Smith and IFI Abuse Non-Profit Status

Earlier this year Advance Indiana reported extensively on apparent abuses of tax-exempt status by Eric Miller’s Advance America organization. Our analysis of Advance America’s tax returns uncovered self-dealing by Miller in the form of excessive salary and six-figure legal retainers for his law firm, in addition to other benefits. The reporting showed that the organization attributed just a small fraction of its expenditures for lobbying purposes, even though the organization engages in extensive lobbying-related activities at the state and local level. And the reporting also questioned the group’s claim that it is a non-partisan organization given its promotion of only conservative, Republican officials and candidates, including Miller himself, who unsuccessfully opposed Governor Mitch Daniels in the 2004 Indiana Republican primary. Advance Indiana can now report that abuse of non-profit status is not unique to Advance America. Curt Smith and the Indiana Family Institute (“IFI”) give Eric Miller and Advance America (“AA”) a real run for their money.

Like AA, IFI is organized as a non-profit, 501(c)(3) tax-exempt organization under the Internal Revenue Code. This means that contributions made by persons to the organization are tax-deductible, and that income related to the organization’s tax-exempt purpose are not subject to taxation. IFI’s stated tax-exempt purpose is to “provide educational material to thousands of individuals, churches and organizations on issues that impact the family.” According to the organization’s website, one of its stated missions is to “preserve pro-family policy already within State Government and push for additional policies that will strengthen Indiana families.”

Though the IFI has an annual budget less than half that of AA, Curt Smith as president has commanded an annual salary as high as $110,000 in one recent year. Smith, who is a part-time executive of the organization, is employed by a major Indianapolis law firm, Sommer & Barnard, P.C., as Director of Public Affairs and Policy Development. In that position, he is registered to lobby on behalf of a number of the firm’s clients, including IFI, at both the federal and state level according to publicly available lobby registration records.

Prior to joining Sommer & Barnard, Smith had worked as a legislative aide to former Indiana Senator Dan Coats and U.S. Representative John Hostettler in Washington. He returned to Indiana to work for a conservative think-tank, the Hudson Institute, where he served as Vice President and CEO. Smith became IFI’s President in late 2001 and began lobbying at Sommer & Barnard in 2002. Micah Clark, executive director of the American Family Association of Indiana (“AFAI”), held Smith’s position as president of IFI before he joined AFAI.

According to IFI’s tax returns, Smith was hired in at a base salary of $100,000 in 2001, which was increased to $110,000 in 2002. In 2003, the organization reduced Smith’s annual salary to $76,000 for what it reported was for just 20 hours of work per week on behalf of the organization. Smith’s salary, even as a part-time president, is unusually high for an organization with an annual budget well below a half million dollars and above the average pay for non-profits heads of similar-sized organizations.

In tax years 2001 through 2003, the organization reported expenses of $300,000, $405,000 and $415,000, respectively. Its expenses actually exceeded its income by $31,000 in 2001, and by nearly $10,000 in 2002. At least 60 percent of the IFI’s expenses were attributed to salaries and employee benefits during the reporting period. Remarkably, IFI’s tax returns attribute on average only about 10 percent of its costs to administrative expenses, notwithstanding Smith’s excessive pay. IFI claims that about 70% of its costs are for program services, and the remaining 15 percent of its costs are for fundraising-related expenses.

Astonishingly, IFI claims that it had zero lobbying expenses during each of these three tax years, which seems at odds with its own stated mission of preserving and pushing for pro-family policies in state government. Curt Smith and the IFI have been quite visible in lobbying the legislature on hot-button social issues for a number of years. The organization registered to lobby the Indiana General Assembly during Clark’s reign of the IFI in the late 1990s and in 2004 and 2005 under Smith, but it did not register to lobby during the tax years 2001-2003. Smith, however, has been a registered lobbyist in the State of Indiana for Sommer & Barnard since 2002, the year following his arrival at IFI. Smith drew his $110,000 annual salary at the same time he was employed as a lobbyist at Sommer & Barnard.

IFI’s tax returns for 2004 are not yet publicly available. The law firm which employees Smith registered to lobby the Indiana General Assembly on behalf of IFI during the 2004 and 2005 legislative sessions. IFI reported lobbying expenditures of $3,712.60 and $2,124.04, respectively, during the past two legislative sessions. During this period, Smith and IFI lobbied the General Assembly extensively for passage of SJR 7, a constitutional amendment to bar recognition of same sex marriages and civil unions. Smith has also called on Governor Mitch Daniels to rescind his EEO policy because it bars discrimination against state employees on the basis of their sexual orientation or sexual identity.

