The Tax Man Cometh
Sierra Club’s Tax Problems
The Sierra Club and its money-raising arm, the Sierra Club Foundation, have received tax-exempt status from the U.S. Internal Revenue Service under Section 501 of Title 26, the Internal Revenue Code. These rules prohibit a variety of actions. Among them is an absolute ban on “net earnings of such entity inur[ing] to the benefit of any private shareholder or individual.” In addition, the Sierra Club is subject to tax on its unrelated business income under section 511(a) (2)(A) if the income arises from a trade or business; the trade or business is regularly carried on; and, the trade or business is not substantially related to the organization’s tax-exempt purpose.
It appears the Sierra Club generates about a million dollars a year in taxable unrelated business income on which there is no evidence that it intends to or is paying taxes. Further, a non-profit organization may not compete with commercial businesses, but there is clear evidence they do. They operate a store selling all manner of goods. Worse, they have become the marketing arm for two private companies selling solar panels. Each of these activities is suspect. None of them involves the core purposes of the Sierra Club and both of them constitute participation in commercial business.
There is no bright line dividing activities that are intended to inform the public about issues of public interest and the overt manipulation of policy debates in a manner intended to favor one industry over another. The problem rising out of this issue is that a non-profit charity and foundation may not create “an Impermissible benefit to ‘private interests,’ [a prohibition that] encompasses not only benefit to insiders but also benefits that an organization may confer on unrelated or even disinterested persons, i.e., outsiders.” In the context of the tax code, neither a 501(c)(3) (the Sierra Club Foundation) nor a 501(c)(4) (the Sierra Club) may directly benefit a named politician. In the same vein, neither may they directly benefit a private interest. The Sierra Club and its Foundation appear to have gone beyond issue advocacy, narrowing their policy focus in a manner that does not merely directly benefit private interests, but with the intent of creating that benefit by destroying other private interests, to the private benefit of others.
There is a line that the law demands not be crossed; and, that line is crossed when those whose interests are directly benefited sit as directors of the organization or are major donors who give money for the express purpose of damaging their competitors. That is the line the Sierra Club and its Foundation have crossed.
So let’s take a look at some areas where it appears the Sierra Club is in violation of tax law, which E&E Legal brought to the attention of the IRS in the form of a “referral” in the fall of 2014:
The proud history of the Sierra Club has been the preservation of unique lands like Yosemite National Park. They have built an organization whose members walk the wild lands and shares their enthusiasm with each succeeding generation. Lobbying to pass preservation legislation has been a mainstay of their work, but the U.S. Tax Code limits the scope of their work. The Club must be operated exclusively for the promotion of social welfare. Organizing trips into the wild may fall within this scope, but attempting to destroy a portion of the U.S. economy is not within their mission no matter how they attempt to clothe that work in pro-environmental garb, and especially when the facts show their efforts cannot produce the environmental benefit they seek.
Further, the Tax Code specifically limits efforts to impermissibly benefit to “private interests.” The Sierra Club has gone beyond the allowable limits in its “War on Coal.” More than half their activities (and revenues) have been dedicated to this “war.” The ground facts are that the Sierra Club’s anti- carbon activities have been specifically organized and operated in a manner intended to promote non- carbon energy generation. Because the Sierra Club specifically organized around an issue that would allow them to seek rents from anti-coal business interests, and because of the Club’s self-proclaimed success in this endeavor, the Club has impermissibly sought to, and succeeded in benefiting private interests through its influence peddling. Put simply, an entity is not exempt if it operates for “any substantial noncharitable purpose.” Harding Hosp., Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir. 1974), The Sierra Club has and we ask the IRS to withdraw the Sierra Club’s tax exempt status until it brings itself back within the strictures of the law.
The Sierra Club Foundation has significantly narrower freedoms. They may not expend funds to lobby beyond their allowable limits. More than half the Foundation’s grants go to the Sierra Club for just such lobbying efforts. Further, because the Sierra Club itself violates the allowable limits for propaganda and lobbying, the effort to wash money through the Foundation for this purpose makes the Foundation a co-conspirator in the violations of the law.
