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Now to a political organization that's been a focus of controversy: ALEC, the American Legislative Exchange Council. It brings together state lawmakers and corporate lobbyists to write legislation, usually measures that have strong conservative support. As we've reported, liberal groups have been pushing corporations to abandon ALEC. Yum Brands, which owns Taco Bell and Pizza Hut, is the latest to break ties. But corporate backers aside, another issue remains with ALEC, its status as a charity. NPR's Peter Overby explains.

PETER OVERBY, BYLINE: A dozen companies have now dropped out of ALEC. And this week, ALEC did some damage control. It said it's shutting down its task force on public safety and elections, which wrote the controversial measures on voter ID, Stand Your Ground and immigration reform. But closing the task force doesn't address the question of ALEC's tax status. As a 501(c)(3) charity - similar to the Red Cross or a religious congregation - ALEC is allowed to do some lobbying. The rule of thumb is up to about 20 percent of the budget. But on ALEC's annual tax returns, where it asks point blank: Did the organization engage in any lobbying activities? ALEC officers check no. Marcus Owens is a tax attorney and the former head of the IRS division on tax-exempt organizations.

MARCUS OWENS: It seems that what ALEC does is either lobbying, or it isn't. And it appears to be all of what ALEC does. So it's kind of an all or a zero-sum game here.

OVERBY: ALEC said it's being demonized by ideological opponents. It claims nearly 2,000 legislative members - state lawmakers who pay token dues - and some 300 private-sector members, mostly corporations, who cover the $7 million annual budget. The public and private members together create model legislation: ready-to-enact packages that the lawmakers take back to their state legislatures. Marcus Owens says there's a precedent for this case from the 1990s, back when he was at the IRS. This precedent would not be good for ALEC.

In 1995, congressional Republicans asked former Congressman Jack Kemp to lead a commission on fixing the tax law. Senate Majority Leader Bob Dole said the mission was a complete overhaul of the tax code.

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SENATOR BOB DOLE: That's why we have asked Jack to re-examine the 9,000 - over 9,000-page federal tax code, to start with a blank piece of paper and design a system that is flatter, fairer and simpler.

OVERBY: The commission had a financing problem of its own. The Republicans wanted the private sector to pay for it. Potential donors wanted the tax deduction - something they'd get only if the commission was a 501(c)(3) charity. The commission applied to the IRS. The IRS said no. The commission went to court, lost, went to the appeals court and lost again. Owens says the commission couldn't get 501(c)(3) status because it fell into the IRS definition of an action organization.

OWENS: An action organization does not qualify for tax-exempt status. The regulations define an action organization as one whose purposes can only be achieved by legislation.

OVERBY: And that's the argument made by the good-government group Common Cause when it asked the IRS to investigate ALEC last summer. Common Cause said that ALEC violates the 501(c)(3) limit on lobbying. Also, that it serves the business interests of the corporate donors, not a public, charitable purpose. Bob Edgar is the president of Common Cause.

BOB EDGAR: We've actually seen their talking points, that are the same talking points that lobbyists use. We've seen their emails, the same emails that go to legislators, trying to lobby. All of that looks and smells like lobbying to us.

OVERBY: Leslie Lenkowsky is a professor of philanthropy studies and public affairs at Indiana University's Center on Philanthropy. He says there is a place for ALEC in the nonprofit world, but maybe not as a (c)(3) charity.

LESLIE LENKOWSKY: They've got to be very careful. It's a very fine line.

OVERBY: Lenkowsky says that ALEC could solve the problem the way a lot of Washington groups do: Set up a new 501(c)(3) side to talk about issues and a 501(c)(4) advocacy side to do the lobbying. The main catch is contributions to the (c)(4) wouldn't be tax deductible.

LENKOWSKY: They could reconstitute themselves as Son of ALEC, right? And it would be a (c)(3) with a (c)(4).

OVERBY: There are other possible outcomes should the IRS move against ALEC, for instance, a massive fine. But so far, there's no indication that the agency is investigating. Peter Overby, NPR News, Washington.

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