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«Audit Report Consumer Federation of America Foundation - Costs Claimed Under EPA Cooperative Agreements CX825612-01, CX825837-01, X828814-01, ...»

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Although OIG’s description of the Foundation’s history and its relationship to CFA, is inaccurate and misleading, we do not agree that the “degree of separation” between the organizations has any effect, one or the other, on the Foundation’s eligibility for Federal funds under LDA Section 18. In fact, we believe that, as a matter of law, a 501(c)(3) or a non-lobbying 501(c)(4) may share directors, facilities and staff — may be all but indistinguishable from the non-lobbying 501(c)(4) in all material respects — without losing its eligibility under LDA Section 18, as long as the organizations respect their Response of the Consumer Federation of America to Draft Audit Report on the Consumer Federation of America Foundation at 1-2 (January 20, 2004) (?Response?).

The Foundation’s original corporate name was the ?Paul H. Douglas Consumer Research Center, Inc.? In March 25, 1997, its name was changed to the ?Consumer Research Council,? and then, in March 1999, to the ?Consumer Federation of America Foundation.? See Response at 1.

See Response at 1.

See Response at 2-3.

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separate corporate status and maintain separate books of account. our conclusion is based on the text of LDA Section 28, its somewhat meager but instructive legislative history, and the statutes underlying purposes and policies.

3. Statutory Interpretation.

LDA Section 18 prohibits Federal financial assistance to a 501(c)(4) organization that engages in lobbying activities — specifically, to ?[a]n organization described in section 501(c)(4) of the Internal Revenue Code of 1986.? By it terms, therefore, the coverage of LDA Section 18 is predicated, in the first instance, on tax-exempt status.

Organizations described in section 501(c)(4) are covered by the section if they lobby;

organizations described in IRC section 501(c)(4) that do not lobby, organizations described in IRC 501(c)(3), and others organizations are not. There is nothing ambiguous in the text

- that is, there are no words or phrases in the text whose meaning or reference is unclear.

As a result, the text cannot be interpreted to provide that close affiliation with a lobbying 501(c)(4) organization brings a 501(c)(3) organization within the ambit of the section.

Support for OIG’s broad interpretation of LDA Section 18, if it exists at all, must come from outside the statutory text.

4. Legislative History

OIG appears to concede that its interpretation of LDA Section 18 finds no support in the statutory text. It offers no argument on this point, but turns immediately to the section’s legislative history. One might question whether resort to legislative history is permissible where the statutory text is plain and unambiguous. Furthermore, one of the sources of legislative history on which OIG relies - a report on the LDA first prepared by the Congressional Research Service (?CRS?) in 1996, after the statute was enacted — does not, strictly speaking, qualify as legislative history. Still, the excerpts offered by OIG in support of its interpretation are instructive, as much for what they omit as for what they quote.

First, OIG cites an excerpt from H.R. 104-339, a report of the House Committee on

the Judiciary:

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It is immediately obvious that neither the House Report nor the CRS report contain any statement directly supporting the extension LDA Section 18 coverage beyond 501(c)(4) organizations that lobby. The CRS excerpt notes that one purpose of LDA Section 18 was to place a ?degree of separation between federal grant money and private lobbying.? But, significantly, the required ?degree of separation? appears to be satisfied by ?separately incorporating.? There is no suggestion that a 501(c)(3) organization, ?separately incorporated? from a 501(c)(4) affiliate, would be subject to any further test regarding the precise “degree of separation” needed to qualify for Federal funding under LDA Section 18.

This reading is supported by the first sentence of the quoted text — i.e., ?The legislative history of the provision clearly indicates that a 501(c)(4) organization may separately incorporate an affiliated 501(c)(4), which would not receive any federal funds, and which could engage in unlimited lobbying.? A 501(c)(4) organization created by a 501(c)(4) parent for the sole purpose of receiving Federal funds will likely — will almost

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certainly — share directors, facilities, and staff with its parent, but that fact would not seem to affect the eligibility of the new 501(c)(4) for Federal funds under LDA Section 18.

Indeed, the issue is not even mentioned. Separate incorporation alone appears sufficient.

This reading is clearly confirmed when the text that OIG deleted from the quoted paragraph is replaced. This deleted text is crucial because it reports real “legislative history” — statements made by the Congressional sponsors of LDA Section 18 — and because it bears directly on the validity of OIG’s interpretation. When the paragraph is read in its entirety, it is clear that the sponsors intended that separate incorporation, by itself, was enough to shelter the affiliates of a lobbying 501(c)(4) from disqualification

under LDA Section 18. The text deleted from the paragraph by OIG is underlined:

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According to Senator Simpson, when a 501(c)(4) organization ?splits? into two separately incorporated 501(c)(4) affiliates, but remains ?one organization,? the non-lobbying 501(c)(4) is treated as independent for purposes of LDA Section 18, and is therefore eligible to receive Federal funds. On the same basis, where a 501(c)(3) and a lobbying 501(c)(4) are ?one organization,? the 501(c)(3) should also be treated as independent for purposes of LDA Section 18, and should therefore be eligible to receive Federal funds.

