Hon. Douglas Shulman
Commissioner, Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Dear Commissioner Shulman:
I write on behalf of my client Common Cause to request that the Internal Revenue Service investigate what appears to be massive under-reporting of lobbying by the American Legislative Exchange Council ("ALEC"). Further, the Service should review the organization's operations to determine whether its tax-exempt status should be revoked due to excess lobbying or, alternatively, because ALEC appears to operate primarily to further private business interests and not to advance a charitable purpose.
ALEC is an Illinois nonprofit corporation recognized by the Service as exempt from federal income taxation under Code section 501(c)(3). In 2009 it reported revenues of nearly seven million dollars, and expenditures slightly in excess of that amount.
ALEC describes itself as a nonpartisan membership association for conservative state lawmakers. It is governed by a Board of Directors that apparently consists of incumbent state legislators. ALEC offers two forms of membership: Legislative and Private Sector. Legislative members are incumbent state legislators who pay $100 for a two-year membership. Private sector (or corporate) members pay a minimum of $7000.
The largest portion of ALEC's work is conducted through nine Task Forces covering various issue areas. Each Task Force has two co-chairs, one state legislator and one corporate representative, and the task force members also include ALEC members from both sectors. The task forces develop policies, position papers, and most notably generate model legislation that is put forward as the officially endorsed legislative position of the organization. These model bills are listed on the organization's web site but the text is hidden behind a password-protected wall, accessible only to ALEC members. ALEC itself describes the role of its task forces as "model bill movers," and it boasts that each year close to 1000 bills based on ALEC Model Legislation are introduced in state legislatures around the country.
Organizations qualify for tax exemption under Code section 501(c)(3) only if "no substantial part of [their activities] is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h))." Section 501(h) in turn, in combination with section 4911, allows most charities to elect to measure their lobbying under an expenditure test, which provides specific definitions and exceptions for both direct and grass roots lobbying. It provides limits for total and grass roots lobbying, imposes an excise tax on organizations that exceed either limit in a given tax year, and provides for loss of exemption only if the organization "normally" (using a four year moving average) exceeds either lobbying limit by more than 50%.
In contrast to the specific and detailed definitions provided under the 501(h) expenditure test and its associated regulations, the statutory default "no substantial part" test is vague and uncertain. By the words of the statute it applies only to efforts to influence legislation, but what types of activity or discussions of public policy will be classed as such an effort is unclear. Regulations, however, provide that an organization is considered to be attempting to influence legislation if it advocates the adoption or rejection of legislation. Treas. Reg. � 1.501(c)(3)-1(c)(3)(ii)(b). In addition, there is no statutory or regulatory definition of "substantial," although a review of the relevant case law leads most practitioners to conclude that activities that do not exceed five percent of overall operations will not be considered substantial. Finally, the "no substantial part" test is not limited to measuring expenditures, and the Service has indicated that it will consider volunteer efforts, along with even less tangible factors such as public perception and efficacy of legislative efforts.
ALEC Lobbies Extensively
Despite its extensive activities developing and promoting legislation (as discussed in greater detail below), ALEC claims on its Form 990 that it does no lobbying at all. For 2009 and 2008 it answered "no" to Part IV, Question 4, and as a consequence did not complete Schedule C or provide any further information on this question. In prior years (2002 - 2007) on the old Form 990, it completed both parts VI-A (required for charities electing under section 501(h)) and VI-B (required for those under "no substantial part") of Schedule A, claiming variously "N/A" or entering zeroes on every line. It is thus impossible to tell from ALEC's information tax return whether it has elected to be governed by the expenditure test of section 501(h), or whether it remains subject to the statory default "no substantial part" limitation on lobbying activities. Under either test, however, ALEC engages in a measureable amount of lobbying and has thus filed false tax returns when it claims otherwise. In addition, it appears highly likely that ALEC's lobbying exceeds the limited amount permissible for a 501(c)(3) organization.
According to ALEC's own tax returns, its largest program area in terms of expenditures is the operation of its task forces. In turn, the primary function of these task forces is development and dissemination of model bills, with the intent that they be introduced and passed in as many state legislatures as possible.
