Wednesday, July 11, 2012

Criminal Tax Penalties for ALEC? CMD's Investigation Provides Facts for Powerful New Complaint by Former IRS Official

Criminal Tax Penalties for ALEC? CMD's Investigation Provides Facts for Powerful New Complaint by Former IRS Official
by Brendan Fischer
PR Watch
July 9, 2012

This month, a former leader of the Internal Revenue Service filed a complaint that the American Legislative Exchange Council (ALEC) has violated the terms of its nonprofit status by operating primarily for the private benefit of its corporate members, based on documents and research from the Center for Media and Democracy (CMD), which manages PRWatch, ALECexposed, and SourceWatch. The complaint, which also alleges that ALEC misrepresented itself in tax filings, raises additional allegations beyond those in earlier IRS complaints filed by Common Cause.

"Astounding" Violations of IRS Law

ALEC "elevates commercial gain for a few over the well-being of society's less fortunate" through "an agenda largely crafted by the organization's corporate members," the complaint states (a pdf of the complaint is below). Marcus Owens, the former chief of the Service's nonprofit division, filed the complaint on behalf of Clergy VOICE, a group of Christian ministers in Ohio. "ALEC has deliberately and repeatedly failed to comply with some of the most fundamental federal tax requirements applicable to public charities," the complaint says. Owens is a nationally recognized expert and leader on nonprofit tax law and a member of the noted law firm Caplin & Drysdale.

ALEC is afforded a variety of benefits by virtue of its "charity" status -- not least of which is giving corporations a tax deduction for paying ALEC membership dues -- but in exchange for those benefits, ALEC is supposed to primarily serve public or charitable interests (rather than private interests) and engage in minimal lobbying.

"ALEC is doing an extraordinary amount of lobbying, but reporting to the IRS they are doing NO lobbying," Owens told CMD. "Even when North Dakota forced two of ALEC's attorneys to register as lobbyists, they still reported [on their IRS filings] they did no lobbying. That is astounding."

"I have never seen such a systematic and extensive operation . . . to sidestep disclosure and ethics rules in a way that really allows them to have an extraordinary impact," Owens said.

Corporate Control over Model Bills Give Private Benefit

In the complaint, Owens and Clergy VOICE allege that ALEC operates primarily for the benefit of its corporate members by offering "not only unprecedented access to state lawmakers -- the very individuals who introduce and support the state laws that positively impact the corporations' bottom lines -- but also the opportunity to draft those laws." The complaint references "model" bills like the asbestos liability act, which specifically shields ALEC member Crown Holdings from asbestos liability claims, and the Drug Liability Act, which benefits ALEC member pharmaceutical companies like Pfizer or Merck by protecting them from lawsuit when their products injure or kill (as CMD discussed when that model bill was introduced in Wisconsin).

ALEC is structured to give private benefit to its corporate members, the complaint states, with its operating procedures giving ALEC's "corporate donors authority to approve or veto every legislative and policy proposal developed by ALEC's Task Forces," and its bylaws giving "corporate members disproportionate authority to appoint and remove legislators from the Task Forces."

According to the complaint, "[t]his effectively ensures that the only model laws distributed to ALEC's Legislative Members and disseminated nationwide are those that have been co-drafted and subsequently blessed by ALEC's corporate donors."

"Further, the legislative proposals that clear this process appear to be motivated substantially, if not primarily, by the pecuniary interests of ALEC's corporate members."

The complaint also notes that ALEC's legislative board and most legislative members are Republicans -- and that most of ALEC's operations provide a private benefit to the Republican Party.

Scholarships Are "the Definition of a Bribe"

The site of the ALEC 2011 States & Nation Policy Summit in Scottsdale. Clergy VOICE also alleges that ALEC operates to benefit its legislative members through the "scholarship program" that allows corporations to pay for the flights, hotel rooms, meals, and entertainment of ALEC politicians. The meetings are ”held in luxury hotels, frequently in vacation-worthy destinations like San Diego, New Orleans and Scottsdale,” and scholarships fund “perks such as meals, recreational activities, and subsidized childcare for legislators and their families.” (CMD has previously described the scholarship scheme here.)

Additionally, “[m]eeting agendas include events like golf tournaments, open bar parties and baseball games — all subsidized directly or indirectly by ALEC’s corporate members,” the complaint says.

Despite this, ALEC has told the IRS that it provides no scholarships and funds no travel or entertainment expenses for elected officials...

