Chamber of Commerce Accused of Tax Fraud

by Eric Lichtblau - Saturday, September 11, 2010 by the New York Times

WASHINGTON - With a war chest rivaling that of the Republican Party itself, the U.S. Chamber of Commerce has emerged in the last year as perhaps the Obama administration's most-well-financed rival on signature policy debates like health care and financial regulation.

Critics on the left have long complained about the chamber's outsize influence. But now they are taking on the business association directly, charging in a complaint filed Friday with the Internal Revenue Service that it violated tax codes by laundering millions of dollars meant for charitable work from a group with ties to the insurance giant A.I.G.

The complaint was brought by a group called U.S. Chamber Watch, which was created four months ago - with the strong financial backing of labor unions - to scrutinize the Chamber of Commerce's growing influence and provide a counterbalance.

But chamber officials said they had complied with all tax laws and dismissed the complaint as a political ploy.

A chamber spokeswoman, Tita Freeman, said its opponents "are desperately looking for opportunities to undermine the chamber's efforts to promote free markets and economic growth."

The I.R.S. refused to comment on the complaint, citing the confidentiality of taxpayer records.

I.R.S. regulators have often been wary of wading into political grievances, particularly after evidence emerged during the Watergate scandal that the Nixon White House had sought to use the agency for political purposes.

But in recent years the agency has occasionally gotten involved in politically tinged controversies. In one high-profile case in 2004, Republican complaints led it to open an investigation into the N.A.A.C.P.'s tax-exempt status after the group's leader criticized President George W. Bush in a speech. The I.R.S. concluded two years later that the remarks did not violate the group's nonprofit restrictions on political activity.

At issue in the complaint against the Chamber of Commerce is whether the group mixed funds for charitable and noncharitable political purposes in violation of tax codes.

The chamber, often using expensive mass-market radio and TV spots, has weighed in on many major public policy debates in recent months, including the Obama administration's health care policy, business regulations, campaign finance laws and Internet rules, as well as job creation and the threat of tax hikes. On many issues, it has pushed for less government regulation in favor of free-market incentives.

Now the chamber's political arm is turning to the November elections, and it expects to spend $50 million or more to push pro-business candidates, usually Republicans. As part of a wave of new commercials broadcast this week, the chamber's California affiliate attacked Senator Barbara Boxer - a Democrat running for re-election against Carly Fiorina, the former chief executive of Hewlett-Packard - and accused Ms. Boxer of "destroying jobs" by voting against business.

Cyrus Mehri, a Washington lawyer who brought the I.R.S. complaint on behalf of U.S. Chamber Watch, said in an interview that the chamber's current political activities were, in effect, being underwritten with money intended for charitable work.

The complaint focuses on loans and grants totaling about $18 million that were made beginning in 2003 to a nonprofit affiliate, the National Chamber Foundation, by the Starr Foundation, a charity started by the founder of A.I.G. and now led by Maurice R. Greenberg, the insurer's former chairman.

Lawyers for Chamber Watch said their research, based largely on public tax filings, found that none of the principal on some $12 million in loans had been paid back and that the money appeared to have been given to the chamber's foundation for unrestricted use.

The lawyers said that the money, in violation of nonprofit restrictions, was ultimately funneled to the chamber itself and used to finance broader political causes, including support for legal tort reform to shield companies like A.I.G. from liability. Mr. Greenberg himself had worked to promote restrictions on lawsuits, the complaint notes.

"You have millions of dollars improperly going to the chamber," said Mr. Mehri, who drafted the complaint with Gail M. Harmon, a Washington lawyer specializing in tax law. "This is not a technical violation."

But Stan Harrell, chief financial officer for the Chamber of Commerce, said in an interview Friday that the chamber's lawyers and its accountants at Ernst & Young had reviewed the Starr Foundation funding and found that it complied with all relevant tax law.

"We've never had an issue, period," Mr. Harrell said. He said that Chamber Watch, which was created by a federation of five unions called Change to Win, was simply trying to create trouble for the chamber because of its opposing political views.

"That's democracy. From time to time, people make allegations," he said. "If their real interest was proper accounting, they'd be talking to us. This is political."

Mr. Harrell said that the funding from the Starr Foundation was listed in tax documents as a loan only in the most technical sense and that it was never intended to be paid back. Instead, he said, the money was restricted for long-term use on educational and research projects as part of the chamber's capital plan and was invested by the chamber to ensure the Starr Foundation a set rate of return.

"We wanted to make sure we guaranteed the investment return," he said. "Legally, that has to be represented as a loan. This was all done very scrupulously. If anything, we overdisclosed the transaction" in the group's federal tax returns, he said.