The organization's second largest area of expenditures is for meetings held several times a year. These are opportunities for "private sector" members (corporate representatives) to interact with legislators and advocate for favored policies. The agendas include discussions of specific legislation and specific legislative proposals supported by the organization. Indeed, in many cases the proposals were developed by ALEC itself as its own model bill.
Under the default statutory test, it seems incontrovertible that ALEC is substantially and indeed primarily engaged in attempting to influence legislation. All of its efforts are geared toward developing and promoting favored state legislation. These proposals are generated in a private process where the business interests of its corporate members are highlighted, then shared only with the organization's legislator members so they can take the proposals back to their states and introduce them as their own idea.
ALEC's lobbying function is demonstrated in its own publicly available materials. Its recruitment brochure for private sector membership (available at http://www.alec.org/am/pdf/Corporate_Brochure.pdf), for instance, describe model legislation as "the centerpiece of the Task Forces." It claims that, "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." The brochure further emphasizes ALEC's legislative policy work and the opportunity it provides for corporate members to promote their policies and set the agenda for the organization and its state legislative members, "ALEC provides the private sector with an unparalleled opportunity to have its voice heard, and its perspective appreciated, by the legislative members. . . This partnership identifies issues and then responds with common-sense, result-oriented policies." In other words, ALEC itself presents its key function as creating a forum for corporate members to present their views on policy to legislators who then enact those views as legislation, after obtaining the organization's seal of approval.
The record demonstrates that ALEC does not just develop model bills, it actively encourages their adoption and provides resources to its members who may be seeking to move ALEC bills in their legislatures. An example of such a communication is attached as Exhibit ___. [from web: ALEC Policy Solutions] This is the web version of an e-mail directed to ALEC's legislator members, highlighting for them a set of new model bills approved by its Board and offering talking points and other materials to support their use. Tellingly, it includes the message, "As always, please let us know if ALEC can provide you with legislative resources." In other words, ALEC makes a practice not only of promulgating model bills as some sort of "best practices" or publicly available reference source but affirmatively and privately provides resources to those legislators promoting these bills. Under any definition, this is lobbying.
A public records request made by Common Cause to the Ohio Senate provided many more examples of ALEC communicating with legislators in support of its legislative agenda. These documents represent one example of such communications, between the organization and a single one of its legislator members. They represent, therefore, the tip of the iceberg, not the total sum of the organization's lobbying communications. In summary, these are:
�Civil Justice Task Force Public Sector Member Survey January 2010. In addition to gathering general issue information, this document specifically offers a list of resources designed to help promote legislation the member may be working on.
�E-mail March 5, 2010. From ALEC staff member to state Senator Seitz, encouraging him to introduce a specific bill endorsed by ALEC and offering "support" should he do so.
�E-mail March 29, 2009. Between ALEC staff member and task force co-chair, indicating that agenda for upcoming task force meeting would include discussion of specific legislative proposals.
�E-mail May 21, 2009. Exchange between ALEC staff member and state Senator. The staffer urges consideration of specific revisions to Ohio Code proposed by Ohio Chamber of Commerce.
�E-mail July 6, 2009. Asking ALEC members to sign on to a letter opposing specific aspects of then-pending federal health care reform legislation. The letter was addressed to Senator Robert Byrd and copied to multiple other Congressional leaders.
Each of these either constitutes or reflects legislative lobbying activity conducted or supported by ALEC. Together they draw a picture of an organization that was not truthful when it reported engaging in no lobbying on its 2009 and 2010 tax returns.
Under the section 501(h) expenditure test, a communication is considered direct lobbying if it made to a legislator (or legislative body employee) and it refers to and reflects a view on specific legislation, including not only bills introduced in the legislature but a specific legislative proposal that the organization supports or opposes. Treas. Reg. �� 56.4911-2(b)(1)(ii) and -2(d)(1)(ii). Thus, any communication from ALEC to its legislator members on the subject of a specific legislative proposal will qualify as lobbying. Every message informing members of newly-approved model bills constitutes direct lobbying. Discussions at organizational meetings constitute lobbying where they include presentation of the organization's position on specific legislative proposals.