Separate incorporation is sufficient. When the language deleted by OIG is included, the Congressional Research Service, Report No. 96-809, Lobbying Regulations on NonProfit Organizations? (updated May 19, 1998), available on-line at http://www.ncseonline.org/NLE/CRSreports/Risk/rsk-53.cfm

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?legislative history? on which OIG relies to support its interpretation of LDA Section 18 turns out to contradict that interpretation.

5. Statutory Purpose/Public Policy It is not difficult to see why the text of LDA Section 18 defines its coverage solely in terms of tax-exempt status, and the legislative history, both authoritative and nonauthoritative, speaks in terms of ?separate incorporation.? First, separate incorporation is sufficient to serve the basic purposes of the statute. Separate incorporation means separate books of account. This, in turn, allows greater transparency in the use of Federal funds, and provides the Government additional assurance that its funds are not being used for lobbying. No similar benefit appears to flow from prohibiting separately incorporated organizations from sharing facilities and staff.

Second, separate incorporation is an objective fact. Using separate incorporation as a benchmark, an organization affiliated to a lobbying 501(c)(4) can determine its eligibility to receive Federal funds under LDA Section 18 with reasonable certainty. In contrast, the test proposed by OIG — i.e., the ?degree of separation? between the two organizations - is neither easy to apply nor certain of result. What precisely is the ?degree of separation?

required by LDA Section 18? Does it demand different directors, different personnel, or both? And how different? In the absence of detailed guidance,13 any organization c)(3), or 501(c)(4) or otherwise - with a lobbying 501(c)(4) affiliate would be unsure of its status. A board resignation, a secondment of personnel or something equally trivial could erase the required ?degree of separation,? and make it ineligible to receive Federal funds.

Similarly, a recipient of Federal funds with a lobbying 501(c)(4) affiliate may discover only after the fact that the ?degree of separation? between the two organizations was somehow insufficient for purposes of LDA Section, and that it was, without knowing it, ineligible to receive Federal funds. The Foundation, of course, is in precisely that situation. Relying on recognized tax exempt status and separate incorporation, the It is highly unlikely that such detailed guidance could be written, given the variety of integration that can exist between organizations. Such guidance would also seem to interfere unacceptably with the freedom of non-profit organizations to structure their internal affairs, and might make it difficult for small non-profits to achieve economies of affiliation.

Appendix B


Mr. Stephen Brobeck January 20, 2004 Page 10 Foundation received Federal funds for five years on five different cooperative agreements.

Now, well after the fact, in circumstances in which the Foundation can take no remedial action, OIG announces that, for five years, the ?degree of separation? between the Foundation and CFA was “inadequate,” making the Foundation’s receipt of Federal funds during that entire period illegal. OIG does not indicate on what basis, or by applying what standard, it determined that the ?degree of separation? was inadequate; it does not suggest when or how the Foundation could have discovered that standard in advance, and adjusted its conduct accordingly.

In brief, it is unreasonable to read LDA Section 18 as OIG suggests. To do so would produce an unending succession of unprincipled ex post facto disallowances, limited only by the definition of “degree of separation” adopted by the Government from time to time. Congress could not have intended that result.

Third, important First Amendment concerns also argue for a narrow construction of LDA Section 18 and against the broad and unprincipled interpretation offered by OIG.

As Congress recognized, the prohibition imposed on lobbying 501(c)(4)s affects their First Amendment interests by, in effect, imposing the penalty of ineligibility on organizations that exercise their right to petition the Government. As a result, Congress had an interest in making the statute clear, precise and easily enforceable, and in allowing the broadest possible freedom for lobbying 501(c)(4)s to organize or affiliate with organizations that are eligible to receive Federal funds. The legislative history of Section 18 clearly shows that Congress encouraged such affiliations — precisely in order to assure that the LDA Section 18 prohibition would not unduly restrict the First Amendment rights of 501(c)(4) members.

A broad, unprincipled reading of LDA Section 18 such as OIG proposes could significantly restrict those First Amendment rights. Statutes which impinge on fundamental rights must be narrowly construed. Woodward v. Rogers, 344 F.Supp. 974 (D.D.C.), aff’d, 486 F.2d 1313 (D.C. Cir.)(1974).

5. Other Sources of Law.

OIG cites no other sources, in law, regulation, case law or commentary, to justify its reading of LDA Section 18. Accordingly, in light of clear statutory language, the legislative history, the underlying statutory purposes and policies, the unacceptable consequences of unprincipled ex post fact enforcement, and the possible chilling affect on First Amendment rights — LDA Section 18 should be read narrowly to exclude all

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separately incorporated lobbying 501(c)(4) affiliates. OIG’s broad reading of the statute should be rejected.

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