Who Controls the Kochs’ Political Network?

Who Controls the Kochs’ Political Network?

Obscure limited liability companies have ultimate say over the Koch network’s nonprofits, which spend hundreds of millions of dollars to advance conservative causes.

By Kim Barker and Theodoric Meyer From ProPublica

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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 nonprofit trusts rather than not-for-profit corporations, an unusual step that reduces their public reporting requirements.

“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.org.

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.

Here’s what we know so far about how the Koch network uses trusts and LLCs, as well as the advantages they may offer.

Disregarded Entities

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.

The first such LLC sprang up in February 2010, when Sean Noble, the head of a Koch network nonprofit called the Center to Protect Patient Rights, formed SDN LLC, using the initials of his own name. (ProPublica wrote a story last month about Noble, the Koch network’s money man in 2010 and 2012.)

Koch network groups came to have a total of 19 disregarded entities, tax records show; Freedom Partners Chamber of Commerce, a trade association that distributed almost $236 million to other nonprofits in the year before the 2012 election, led the way with five.

Unlike corporations, LLCs set up in Delaware are not required to disclose who runs them. The only documentation available is the name of the person who creates them. In the Koch network, 11 of the disregarded entities were formed by the same Chicago trust lawyer, Jonathan Graber. Most had nonsensical strings of letters for names, like SLAH, ORRA or DAS MGR. All were set up in Delaware.

Before the 2012 election, two groups sat at the top of the Koch money spigot. TC4 Trust, which has since folded, and Freedom Partners, which remains on top of the Koch pyramid, shelled out more than $204 million to the network’s 10 other nonprofits. But instead of giving the money directly to the nonprofits, TC4 and Freedom Partners gave those millions to the groups’ disregarded entities.

That made the money more difficult to follow. We had to wait for the group’s tax return, filed in August 2013,

Donors to social welfare groups and trade associations have only become public in a handful of cases, but some corporate and individual donors still worry about scrutiny from stockholders or the IRS. One operative told ProPublica he’d heard a Koch network official suggest that a donor with such concerns write checks to disregarded entities rather than to better-known nonprofits.

“You don’t want to just create one layer of anonymity, because that layer could be breached, maybe just by accident – you know, the memo that’s left lying around kind of situation,” said Lloyd Hitoshi Mayer, a law professor and associate dean at the University of Notre Dame who specializes in nonprofits and campaign finance and who reviewed the groups’ available documents for ProPublica.

Further, while nonprofits are required to disclose their top administrators and boards in tax filings, disregarded entities can have separate managers who are not identified anywhere, said Ellen Aprill, a professor at Loyola Law School in Los Angeles who has studied politically active nonprofits. Such a manager would be able to control how the money received by the LLC was spent.

Seven disregarded entities in the Koch network took in more than three-quarters of the money received by their parent nonprofits. POFN, the disregarded entity of a nonprofit called Public Notice, for instance, brought in more than 75 percent of its parent’s $6 million in revenue from May 2011 through April 2012. POFN’s manager — whoever that may be — would control how that money was spent, nonprofit experts said.

So far, the Koch network’s use of disregarded entities has been unique. ProPublica reviewed tax returns filed by more than 100 liberal and conservative nonprofits that reported spending money on elections in 2010 and 2012. No group unaffiliated with the Kochs had such offshoots.

Their use might be catching on: In July 2012, the American Future Fund, a dark money behemoth that received most of its money through the Koch network but is not part of it,formed its own disregarded entity, Franklin Squared.

Trusts

Social welfare nonprofits are typically formed as not-for-profit corporations, with boards that set their policies.

But nine of the 12 nonprofits in the Koch network were formed as trusts — an approach several tax experts said they had rarely, if ever, encountered. The first was TC4 Trust, which was established in August 2009 and folded in 2012. Eight more Koch-affiliated groups were set up as trusts in 2010 and 2011.

Trusts are subject to little outside oversight. They don’t have to file incorporation papers or annual reports to the state. Any documents filed with the IRS take effort and time to get. “It keeps it out of the public eye a little longer,” said Lawrence Katzenstein, a lawyer in St. Louis who has formed charitable trusts.

Trust agreements rarely have to be filed publicly, but since most of the Koch-connected trusts have been recognized by the IRS as social welfare nonprofits, their trust agreements are available from the agency. ProPublica examined six trust agreements for groups that are still active.

The trust agreements are all “irrevocable,” meaning the trustee cannot change them, except for changing the trust’s name or anything necessary to maintain the group’s tax-exempt status. Two of the trustees are longtime Koch insiders; a third used to be a lawyer for the Charles G. Koch Charitable Foundation. Two other trustees are relatively new to the Koch fold but have long conservative pedigrees.

Despite those credentials, the trustees can be axed at any time. Each trust agreement gives an LLC xxx  not a disregarded entity, but a different one with a similarly nonsensical string of four letters for a name — power to remove the trustee for any reason. For instance, Daniel Garza, the trustee for the LIBRE Initiative Trust, can be removed by an LLC called THGI.

Tax experts say that this means that someone behind that LLC can actually control the nonprofit. “It’s someone having control, and it’s that someone going to great lengths to avoid being known,” said lawyer Marcus Owens, who used to run the Exempt Organizations division of the IRS.

Little else is known about these LLCs except that they, too, were formed by Graber in 2010 and 2011 in Delaware, a state that requires virtually no disclosure.

Giving someone the power to remove the trustee is increasingly common, said Charles Durante, a Delaware lawyer who does work with trusts, nonprofits and LLCs. But it’s typically a named individual, he said, not an anonymous LLC.

“That is not customarily how people structure their trusts,” he said.

One employee of a nonprofit with ties to the Kochs, who spoke on condition of anonymity because he feared retribution, said the LLC arrangement fit in with the brothers’ desire to keep a tight grip on their organizations.

He said “Their level of degree to which they insist on control is truly spectacular,”