Tuple Legal is California’s only political research law firm. Tuple occasionally publishes memos on matters of public interest, like this one. By Ryan Hughes (contact).

Note: This memo was not created or posted at the behest of Eric Bauman, his campaign, or anyone else.

Kimberly Ellis Violated Federal Tax LawCampaign finance disclosure is a cornerstone of a functioning democracy. It lets voters know how candidates raise funds for their election, and how they spend that money. Virtually all political organizations must file public disclosures–including candidates for Chair of the California Democratic Party. Kimberly Ellis failed to make any required disclosures for nearly two years, in violation of federal tax law.

Read on for: 1) specifics of Ellis’s violation of the law, 2) what Ellis was required to disclose, 3) the problem with not disclosing, and 4) what you can do to report her violation to IRS regulators.

How Was Kimberly Ellis Breaking Federal Tax Law, Exactly?

Ellis violated the Internal Revenue Code by never filing regular contribution and expenditure reports (known as Form 8872).

In order to receive contributions and not pay income tax on them, an organization must establish tax-exempt status. Kimberly Ellis did that in 2015, when she registered her campaign as a 527 political organization:1

Kimberly Ellis 8871

Having tax-exempt status comes with public disclosure requirements. A 527 organization that “accepts a contribution, or makes an expenditure, for an exempt function” must regularly file campaign reports with the IRS.2 3

But what is an “exempt function”? An exempt function is “influencing or attempting to influence the … election … of any individual to any Federal, State, or local public office or office in a political organization…”4 The IRS considers political parties like the California Democratic Party to be a “political organization.”5

Kimberly Ellis’ campaign organization was of course created to influence the election of the CDP Chair’s race, which is the office of a political organization. She was therefore required to file reports pursuant to the Internal Revenue Code.

As of this writing, Ellis has not filed any of the required Form 8872 reports in the almost two years since she filed for 527 status–despite her legal obligation to do so:6

Kimberly Ellis Did Not File Form 8872

Ellis claimed repeatedly during the campaign that she was not required to file Form 8872,7 8 but that is plainly untrue.

For his part, Eric Bauman did file Form 8872 reports for his committee, as required by law.9

What Did Kimberly Ellis Publicly Disclose, and What Was She Required to Disclose?

Despite this violation of law, the Ellis campaign touted its supposed commitment to transparency by releasing the names of their donors on their campaign website.10 Putting aside for a moment that Ellis’ “disclosure” was through her own website and not through a regulatory body, it falls woefully short of what is required by law.

Take a look at what Ellis disclosed and what she was required to disclose by law on Form 8872:

What Ellis Disclosed

  • Names of Donors

What Ellis Did Not Disclose

  • Amounts Donors Contributed
  • Donors’ Employers
  • Donors’ Occupations
  • Donors’ Locations
  • Contribution Dates
  • Names of Campaign Expenditure Recipients
  • Amounts of Campaign Expenditures
  • Campaign Expenditure Recipients’ Employers
  • Campaign Expenditure Recipients’ Occupations
  • Campaign Expenditure Recipients’ Locations
  • Campaign Expenditure Dates
  • Name of Person in Charge of Keeping Accounting Records

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What Is the Potential Harm In Kimberly Ellis Not Disclosing?

Public disclosure requirements for 527 organizations — and all forms of nonprofit organizations — exist for two main reasons.

The first reason for public disclosure is that it allows the public to know who stands behind a nonprofit organization. For example, the public has no idea how much Quinn Delaney contributed to Ellis, and Quinn Delaney’s personal fortune comes from Bay Area real estate development.11 Similarly, the public has no idea how much money Ellis took from Freada Kapor Klein, whose largesse comes from Silicon Valley venture capital investments.12 Without public disclosure, we’ll never know much corporate influence there actually was over the Ellis campaign. All we know from Ellis’ website is that these very wealthy, corporate individuals contributed over $1,000.

The second reason for public disclosure is that it’s a check on those who would abuse tax-exempt status. Ellis had a half a million dollars at her disposal in this campaign.13 Without publicly disclosing the required information above, the public has no idea how Ellis spent that money. The public simply cannot answer questions like:

  • Did Ellis pay herself a salary from her campaign account?
  • Did Ellis pay family members as campaign vendors?
  • Did her staff charge above-market rates for their services?
  • Did Ellis use non-union vendors for campaign paraphernalia? Did she use overseas vendors?

We’ll never be able to answer these questions until she files the reports she was required to by law.

What Can You Do?

Luckily, the IRS has a mechanism to report tax law violations. You can fill out and email Form 13909 to eoclass@irs.gov.

Ryan Hughes is a political researcher and nonprofit law attorney. Contact him here.

Notes:

  1. IRS, Search Political Organization Disclosures
  2. 26 U.S.C. § 527(j)(2)
  3. Subject to some exceptions, none applicable applicable here: FEC filers, state/local party committees, state/local candidate for public office committees, organizations required to file reports similar to Form 8872 in their jurisdictions, organizations with receipts less than $25,000, 501(c) organizations, and independent expenditures; see 26 U.S.C. § 527(j)(5)
  4. 26 U.S.C. § 527(e)(2) (emphasis added)
  5. See Example 7 at 26 C.F.R. 1.527-2(c)(5)(vii)
  6. IRS, Search Political Organization Disclosures
  7. See, e.g., Kimberly Ellis Campaign Email “Taking Money Matters” (cached version here)
  8. See, e.g., Kimberly’s Ellis Self-published Donor List
  9. IRS, Search Political Organization Disclosures
  10. See: Kimberlys Ellis Self-published Donor List
  11. SF Chronicle, Obama’s Piedmont Backers an Emerging Force
  12. The Verge, Early Uber Investors Put the Company on Blast for Its Response to Harassment Scandal
  13. Politico, Bernie Backers Rage Over Calif. Democratic Party Chair Race