IFI has not disclosed how much it pays Sommer & Barnard to lobby on its behalf. Federal tax returns require only that non-profits disclose payments to independent contractors of $50,000 or more per year, and IFI's most recent tax returns were not available for purposes of this analysis. Not all payments made by employer lobbyists like IFI to its compensated lobbyists are reportable under Indiana’s Lobby Law; however, lobbying expenditures for federal income tax reporting purposes are defined more broadly than Indiana’s Lobby Law. IFI’s reporting of zero lobbying expenditures during the 2001-2003 tax period is simply not credible given the organization’s well-recognized role in lobbying the legislature on social policy concerns.

IFI’s employment of Sommer & Barnard as its registered lobbyist raises serious conflict of interest concerns. Advance Indiana reported the fact that AA pays Eric Miller’s law firm an annual six-figure retainer fee to perform legal work, in addition to the excessive pay he received as the organization’s executive director. Unlike Miller, Smith is a non- attorney, employee and not a partner of the law firm retained by IFI. Nonetheless, Smith’s compensation as an employee could be related to the payments made by IFI to Sommer & Barnard. As IFI’s President, it is inappropriate for Smith to engage his employer in any lucrative contract, even if approved by the organization’s board of directors. How can Smith serve two masters?

It should also be observed that the public policy positions of IFI are sometimes at odds with the public policy positions of the clients of Smith’s employer. IFI has consistently opposed an expansion of gaming in Indiana because of its sometimes detrimental impact on the families of problem gamblers and associated crime. Sommer & Barnard has in the past lobbied on behalf of the Cook Group in Bloomington for the newly-approved riverboat casino in French Lick. While Smith did not personally lobby for the French Lick casino, his colleagues did and were most assuredly well-compensated for their work.

According to federal lobbying reports, Smith is registered to lobby for a variety of interests, including the Southern Indiana Business Alliance, Inc., First Internet Bank of Indiana, Rose-Hulman, Vincennes University Foundation, Semafore Pharmaceuticals and St. Francis Hospital. It is not a difficult reach to believe that at least some of IFI’s public policy positions are at odds with the other clients Smith is representing in lobbying matters.

Some of these businesses, for example, oppose discrimination of persons on the basis of their sexual orientation, while IFI and Smith openly advocate such discrimination based upon fundamentalist Christian beliefs. The City of Indianapolis has in the past retained Sommer & Barnard for lobbying purposes, and its EEO policy specifically prohibits discrimination on the basis of sexual orientation or sexual identity. Semafore Pharmaceuticals is an innovative, Indianapolis-based bio-technology company which develops drug therapies for treating cancer and immune-related disorders. Generally speaking, companies like Semafore would benefit from federally-supported embryonic stem cell research. Smith and the IFI oppose embryonic stem cell research. In fact, Smith and IFI have invited the controversial Dr. James Dobson to speak at its fall dinner next month. Dobson has compared embryonic stem cell research to the Nazi medical experiments conducted on Jews in the concentration camps during World War II.

In conclusion, Advance Indiana’s analysis of IFI’s tax returns and lobbying activities raise some of the same concerns our analysis of AA’s tax returns and lobbying activities raised. IFI is paying Smith excessively for a part-time position. Smith is engaging in self-dealing by employing the very law firm where he is employed to lobby on behalf of IFI. Based upon the tax returns analyzed, it does not appear that IFI is fairly reporting expenditures it makes for lobbying purposes, as is required by Internal Revenue Code regulations. Its own stated mission is to preserve and push for pro-family policies in state government, and that necessarily requires some lobbying activities. Yet, IFI reports zero lobbying expenditures during the 2001-2003 tax period, and it reports paltry expenditures during the past two years to lobby the legislature when its extensive lobbying activities were apparent to any objective, State House observer.

Like AA, IFI promotes, to the exclusion of all others, conservative, Republican officials and candidates who support the IFI's fundamentalist Christian agenda. As a tax-exempt organization, IFI is prohibited from engaging in partisan politics. Its events always feature only conservative Republican candidates. It prepares voter guides just like AA to contrast the legislative voting records and positions of legislators and candidates who support their extreme conservative positions with those who do not support their narrow views. And it disseminates these voter guides through its network of conservative churches and individuals to influence elections.

As a publicly-subsidized organization, Smith and the IFI are accountable to the public. Like AA, Smith and IFI should be investigated by the Internal Revenue Service to determine whether IFI should be permitted to retain its tax-exempt status, and whether Smith should be personally subject to a financial penalty if IFI is found to have under-reported its actual lobbying expenditures or impermissibly engaged in partisan politics. Further, mainstream media organizations should start doing their jobs and begin investigating the gross abuses of non-profit organizations like AA and IFI. The public deserves a full accounting of their practices if we are to be expected to continue subsidizing their activities.