Feb. 18 2019 01:51 PM

Experts: Schor likely violated federal tax laws

(This story has been updated to clarify that the Schor Lansing Fund could face fines for not filing filing IRS reports, not Mayor Andy Schor peronally. It also adds information from the fund’s registered agent.)


MODAY, Feb. 18 — The registered agent for the Schor Lansing Fund, which Mayor Andy Schor uses to pay “incidental expenses,” said the mayor has probably failed to file reports required by the IRS.

The agent, Rebecca Bahar-Cook, said there was “probably something missed” when she was asked why Schor has not filed the quarterly reports the IRS requires, except in rare instances. Bahar-Cook, a former Ingham County commissioner, heads Capitol Fundraising Associates.

Bahar-Cook said she was waiting for information from an attorney on whether the fund’s transactions need to be reported. “I’m not familiar with the requirements,” she said.

Bahar-Cook’s company received $17,500 in fees for managing the account in 2018, according to a report Schor provided to City Pulse.

Schor told City Pulse on Monday he is waiting for legal advice, but will eventually file the reports if legally required to do so. Regardless, he may still do so voluntarily, he said.

City Pulse first reported the problem last week in a story on those who contributed about $170,000 to the fund during Schor’s first year as mayor.

The fund could face thousands in fines for failing to file quarterly reports, which is set up as a 527 account.

Funds like Schor’s, known as 527 accounts, are widely used by politicians. Donations and expenditures aren’t capped, and they operate outside the bounds of typical campaign finance laws.

Schor set up his account in 2013 while still a legislator. But in December 2017, as he prepared to be sworn in as mayor, he amended the funds Articles of Incorporation to say that the fund would be used to pay “incidental expenses” as mayor after he took office.

A Washington expert on political funds said he does not see a reason Schor would be exempt from filing such reports.

“If these reports aren’t being disclosed to another state agency, I don’t see any reason why this organization shouldn’t be filing its receipts with the IRS,” said Austin Graham, legal counsel for the Campaign Legal Center, a national watchdog on political spending. “It certainly seems like an unusual situation.”

Schor gave City Pulse a detailed report on donations and expenditure, even though he not filed it with the IRS. It shows he spent about $60,000 on his inauguration ceremony and party. Another $1,131 covered a conference in Washington and $911 paid for food at Lansing Lugnuts games. About $10,000 more was spent at local fundraisers or donation-based dinner events. Another $100,000 still remains to be spent.

Federal tax laws allow for these types of accounts to exist without reporting as long as the officeholder “reasonably expects” revenues to stay below $25,000. That was the case while he represented Lansing in the state House, he said.

But less than one week after Schor was elected mayor, a deluge of tax-free donations from developers, lawyers, lobbyists and labor unions pushed the Schor Lansing Fund well into six digits. Three local unions pitched in $10,000 each. The local tech firm Dewpoint, the largest single giver, donated $10,500. The city has spent about $1.25 million on business with Dewpoint. Other donors chipped in thousands more over the year.

Despite tax code language that requires an initial registration and quarterly spending reports with the IRS, Schor still believes his fund may be exempt from disclosure. His attorneys and the IRS couldn’t provide additional clarification this week, but Schor said he’s ultimately willing to accept the penalties if they find he broke the law.

“We may be exempt. But we aren’t sure and are seeking IRS clarification,” Schor added today. “At this time, we are considering voluntarily filing (regular contribution and expense reports) for 2018 and seeking a waiver of fees. If we don’t get a waiver and are deemed to not be exempt, we will pay the penalties.”

Those penalties, according to the federal tax code, could rise as high as $10,000 for each missed quarterly report with daily fines assessed for every day the account was found to be out of compliance with IRS reporting requirements. The IRS also requires holders of 527 accounts to file an annual 990 report as a nonprofit.

“Once you hit that $25,000 threshold, there needs to be disclosure,” said Adrian Hemond, who heads the political consulting firm Grassroots Midwest in Lansing.

But that does not mean Schor will be fined.

“The IRS is horribly understaffed,” Hemond said. This isn’t just about Andy Schor. It’s an ongoing finance issue. This could be a conscious choice coming from the Trump administration to not enforce these things, or they could just be understaffed.”

Political parties, candidates, committees and other organizations formed to influence an issue, policy, appointment or election are governed by Section 527 of the federal tax code. They can raise unlimited funds and are generally only exempt from disclosure if they also file reports with another federal or state agency.

While the Schor Lansing Fund is registered with the state Department of Licensing and Regulatory Affairs, its cash flows haven’t been reported anywhere since it was created.

Schor can retroactively file his expense reports, but experts contend that won’t necessarily preclude him from eventually facing federal fines.

“The law is a bit fuzzy on some of these things, but this seems to be something where regular reports would need to be filed,” added Craig Mauger, CEO of the Michigan Campaign Finance Network. “Enforcement and consequences are really between the person and the IRS, and I know the IRS is usually slow with enforcement.”

The IRS was unable to provide specific details about the reporting requirements of the Schor Lansing Fund as a matter of policy. Officials there instead directed City Pulse to several specific excerpts of the federal tax code that would seem to mandate regular expense reporting for Section 527 political organizations like Schor’s account.

Regardless of any possible tax code loopholes that would allow the Schor Lansing Fund to discreetly operate without reporting its expenses, campaign finance experts agreed: It’s more about the principle than the law. Elected officials who solicit donations — in any form — should expect to keep those records public, they said.

“Having full information about the funding behind an organization tied to any officeholder, in this case an elected mayor, helps to inform the public about interests to whom they might be beholden,” Graham added. “More generally, it helps the public evaluate their performance. That’s why these IRS requirements exist.”

Brian McGrain, director of economic and planning under Schor, is listed as a “director” of the Schor Lansing Fund in state records. Schor said he came on board when the two served together on the Ingham County Board of Commissioners, but McGrain gave up the role when Schor later hired him into his mayoral administration.

McGrain, however, was still listed as “secretary” of the account in LARA reports from last October — months after McGrain already took a job in Schor’s administration. Schor labeled it an oversight and maintained that McGrain no longer has any involvement in the day-to-day operations of his 527 political organization.