Caplin ti Chartered Ea Washington, DC 20005 202-852-5000 202-429-3301 FEIX it I I ll I I 202.862.5020 Direct June 18, 2012 The Honorable Douglas Shulman Commissioner Internal Revenue Service 1111 Constitution Avenue, N.W. Washington, D.C. 20224 RE: Violations of the Internal Revenue Laws by The American Legislative Exchange Council QEIN: S2-01409791 Dear Commissioner Shulman: I am writing on behalf of my client, Clergy VOICE, a group of Christian clergy located in Ohio. The members of Clergy VOICE are committed to principles of social justice and believe that the defense of these principles is a central tenet of their faith. They gather together as individual clergy and not as representatives of any congregation, judicatory, or denomination. Among them are religious leaders from within the following religious traditions: the American Baptist Churches/USA; the Christian Church (Disciples of Christ); the Episcopal Church in the the Evangelical Lutheran Church in America; the United Church of Christ; and the United Methodist Church. The members of Clergy VOICE are quite troubled by the activities of the American Legislative Exchange Council that have been brought to the public's attention in numerous media reports and were the subject of a recent IRS Whistleblower complaint filed by the nonprofit advocacy organization, Common Cause. The information in these materials suggests that ALEC is significantly misrepresenting its activities to the IRS, the states, andthe public in order to advance a legislative agenda-an agenda largely crafted by the organization's corporate members- that elevates commercial gain for a few over the Well-being of society's less fortunate. My clients' theological concerns with ALEC's behavior are set forth more fully in the attached letter. I am writing today to discuss the serious legal implications of that same behavior. The information in this submission, a great deal of which was not presented in prior complaints, confirms that ALEC has deliberately and repeatedly failed to comply with some of the most fundamental federal tax requirements applicable to public charities. The information in this submission also suggests, quite strongly, that the conduct of ALEC and certain of its representatives violates other civil and criminal tax laws and may violate other federal and state criminal statutes as well. Thus, Clergy VOICE urges the Service to investigate immediately and, after verifying this . iirifihiniatiidni to assess penalties and other appropriate sanctionswiricluding revocation of ALEC's tax-exempt status. indeed, given the visibility of the organization, the significant dollars involved, and the continuing nature of ALEC's troubling activities, any inaction on the part of the Service would undermine the integrity of the law itself. OVERVIEW OF KEY FINDINGS 0 A pattern of lobbying activity far beyond the limits set by federal tax law; Excessive private benefit to corporate members, including the promotion of legislation applicable to only one or a small number of corporate members; Excessive private benefit to state legislators, including unreported taxable income for personal expenses, which may also implicate state ethics laws and federal anti-bribery laws; 0 Excessive private benefit to the Republican Party in a manner similar to that in American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989); and 0 A pattern of filing multiple inaccurate Forms 990--which include affirmative statements that ALEC engaged in no lobbying activities (even in years when it had registered two of its attorneys as lobbyists for the organization), and affirmative statements that ALEC made no payments to or for the benefit of government officials (even when it paid travel and entertainment expenses for state legislators and their families)-mindicating beth civil and criminal violation of federal tax laws. BACKGROUND 1. Overview of ALEC's Mission, Governance, and Activities. As you know, ALEC is a membership organization that is tax-exempt under section 50l(c)(3) of the Internal Revenue Code, as a publicly~supported charity described in section Its stated mission is "to advance the effersonian principles of free markets, limited government, federalism, and individual liberty" through a "nonpartisan public-private partnership between Americafs state legislators, concerned members of the private sector, the federal government, and the general public."2 ALEC self-identifies as "the nation's largest nonpartisan, individual membership association of state legislators,"3 suggesting that it differs little liorn the National Conference of State Legislatures and similar nonprofits that provide research, technical assistance, and an opportunity for bipartisan collaboration among state lawmakers. ln fact, ALEC differs markedly from these organizations. For example: I Unless otherwise stated, section references are to the Internal Revenue Code of 1986, as amended (the "Code" oi and all regulatory references are to the Treasury Regulations currently in effect under the Code (the "Regulations" or "Treas. 2 ALEC, 2010 Form 990, Part ill, line i (brief description of the organizatioifs mission); see also bout ("Our 3 ALEC Legislative l\/lembership Brochure, available at A A is members include not only state legislators ("Legis1ative Members"), but also representatives from private corporations ("Private Sector Members"). As described below, Private Sector Members pay steep fees for the privilege of membership, which gives them access to the Legislative Members and a voice in setting ALEC's legislative agenda. 0 While ALEC professes to be nonpartisan, "the vast majority [of its members] are Republican," and its governance structure reveals an even more glaring partisan imbalance. '72 of ALEC's 74 filled State Chairman seats are held by Republican legis1ators.5 16 ofthe 17 state legislators serving on ALEC's Board of Directors are Republican. And every legislator serving as an officer of ALEC is Republican. 