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...