Grover Norquist and the Tax Code

In October, I asked: Did Grover Norquist Commit Tax Fraud? The information that is publicly available is still too limited to allow one to definitively answer that question. However, the facts that are publicly available point to systematic violations by Norquist of various provisions of the Internal Revenue Code.

Case in point. In an article entitled The Pimping of the President, the Texas Observer gives a detailed account of how Jack Abramoff and Norquist got paid by two Native American tribes to provide a personal audience with President Bush. There seems to be some question as to who was in attendance, but there is no question that Norquist's organization, Americans for Tax Reform, recieved a $25,000 payment for Norquist's efforts. (A facsimile of the check accompanies the article.)

In my October posting, I noted that there are two entities controlled by Norquist that go by the name "Americans for Tax Reform." One is a 501(c)(3) charitable foundation, the other a 501(c)(4) "civic organization." The principal difference between the two classifications for the purposes of my October discussion was the fact that more stringent limits are imposed on the amount of lobbying expenses that the 501(c)(3) foundation can incur. However, there is an important limitation that applies to both types of entity. Specifically, neither a 501(c)(3) or a 501(c)(4) entity can be what is termed "an ACTION organization," although that term of art applies more broadly (and is thus more restrictive) with respect to 501(c)(3) entities than 501(c)(4) entities.

With respect to 501(c)(3) organizations, there are three forbidden areas:

• Legislative lobbying efforts;


• Participation in campaigns for public office; and


• As described in Treas. Reg. Section 1.501(c)(3)-1(c)(3)(iv):

[The organization's] main or primary objective or objectives (as distinguished from its incidental or secondary objectives) [cannot] be attained only by legislation or a defeat of proposed legislation; and (b) [and it cannot] advocate[], or campaign[] for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results thereof available to the public. In determining whether an organization has such characteristics, all the surrounding facts and circumstances, including the articles and all activities of the organization, are to be considered.

A 501(c)(4) entity is only an ACTION organization subject to losing the benefits of Section 501 if it engages in active participation in campaigns for public office. I will, as lawyers are wont to say, assume, arguendo, that Norquist honored the distinctions between the types of activities that 501(c)(3) organizations are prohibited from engaging in and the more broader range of activities allowed to 501(c)(4) organizations. However, even allowing Norquist that assumption does not get him off the hook.

The reason is that neither 501(c)(3) nor 501(c)(4) organizations can be "organized or operated for profit." (The term is from 501(c)(4), but but 501(c)(3) organizations are subject to limitations that are similar, but even more limiting.) Norquist's actions as detailed in the Texas Observer story show that he was using Americans for Tax Reform, whether in its 501(c)(3) or 501(c)(4) incarnation, as his personal business vehicle.

By way of example, the visit to the White House took place in May of 2001. The check in consideration for Norquist's efforts was drawn in the next month. This raises two possibilities.

First, Americans for Tax Reform may have been engaged in a profit-making endeavor. If that was the case, there was a violation of the rules under Section 501(c).

Alternatively, the lobbying was a business activity that Norquist personally engaged in. If that was the case, Norquist would be deemed to have "constructively received" the $25,000 check. In that event, he should have reported the $25,000 payment as income on a Schedule C on his Form 1040 for the year. He would not have been able to claim a deduction for the transfer of the funds to Americans for Tax Reform, regardless of whether the entity that the funds found their way into was the 501(c)(3) or 501(c)(4) entity.

Let me reiterate: There are not yet sufficient facts on the public record to prove that Norquist engaged in tax fraud. However, it is difficult to believe that the actual transaction reported in the Texas Observer was an isolated incident. Rather, it appears that Norquist, and probably others, used 501(c)(3) and 501(c)(4) entities to engage in the "business" of partisan politics. That business made them money, as their influence and the funding of their controlled 501(c) entities grew.

To determine whether a violation of the 501(c) rules occurred, the transactions engaged in cannot be viewed in isolation. Rather, "all the surrounding facts and circumstances, including . . . all activities of the organization, are to be considered." I assume that this is an effort that the federal prosecutors are currently undertaking.

Hat Tip: Mark Kleiman at The Reality-Based Community.