6 Board of Directors is advised by a Private Enterprise Board, representing major corporate and foundation sponsors." According to ALEC's Bylaws, the "Private Enterprise Board of Directors" meets jointly with ALEC's Board of Directors at least once per year. 8 Members of the Private Enterprise Board represent tobacco, pharmaceutical, alcoholic beverage, oil and gas, and insurance companies, as vvell as lobbying firms that serve these industries? ALEC's Private Sector Members pay significant sums to sit down at the table with its Legislative Members. Whereas legislators pay membership fees of $50 per year,l0 private companies pay between $7,000 and $25,000, depending on the membership tier." Buying into a more costly membership tier gives the corporation access to a greater number of ALEC meetings, policy summits, Events," and Board of Directors receptiotisu--and with this access, more opportunities for the corporation's representative (which, we understand, is frequently an in-house attorney or lobbyist) to interact directly with AI..EC's Legislative Members. 4 See Report ofthe American Association for Justice, ALEC: Lawfor Cofyoorore /lmerica, (May 2010) at 6 (hereinafter Report"). See (as of May 15, 2012). One is held by a Democratic legislator, one is held by a nonpartisan legislator. Two seats are vacant. See list of ALEC's officers and directors, or (as of May 15, 2012). 7 ALEC, Proposing Consn'lza'z'onol Amendments by ct Convention ofthe Srofres: A Honclbookfor' Store Lawmakers, available of The reference to "foundation sponsors" is a bit misleading. While the Private Enterprise Board includes a representative from an industry-focused trade association--~the American Bail Coalition--no private or company foundations are represented. 8 See American Legislative Exchange Council Bylaws (Rev. July l0, 2007) ("Bylaws"), alt. V, 5.l0; see also id. XV (describing the role, composition, and responsibilities of the Private Enterprise Board). 5 6 9 ALEC Private Enterprise Board, (as of May 15, 2012). to See ALEC Legislative Membership Brochure, ovoflolale or membership/; Laura Sullivan, National Public Radio, Shaping State Laws With Little Scrutiny (Oct. 29, 2010), available or 3089i 396, See ALEC Private Sector Membership, at 12 See ALEC Private Sector Membership Brochure, available at membership/. ll 'il' li ll ll 5 ln addition to paying substantial membership fees, some Private Sector Members pay separate fees to participate in ALEC's eight issue-focused "Task "public policy laboratories" where ALEC's Legislative Members "welcome their private sector counterparts to the table as equals" to jointly draft "model legislation" in areas like healthcare, energy and the environment, communications and civil justice." These industry-written bills are introduced with few alterations-wand, in many cases, passed--at statehouses around the country.l4 Indeed, ALEC's Bylaws state that one ofthe organization's purposes is to "disseminate model legislation and promote the introduction of companion bills in Congress and state legislatures"l and, consistent with _this objecive, the organization tracks the success of its legislative efforts on "Legislative Scorecards," which detail the number of ALBC-drafted bills introduced and enacted each year.l6 As ALEC boasts: To date, ALEC has considered, written, and approved hundreds of model bills, resolutions, and policy statements. Historically, 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." ALEC's Private Enterprise Board hand-picks the Private Sector Members serving on each Task Force. Those selected must pay additional annual dues of $2,500 to $10,000 for the privilege of participating. I 3 See ALEC Legislative Membership Brochure, supra note 10. See, eg., Sullivan, supra note 10 ("Since Arizona Gov. .ian Brewer signed [ALEC-drafted] SB 1070 into law in April, five state legislators have introduced eight bills similar to it. Like SB 1070, four of them were also named 'Support Our Law Enforcement and Safe Neighborhoods Act." Lawmakers in many more states NPR interviewed have said they would introduce or support a similar Beth l~lawl-tins, Treyvon Martin Case Leads to Corporate ALEC, MinnPost (April 16, 20l2), ("ln total over the last two years Minnesota lawmakers have introduced some 60 bills identical or very similar to model legislation drafted by Salvador Rizzo, Some oj`Chrz`srfe's' biggest bills march model D. C. group called ALEC, New Jersey Online (April l, 2012), af model bills used in ni la.html ("The Star-Ledger found a pattern of similarities between proposals and several measures championed by the Christie administration. At least three bills, one executive order and one agency rule accomplish the same goals set out by ALEC using the same specific policies. In eight passages contained in those documents, New Jersey initiatives and ALEC proposals line up almost word for word. Two other Republican bills not pushed by the governor's office are nearly identical to ALEC Paul Krugman, Lobbyists, Gww, and Money, N.Y. Times (Mar. 25, 20l2), at doesn't just influence laws, it literally writes them, supplying fully drafted bills to state legislators. ln Virginia, for example, more than 50 ALEC-written bills have been introduced, many almost word for word. And these bills often become 15 Bylaws, 2.01. I6 See, eg., 2010 ALEC Legislative Scorecard, of ScQrecard%2020l0.pdf (noting that 826 pieces of model legislation- based laws were introduced nationwide, and 15 enacted, during the 2009 legislative season--"an "enactment rate of rd. 18 I3 ALEC Private Sector Brochure, supra note i2. 