A complaint filed Monday charging a conservative nonprofit with tax fraud brings a new legal twist to the thorny issue of what constitutes lobbying and how much charities can engage in it.
The complaint, lodged with the Internal Revenue Service by the watchdog group Common Cause, says the American Legislative Exchange Council, or ALEC, is a lobbying group rather than a tax-exempt charity, as it claims, and should pay taxes retroactively along with penalties.
“ALEC’s primary purpose is to pass legislation that benefits the economic and partisan interest of its corporate members,” Bob Edgar, president of Common Cause, told reporters on a conference call.
But ALEC says it followed IRS rules to the letter, engaging only in “nonpartisan analysis and research.”
Now, legal and nonprofit experts are trying to determine whether Common Cause has a case, and if so, whether it will set any kind of precedent for all charities classified under Section 501(c)(3) of the tax code.
Some say ALEC’s structure is so unusual that any IRS decision would have a limited impact.
“ALEC is so far outside the mainstream of 501(c)(3)s organizations that I don’t see it as much of a precedent,” Eric R. Havian, a lawyer who is helping Common Cause with the filing, told reporters in a telephone news conference.
But Gary Bass, a longtime government watchdog who is executive director of the Bauman Foundation, said allegations like those can produce a “chill around nonprofit advocacy” because they make charities more jittery about lobbying, even though they are permitted to do a limited amount.
“The main message is that charities are allowed to lobby,” he said. “I still don’t think we’ve done a good job of conveying that to our community.”
ALEC, a network of conservative state lawmakers and dues-paying corporate members, has been in the news lately because it promoted “stand your ground” laws like the one that was cited as a defense in the Trayvon Martin shooting case in Florida. Liberal groups have also criticized it for supporting tighter voter-identification rules and anti-union laws. A number of corporations, including Coca-Cola, Intuit, and Kraft Foods, announced in recent weeks they were leaving ALEC, and the Bill & Melinda Gates Foundation, which has awarded the group money for education projects, said it will not provide any future grants.
Common Cause says that thousands of pages of documents it submitted to the IRS show that ALEC operates committees made up of state legislators and business representatives; drafts model legislation that is presented to lawmakers in closed-door seminars; lobbies for the adoption of bills and tracks their progress; and provides talking points to legislators. Nonprofits can obtain charity status—and accept tax-deductible donations—only if they devote “no substantial part” of their activities to lobbying. Common Cause says ALEC’s corporate members have obtained deductions for their contributions to the group and should be required to pay back taxes.
Common Cause complained about ALEC in a letter to the IRS last summer, but decided to file a more formal whistle-blower complaint after getting no response, Mr. Edgar said. That process allows a whistle-blower to obtain between 15 percent and 30 percent of the amount the IRS collects as a result of uncovering tax fraud. Mr. Havian, the lawyer, said the IRS could take several years, however, to make a decision.
But ALEC says Common Cause is attempting to tarnish its reputation for ideological reasons. It maintains that its activities are allowed under tax rules governing charities that choose to limit their lobbying activities to a percentage of their expenses instead of trying to determine what “no substantial part” means. Alan P. Dye, a lawyer for ALEC, said that even though the group does no lobbying, it has requested tax-status consideration under those rules because they offer a “relatively clear” definition of what constitutes lobbying.
He said ALEC’s activities fall under an exception to the lobbying limits that allows nonprofits to undertake “nonpartisan analysis, study, or research.” While the group often expresses a point of view on model legislation, it also provides background on the issues involved, for example, by including a link to “substantive studies” when it sends e-mail communications to legislators, he said.
Charities that are worried about overstepping IRS restrictions often set up separate advocacy groups under Section 501(c)(4) of the tax code so they can pursue unlimited amounts of lobbying. Such groups cannot offer tax deductions for donations. Mr. Dye said ALEC is not interested in that approach since “they want to be thought of as an organization that looks at all sides” and acts in the public interest.
ALEC’s structure as a membership organization could raise some legal questions that would not apply to other types of charities.
Ellen Aprill, a law professor at Loyola Law School, said she’s “trying to sort out in my mind” how lobbying rules would apply to communications with ALEC members. “If an organization that had no legislators as members drafted model legislation and then went to legislators urging them to adopt the model, the action would clearly be lobbying,” she wrote in an e-mail discussion of the case with fellow lawyers. “It bothers me if it is possible to avoid lobbying by making the legislator a member of the group.”
But the corporate members may lose one kind of protection, says Marcus Owens, a lawyer who formerly headed the IRS division that deals with nonprofits. Normally, donors can claim charitable deductions until the IRS publishes a notice revoking an organization’s tax-exempt status. However, in this case, if the IRS rules against ALEC, it could find that as members, the companies should have known that the nonprofit was doing something wrong, he said.
Send an e-mail to Suzanne Perry.