ALEC Accused of Violating Its Tax-Exempt Status; Will the IRS Take Action?

Will the Internal Revenue Service (IRS) launch an investigation into the American Legislative Exchange Council (ALEC), the corporate-backed “nonpartisan” “stealth business lobbyist” group that has been accused of flouting civil and criminal tax laws?

That’s the obvious question to ask after a prominent Washington, DC-based tax attorney, acting at the behest of one of his clients, sent the IRS a 30-page complaint two weeks ago, following a months-long exhaustive study of ALEC’s tax filings, expenditures and public reports about its political activities. The study contained dozens of new examples of how ALEC, whose board is made up entirely of Republican lawmakers, has violated its tax-exempt status.

ALEC has claimed on its annual tax filings with the IRS that it has not engaged in lobbying activities, but publicly boasts that it has helped write and enact at least 1,000 pieces of legislation, such as the controversial “Stand Your Ground” law, used as a defense in the shooting death of Florida teen Trayvon Martin. ALEC’s assertion, however, is undercut by the fact that the organization’s attorneys, Mark Behrens and Corey Schaecher, registered as lobbyists to represent ALEC in 2008 and 2009, according to North Dakota state records.

ALEC was founded in 1973 in Chicago by state lawmakers and a conservative activist. It is listed as a 501(c)3 tax-exempt organization and, under the IRS code governing 501(c)3’s, it is prohibited from influencing legislation “as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”

“The fact that ALEC provides significant benefits to its corporate donors and Legislative Members is incontrovertible,” says the June 18 complaint sent to IRS Commissioner Douglas Shulman on behalf of Clergy VOICE, a group of Christian clergy based in Ohio. “The benefits conferred on either group would alone be sufficient to jeopardize ALEC’s tax-exempt status. Moreover, based on the political orientation of the organization’s corporate members and its Legislative Members’ strong ties to the Republican Party, ALEC’s operations appear to benefit one particular segment of the political spectrum. In light of this, it is appropriate – indeed, necessary – for the IRS to investigate ALEC’s activities.”

An IRS spokeswoman told Truthout earlier this week that the agency does not comment on any investigative actions it may or may not take against an organization or an individual for alleged tax-code violations.

But Marcus Owens, the lawyer who represents Clergy VOICE and wrote the letter to the IRS, detailing what he says is confirmation that “ALEC has deliberately and repeatedly failed to comply with some of the most fundamental federal tax requirements applicable to public charities,” expects the IRS to take Clergy VOICE’s demands for an investigation into ALEC seriously.

“This letter, along with other information the IRS might not know about, will be forwarded to the director of Exempt Organizations, Examinations Office in Dallas,” a division of the agency Owens once directed during his more than two-decade long stint working for the IRS, he said in an interview. Owens was director of the Exempt Organizations Division from 1990 and 2000.

“That office evaluates the information in the complaint and a decision is made to either schedule an examination, that is, an audit or not. That decision is made in Dallas by a group of experienced career IRS employees.”

Owens said the IRS is not required to act on his letter, but if it does decide to probe ALEC based on his complaint and one filed in April under the Tax Whistleblower Act by the government watchdog group CommonCause, which made similar charges, it could be years before the IRS completes an investigation and audit, and the only way the public would learn about it – barring a leak from ALEC – is if ALEC’s tax-exempt status is revoked.

Owens said the career IRS employees based in Dallas would be responsible for analyzing the “nature and quality of the information” the IRS received about ALEC’s alleged violations and they would then decide whether an audit into ALEC to determine if the organization is in violation of its tax-exempt status is warranted.

“The decision about investigations and audits will be made without regard to the politics of it,” Owens said, adding that the only two political appointees at the IRS are Commissioner Douglas Shulman and Chief Counsel William J. Wilkins. “The group of career employees will have to document their findings in order to preserve the nature of their decision and why it was made.”

An ALEC spokeswoman did not respond to requests for comment.