0 2. A del Legislation ALEC's Private Sector Members include significant representation from the tobacco, oil and gas, transportation, insurance, energy, telecommunications, pharmaceutical, private prison, and other industries." These corporations make substantial contributions to also to ALEC's Legislative Members and their political action committees." These industries also are well-represented on ALEC's Private Enterprise Board and its Task Forces." As Task Force members, industry representatives are given an equal vote with ALEC's Legislative Members- and, thanks to ALEC's internal governance policies and procedures, industry representatives also have effective veto power over the Task Porce's activities and legislative recommendations.23 "As a result, meeting minutes show, draft bills that are preferred by a majority of lawmakers are sometimes killed by the corporate members at the table."24 Given their ability to direct ALEC's agenda, it is not surprising that the legislative focus of ALEC's Task Forces tracks the ideological and business priorities of the organization's corporate members. Consider the following examples: 0 Model Legislation to Limit Successor Asbestos-Related Liability for Crown Holdings. ALEC helped the asbestos industry, in particular, ALEC member Crown Holdings, lnc. (formerly known as Crown, Cork Seal), by convincing state legislatures to cap the w# 19 See Sullivan, supra note 10; Report at 16 (presenting a list of "Companies and Groups Known to lrlave Been ALEC See Mike C'onservalive Nonprofit Acts as Stealth Business Lobbyist, l\l.Y. TIMES, April 21, 2012 available at (noting that Pfizer and Reynolds American each contributed 30,000 to $398,000, according to a copy of ALEC's 2010 tax returns, obtained by The Times, that included donors' names, which are normally withheld from public 2| 20 Eg., Anita Kumar, Virginia passes bill to limit legal claims on one firm, Wash. Post, Feb. 10, 2010, at B0l, available al I R20 1 0020903'797.html (discussing the efforts of ALEC Legislative Members and ALEC corporate member, Crown Holdings, to secure passage of a bill to limit Crown's successor liability for asbestos-related lawsuits in Virginia, where Crown employed 300 workers, and noting that "[s]ince 2007, Crown has donated more than $100,000 to 46 Virginia legislators or their political action 22 According to website, its Private Enterprise Board members represent the following organizations: Centerpoint360; Bayer Corporation; GlaxoSmithKline; Reynolds American; Wal-Mart; Energy Future Holdings; Johnson Johnson; American Bail Coalition; Kraft Foods; Pfizer; Reed Elsevier; Peabody Energy; Koch Companies Public Sector, Altria Client Services; Exxonlvlobil Corp.; Salt River Project; and State Farm Insurance Co. 23 See ALEC Task Force Operating Procedures (May 2009), para. majority vote of legislative members present and voting and a majority vote of private sector members present and voting, polled separately, are required to approve any motion offered at a Task Force or Executive Committee (emphasis supplied). 24 supra note 20; see also Defenders of Wildlife NRDC, Corporate Aznerica 's Trojan Horse in the States: The Unlola' Sfoi;v Belrina' the American Legislative Exchange Council (2002), at 8 available at (hereinafter "Defenders/NRDC Report") ("1\lothing can move out of the Task Force without agreement from its private-sector representatives"). For example, "ln August, the telecommunications task force met and considered a model resolution regarding online piracy that had been introduced by the UQS. Chamber of Commerce. Although Verizon and AOL could not agree on the details, the lawmakers present overwhelmingly supported the resolution in a 17-to~l vote. ilowever, because the corporate members deadlocked 8 to 8, the bill failed." supra note 20. I liability of companies that acquire the assets of a business that previously engaged in asbestos>>related activities." The stated purpose ofthe legislation was to exempt successor entities from asbestos->>related liabilities assumed or incurred prior to January l, 1972.26 The practical effect of the bill--known in some jurisdictions as the "Crown Cork to exempt Crown (which had acquired an asbestos manufacturer in 1963, knowing that asbestos~related claims were pendingzg) from these suits29--~thereby protecting the financial assets of Crown at the expense of the countless victims of asbestos-related diseases and their families. Thanks to the efforts of ALEC's Legislative Me1nbers,3`0 legislation providing Crown with immunity was enacted in more than a dozen states, and similar legislation was introduced in other states." 0 Model "Stand Your Ground" Legislation. In March 2005, the Florida Legislature passed its infamous "Stand Your Ground" law, also known as the "Castle Doctrine" law, which has generated public outcry in the wake of the death of Florida teenager, Trayvon Martin.32 One See Brad Shrade, Asbestos victims oppose companys piishfor liability shield in siaie law, Minneapolis Star- Tribune, Feb. 14, 2012, ai 39335403.html. A copy ofthe law, as passed by the Michigan Legislature, is available at 460 deg 26 25 Kumar, supra note 2l. 21 . See id. 28 Report at claims were pending against l\/lundet Cork at the time it was acquired by Crown, Cork Seal. This was not news to Crown, but the claims were covered by insurance and lvlundet still presented good value, so Crown bought Mundet. Indeed, it continued to produce asbestos for some time.") (citing Deposition of EJ. Stansbury, pg. 23, U.S. District Court for the Western District of Texas, San Antonio and Austin Divisions, Hawkins v. Fireboard Corp., Jan. 10, 1984). 29 See Kumar, supra note 21 ("The 30-minute House Commerce and Labor Committee hearing last week included testimony from representatives of Owens Illinois, a Fortune 500 glass container manufacturer that argued it would pay more in asbestos claims if Crown Cork was no longer held liable Richard Ottinger, a lawyer representing Owens which has two factories in Virginia, employing 350 people, said the bill 'specifically benefits one company to the detriment of other ALEC's "Successor Asbestos-Related Liability Fairness Act" capped a successor corporation's liability at an amount equal to the assets of the acquired company at the time of acquisition, unadjusted for inflation or subsequent growth ofthe assets and without regard to the number of claims. Report at 8. A copy of ALEC's Successor Asbestos-Related Liability Fairness Act is available at Asbestos- Liability Fairness Act Exposed.pdl'. 