by Kim Barker and Theodoric Meyer, ProPublica, The National Memo, 3/17/14
Libertarian billionaire brothers Charles and David Koch were among the first to grasp the political potential of social welfare groups and trade associations — nonprofits that can spend money to influence elections but don’t have to name their donors.
The Kochs and their allies have built up a complex network of such organizations, which spent more than $383 million in the run-up to the 2012 election alone.
Documents released in recent months show the Kochs have added wrinkles to their network that even experts well versed in tax law and campaign finance say they’ve never seen before — wrinkles that could make it harder to discern who controls each nonprofit in the web and how it disperses its money.
A review of 2012 tax returns filed by Koch network groups shows that most have been set up as trusts rather than not-for-profit corporations, an unusual step that reduces their public reporting requirements. But that’s only the beginning. Each nonprofit has in turn created limited liability companies or LLCs, through which money can be funneled. Some also have a separate LLC that has the power to replace the nonprofit’s leader.
It sounds complicated and arcane because it is. Some of the nation’s top nonprofit experts said they could only speculate on the reasons for the network’s increasingly elaborate setup.
“My guess is that we’re looking at various forms of disguise — to disguise control, to disguise the flow of funds from one entity to another,” said Gregory Colvin, a tax lawyer and campaign-finance specialist in San Francisco who reviewed all the documents for ProPublica.
Four other leading nonprofit experts and three conservative operatives with knowledge of the Koch network said the most likely reason that the Kochs and their inner circle are using this arrangement was to exert control over the groups without saying publicly who was in charge. In particular, they said, the Kochs likely wanted to prevent any of the groups that they help fund from going against their wishes — as happened with the Cato Institute, the libertarian think tank the Kochs had long supported before they got into a dispute with its president, Ed Crane.
After a top Cato official ridiculed Charles Koch in a 2010 New Yorker article, the brothers pushed to put allies on the think tank’s board. The following year, they pressed Cato to provide “intellectual ammunition” for their oldest politically active nonprofit, Americans for Prosperity, Cato officials later alleged. The dispute was settled in 2012, with the departure of Crane and the installation of a traditional board. (Cato previously was controlled by four private shareholders, including the Kochs, an unusual setup for a nonprofit.)
Robert Levy, Cato’s board chairman, told ProPublica that while he didn’t disagree with the Kochs’ aims, Cato’s leaders were uncomfortable with serving as advocates for their political agenda.
“The Kochs had their notions about what they wanted to focus on, and those tended to focus on intellectual ammunition for what their political ambitions were,” Levy said in an interview last fall. “We didn’t disagree with that, but we didn’t want to operate at the direction of the Kochs. We’re not involved in electoral politics. We are strictly nonpartisan.”
The Kochs have disputed the allegation that they tried to force Cato to do their political bidding.
In this story, we define the Koch network as including 12 nonprofits active in 2012 — 11 social welfare nonprofits and one trade association. These nonprofits all shared the same attributes: They used LLCs, installed Koch allies at the helm and hired the same set of lawyers. (We did not include think tanks, foundations or other charities, nor the like-minded groups that are funded by the Kochs.)
Officials with Koch Industries and groups in the Koch network did not respond to calls or written questions from ProPublica.
When asked about his involvement with Americans for Prosperity in a rare interview with the Wichita Business Journal last month, Charles Koch downplayed his political activity, saying he and his brother did not have day-to-day involvement with the group.
“Listen, if I could do everything that’s attributed to me, I would be a very busy boy,” he told the Journal.
Here’s what we know so far about how the Koch network uses trusts and LLCs, as well as the advantages they may offer.
As of 2012, all 12 Koch network groups had offshoots known as “disregarded entities” — LLCs that are “owned” by their parent nonprofits and are considered part of them for tax purposes….
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