On October 12, 2006, Senator Max Baucus (D-MT), ranking member of the Senate Finance Committee, released a 600-page minority staff report of an investigation into certain tax-exempt organizations and their dealings with lobbyist Jack Abramoff.

Full Minority Staff Report (600 pages, PDF)
Excerpt of Staff Findings and Recommendations (15 pages, PDF)

According to the minority staff, the five tax-exempt organizations may have violated their tax-exempt status by allegedly providing lobbying and public relations services to Mr. Abramoff’s clients in exchange for payments, and in some cases transferring funds to disguise their source. The staff makes a number of recommendations (see below) to clarify and strengthen laws governing tax-exempt nonprofit organizations and have referred the matters to the IRS and the Department of Justice for further review.

While the focus of the report is on the five specific groups, the introduction explains that the findings will also “provide a broader picture of issues to be considered by Congress and the public with regard to tax-exempt organizations, including charitable organizations.”

Independent Sector released a statement on October 13 commending Senator Baucus for the investigation and the attention it has focused on activities that are inconsistent with accepted standards of practice by charitable organizations and which could undermine the public trust in our sector. IS has consistently supported efforts to strengthen the stewardship of charitable organizations and will work closely with Congress to ensure that any proposed legislative reforms are consistent with the good governance recommendations of the Panel on the Nonprofit Sector and also preserve the ability of charitable organizations to engage with lawmakers on policy matters on a nonpartisan basis.

Meanwhile, Senator Charles Grassley (R-IA), chairman of the Finance Committee, sent a letter (PDF) on October 25 to the Association of Community Organization for Reform Now (ACORN) raising questions about its activities and asking for extensive financial and employment records, including any documents regarding election or lobbying activity. In the letter, Senator Grassley referred to the minority staff report and said he is concerned that "the misuse of tax-exempt organizations for political activities and lobbying is a widespread problem across the political spectrum." He also sent a referral letter to the IRS (PDF) on the matter on November 8.

Minority staff recommendations, as outlined in Senator Baucus’s press release:

501(c)(3) organizations

• For purposes of section 501(c)(3), “lobbying” should include payment of travel, meals, and other expenses for government officials if a registered lobbyist is a disqualified person (board member) of or a substantial contributor to the 501(c)(3).
• Organizations that pay such expenses should publicly disclose corporate donors and contributions by lobbyist above a certain amount.
• The rate of tax on excess lobbying expenses (IRC Section 4912) imposed on the organization and on the organization manager should be increased.
• Expand the definition of“lobbying” under section 501(c)(3) to include lobbying of the Executive branch and lobbying regarding Federal appointments.
• Apply the present law proxy tax (Section 6033) to 501(c)(3) organizations, requiring groups either to inform donors of the percentage of organization funds that go to lobbying and that that percentage of their donation would be non-deductible, or to pay a proxy tax.
• Congress should consider imposing special rules (such as disclosure of contributions from corporations or registered lobbyists) for 501(c)(3) organizations founded by a Member of Congress or over which the Member exercises control.

501(c)(4) organizations and other 501(c) organizations

• Corporate contributions to organizations that engage in lobbying should not be deductible as a business expense, or should be subject to an excise tax, or should be treated as unrelated business income.
• Alternatively, if a contribution is accepted by the organization with any expectation of quid pro quo, that contribution should be treated by the organization as unrelated business income.
• Organizations engaged in lobbying should publicly disclose all corporate donors.
• Impose an excise tax on organization managers that knowingly accept and disburse contributions for the primary purpose of facilitating transactions from a contributor for a non-exempt purpose.

Last Updated: November 22, 2006