3? In Virginia, for example, ALEC Virginia Delegate Terry Kilgore, a member of ALEC, and Virginia House Speaker William Howell, ALEC's former national chairman, went to great to secure passage ofthe bill. See Kumar, supra note 21 (The lirst year, the bill died in committee. Howell directed it to a different committee last year, but it went down in a surprising defeat when 'live Republicans joined all the Democrats in opposition. This year, Howell altered flee makeup ofilze Demoerais were removed and three open sears werejilled with Republicans who backed ilie legislation, which passed ll io (emphasis supplied). These states include: Florida, Georgia, Indiana, Mississippi, Nebraska, North Dakota, Ohio, Oklahoma, Michigan South Carolina South Dakota, Texas, and Wisconsin See also AAJ Report, at 9. 32 See, e. i\/lallory Simon Ann O'l\leill, Unstable Ground: Thefine line beiween seddefense and murder", CNN, l\/lay 2, 2012, ai ("The controversy has ricocheted from coast to coast ever since unarmed teenager Trayvon Martin was shot to death in Sanford, Florida, on February "The Florida measure says any person 'has the right to stand his or her ground and meet force with force, including deadly force if he or she reasonably believes it is necessary to do so to prevent death or great bodily harm."' Manuel Roig-Franzia, NRA plans to push expanded law beyond Florida: Measure urges "chief architects" ofthe Florida statute was lobbyist and former National Rifle Association President, Marion Hamrne1?33--and, following its enactment, an NRA executive pledged to "mov[e] from state legislature to state legislature" to advocate for passage of the law nationvvide.34 The NRA, a longtime corporate member of ALEC, turned to ALEC to accomplish this goal." According to the NRA, Marion Hamrner "presented the ALEC Criminal Justice Task Force with proposed model legislation based on Florida's landmark 'Castle Doctrine" law" in August 2005, and "the task force subsequently adopted the measure unanimously" as ALEC model legislation." The "Castle Doctrine bill" was listed among priority legislation on ALEC's annual "Legislative Scorecard,"37 and ALEC broadcasted its "continued success" securing passage ofthe law in other states." Since 2005, legislation based on ALEC's Castle Doctrine bill has been enacted in 31 states. Hovvever, in the Wake of the intense public scrutiny following the Trayvon Martin shooting, ALEC's Board recently "voted unanimously to disband its [Task Forces] that developed policies on public safety, elections and noneconomic issues," including the Criminal Justice Task Force. 9 These examples are by no means unique. A survey of model legislation reveals numerous examples of bills that were crafted by industry representatives to advance their business interests, including: The Drug Liability/Act, a model bill drafted by ALI-EC's Health and Human Services Task members include representatives from the Pharmaceutical Research and fights, some say, Wash. Post, May 1, 2005, available at plans to push expanded gun law beyond florida). 33 Ann O'Neil1, NRA 's Marion Hammer sranals her ground, CNN (April 15, 2012), at 34 Roig-Franzia, supra note 32 ("Wayne LaPierre, NRA executive vice president, said in an interview that the Florida law is the 'first step of a multistate strategy' that he hopes can capitalize on a political climate dominated by conservative opponents of gun control at the state and national levels. a big tailwind we have, moving from state legislature to state 1egislature,' Lai'ierre said. 'The South, the Midwest, everything they call "flyover land." If John Kerry held a shotgun in that state, we can pass this law in that 35 supra note 20 has drawn scrutiny recently for promoting gun rights policies like the Stand Your Ground law at the center of the Trayvon Martin shooting case in Florida, as well as bills to weaken labor unions and tighten voter identification see also Krugman, supra note 14 virtually identical to Florida's ["Stand Your Ground"] law is featured in a template supplied to legislators in other states by the American Legislative Exchange Council, a corporate-backed 36 NRA institute for Legislative Action Press Release, NRA Presents ALEC Model Legislation in Grapevine, Texas (Aug. 12, 2005), available at 0507cposed.pgij. 'll 40 supra note 20; see also Cora Currier, ALEC and ExxonMobil Posh Loopltoles' in Fracking Clrenzical Disclosure Rules, ProPublica, April 24, 2010, at 42 See Sullivan, supra note l0. 43 Laura Sullivan, Prison Economics Help Drive Ariz. Low, National Public Radio, Oct. 28, 2010, at -understandable, as states are broke, the considered advice #om at ALEC was that such. legislation is not vvell taken and should not be approved," he said in a private memorandum. The legislation was reworked to ease some of ALEC's concerns, making it one of many bills the group has influenced by mobilizing its lawmaker members, a vast majority of them Republicansfm Incredibly, ALEC reports on its annual information returns that the organization engages in no lobbying activity," a position that was recently affirmed by the organization's counselfm However, based on the organization's website and information detailed above, it appears that ALEC's primary activity is to craft the "model legislation" for which it is famous and advocate for its passage nationwide. Indeed, ALEC's Bylaws state that its corporate purposes include "disseminat[ing] model legislation and promot[ing] the introduction of companion bills in Congress and state Further, the organization admits on its most recent Form 990 that its two largest program services measured bsy expenses--"Task Forces" and "Conferences"-"involve the formulation of "model legislation." These programs consumed 68% of ALEC's total expenditures in 2010. ALEC's Forms 990 for 200s and 2009 1-enact tt similar rl-ella." ALEC's declaration on its Form 990 filings that it engages in no lobbying activity is contradicted by admissions in at least one state tiling by the organization. Specifically, in North Dakota, ALEC registered two of its attorneys as lobbyists forthe period of July 1, 2008 through June 30, 2009.50 However, despite these registrations, its 2008 and 2009 Forms 990 report that the organization did not engage in any lobbying during either year. l\/loreover, according to one watchdog group, ALEC appears to have broken registration laws in Minnesota, when it hosted an event with lobbyists and state GOP lawmakers without registering its agents as lobbyists." 