Without question, the Sierra Club Foundation’s War on Coal inures to the private interests of eight Foundation directors. This is in direct violation of 26 U.S.C. § 501(c)(3) and is sufficient to invalidate the Foundation’s non-profit status. Under law, the Foundation must be organized and operated “exclusively” for a tax-exempt purpose. “Put in other terms, an entity is not exempt if it operates for “any substantial noncharitable purpose.” Harding Hosp., Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir. 1974)), and see, Asmark Inst., Inc. v. Comm’r, 486 Fed. Appx. 566, 569-70 (6th Cir. 2012). $31.6 million of the Foundation’s 2012 $69.5 million in gross receipts was targeted to the War on Coal and related activities. This is 45.5 percent of the Foundation’s revenues. This is a substantial noncharitable purpose.
Gelbaum’s $100 million donations that go directly to increase the market share for his 40 “clean tech” companies is a form of inurement to an individual not allowed by law. Although an “outsider” to the Sierra Club Foundation, the benefit to him as the largest donor remains the basis for violation of the Foundation’s non-profit status. See, Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1068-1069 (1989) (“Impermissible benefit to “private interests” thus encompasses not only benefit to insiders but also benefits that an organization may confer on unrelated or even disinterested persons, i.e., outsiders.”); and see, Capital Gymnastics Booster Club, Inc. v. Comm’r, T.C. Memo 2013-193 (2013); 2013 Tax Ct. Memo LEXIS 203; 106 T.C.M. (CCH) 154.
The IRS has previously taken care to distinguish between shame claims of charity and actual charity. The successful efforts of business men and women to use the Sierra Club for their own corporate purposes is a new version of an old game. We have some difficulty blaming Carl Pope, the then Sierra Club chief executive who was enticed by the offers of cash, but in fact, he took the step he should not have taken and his successors have followed in those footsteps. The Club and its Foundation have become committed to corporate welfare in place of true charity.
It is one thing to rent out the good name of an organization. Endorsement of the Clorox line of products is quite another. Had, for example, the Sierra Club endorsed programs to bring children to national parks or municipalities that took steps to preserve natural settings, and in the process gained members or donations, they would have acted within the scope of their mission. But to endorse commercial products that have nothing to do with their mission is not allowed. Clorox’s profits on the endorsed products increased by 50 percent in a single year. This clearly falls afoul of 26 C.F.R § 1.501(c)(4)-1(a)(2). These endorsements are not for the purpose of bringing about civic betterments and social improvement. They are intended exclusively to generate revenues to the Club. They are no different than advertising of a product on behalf of that product’s manufacturer and are a form of carrying on a business. They are beyond the law and we ask the IRS to withdraw the Sierra Club’s tax exempt status until it pays taxes on those revenues.
Finally, the Sierra Club is engaged in direct commercial sales – creating unrelated business taxable income (UBTI) – on which they have never paid taxes. They have a store through which to sell their goods. Had someone donated those goods for resale, they would not be taxable. No one did that.
It appears that the Sierra Club claims these sales as some kind of advertisement of their activities and claims a loss on them, thus avoiding taxes. This is a sham claim. A hat is a hat regardless as to whether there is a logo on it or not. The cost of putting a logo on a hat is but a tiny portion of the cost of the hat or the price of the hat.
The Sierra Club sells more than hats. It functions as a travel agency. This travel service is in direct competition with many travel agencies and travel guides. It is a private business that does not “serve a valid purpose and confer a public benefit.” See, Asmark Inst., Inc. v. Comm’r, 486 Fed. Appx. 566, 569-70 (6th Cir. 2012).
Far more distressing is the use of Sierra Club funds and members as a sales force for private companies. An e-mail from the Sierra Club, which said: “the Sierra Club and our solar partner, Sungevity,” is clearly a pitch as a unitary commercial sales organization. The IRS rules on this behavior cannot be more clear: “The promotion of social welfare does not include . . . carrying on a business with the general public in a manner similar to organizations which are operated for profit.” 26 CFR 1.501(c)(4)-1(a)(2)(ii). We ask that the IRS to withdraw the Sierra Club’s tax exempt status until it pays taxes on those revenues.