by Linda Beale
Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions
The Common Cause organization filed a complaint with the IRS under 26 USC 7623, the tax whistleblower act, alleging that the American Legislative Exchange Council violated the lobbying restrictions applicable to tax exempt organizations through underreporting and operating in furtherance of private corporate interests. The complaint argues that “ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization.”
The following paragraphs are from the introduction to the complaint.
This matter concerns the massive underreporting of lobbying by the American Legislative Exchange Council (“ALEC”). While ostensibly a nonprofit organization under Section 501(c)(3) of the Internal Revenue Code, ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization under 26 U.S.C. §501(c)(3), because (i) “no substantial part” of a charity’s activity can be “attempting to influence legislation,” and (ii) ALEC’s activities do not qualify under any of the enumerated purposes of Section 501(c)(3).
This scheme causes harm to taxpayers in two distinct ways. First, ALEC’s activities constitute an abuse of its 501(c)(3) tax exemption, which is reserved for organizations “operated exclusively ” for a limited number of purposes, such as “religious, charitable, scientific … or educational purposes ….” 26 U.S.C. §501(c)(3). Second, ALEC’s corporate members improperly deduct from their taxable income the dues and other contributions made to ALEC; such expenditures are non-deductible lobbying expenses under Section 162(e). In fact, because ALEC solicits very few contributions from individuals, its false claims of tax-exempt status appear driven by the desire of ALEC corporate members to deduct lobbying expenses as charitable contributions.
ALEC’s primary, if not sole objective is to “influence legislation.” Its bylaws state that its purpose is to “formulate legislative action programs,” “disseminate model legislation and promote the introduction of companion bills in Congress and state legislatures,” and “[e]establish a clearinghouse for bills at the state level, and provide for a bill exchange program.” 1 As recently as April 11, 2012, ALEC boasted that “for years, ALEC has partnered with legislators to research and develop better, more effective … legislation. 2Notwithstanding these claims, however, ALEC has reported ”for years“ to the IRS that it has not spent a single penny on lobbying or attempting to influence legislation. These tax returns are patently false. (Complaint available here, on BNA’s tax service)
The complaint goes on to specify how ALEC develops legislation and works to get that model language enacted. The following is an excerpt from this portion.
ALEC boasts about how frequently its bills are introduced in state legislatures to show its influence over the legislative process, publishing “scorecards” to demonstrate the high numbers of ALEC bills enacted. [Exhibit 9] In its 1995 scorecard, then-ALEC Executive Director Samuel A. Brunelli explicitly stated that corporations join ALEC to drive a legislative agenda in a cost effective way: “’This was a landmark legislative year in ALEC’s history,’ said ALEC Executive Director Samuel A. Brunelli. ’With our success rate at more than 20 percent, I would say that ALEC is a good investment. Nowhere else can you get a return that high.’” [Exhibit 11] Similarly, in a brochure that ALEC distributed to recruit more corporations for its private sector membership, it claimed that “during each legislative cycle, ALEC legislators introduce more than 1,000 pieces of legislation based on these models, approximately 17 percent of which are enacted. ” [Exhibit 12] It is telling that ALEC expresses its success in corporate terms, as a good “return” on a corporation’s “investment” in tax-exempt lobbying.
Beyond quantifying its influence by measuring how often its lobbying efforts succeed, ALEC trumpets how its Task Forces and other programs provide corporations with direct access to state legislators. In a near textbook definition of lobbying, the recruitment brochure states “ALEC provides the private sector with an unparalleled opportunity to have its voice heard, and its perspective appreciated, by the legislative members.” !d. The brochure further explains that “[t]his partnership identifies issues and then responds with common-sense, result- oriented policies. The two groups work in unison to solve the challenges facing the nation, with results that will define the American political landscape in the 21st century.” Jd. In other words, ALEC provides a network to influence the legislative process and deliver “results” to its private 13 corporate membership – namely, legislation favorable to corporate members’ interests. These statements by ALEC belie any claim that it is engaged in “education” rather than lobbying . The ALEC Task Forces provide a venue for corporations to lobby legislators while deducting the expenses as charitable donations.
The complaint goes on to outline the way ALEC presses for legislation, including issue alerts and one-on-one contacts with key legislators, bill tracking documents, model press releases and talking points to assist legislators in getting its model legislation passed, hearing testimony by staffers in support of the ALEC legislation, and even luxury conferences three times annually to which legislators are encouraged to bring families for subsidized work/vacations.
Legislator members on ALEC Task Forces are also eligible for “ALEC scholarships,” which reimburse a legislator’s accommodation, transportation and other expenses to attend the ALEC national conferences. Scholarships are also available for legislators to attend other events, including “ALEC Academies,” which are described as a “two-day intensive program on a specific issue;’ attended by invited members of both the public and private sector. Contributions to the ALEC scholarship fund are made by corporations who are solicited directly by legislators at the individual state level. See Exhibit 18 (a breakdown of payments to the ALEC in Ohio scholarship fund). According to the tax filings of PhRMA, the pharmaceutical lobbying group and ALEC private sector member, it provided $356,075 to the ALEC scholarship fund in 2010. 13Many of these expenses are likely deducted from corporate taxable income. The ALEC conferences are nothing more than a forum for tax-subsidized lobbying. ALEC provides logistical support in the form of travel, accommodations, entertainment, and family services, in order to facilitate lobbying by ALEC’s corporate members targeting ALEC’s legislative members.
The complaint considers whether ALEC even qualifies as a 501(c)(3) organization. Suggesting that the only possible qualifying purpose that might be claimed is educational, the complaint concludes that ALEC clearly fails to satisfy any concept of an educational non-profit.
[E]ven if a tortured interpretation of the regulations led to the conclusion that ALEC is not engaged in lobbying, ALEC would fail to satisfy the most basic requirement for 501(c)(3) status – operations that are exclusively for charitable purposes . ALEC’s operations are neither charitable nor educational, much less exclusively so. They are pecuniary and political, and devoted to fostering the enactment of bills that will financially benefit and further the ideological goals of ALEC’s corporate membership.
crossposted with ataxingmatter