44 l\/iclntire, supra note 20 (emphasis supplied). A copy of Senator Seitz's memo appears at Exhibit 16 of the Common Cause complaint. lt goes on to state that "anyone can introduce legislation he or she wishes, but when our friends at ALEC caution us against doing so, we should at least carefully consider their sage advice. I know that Representative l\/lecklenborg feels just as strongly on this subject as do, and anything you can do to help educate our fellow ALEC members about this proposal would be welcome." 45 ALEC 2010 Form 990, Part IV, line 4. Suzanne Perry, Challenge to Conservative Group 's Advocacy Raises Questions about Charity Lolvloytng, Chronicle of Philanthropy, April 25, 2012 available at medi_um=en (referencing statements by ALEC's counsel that "the group does no lobbying"). 4? Bylaws, 2.01. is Arne 2010 Form 990, Part 11, lines fire), nb). 49 .see Arno 2009 Form 990, Part ll, time 4; 2008 Form 990, Pan 11, line 4. See List of Registered Lobbyists forthe period of July l, 2008 through June 30, 2009, at (listing l\/lark Behrens and Corey Schaecher as lobbyists for ALEC). Si Lee Fang and Scott Keyes, VIDEO: Corporate Lobbyist Concedes He Does Not Always Register as a Lobbyist for Bills He Heosvs Write, Think Progress, August 17, 2011, available at 46 50 Eaplimitlliysdalt "lo" Alai-iC's claim that it engages in no lobbying activity is also undermined by the successful efforts of ALEC members and supporters to secure the passage of legislation exempting ALEC from state disclosure and reporting laws that apply to lobbyists. For example, 0 A 2003 South Carolina law exempts ALEC from the requirement to register as a lobbyist or disclose its lobbying expendituressz It also exempts ALEC from the prohibition against paying a legislator more than $400 a year for lodging, transportation, entertainment, or food-a move that enables South Carolina legislators to participate in ALEC's Task Forces and attend ALEC-funded Task Force meetings.53 One ofthe bill's sponsors was a member of ALEC.54 0 ln 1991, an ALEC member successfully introduced a bill to amend the Colorado ethics laws to exempt ALEC from lobbyist status. The bill passed. As a result, for legislators who attend ALEC events, "the expenses of such members for travel, board, and lodging related to such attendance may be paid from appropriations."55 Had ALEC not been able to secure these specific legislative carveouts>>-one of which may be overturned in the near future"-"its activities would be considered lobbying under the laws of these states. However, it should be noted that the ALEC-developed state law exceptions to lobbying do not affect the federal tax law characterization of the same events. To the contrary, the fact that a specific exception was necessary to avoid classfication of ALEC's activities as lobbying under state law likely confirms the characterization of the activity as lobbying for federal tax purposes. Additionally, the state law exceptions do not shield the payment of legislators' personal expenses by corporate members (described below) from federal income tax. 3. ALEC's Meetings and Legislative Scholarship Program. In addition to its regular legislative Task Force meetings, ALEC brings its Legislative and Private Sector Members together to meet and draft model legislation at an Annual Meeting and a State and Nation Policy Summit." These meetings are held in luxury hotels, frequently in vacation- worthy destinations like San Diego, New Orleans, and Scottsdale, and include perks such as meals, 52 See S.C. Code 2-17-90. 53 See ALEC Scholarship Policy by Meeting (Mar. 7, 201 1) (stating that Task Force l\/lembers are reimbursed by ALEC up to $350.00 for travel expenses" and that "Task Force Members' rooms and tax fees for up to a two-night stay at the host hotel are covered by A copy of the Scholarship Policy can be found at page I2 ofthe May 2012 Education Task Force materials that are part of Exhibit 4 to the Common Cause complaint. 54 Paui Abowd, Aiec Gets cz Break rom Stare Lobbying Laws, Mother Jones Mag., May 8, 2010, of 2/05/aiec-lobbyist-exemption. 55 see Colo. Rev. sat 2-3-31 1. See Corey Hutchins, Lawmakers Exempled ALEC in S.C. Lobfuyfng Law, Columbia (SC) FreeTimes, April 26, 2012, at 1862604 1 23541405 am tiling a bill tomorrow to remove this section nom our code of laws and make ALEC subject to the same standards we expect other special interest groups to foilow.") (quoting S.C. Rep. Boyd Brown). A copy ofthe bill, which was introduced May l, 2012, is available at 19 201 56 Sl See AAJ Report at 5. . . il is li ll activities, and subsidized childcare for legislators and their families." For example, ALEC's meeting agendas generally include events like golf tournaments, open bar parties, and baseball games-all subsidized directly or indirectly by ALEC's corporate members." Some legislators pay for ALEC-related trips using state or campaign funds.60 Indeed, according to one study, examination of financial-disclosure forms filed by state legislators in 1999 and 2000 suggests that taxpayers foot the bill for at least $3 million in exgoenses the lawmakers incur each year in connection with their travel to ALEC-sponsored meetings." I Frequently, however, the state legislators receive industry-funded "legislative scholarships" from ALEC to cover the costs incurred in connection with attending these meetings and events. ALEC's legislative scholarships are not "scholarships" in the traditional sense. They are not merit awards. They are not made through a selective or competitive process. And they are not intended to fund educational pursuits. Rather, as ALEC admits