Posted October 13, 2006 by Frances R. Hill

Rampant Abuse of Tax Exempt Status in Abramoff Scandal

     The minority staff of the Senate Finance Committee released a scathing report on the role of certain nonprofit organizations in the Abramoff scandals that have engulfed Congress.  The report accuses nonprofit organizations of serving as accommodation parties to a fraud on taxpayers by using their exempt status to launder money for the private benefit of Abramoff, his henchmen, members of Congress receiving lavish gifts from Abramoff, and the exempt entities and their leaders.

The report finds that the nonprofit organizations provided the following types of help to Abramoff and his henchmen:

(1)        Concealing the sources of funds by laundering payments and making disbursements at Abramoff’s direction

(2)        Writing newspaper columns or press releases in exchange for payments from Abramoff

(3)        Introducing Abramoff’s clients to government officials in exchange for payment

(4)        Acting as front organizations ostensibly paying for Congressional travel in fact funded by Abramoff’s clients.

Much of the report focuses on the activities of Grover Norquist and Americans for Tax Reform.  The report documents the care that Norquist devoted to being paid for his services and his explicit knowledge of the precise services he agreed to perform.  No one can claim that Americans for Tax Reform was simply a small nonprofit headed by politically naive citizens who were victimized by complex laws that burden their First Amendment rights.  Americans for Tax Reform sold itself to Jack Abramoff based on full knowledge of the nature and scope of the enterprise.  This choice is the heart of the critique leveled in the report. 

Based on its investigation, which is based in part on the investigation conducted earlier in the year by the Senate Committee on Indians Affairs, the minority staff concludes that the nonprofit organizations violated their tax exempt status, that they earned unrelated business taxable income by operating exactly like commercial lobbying firms, and that they may well have violated a number of tax provisions subject to criminal penalties as well.

The report calls for a number of reforms for nonprofit organizations.  These reforms include subjecting the fee income earned to the unrelated business income tax, imposing an excise tax on managers of organizations that engage in money laundering activities of this type, preventing corporations from deducting contributions to exempt organizations that launder their contributions in the ways detailed in the report, expanding the definition of lobbying, and require that corporate donors to certain nonprofit organizations that engage in lobbying be disclosed.

While these suggested reforms focus exclusively on the nonprofit organizations and not on the members of Congress and the private lobbyists involved in these tawdry transactions, this is a report written by the minority staff of the Senate tax-writing committee and are limited to the jurisdiction of that committee.  Of course broader measures are required, but this broader response must come from a comprehensive response based on the work of several committees and expressing the values of the entire Congress.

The report calls for full scale investigations of these issues by the Department of Justice and by the Internal Revenue Service. Both agencies should heed this call and move forward on an expedited basis. 

But these Government actions are not enough.  The report should be read as a wakeup call to the exempt sector.  Together with the earlier report of the Senate Committee on Indian Affairs, this report should become the basis of a wide ranging discussion of the misuse and abuse of tax exempt entities by members of the political class and of reforms that will eliminate the abuses while ensuring that exemption serves the important public purposes that support its continuation.              

 Even assuming that only a very small number of exempt entities were involved in these scandals, this kind of abuse and misuse of exempt entities by lobbyists, by Members of Congress and by the organizations’ own leaders raise profound issues that transcend the immediate facts of the Abramoff matter.  The issues go to the heart of the integrity of the exempt sector and the integrity of our political institutions.    

This report is a must read for anyone interested in American democracy. 

To read the full report, click here.