Running Scared: ALEC Anticipating an IRS Audit?

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The American Legislative Exchange Council (ALEC) appears to be anticipating an Internal Revenue Service (IRS) audit, after multiple complaints challenging the "corporate bill mill's" charitable status, based on documents recently obtained by Bloomberg News.

According to internal ALEC documents, the organization has discussed forming a nonprofit organized under Section 501(c)(4) of the tax code, apparently in anticipation of the IRS revoking ALEC's current "charitable" status. Charities (which are organized under Section 501(c)(3) of the tax code) as well as nonprofits are tax exempt, but ALEC's charitable status had allowed its corporate members to write-off their ALEC membership dues and costs as tax-deductible charitable contributions.

ALEC's charitable status has been challenged in multiple IRS complaints in the past year -- and despite publicly dismissing the allegations as "patently false" and "ignor[ing] applicable law," behind the scenes, ALEC's leadership apparently recognizes their vulnerability.

ALEC Executive Director Ron Scheberle discussed forming a 501(c)(4) called "ALEC NOW" in an August memo, claiming that if a 501(c)(4) were "operating fully prior to an IRS audit," the agency might allow the newly-formed (c)(4) to continue operating and take over activities impermissible for a (c)(3) charity.

"ALEC is now grasping at straws," said Nick Surgey of Common Cause, which has challenged ALEC's charitable status. "This leaked memo exposes a desperate attempt to find a "get out of jail free card" before an inevitable full-scale IRS audit."

IRS rules are clear that a charity which loses its exemption for excessive lobbying cannot reorganize as a 501(c)(4). But nonprofit law experts tell the Center for Media and Democracy that ALEC may be able to get around this rule by forming the (c)(4) in advance of the audit.

ALEC's Charitable Status Challenged

ALEC is afforded a variety of government-conferred 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 engage in minimal lobbying and primarily serve public or charitable interests, rather than private interests.

In April, Common Cause filed a whistleblower complaint, backed by hundreds of pages of documents, alleging ALEC violates its charitable status by engaging in substantial lobbying through the development, promotion, and dissemination of corporate-sponsored "model" bills.

In July, former IRS Exempt Organizations head Marcus Owens (on behalf of a group called Clergy VOICE) filed another complaint arguing ALEC exists for the private benefit of its corporate members and had misrepresented itself in its tax filings. Owens filed a followup complaint in October based on contradictory claims ALEC had made to the IRS and Wisconsin's Government Accountability Board about the "scholarship" program that allows corporations to pay for legislators' flights and hotel rooms; those contradictory claims were initially highlighted by the Center for Media and Democracy. The Voters Legislative Transparency Project (VLTP) also filed a complaint.

"The evidence of ALEC's abuse [of its charitable status] is so extensive," Surgey said, "that it is difficult to think the IRS could be fooled by a non-profit law version of the cup and ball magic trick," where ALEC continues functioning after revocation just by setting up a new nonprofit entity.

Rough Year for ALEC

The leaked memo caps a difficult year for ALEC that has seen it shed over 40 major corporate members and the loss of more than 70 legislative members.

ALEC came under particularly intense criticism starting in March 2012 for its national drive to promote the "Stand Your Ground" gun law that initially shielded 17-year-old Trayvon Martin's killer from prosecution, and weathered additional criticism in the following months over its role in advancing laws that make it harder to vote, that criminalize immigrants, protect corporations from civil liability, thwart environmental regulations, and cut holes in the social safety net -- all while enjoying tax-exempt "charitable" status.

Most recently, ALEC has been directly tied to Michigan's anti-union "right to work" push, with the language in the Michigan law lifted verbatim from the ALEC model.