If ALEC is covered by the 501(h) election, it may argue that many of its communications with members are excluded from the definition of lobbying by virtue of the special rules for communications with the organization's own members, which provide that expenditures for a communication that refers to, and reflects a view on, specific legislation are not lobbying expenditures if the communication is directed only to members of the organization; the specific legislation is of direct interest to the organization and its members; and the communication does not directly encourage the member to engage in direct or grassroots lobbying. Treas. Reg. 56.4911-5(b). In context, however, this provision does not provide a sweeping exception that allows an organization whose membership consists of legislators to lobby them on specific legislation without limit. Rather, this is setting out a slightly more lenient rule for communications to members than applies to communications to the general public, so that messages that include an indirect lobbying call to action (as defined in Treas. Reg. � 56.4911-2(b)(2)(iv)) are not captured as lobbying. It applies to communications the organization makes to its members as members, not when it targets them in their capacity as legislators. Cf. Treas. Reg. � 56.4911-2(b)(4) Example 7 (an organization is not engaged in direct lobbying when its newsletter includes an article reflecting a view on a pending bill even though a Senator is among the subscribers, because the communication is sent to the Senator in her capacity as subscriber rather than in her capacity as a legislator).
Even if an extremely literal reading of this regulation were considered to support the conclusion that ALEC can recruit legislators to join as members and then communicate with them about legislating without lobbying, in many instances the communication does directly encourage the recipient to engage in direct lobbying. When an ALEC member is urged to introduce one of ALEC's model bills, they are ipso fact being asked to communicate with other legislators regarding that specific legislative proposal - in other words, they are being asked to lobby.
Thus, the evidence clearly demonstrates that ALEC engages in lobbying despite its reports to the contrary. The substantiality of this lobbying effort is demonstrated by the amounts expended for its task force work ($2,634,723 in out of total program expenses of $5,549,647 in 2009), and its conferences which inherently include communications with legislators about specific legislation ($1,955,457 in 2009). Given ALEC's failure to report so much as a penny spent on lobbying, the available evidence indicates it is flagrantly disregarding its obligation to report and disclose amounts spent on lobbying and likely is lobbying in excess of the limited amount consistent with 501(c)(3) exempt status. The IRS should conduct an audit to determine the extent of ALEC's lobbying activities and impose appropriate penalties.
ALEC Serves Private Interests not Charitable Purposes
In addition to the concerns about excess and unreported lobbying outlined above, it appears that
ALEC's fundamental purpose is to advance the private legislative agendas of its corporate members. While this may be appropriate for some kinds of tax-exempt organizations, such as 501(c)(6) trade associations, it is inconsistent with the requirement that a 501(c)(3) organization be operated "exclusively" for charitable and educational purposes.
ALEC was originally created to further "conservative" principles. While people on different sides of the aisle may disagree about the desirability of such principles, it must be conceded that this apparently represented the desire of the organization's founders to promote what they believed to be the public good. Over time, however, the organization has evolved into a platform whereby private commercial interests pay substantial sums of money to put their legislative interests in front of state legislators who can promote appropriate legislation. It develops and promotes model bills in task forces where only private business interests and legislators participate; there seems to be no attempt to review considerations of public benefit or social good. The driving force is promotion of corporate business interests. This would be all well and good for a chamber of commerce, but it is not charitable.
Yet by claiming to be a charity and calling participating legislators "members" ALEC attempts to evade disclosure of its lobbying, allows corporate members to deduct their payments as charitable contributions rather than non-deductible lobbying expenses, and does an end-run around state ethics laws intended to restrict the ability of businesses to buy access to legislators in order to promote their policy agendas. The IRS should stop allowing the continuation of this farce.
cc: Lois Lerner, Director of Exempt Organizations Division
Nanette M. Downing, Acting Director, Exempt Organizations Examinations
 $2,634,723 of expenditures in 2009 out of a total of $5,549,647 in claimed program service expenses.
 An organization will not be denied exemption under this provision if it has elected the 501(h) expenditure test and is not denied exemption under those rules. Id. � 1.501(c)(3)-1(c)(3)(ii).
 Contrast this approach with other organizations that develop model legislation, most notably the National Conference of Commissioners on Uniform State Laws, which works through an open process, accepts members from any ideological position, and generates work products that are publicly disseminated and include detailed analysis and comment rather than just legislative text made available only to members who share a common ideology.
 The July 6, 2009 e-mail is not even arguably covered by this rule, as it directly encourages the recipient to engage in direct lobbying by signing on to the letter to federal legislators.