“Cover-Up”

ALEC’s most recently filed Form 990, the type of tax filing charities are required to file annually with the IRS, identifies $7.1 million in total revenue raised in 2010. On that filing, ALEC says its mission is to “assist state legislators, Congress & the public by sharing research and educational info.” Its 2010 Form 990 and others from previous years show ALEC has spent millions of dollars on conferences and legislative task forces, which “provide a forum for legislators and the private sector to discuss issues, develop policy and draft model legislation.”

But it’s what ALEC omitted from its Form 990 that led Owens to believe ALEC was engaging is some sort of “cover-up.”

“There wasn’t any reporting of lobbying activity,” Owens said. “The organization has consistently said zero and yet they boast about changing laws. That’s just unbelievable. How can you enact legislation without engaging in lobbying activity? You just can’t. They registered two of their lawyers as lobbyists. Why isn’t that in their filings? I think they are trying to cover something up. I think that their lobbying goes well beyond what’s permitted.”

If ALEC’s tax-exempt status is revoked, for example, because the organization failed to file accurate Form 990s, the organization could be liable for millions of dollars in taxes and penalties going back many years, Owens said, in view of the fact that an incomplete and materially inaccurate Form 990 does not start the normal statute of limitations running, which is about three years.

In his letter to the IRS, which was sent to the attention of Commissioner Shulman, Owens noted that ALEC defended itself against earlier charges raised by CommonCause that its work primarily consisted of lobbying in violation of its tax-exempt status. ALEC had said its work fell “within the exception from lobbying for ‘nonpartisan analysis, study, or research'” because ALEC “provides background on the issues involved, for example, by including a link to ‘substantive studies’ when it sends e-mail communications to legislators.”

While Owens admits that he and Clergy VOICE “have not reviewed all of ALEC’s model legislation and related communication” because many have never been made available publicly, the “legislative proposals and related communications we have reviewed do not satisfy any of the requirements for the exception for nonpartisan analysis, study or research.”

Owens compared ALEC’s work on public policy issues to that of disgraced pay-for-play lobbyist Jack Abramoff, who had close ties to top lawmakers and officials in the Bush White House, and used his clout and his clients’ cash to win them special favors from lawmakers.

“Abramoff would probably feel right at home at an ALEC meeting,” Owens said. “Abramoff used charities to cover travel expenses of legislators and staff to resorts in much the same way that ALEC covers the travel and entertainment expenses of legislators, their spouses and children to [conferences that have been held in] San Diego, Scottsdale and similar locations.”

Indeed, under the guise of “scholarships,” ALEC funds state legislators’ and their families’ travel to ALEC-sponsored conferences at luxury hotels where lawmakers meet with corporate executives to discuss and draft policy pertaining to issues that often benefit the corporate entity represented.

“Who knows what goes on at their conferences in San Diego and Scottsdale?” Owens said. ALEC makes “very few of their studies public.”

Owens said the fact that ALEC has not disclosed on its Form 990 that it makes financial payments to lawmakers in the form of scholarships and that the individual lawmakers do not disclose receiving the “scholarships,” even for their spouses and children, on their state ethics disclosure forms is yet another example of the organization’s “laundry list of civil and criminal violations and is difficult to explain.”

Owens added that the IRS consistently treats the travel and entertainment expenses of family members as taxable income.

“One has to wonder,” he said, “whether the legislators are reporting and paying income tax on such amounts, which collectively total more than $1 million each year.”

While ALEC does not disclose what takes place behind closed doors in the meetings the organization arranges between corporate officials and state legislators, it is well documented that the legislative proposal that emerge are designed to specifically benefit ALEC’s corporate members, which, for example, was the case by the limits placed on asbestos-related liability claims that turned out to be a huge benefit to Philadelphia-based Crown Holdings and apparently to no other company.

“That’s not what a charity does,” Owens said. “They are promoting legislation that is not in the public interest but rather in the interest of organizations like [Crown Holdings]. I have never seen anything like this under the guise of a charity.”