on its Form 990 filings, "legislative scholarships" are simple expense payments made by ALEC to "reimburse [state legislators] for travel expenses incurred" by at times, their families--~in attending ALEC meetings and events.62 ALEC's Bylaws mandate that "[a]ll funds for ALEC State Scholarship Accounts shall be deposited in accounts designated by the ALEC Board of Directors."63 The Bylaws also require "legislative scholarship funds" to be raised and collected jointly by each state's "State Chairman" (a state legislator) and "Private Enterprise State Chair" (a representative from the private sector).64 And ALEC's Private Sector Members appear to give quite generously. While we do not have access to records detailing every corporate contribution to ALEC's scholarship funds, a member ofthe Private Enterprise Board, reported. a $356,075 grant to the Wisconsin 58 See Sullivan, Shaping State Laws With Little Scrutiny, supra note I0 (observing that "[t]ax records show the group spent $88,000 to keep legislators' children entertained" at one meeting). For example, the 2012 Annual Meeting will be held in Salt Lake City at the Grand America Lake City's only Five Diamond Hotel." See 2010 Annual meeting was held in San Diego at the i\/lanchester Grand Hyatt, where members' children were able to participate in an ALEC-subsidized childcare program called "Kids" Congress" and "see the beautiful beaches, enjoy the perfect weather, and make new friends while having a west coast blastl" See Congress. 59 Sullivan, supra note 10 encourages state lawmakers to bring their families [to ineetings]. Corporations sponsor golf tournaments on the side and throw parties at night, according to interviews and records obtained by See Sullivan, supra, note i0; Laura Sullivan, NPR, Prison Economics Help Drive Ariz. immigration Law (Oct. 28, 20 i 0), available at 30833741 . ei 60 Defenders/NRDC Report at 26 (emphasis supplied). ALEC 2010 For-in 990, sen. D, are Defenders/NR_DC Report at 6. 63 See Bylaws l0.07 ("State Scholarship Accounts"). 64 See fd. 10.03 ("State Chairmen duties shall include recruiting new members, working to ensure introduction of model legislation, suggesting task force membership, establishing state steering committees, planning issue events, and working with the Private Enterprise State Chairman to raise and oversee expenditures of legislative scholarship funds). "li" il ll ll Scholarship Fund" on Schedule I ofits 2010 Form 990. In Ohio alone, private companies gave more than $130,000 to ALEC's Ohio Scholarship Fund between January and August 2011.65 We understand that the expense reimbursements through ALEC's legislative scholarship program range from several hundred to several thousand dollars per legislator, per event. The process for securing this funding is described in ALEC's "Scholarship Policy" and is quite straightforward.66 First, the legislator personally pays the costs of travel, event registration, and lodging for the legislator and his or her family. Then, after the meeting concludes, the legislator submits receipts to the State Chairman from the legislator's home state, and the State Chairman submits a request for repayment to ALEC's Director of Membership. According to records that were obtained through a Freedom of Information Act Request: 0 A $3,454.36 reimbursement from ALEC's Ohio Scholarship Fund was approved for Ohio State Representative Seth Morgan following ALEC's 2009 Annual Meeting. The amounts reimbursed included (1) entertainment and childcare for his three children at ALEC's "Kid's Congress"; (2) his wife's costs to attend the meeting; and (3) travel expenses forthe entire family. Ohio State Representative Todd Snitchler also attended the 2009 Annual Meeting and received a "scholarship" that cover'ed (1) entertainment and childcare for his two children; (2) his wife's costs to attend the conference; and (3) airfare for him and one of his children. 0 Ohio State Senator Kris Jordan and State Representative John Adams also received "scholarships" for their spouses to attend the Annual Meeting in 2009.67 Significantly, none of the legislators reported the payments for family travel and entertainment on state disclosure forms.68 While my clients are, understandably, particularly concerned with ALEC's activities in their home state of Ohio, where the scholarship payments arguably violate state ethics laws,69 it bears emphasis that this practice appears to be replicated in other states. 65 See Exhibit 18 to the Common Cause complaint. The "thank you note" from the ALEC State Chair in Ohio to the corporate contributors to the Ohio ALEC scholarship fund implies that the corporate contributions might motivate legislators to introduce ALEC model legislation favorable to the donors' interests: "Because of your help and others like you, the trip to ALEC was made possible for our legislators. With information that is disseminated at these meetings, my desire is that the Ohio Legislature will pass and repeal laws to make Ohio a much more business friendly state." See Source Documents #11, ar (page 1). 66 A copy ofthe Scholarship Policy can be found at page 12 ofthe May 2012 Education Task Force materials that are part of Exhibit 4 to the Common Cause complaint. 67 See Source Documents #29, er 1/ (pages, 32, Source Documents #28, at (pages 53, 55). 