit Disclosure Requirements
One central feature of 501(c)(3)s, typically, is a disclosure requirement. For example, both private foundations and public charities – the two most common types of 501(c)(3) entities – must disclose where their money is going on an annual form, known as a 990. These forms are publicly accessible and can be accessed easily through online search engines. Much of the data on these forms is valuable and has been used by public organizations looking to measure effective means of justice and adherence to the group’s stated mission by outside groups, such as Charity Navigator.
Donor Advised Funds: A New “Nonprofit”
However, one vehicle which has been in the news lately is the Donor Advised Fund, or DAF.
Donors to DAFs give their money to a fund, which they then legally do not control. Thus, they can immediately get a tax benefit from their initial gift. However, at a practical level, the gift merely sits in a fund, often managed by a large financial institution, and does not yet go to any cause. At any time, the donors can merely advise the fund managers to give the money to whatever 501(c)(3) nonprofit they wish. For disclosure purposes, the only item listed on any otherwise publicly accessible is the name of the financial institution.
While some criticism of the of DAFs has existed before, it has recently taken on a more political tenor.
Criticism and Opportunities for Reform
Just last week, perhaps the most high-profile critic of DAFs emerged. Kat Taylor, the billionaire CEO of the Beneficial State Bank has criticized some major aspects of DAFs. This is notable both given that she stands to significantly benefit from the DAF structure, and admits to using them. Further, she co-runs her 1,800-acre personal cattle ranch with another high-profile individual, her husband and presidential candidate Tom Steyer. Thus, her criticism, which elsewhere may have been more notable in philanthropic circles, has political and justice implications, given her connection to her husband’s campaign.
Taylor’s criticism centered on the idea that when a donor gives to a DAF, they get an immediate tax break without necessarily passing that money to an actual good cause, which mirrors existing scholarly criticism. However, more generally, the increased scrutiny on DAFs can hopefully bring attention to another issue: they allow for easy and effective circumvention of disclosure requirements for 501(c)(3) entities.
To be clear, there are many ways for donors may attempt to hide their contributions. But given the increasing role of 501(c)(3) entities in framing ideological arguments and the simplicity and effectiveness of DAFs in allowing for donors to hide their involvement with such entities, increased transparency may provide a simple half-measure towards a more just approach to elections and campaigns. The role that DAFs can have in allowing donors to get tax breaks but hide the fact that they are giving in politically oriented, if not explicitly political (as the Trump Foundation acknowledged it illegally did), ways further may provide opportunities for more money to meddle in elections.