Wednesday, July 4, 2012

Mystery Bermuda-based company and other undisclosed Romney assets hint at larger wealth

Mystery Bermuda-based company and other undisclosed Romney assets hint at larger wealth
For nearly 15 years, Republican presidential candidate Mitt Romney’s financial portfolio has included an offshore company that remained invisible to voters
By Associated Press
July 3, 2012

WASHINGTON — For nearly 15 years, Republican presidential candidate Mitt Romney’s financial portfolio has included an offshore company that remained invisible to voters as his political star rose.

Based in Bermuda, Sankaty High Yield Asset Investors Ltd. was not listed on any of Romney’s state or federal financial reports. The company is among several Romney holdings that have not been fully disclosed, including one that recently posted a $1.9 million earning — suggesting he could be wealthier than the nearly $250 million estimated by his campaign.

The omissions were permitted by state and federal authorities overseeing Romney’s ethics filings, and he has never been cited for failing to disclose information about his money. But Romney’s limited disclosures deprive the public of an accurate depiction of his wealth and a clear understanding of how his assets are handled and taxed, according to experts in private equity, tax and campaign finance law.

Sankaty was transferred to a trust owned by Romney’s wife, Ann, one day before he was sworn in as Massachusetts governor in 2003, according to Bermuda records obtained by The Associated Press. The Romneys’ ownership of the offshore firm did not appear on any state or federal financial reports during Romney’s two presidential campaigns. Only the Romneys’ 2010 tax records, released under political pressure earlier this year, confirmed their continuing control of the company.

The mystery surrounding Sankaty reinforces Romney’s history of keeping a tight rein on his public dealings, already documented by his use of private email and computer purges as Massachusetts governor and his refusal to disclose his top fundraisers. The Bermuda company had almost no assets, according to Romney’s 2010 tax returns. But such partnership stakes could still provide significant income for years to come, said tax experts, who added that the lack of disclosure makes it impossible to know for certain.

“We don’t know the big picture,” said Victor Fleischer, a University of Colorado law professor and private equity expert who urged corporate tax code reforms during congressional testimony last year. “Most of these disclosure rules are designed for people who have passive ownership of stocks and bonds. But in this case, he continues to own management interests that fluctuate greatly in value long after his time with the company and even the end of his separation agreement. And the public has no clear idea where the money is coming from or when it will end.”

Named for a historic Massachusetts coastal lighthouse, Sankaty was part of a cluster of similarly named hedge funds run by Bain Capital, the private equity firm Romney founded and led until 1999. The offshore company was used in Bain’s $1 billion takeover of Domino’s Pizza and other multimillion-dollar investment deals more than a decade ago.

Romney’s campaign declined to answer detailed questions from AP about Sankaty. Romney aides have said in the past that some disclosures were not required because those assets were valued by his financial advisers at less than $1,000 — below the minimum threshold under federal rules set by the U.S. Office of Government Ethics. A financial snapshot of Sankaty in Romney’s 2010 tax returns showed the holding with almost no value at the time— with $10,000 in both assets and liabilities...

The implications of Romney’s Bain profit-sharing became clear last month when his trust reported that one rarely disclosed asset had posted a $1.9 million payout. The income was described as a “true-up” payment, catch-up income that made up for unpaid earnings owed to Romney as part of his Bain separation agreement.

Such sizable earnings are possible “depending on the terms of the agreement,” said tax law expert Michael Kosnitzky, an attorney at the New York firm of Boies, Schiller & Flexner. The Romney campaign acknowledged recently that it could not rule out more large future payments.

The use of offshore companies such as Sankaty is allowed under U.S. tax laws. They are typically set up as shell corporations by private equity and hedge funds to route investments from large foreign and institutional investors, such as large pension plans, into corporate takeovers. The money is used to provide equity and buy up debt. In turn, the investors gain U.S. tax advantages by passing their funds through the offshore “blocker” corporations, avoiding a high 35 percent tax on earnings that the Internal Revenue Service describes as “unrelated business income.”

Set up in Bermuda in 1997, Sankaty served as Romney’s partnership stake in Bain’s Sankaty group, which invests in bonds, bank loans and corporate debt instruments. That first wave of Sankaty funds managed more than $100 million in investments in the late 1990s and early 2000s, according to a corporate analyst familiar with the funds. The analyst insisted on anonymity because the analyst was not authorized to discuss the funds publicly...