63 Ohio legislators were not required to report payments received to cover the legislator 's expenses for travel and meals, incurred in connection with the legislator 's official duties, at "at a meeting or convention of a national or state organization to which any state agency . pays membership dues," including ALEC. See, e. Ohio Joint Legislative Ethics Committee, 2009 Financial Disclosure Statement, 8, IO. 69 Specifically, Ohio's ethics laws prohibit "member[s] of the general assembly [from] accept[ing] anything of value which would result in a substantial and improper influence upon the member with respect to his or her duties." Legislative Code 0fEfkics_f0r fl/fembefxs' and Employees ofthe 129m Ohio General As.s'em'bly, Employees Qfany Legt's'!efz've Agency, and Candidatesfor the General Assembly, The Ohio Joint Legislative Ethics Committee has stated that a benefit "result[s] in substantial and improper influence" on a legislator if it . _13_ Bylaws provide that the duties of each state's State Chair and Private Enterprise State Chair include (I) soliciting funds for legislative scholarships; (2) depositing these funds in accounts designated by ALEC's Board; and (3) overseeing the payment of scholarships to legislators. In other words, these officials act on behalf of ALEC in executing the organization's legislative scholarship program and depositing the funds in accounts. Further, ALEC's Scholarship Policy makes clear that State Chairs do not "select" scholarship recipients; rather, any legislator who provides proper documentation will have their expenses reimbursed. Despite this, ALEC takes the incredible position that the are not revenues or expenses Instead, ALEC reports the combined scholarship fund balance as a liability on its balance sheet. On its 2007 through 2009 Form 990 filings, ALEC reported the scholarship funds to the IRS as an "Other liability" for "Scholarship funds held as an agent." On its 2010 Form 990, ALEC refined its position, reporting the scholarship fund balance as an "Escrow or custodial account liability" on Part X, line 21 and providing the liollovving explanation: ALEC is the recipient of funds tiom various outside organizations and individuals which are to be used exclusively for scholarships on behalfof state legislators. Scholarships are payable, upon approval by the relevant State Chair, to State Iiegislators to reimburse them for travel expenses incurred attending meetings of The amounts received and disbursed by ALEC for such purposes are not considered revenue and expenses of ALEC as the State Chair retains the exclusive right to determine the expenditures. The cash held and related liability are reported in the financial statements T0 ALEC's financial statements similarly provide: Funds for scholarships received by ALEC on behalf of State Legislators in agency transactions are _reported as scholarship funds held as agent. Scholarships are payable, upon approval by the relevant State Chair, to State Legislators to reimburse them for expenses incurred attending meetings of ALEC. The amounts received and disbursed for this scholarship program are not considered revenue and expenses of ALEC as the State Chair retains the exclusive right to approve scholarships." According to ALEC's financial statements and inforniation returns, the total amount held in state scholarship funds ranges from $1 million to $2 million each year, a significant sum "impair[s] his objectivity and independence of judgment as a public official." See Ohio Joint Legislative Ethics Committee Advisory Opinions 95-006 and 00-003. By ensuring the participation of the Ohio legislators in closed- door meetings with representatives (including lobbyists) from corporate inembers-corporations that, we understand, contribute to the legislators' campaigns and political action committees--to draft legislation that is intended to advance those corporations' interests, ALEC's legislative scholarships arguably "results in a substantial and improper influence" on the legislator. 70 2010 Form 990, Schedule (Supplemental Financial Statements), Part XIV (Supplemental Information). ii Note to ALEC's audited financial statements for the years ended December 31, 2010 and 2009. giisieh itlieisiize ofthe organ_ization.T2 Claiming that these funds do not belong to ALEC facilitates other helpful reporting positions taken by the organization. For example: On Part IX, line 18 of _its 2008 and 2009 inibrmation returns, ALEC reported that it made no expendi!ure,s~ for "travel or en_tertainmen_t expenses of any federal, state, or local public officials," and reported. spending only 849,499 for government official travel in 2010. On Schedule J, Part 1 of its 2008, 2009, and 2010 inforniation returns, ALEC reported that it did any "travel for companions" for any of its officers or directors Relatedly, it appears that ALEC does not treat amounts related to spousal and family travel as compensation, where appropriate, or issue Form 1099 information returns to the parties receiving this benefit. - 1. ALEC Operates for the Private Benefit of its Corporate Donors, Legislative Members, and the Republican Party, in Violation of Section As you are Well-aware, organizations that are exempt from federal income tax under section 501(c)(3) must be organized and operated exclusively for charitable, educational, or other exempt purposes. Indeed, the Supreme Court has held that "the presence of a single non-exempt purpose, if substantial in nature, will disqualify an organization from tax-exempt status, even if the organization also conducts charitable activities."73 The Treasury Regulations further clarify that an organization is not operated exclusively for exempt purposes unless it "serves a public rather than a private Courts have interpreted this regulation to create a "private benefit test" that prohibits tax-exempt organizations from conducting more than insubstantial activities that confer "nonincidental benefits . on disinterested persons people who do not control the organization] that serve private interests." In other Words, if an organization serves private interests other than incidentally, it will not meet the standard for tax-exemption, even if it otherwise appears to conduct charitable activities.?6 Based on the foregoing, this appears to be precisely ALEC's situation. A. Contours ofthe Private Benefit Doctrine. While the most common examples of impermissible private benefit involve a charity conferring financial benefits to individuals, the doctrine is substantially broader than this paradigm. 