Conservative Group's Charity Status Draws Questions
Yum Brands, the company that owns Taco Bell and Pizza Hut, says it's the latest corporation to break ties with the American Legislative Exchange Council — a group that brings state lawmakers and corporate lobbyists together to write legislation.
Liberal groups are pressuring corporations to abandon ALEC, and a dozen companies have now dropped out.
This week, ALEC did some damage control. It said it is shutting down its task force on public safety and elections, which wrote controversial measures on voter ID, "stand your ground" and immigration reform.
But another issue remains. ALEC is a 501(c)(3)charity under the tax code. That means it's not supposed to do any "substantial" lobbying — and its donors get a tax write-off for their contributions.
As a 501(c)(3)charity — similar to the Red Cross or a religious congregation — ALEC is allowed to do some lobbying. The rule of thumb is up to about 20 percent of the budget. But on ALEC's annual tax returns, where it asks if the organization engaged in any lobbying activities, ALEC officers check "no."
Marcus Owens, a tax attorney and the former head of the Internal Revenue Service division on tax-exempt organizations, says it seems that "what ALEC does is either lobbying, or it isn't. And it appears to be all of what ALEC does. So it's kind of ... a zero-sum game here."
ALEC said it's being demonized by its ideological opponents.
ALEC claims nearly 2,000 legislative members — state lawmakers who pay token dues — and some 300 private-sector members, mostly corporations, which cover the $7 million annual budget.
The public and private members together create model legislation — ready-to-enact packages that the lawmakers take back to their state legislatures.
Owens says there's a precedent for this case from the 1990s, when he was at the IRS, and it isn't one that would be good for ALEC.
In 1995, congressional Republicans asked former Rep. Jack Kemp, R-N.Y., to lead a commission on fixing the tax law. At the rollout, Senate Majority Leader Bob Dole of Kansas said the mission was a complete overhaul of the tax code.
"That's why we have asked Jack to re-examine the over 9,000-page federal tax code, to start with a blank piece of paper and design a system that is flatter, fairer and simpler," he said at the time.
The commission had a financing problem of its own. The Republicans wanted the private sector to pay for it. Potential donors wanted the tax deduction — something they'd get only if the commission were a 501(c)(3) charity.
The commission applied to the IRS, which said no. The commission went to court and lost, then went to appeals court and lost again.
Owens says the commission couldn't get 501(c)(3)status because it fell into the IRS definition of an "action organization."
"An action organization does not qualify for tax-exempt status," Owens says. "The regulations define an action organization as one whose purposes can only be achieved by legislation."
That's the argument that the good-government group Common Cause made when it asked the IRS to investigate ALEC last summer.
'A Very Fine Line'
Common Cause said that ALEC violates the 501(c)(3)limit on lobbying and that it serves the business interests of the corporate donors, not a public, charitable purpose.
"We've actually seen their talking points, that are the same talking points that lobbyists use," says Bob Edgar, president of Common Cause. "We've seen their emails, the same emails that go to legislators, trying to lobby. All of that looks and smells like lobbying to us."
But so far, there's no sign the IRS is investigating.
Leslie Lenkowsky, a professor of philanthropy studies and public affairs at Indiana University, says there is a place for ALEC in the nonprofit world. But maybe not as a 501(c)(3)charity.
"They've got to be very careful," he says. "It's a very fine line."
Should the IRS move against ALEC, there are other possible outcomes — a massive fine, for instance.
But Lenkowsky says that ALEC could solve the problem the way a lot of Washington groups do: Set up a new 501(c)(3) side to talk about issues and a 501(c)4 advocacy side to do the lobbying. The main catch is that contributions to the (c)4 wouldn't be tax deductible.
With the combination of a (c)(3) and a (c)(4), says Lenkowsky, "they could reconstitute themselves as Son of ALEC."
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