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AUGUST 7, 2013

Groups charge ALEC with tax fraud over secretive “Scholarship” fund that finances junkets for state lawmakers

As legislators converge on Chicago, watchdogs urge full disclosure of travel slush fund spending and tough enforcement of state gift laws

The American Legislative Exchange Council (ALEC) is running a secretive, multi-million dollar slush fund that finances lavish trips for state legislators and has misled the Internal Revenue Service about the fund’s activity, two government watchdog groups charged today.

Common Cause and the Center for Media and Democracy said the “scholarship fund” scheme also raises serious questions about ALEC’s compliance with state gift and disclosure laws, and the ethics of lawmakers who accept ALEC’s travel payments.

The watchdogs said that by funneling money through ALEC, that group’s corporate sponsors are able to take a federal tax deduction for the cost of wining, dining and housing lawmakers and their families at resorts and events like ALEC’s 40th anniversary meeting this week at Chicago’s posh Palmer House Hilton (August 7-9).  Meanwhile, ALEC conceals the sources of the funds from the public and hides the amount of spending from the IRS by claiming that it only holds the funds in “trust,” while writing lawmakers’ checks to cover their trips. 

Common Cause and CMD laid out details of the fund’s operation in an IRS tax whistleblower complaint and letter to the IRS Commissioner.

The groups have built their case based on documents obtained through open records requests, and are taking a number of actions this week to urge a crackdown on the ALEC slush fund’s operation, including: 

• Filing a Common Cause complaint with the IRS Whistleblower Office and submitting a joint letter to the IRS Commissioner charging ALEC with filing fraudulent tax returns that massively underreported and grossly misrepresented its “scholarship scheme,” and of operating the fund in violation ALEC’s 501(c)(3) tax exempt status.

• Releasing an investigative report, Buying Influence, prepared by both groups and DBAPress, that documents how ALEC’s member companies have funneled at least $4 million for lawmakers since 2006 into the “scholarship” fund. ALEC’s corporate funds have been used to fly state lawmakers to resorts for closed-door meetings with corporate leaders and lobbyists, and to finance the purchase of exclusive tickets and receptions at professional baseball games, cigar parties, and skeet shoots. The "slush fund…leaves constituents in the dark about who is really footing the bills for their representatives,” the groups charged.

• Sending letters to state ethics oversight agencies urging authorities to carefully review the ALEC “scholarship” scheme and determine if it complies with state gift and disclosure laws.

• Sending letters to the ALEC elected state chair in each state, asking for the names of legislators receiving ALEC corporate funds to travel to this week’s Chicago conference, and which corporations are underwriting that travel. CMD and Common Cause also asked the ALEC chairs to provide a full public accounting of legislative “scholarship” recipients and funders for the past five years.

“We now know which corporations funded trips to posh resorts for hundreds of lawmakers to vote behind closed doors with lobbyists on proposals to change state laws,” said Lisa Graves, executive director of CMD and alecexposed.org.  “It’s disgraceful for ALEC to use its tax-exempt status to act as a conduit for gifts to facilitate influence peddling that advances the lobbying agenda of special interests to the detriment of ordinary Americans. This is corruption."

“ALEC pledged this spring to be more transparent. This is a chance for the organization to keep that promise,” said Arn Pearson, Common Cause’s vice president for policy and litigation. “Our elected officials really should not accept expense-paid trips and lodging from special interests, but if they choose to do so, the voters are entitled to know who is paying, and how much.”

The ALEC confabs bring together corporate executives, lobbyists, and state lawmakers for closed-door meetings where they vote side by side on pro-corporate legislation to take back to their states. ALEC’s agenda includes the privatization of schools and other public assets, anti-labor laws, weakened protections for clean water and air, and telecom deregulation bills. ALEC’s legacy includes a national drive on behalf of “Stand Your Ground” laws like the Florida statute at issue in the Trayvon Martin shooting, and restrictive Voter ID measures that make it harder for students, elderly, minority and disabled voters to cast their ballots. 

Most of the money in the scholarship fund comes from telecom, pharmaceutical, tobacco, alcohol, and oil and gas industry giants – companies and trade associations that benefit financially from the passage of state legislation promoted by ALEC. The top 10 corporate donors to the ALEC scholarship fund for the years data is available are:

The CMD-Common Cause report said ALEC promotes its meetings “in vacation-like terms.” One of its invites promised legislators “endless sandy beaches, sunny days, beautiful sunsets and the cool gulf breezes.” The event was at a luxury hotel, near a golf course where ALEC funder R.J. Reynolds Tobacco sponsored a clinic and tournament for lawmakers and lobbyists, the report said, one of many such events.
Others – Marcus Owens, the former head of the IRS’ nonprofit tax section, and Bob Sloan of the Voter Legislative Transparency Project – have also urged the IRS to investigate misrepresentations they allege ALEC has made in its federal tax filings regarding its lobbying and its payments for travel by elected officials.

The top 10 states receiving ALEC “scholarships” for legislators for the years data is available were: