Monday, October 17, 2005


Did Grover Norquist Commit Tax Fraud?

As of today, my answer to the question posed in the caption is "I don't know." However, a story in yesterday's Washington Post raises the question.

The story, How a Lobbyist Stacked the Deck, relates how cash moved in a pre-arranged plan from a Jack Abramoff client, eLottery, to a Norquist related entity, then to a group in Virginia Beach called the Faith and Family Alliance, and then came to rest in the hands of a lobbying firm run by Ralph Reed, Century Strategies. In order to conclude that Norquist did commit tax fraud, several subsidiary questions have to be addressed.

First, what Norquist entity received the Abramoff/eLottery cash? The Washington Post identifies the entity as "Norquist's foundation, Americans for Tax Reform (ATR)." However, there are two Norquist entities with similar names, Americans for Tax Reform and Americans for Tax Reform Foundation. The distinction is described on the ATR website as follows:
[Americans for Tax Reform] is a nonprofit, 501c(4) lobbying organization. Contributions to Americans for Tax Reform are not tax deductible. The Americans for Tax Reform Foundation is a 501c(3) research and educational organization. All contributions to the Americans for Tax Reform Foundation are tax deductible.
If the cash found its way into the 501(c)(4) entity, Norquist, though sleazy, probably did not commit tax fraud. However, if the cash went into the foundation, as the Post story seems to indicate, we have to follow the story further.

Section 501(c)(3) organizations can engage in some lobbying, but the amount is limited. They cannot engage in political activity. The IRS explains the differences here.

To determine whether a 501(c)(3) is engaged in excessive lobbying, it can elect to have its activities tested using one of two tests. If an organization is found to have engaged in lobbying in excess of the applicable limitation, it is subject to an excise tax and, under certain circumstances, may lose its tax exempt status entirely. If a 501(c)(3)'s tax exempt status is revoked (and a revocation can be retroactive), all of its income is subject to taxation. Finally, the managers of a 501(c)(3) that is found to have exceeded the lobbying limitations rule may be personally subject to financial penalties if they acted knowing that the the expenditures would likely result in the loss of the organization's tax-exempt status.

If the ATR Foundation was the conduit for the Abramoff/eLottery cash, how was it reported? So far as I can determine, the Faith and Family Alliance is a Section 527 organization. If that is the case, any payments by the ATR Foundation to that organization are a violation of the rules under 501(c)(3) and could cause it to lose its 501(c)(3) status. See here ("none of [an] IRC 501(c)(3) organization's assets can be used to set up or operate [an] IRC 527 organization").

(Note: There's another angle on this. A 527 organization is required to include the name of the connected organization (i.e., a 501(c)(4) organization) in its name. See 11 C.F.R. § 102.14(c). Here, it is clear that the Faith and Family Alliance was "operating as a shell." Under the circumstances, the use of the shell by ATR without including the name of ATR constituted a violation of this requirement, even if it was only the 501(c)(4) ATR that was the conduit for the funds.)

It is also possible that, assuming that the money was funneled through the ATR Foundation, Norquist could contend that the cash was being used in a lobbying effort. In tax parlance, this is an application of what is known as the "step transaction doctrine." Usually tax authorities seek to apply that doctrine to collapse a chain of transactions that, in form, are beneficial to the taxpayer, but which, when one examines the substance of the chain, show up in a different, less favorable, light. On occassions, taxpayers have successfully been able to apply the step transaction doctrine to their benefit. However, for this argument to make any sense (i) ATR Foundation must have reported the cash that found its way to Reed's organization as a lobbying expenditure and (ii) the total amount of lobbying expenditures during the year in question cannot have exceeded the amount allowable under the test that ATR Foundation elected to have apply.

Thus, the questions that have to be answered are as follows:
  1. Did the cash flow through ATR Foundation or ATR the 501(c)(4) organization?

  2. If it flowed through the foundation, does the cash payment from the foundation constitute a prohibited political activity merely because the Faith and Family Alliance was a 527 organization or can ATR Foundation apply the step transaction doctrine to argue that the transaction constituted a lobbying expense?

  3. Even if the transaction constituted a lobbying expense, how was it reported? If the payment was not reported as a lobbying expense or noted as a prohibited political expenditure, tax fraud was arguably committed.

  4. Assuming correct reporting, did the $150,000 payment cause the ATR Foundation to exceed the limitations on lobbying expenditures?

  5. Finally, if the money flowed through ATR the 501(c)(4), why didn't the Faith and Family Alliance include the ATR name in its name?
The Abramoff affair widens.

Update

The front group through which Norquist's ATR funneled the cash, the Faith and Family Alliance, apparently never reported the contribution. The only report that the FFA ever filed with the IRS can be found here. That report, which likely covered a period prior to the date that the ATR transferred the cash, was signed under penalties of perjury by FFA's President, Robin Vanderwall. Mr. Vanderwall is presently serving a seven year sentence in the Virginia prison system for soliciting sex with minors via the Internet.

The lack of reporting raises a serious issue for Norquist regardless of whether the money was funneled through the ATR 501(c)(3) or the ATR 501(c)(4). Specifically, if FFA was used by Norquist with the intent to avoid the public reporting of the contribution, a crime was likely committed. If Norquist knew, when the payment was made to FFA, that FFA was merely a shell organization and would likely never file any further additional reports with the IRS, it can be inferred that he chose the FFA as a conduit with the specific intent to avoid disclosure. In other words, that he intentionally evaded obligations imposed by the Internal Revenue Code.

2 comments:

taters said...

What a great site, Mr. Levine.
I've had issues with Mr. Norquist ever since he wanted to replace FDR's image on the dime with Reagan. not to mention Mr. Norquist's referral to WWII vets as commies. ( Ok, I'm paraphrasing and he did issue some kind of retraction.) he is scum, that's for sure. Thank you sir for fighting the good fight.
Taters Detroit, MI

Anonymous said...

Now HERE is a useful blog. Great information. Let's hope Norquist's sleaze-ridden career is soon drowned in the bathtub.