12 For example, in 2010, AIQEC reported contributions of $5,997,341 membership fees of $1,166,804, end-of-year assets of $4,047,129 and a scholarship fund liability of $l,023,761. In 2009, ALEC reported contributions $5,302,779, membership fees of $961,104, $3,306,976, and a scholarship fund liability of$1,042,629. PM See Better Business Bureau v. United States, 326 U.S. 279 (1945). fn-ear. Reg. Am. Campaign Acad. v. Comm'r, 92 T.C. 1053, 1069 (1989); Rev. Rui. 2006-27, 2006-21 1.R.B. 915. 16 See Columbia Park Recreation Ass'n v. Comm'r, 88 T.C. 1, 25 (1987) (explaining that under the section 501(c)(3) Regulations, "a private interest exists if any person having a private or personal interest in [the organizati0n's] activities is the focus of (the organizatioifs] 15 il for purposes of our analysis, the IRS and courts have long recognized that a charity may create an inipermissible private benefit-and, accordingly, jeopardize its exempt status-if it has a substantial purpose of generating business or providing pecuniary support for one or more nonexernpt entities? ln one case, for example, the Tax Court upheld the IRS's revocation of the section 501(c)(3) status ofthe International Postgraduate Medical Foundation because a substantial purpose of its operations was to benefit a for-profit company owned by an officer of the charity." ln its decision, the court explained: "When a for-profit organization benefits substantially from the manner in which the activities of a related organization are carried on, the latter organization is not operated exclusively for exempt purposes Within the meaning of section 50l(c)(3), even if it furthers other exempt purposes." 9 Moreover, impermissible private benefit exists where a charity allows private interests to dictate the charity's internal operations and policies. Thus, in Columbia Park Recreation Association v. Commissioner, the Tax Court ruled that a nonproht civic association created to provide park, recreation, and other services to a planned community failed to qualify for exemption because it was operated principally to promote the private interests ofthe homeowners residing in the community. The court rejected the argument that this benefit was incidental to a greater benefit to the public at large, which had access to some of the developnnent's facilities and amenities, stating: We find it difficult to accept petitioner's contention that the residents and property owners do not have a personal interest in petitioner Petitioner's operations are controlled by the residents and property owners In addition, residents' advisory committees participate in formulating petitioner's budget and defining its goals and policies. Moreover, a substantial number of petitioner's activities are solely for the purpose of providing the "new life style" promised to the residents of the development. We, therefore, find that the residents and property owners of Columbia are the intended beneficiaries of petitioner's facilities and services and that they have a personal interest in petitioner's activities." Finally, the private benefit doctrine also has been applied in the political and public policy arena to deny tax-exempt status to organizations that provide direct or indirect benefits to political parties, candidates, or officeholders. These cases and decisions establish that advancing the political fortunes of a particular party or group of candidates is not a permissible public benefit purpose and, thus, constitutes grounds for revocation. In the leading case, American Campaign Academy v. Commissioner, the Tax Court applied this doctrine to deny exempt status to an organization that operated a school for campaign workers." While the school was ostensibly open 77 Eg., International Postgraduate Med. Found., T.C. Memo 1989-36; l>-are Republican. Further, ALEC's corporate members favor policies that advance traditionally conservative causes and the private interests of its members. These policies, which are embodied in ALEC's model legislation, include limiting tort liability for corporations; relaxing gun control laws; limiting the activities of unions; and privatizing government programs and services like Medicare, public education, foster care, Water and sewer systems, and the corrections system. If supporting the Republican Party constitutes private beneiit-mas courts and the IRS have determined it does-#then surely supporting the big business segment of the Republican Party is equally impermissible. 2. ALEC Engages in Substantial Lobbying, in Violation of Section 501(c)(3). As you know, federal tax law limits the lobbying activities of organizations exempt from tax under section 50l(c)(3). This limitation "stem[s] from congressional policy that the United States Treasury should be neutral in political affairs and that substantial activities directed to attempts to influence legislation . should not be subsidized."90 As the Supreme Court explained, the limitation on lobbying in section 50l(c)(3) came about because "Congress was concerned that exempt organizations might use tax-deductible contributions to lobby to promote the private interests of their members."9i Public charities have the option of choosing between two quite different methods of complying with the lobbying restriction. Under the default regime, a charity is subject to the so- S8 See, eg., Form 990 Schedule D, Part IV. 89 Eg., Rev. Rul. 71-395, 1971-2 CB. 228 (a cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify under section 50 of the Code because it provides a private benefit-~t. the sales proceeds-to the artists); Rev. Rui. 76-152, l976~l C.B. 151 (same). 90 Christian Echoes Nat'l Ministry v. United States 470 F.2d 849, 854 (l0th Cir. 1972); See also Taxation With Representation v. Regan, 461 U.S. 540, 544 (1983) ("ln short, Congress chose not to subsidize lobbying as extensively as it chose to subsidize other activities that nonprofit organizations undertake to promote the public id. at 550 ("lt is not irrational for Congress to decide that tax-exempt charities . . . should not further benefit at the expense of taxpayers at large by obtaining a further subsidy for gl Taxation With Representation, 461 U.S. at 550 (citing 78 Cong. Rec. 586i (remarks of Sen. Reed), 5959 (remarl