Groups hide behind tax code

Published December 11, 2006

WASHINGTON - Like other charities, Citizens Against Government Waste enjoys gentle treatment from the government.

It doesn't have to pay income taxes. It doesn't have to publicly disclose its donors. And those who donate get generous tax deductions.

But CAGW, as the group is known in Washington, sometimes acts more like a corporate lobbying firm than a guardian of the little guy. It has received tens of thousands of dollars from corporations and trade associations to lobby on topics such as imported avocados that have nothing to do with government waste.

CAGW, like other so-called watchdog groups, uses its special federal status to lobby in disguise. While Washington lobbyists must tell the public who pays them, tax-exempt groups do not.

The pay-to-play activities of CAGW, first detailed by the St. Petersburg Times last April, have raised questions about whether tax-exempt groups exploit their status to build false credibility with Congress and the public.

Critics say such actions undermine faith in all tax-exempt groups.

"These kind of abuses discredit all nonprofits and make Americans suspicious of the laws on public charity," said Jeffrey Berry, a political science professor at Tufts University who studies tax-exempt groups. "I would regard what they have done as violating the spirit of the law - egregiously so."

A recent Senate Finance Committee report shows CAGW is not alone.

It reveals how former lobbyist Jack Abramoff orchestrated elaborate lobbying campaigns with Americans for Tax Reform, an influential conservative group. The report documents how Abramoff secretly paid the group thousands of dollars to write favorable research reports and newspaper articles about his clients.

The Senate report says CAGW, Americans for Tax Reform and other groups "appear to have perpetrated a fraud" by hiding behind their special tax-exempt status when they were simply acting like corporate lobbyists.

"Nonprofits should not function as de facto lobbying firms," said Sen. Max Baucus, D-Mont., the incoming committee chairman.

Special treatment

The federal government recognizes more than two-dozen types of tax-exempt groups. Charities account for the largest share, about 1-million of the nation's 1.5-million tax-exempt groups.

The idea behind the tax exemption for charities is to encourage people to help their community.

Charities are commonly known as C3s because they operate under Section 501c(3) of the federal tax code. They do not have to pay income tax and do not have to disclose their donors, but they face strict limitations on lobbying. The government encourages contributions to C3s by allowing donors to take tax deductions.

The federal tax code has a separate category for social welfare organizations that have more freedom to lobby. Such groups are known as C4s, for the section of the tax code under which they operate.

C4s do not pay income tax and do not have to disclose their donors, but the donors are not allowed to take a tax deduction.

Many groups have both types of tax-exempt organizations. CAGW is a C3 but has a lobbying arm called the Council for Citizens Against Government Waste that is a C4. They are run by the same leaders, but must keep separate records and keep their money separate. Such a structure gives tax-exempt groups the best of both worlds.

The groups must identify large donors to the IRS, but not to the public. That is based on a 1958 U.S. Supreme Court case that allows groups to keep membership and donor lists secret under the constitutional right of privacy.

'Way Washington works'

The St. Petersburg Times investigation last April, as well as an October report by the Democratic staff of the Senate Finance Committee, revealed how CAGW and other tax-exempt groups have been paid by corporations and trade associations to conduct lobbying and public relations campaigns.

CAGW, which bills itself as "America's No. 1 taxpayer watchdog," is famous for its Pig Book, an annual publication that lists federal programs the group considers wasteful. CAGW officials are widely quoted in the news media and are portrayed as independent critics of government waste.

The Times reported that CAGW traded on its good name by taking money to lobby. The group received about $100,000 from Mexican avocado growers for a campaign urging the Department of Agriculture to allow more avocados imported from Mexico.

It also took at least $245,000 from tobacco companies while urging the government not to regulate tobacco. It received thousands from a health club association while promoting tax breaks for health club memberships.

The recent report from the Finance Committee, published by the Democratic staff but backed by the Republican chairman, provides a glimpse behind the scenes as lobbyist Abramoff enlisted tax-exempt groups. It documented how he got CAGW and Americans for Tax Reform to publish articles and news releases on behalf of his clients - and then directed tens of thousands of dollars to the taxpayer groups.

That practice has become routine in the nation's capital. Asked if it was appropriate to pay CAGW to lobby, Ron Campbell, the avocado growers' lobbyist, replied: "Hey, that's the way Washington works, right?"

'Out in the open'

Is it legal for CAGW to take money to lobby on behalf of Mexican avocado growers? And for other groups to conduct similar lobbying campaigns?

Lawmakers and charity experts say the groups have definitely violated the law's intent.

"It's an abuse of the tax code," said Sen. Charles Grassley, the Iowa Republican who chairs the Finance Committee.

Berry, the Tufts professor, said, "If they are taking money under a quid pro quo that they will engage in lobbying, then they have engaged in a commercial transaction that is way outside the intent of nonprofit law."

The Senate report was critical of the lobbying and said "there is a strong likelihood" it goes beyond the bounds of the groups' IRS-approved missions. Some attorneys who specialize in tax-exempt groups said they agree with that assessment, but others said the laws are written so broadly that the groups probably have leeway to do the lobbying campaigns.

An IRS spokesman noted that the law allows C4 groups to engage in lobbying that is unrelated to their mission as long as it accounts for less than half of their activity. That gives groups a lot of latitude to lobby.

The IRS has only 1,000 agents to track about 1.5-million tax-exempt groups. The IRS examines lobbying by tax-exempt groups during audits, but the agency does not discuss individual organizations.

Officials from CAGW did not return calls for this story. Last spring, CAGW president Tom Schatz acknowledged his group accepted money from groups such as the avocado growers for lobbying, but said it was a small part of CAGW's work and that it fit within the group's principles.

Americans for Tax Reform, the other group in the Senate report, has said it complies with the law and alleged that the report was politically motivated.

Baucus, Grassley and charity experts have called for tougher laws that prevent lobbying-for-hire or require more disclosure about large contributions.

"The Federal laws that govern lobbying activities by not-for-profit organizations are simply too murky," Baucus said.

Grassley, the outgoing chairman, supports more disclosure.

"Where more things are out in the open, there is less chance for abuse," he said.

Experts on charitable groups like the idea of holding tax-exempt groups to the same standard as federal lobbyists.

"It seems to me we have to find a way to increase the disclosure of the contributors," said Frances Hill, a law professor at the University of Miami. "I'm not talking about every church in America disclosing who gives money to their collection plate. But there's got to be a way to show who gives big chunks of money."

Others say Congress should clarify what kind of lobbying is okay for tax-exempt groups.

Marcus Owens, former director of the exempt organizations division in the IRS, said, "I think there should be a distinction between groups formed to promote a particular concept and groups that are simply formed to be lobbyists for hire."

Times researcher Angie Drobnic Holan contributed to this report. Washington Bureau Chief Bill Adair can be reached at adair@sptimes.com or (202) 463-0575.