Kochs' Attempt At Hostile Takeover Of Cato Exposes Right Wing Non-Profit Abuse

As information continues to come to light about the attempted hostile takeover of the Cato Institute to make it into a tool of their political empire, the plan both confirms and exposes the ultimate realization of the Powell memo, which set out to

Koch Cato.jpg
As information continues to come to light about the attempted hostile takeover of the Cato Institute to make it into a tool of their political empire, the plan both confirms and exposes the ultimate realization of the Powell memo, which set out to create an indestructible infrastructure to support and sustain the far right as the dominant political force in this country. There was only one purpose to this infrastructure: Consolidation of political power to benefit business in the name of "free enterprise."

As we now know, that infrastructure extends from right wing radio networks to non-profits like Citizens United and Americans for Prosperity. Although the Cato Institute was funded with Scaife, Olin and Koch money, it has managed to remain true to libertarian principles in their purer form.

But no more. With the death of one of the founding board members and shareholders, the Kochs have made a move to pack the board with their ideological counterparts and take majority control of Cato in order to use it as an "ammo shop" for AFP, as Susie wrote about Sunday.

Dave Weigel has more details:

“They said that a principle goal was to defeat Barack Obama,” remembered Levy. “The way David [Koch] put it was, ‘We would like you to provide intellectual ammunition that we can then use at Americans for Prosperity and our allied organizations.’ AFP and others would apply Cato's work to advance their electoral goals.”Levy asked them: “What gives you the impression that [Cato isn’t] providing intellectual ammunition?” He says now: "I never got a satisfactory answer. The only answer that makes sense was that Cato needed to be more responsive to their needs. We would take closer marching orders. That’s totally contrary to what we perceive the function of Cato be.”

Cato’s leadership didn’t respond to this directive, nor did they change anything about the think tank. The Kochs began to change it for them. In February, they nominated 16 people for four slots on Levy’s board. Levy and others were aghast at some of the names. One nominee, Tony Woodlief, a former leader of several Koch-funded groups, had blogged in the past about “sanctimonious libertarians” who refused to get serious about policy. “Libertarianism in practice largely consists of a homogeneous group of people talking to one another about a narrow set of things that matter most to them (legalized drugs, lower taxes), and hoping that the rest of America will wake up and elect them to office,” he sneered in a 2002 post. “The majority of Americans are not, in fact, ‘live and let live’ types.” John Hinderaker, a lawyer and founder of the blog PowerLine, had backed the Iraq war and called George W. Bush a “man of extraordinary vision approaching to genius.

”In the end, the board chose the four members that horrified libertarians the least. The four new members were Judge Andrew Napolitano (“the only one of these nominees who actually is a libertarian,” says Levy), former solicitor general Ted Olsen, Koch Industries shareholder Preston Marshall, and Charles Koch himself. Both brothers were now on the board. They or their close allies held seven of 16 seats. Two more, and they would have had control of the board.* That would end Cato as Washington knows it. “You think I’d WANT to stick around a partisan propaganda farm?” tweeted Julian Sanchez, a Cato research fellow, on Friday. “The Kochs are making me root for that asshole Ed Crane,” tweeted Will Wilkinson, a scholar with some liberal leanings who left the think tank in 2010, sparking a now-quaint round of speculation about Cato’s politics.

It's not against the law for a non-profit organization like Cato to have political leanings, but it's one thing to swear allegiance to libertarian principles and something else again to directly meddle in political affairs on the taxpayers' dime. And make no mistake, that is what the Kochs' goal is, whether stated or unstated. While this power move on the part of the Kochs makes it clear that non-profits are regarded by their ilk as a tool to more easily finance their efforts to own American politics, it also lays bare the abuse of a non-profit organization which was not created to interfere in elections, but to foster scholarship and research of the principles upon which it was founded.

As this paper explains, a takeover of a nonprofit organization differs from a for-profit corporation in significant ways:

Fiduciaries of a nonprofit faced with takeover efforts or preparations view insurgents as desiring to transform their organization’s mission illegitimately. The clearest and legally-binding statement of a nonprofit’s mission can be found in the statement of purposes in its corporate charter.3 Barring amendment of these purposes, any new control group can make only programmatic and policy changes within the range of this mission. Thus, an insurgent group mounting takeover efforts or preparations generally will explain its plans as furthering the mission the nonprofit states in its charter.4 This limitation often will be of little comfort to incumbents facing takeover activity, however, as the expressions of mission in corporate charters are typically quite broad. The sense of a nonprofit’s leaders of its appropriate mission will be more specific, shaped by the history of the organization, the trend in its policies and activities, and the plans and strategies its fiduciaries have laid out for it over time. Despite insurgents’ ability to frame their plans for the nonprofit as existing within the terms of the mission the charter technically states, incumbent leaders may view these plans as a serious compromise of the organization’s true mission – one that they have seen evolve firsthand.

Indeed. Don Bordreaux, a Cato adjunct scholar and advisory board member, writes:

As the narrative is taking form now – on the morning of March 4th, 2012 – the Kochs seem to want to gain greater control over Cato so that they can turn it to play a more prominent role in influencing current political outcomes – that it will work harder at pushing into the public mind the case for today’s pro-freedom political candidates and (hence) less hard at nurturing ideas whose effects on political outcomes will not be felt for years, perhaps decades.

If, in fact, the Koch brothers' strategy is to use Cato to influence political outcomes, they have a problem. Via the Washington Post, a former IRS attorney comments on Cato's unusual shareholder structure:

The unusual structure for Cato raises questions about whether it meets the requirements for a nonprofit under federal tax law since the board could essentially agree to allow control of the organization to be sold to the highest bidder — a highly unlikely scenario but one with possible legal ramifications.

“That is completely at odds with the requirements for [a nonprofit],” said Marcus Owens, a lawyer with Caplin & Drysdale in Washington. Owens was a lawyer with the IRS for 25 years and ran its nonprofit division for a decade.

“The Cato Institute is at risk of retroactive revocation of its tax-exempt status back to 1977,” Owens said.

If the IRS were to decide that Cato should not be exempt from federal taxes, it could order the organization to pay taxes on income from a limited number of years at the corporate rate of 35 percent. The organization had revenues of $39.3 million in 2011, according to its tax forms.

That assessment only addresses the arrangement under which a nonprofit can be usurped by its shareholders. The more important question is whether or not their plans for Cato would also cause it to lose its tax-exempt status. Here are the general IRS guidelines:

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively forexempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

Here's the question. If the goal isn't to push Cato into direct electoral influence, what IS the goal? Why have the Kochs decided that right now, in this day, and this time, they should sue to gain control over Cato in order to install their board?

Jerry Taylor, a senior fellow at the Cato Institute, seems to have the answer as it relates to the conversion of Cato from think tank to "ammo shop" for AFP:

That statement of intent is certainly consistent with what we’ve been hearing from both Kevin Gentry and Nancy Pfotenauer. They’ve frequently complained during their short time on our board that Cato wasn’t doing enough to defeat President Obama in November and that we weren’t working closely enough with grass roots activists like those at AFP.

I'm no fan of Cato's libertarian, Randian philosophy. That said, it seems clear that Ed Crane and current Cato scholars are fighting for their right to be scholars instead of partisan hacks. It may take the clout of the Internal Revenue Service to protect that right.

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