Consumer group challenges governor’s nonprofit political fund

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San Jose Mercury News

SACRAMENTO – A consumer group is asking the IRS to reconsider its ruling granting tax-exempt status to a political fund run by Gov. Arnold Schwarzenegger, saying the entity violates federal tax laws by allowing the governor to raise money, lobby lawmakers and conduct polls without disclosing its source of money.

Even while pledging to disclose all his political contributions, Schwarzenegger quietly incorporated the private nonprofit organization in January to serve as a companion group to an already complicated array of political action committees.

The nonprofit, called California Recovery Team, was organized as a “social welfare” entity exempted from paying taxes under section 501 (c)(4) of the tax code.

But the Foundation for Taxpayer and Consumer Rights has challenged that designation, arguing that the Recovery Team’s primary mission is political.

If the challenge is successful, not only could the governor be required to pay a substantial amount in back taxes but it could also force Schwarzenegger to reconsider a highly successful strategy of raising and holding large amounts of money as a war chest for a variety of political purposes.

Critics say Schwarzenegger’s promise to disclose all political contributors is not good enough.

“The problem is that no one can be sure he delivers on the promise unless he is required,” said Carmen Balber, spokeswoman for the Foundation for Taxpayer and Consumer Rights. “I think there are a lot of Californians who are disillusioned with Schwarzenegger’s promise not to accept special-interest donations. This promise is little more than hallow.”

Tom Hiltachk, Schwarzenegger’s attorney, said that creation of the nonprofit arm to promote ballot measures is not a violation of federal tax law. “They are just wrong,” he said. “For the 15 years that I’ve been in practice, the IRS has recognized campaign committees that support or oppose ballot measures as exempt.”

Bill Steiner, spokesman for the IRS, said he could not comment.

As a candidate, the former Hollywood superstar say he didn’t need outside support to achieve his political goals. But now as governor, Schwarzenegger has proven an aggressive fund-raiser for both himself and his party and his methods are coming increasingly under scrutiny.

Schwarzenegger raised and spent $27 million during the recall and another $11 million to help pass ballot measures in March. Now with the November election only a few months away, he’s been again busy – a recent appearance in support of Republican Senate candidate Gary Podesto raised more than $500,000; while his showing in Yuba City last week was expected to bring in $300,000 more; and an event for the California Republican Party on Monday generated about $2 million.

The California Recovery Team serves as the primary fund-raising vehicle for ballot measures the governor supports.

Hiltachk said the corporation is identical to an existing Schwarzenegger political action committee known as “Gov. Schwarzenegger’s California Recovery Team.” He said it is a common practice among campaign managers to have both the private nonprofit and the political committee so that donations can be collected without paying taxes on interest income earned.

But Balber points out that the IRS section under which Schwarzenegger’s group was granted tax exempt status doesn’t apply: Section 501 (c)(4) is intended only for social welfare organizations.

She notes the governor’s nonprofit is political, as it’s led by Schwarzenegger, its board of directors consists of Schwarzenegger supporters or staff members, including Hiltachk; Gary Hunt, a longtime Schwarzenegger supporter; senior adviser Bonnie Reiss; and Deputy Chief of Staff Donna Lucas.

“They did this only to dodge taxes,” said Balber. “We think it is important that with California in financial crisis, that the governor pay all the taxes he owes.”

Although Hiltachk said use of the nonprofit status in support of a ballot measure campaign was common, a number of political watchdog organizations said they were not familiar with the practice.

Because Schwarzenegger has six political action committees along with the nonprofit it’s difficult for voters to follow where and how contributions are being used, said Jim Knox, former executive director of California Common Cause.

In March, Schwarzenegger said in an interview there is no intent to hide any contributors.

“We don’t put any blocks on information,” he said. “It’s all legitimate. One of the very important directions everyone has on my team is to do everything straight forward, legitimate and open. There’s no monkey business.”

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