How Dark Money Works


The Underwood Tariff Act, named for the pleasant-looking Sen. Oscar Underwood, re-instated the federal income tax.
The Underwood Tariff Act, named for the pleasant-looking Sen. Oscar Underwood, re-instated the federal income tax.
Philipp Kester/ullstein bild via Getty Images

Sure, dark money has a cool name, but what about its backstory? To boil it down, dark money is the result of a convergence between a seemingly innocuous tax statute and a deeply divisive Supreme Court ruling. Sensational stuff? In its own way, yes. Let's start with the tax status.

Back in 1913, the U.S. Congress enacted the so-called "Underwood Tariff Act" (aka the Revenue Act of 1913). That's the one in which the feds reintroduced income tax. Included in the act were a bunch of exemptions, one of which was for nonprofit groups [source: Gershman]. It's generally thought that the U.S. Chamber of Commerce was behind this statute, which would make sense because the Chamber just happens to be a nonprofit. This exemption included in the 1913 Act is considered the forerunner to 501(c)(4) designation, but it's unclear exactly when that precise nomenclature appeared. The 501(c)(4) designation refers to two different types of nonprofits: "social welfare organizations" and "local associations of employees" [source: IRS].

By 1959, the government had accepted the idea that these organizations could be involved in politics and had codified them as "action organizations." By 1981 the rules were further loosened with the result that such a group could be politically engaged and still retain 501(c)(4) status if it limited its engagement to the promotion of "social welfare." It doesn't take a tax accountant to see that this kind of language is a slope waiting to be slipped down [source: Gershman].

Indeed, 501(c)(4) has always been slippery, but the slope it established turned out to be the setting for an avalanche.

On to part two: In 2010, the Supreme Court handed down a ruling in the case of "Citizens United v. the Federal Election Commission." In a nutshell, the ruling defined corporations and unions as individuals and spending as a form of free speech. Since the free speech of individuals is protected by the First Amendment, the ruling meant that corporations are allowed to spend as much as they want when it comes to political campaigns. While direct contributions to candidates remain limited, contributions to the PACs that support them are completely unlimited. PACs, however, are inconveniently obliged to disclose the names of their donors [source: Levy].

Say you want to help create an ad that viciously attacks a candidate. Maybe, to up the ante, you wouldn't be averse to spreading a little misinformation. This kind of thing looks bad if it can be traced back to you and your associates. That's where dark money comes in. By shoveling funds into a nonprofit "social welfare" organization with 501(c)(4) status, you can avoid all that. Your donation remains anonymous, and the organization can fund away without any fear of blowback. In fact, the 501(c)(4) organization can even donate your funds to a PAC. When the PAC discloses its sources, all that pops up is the name of the nonprofit. You and yours stay safely hidden behind the dark money curtain, and, best of all, you can give as much as you want.

So while the 501(c)(4) designation has been around for decades, the Citizens United decision made it deeply relevant to American politics.