Union Busting by Profiting From Non-Profit May Breach IRS

When Smithfield Foods Inc. (SFD) was trying to fend off a union organizing drive at its largest meat- processing plant, it hired public relations executive Rick Berman. They discussed “preparing the nuclear strike,” according to e-mail records.

Soon after, a non-profit called the Center for Union Facts began running television ads slamming the “union bosses” who were trying to organize Smithfield’s plant in Tar Heel, North Carolina. That was no coincidence: Berman also runs the center.

Berman operates five such non-profit groups from the offices of his for-profit Washington public relations firm. Those five organizations paid his firm $15 million from 2008 to 2010 for its work, tax records show.

Tax lawyers say this arrangement may violate Internal Revenue Service rules that prohibit executives from profiting off the tax-exempt entities they run. IRS rules also require charities to have a public purpose.

Berman’s “web of organizations clearly, in my view, is operating for his private benefit and for the private benefit of his clients,” Marcus Owens, a former director of the exempt organizations department at the IRS, said in an interview. That’s “a clear violation of the requirements for tax-exempt status.”

The IRS is being urged to revoke the groups’ exempt status and impose penalties. The Humane Society of the United States filed a complaint with the IRS in June, saying the non-profits allow companies to fund anonymous corporate campaigns under a charitable cover, and for Berman to unjustly profit.

‘Phony Non-Profit’

“Berman’s developed a cottage industry of setting up phony non-profit organizations to take in money from corporations that have a public relations problem,” Wayne Pacelle, the president of the Humane Society, which has been the target of Berman-led campaigns, said in an interview. “When you look at it in its full composition, it’s a very disturbing picture.”

Anthony Burke, a spokesman for the IRS, said the agency is prohibited by law from discussing any investigation, or even confirming if an inquiry is underway. Such complaints can be filed by anyone and the IRS doesn’t have to pursue them, according to IRS rules. Past complaints against Berman’s organization haven’t resulted in adverse judgments.

Berman didn’t return telephone messages left at his office. Alan Dye, a lawyer for Berman’s groups, didn’t return telephone and e-mail messages.

IRS Compliance

Sarah Longwell, a vice president of communications at Richard Berman and Company Inc., declined by e-mail to comment. She provided a Web link to a fact sheet that says the groups Berman manages adhere to IRS standards. The IRS examined their structures in the past, and hasn’t sanctioned or altered their tax status, it said.

Bloomberg obtained the IRS complaint from the Humane Society and independently reviewed tax documents, legal filings and other public information about Berman’s groups. Five independent outside experts contacted by Bloomberg said the allegations warrant an IRS review.

“This is the kind of thing the IRS will not ignore,” said Owens, a lawyer at Caplin & Drysdale in Washington who is not involved in the dispute. The IRS could revoke the groups’ tax- exempt status and also launch a criminal probe, he said. While a similar complaint was filed against one of the groups in 2004 and never resulted in penalties, the Humane Society’s evidence is the most comprehensive compiled about Berman’s groups, he said.

PETA ‘Myths’

The fact sheet from Berman’s firm said the Humane Society, People for the Ethical Treatment of Animals and labor organizations have created “myths” about Berman because he has questioned their actions. One of Berman’s groups runs a website called HumaneWatch.org that criticizes the Humane Society for not giving enough of its budget to local animal shelters, and for being “obsessed with veganism and attacking meat.”

“Berman and Company clients have acted as watchdogs who question the motivation, tactics, and fundraising efforts of these powerful groups,” the fact sheet said. “When these organizations feel threatened they often respond by throwing mud -- instead of debating the issues.”

Berman, 69, is a former labor lawyer for Bethlehem Steel Corp., auto-parts maker Dana Corp. (DHR) and the U.S. Chamber of Commerce. In the mid-1980s, he formed Berman and Company with his wife, Dixie, and set up shop in Washington. He began taking on some of the most esteemed health and public-interest groups, including Mothers Against Drunk Driving.

‘Dr. Evil’

Taking on unpopular causes -- such as objecting to new restrictions on drinking or food portions -- earned him the moniker “Dr. Evil” from the CBS News broadcast “60 Minutes” in 2007.

In the 1990s, cigarette-maker Philip Morris USA (PM), now part of Altria Group Inc. (MO), poured hundreds of thousands of dollars into a trade group Berman ran, which aimed to block smoking sections in restaurants, according to internal documents Philip Morris published as part of a settlement between the tobacco industry and 46 states. Berman hasn’t worked with tobacco companies for almost 15 years, his company’s fact sheet said.

From a suite of offices just a few blocks from the White House, Berman runs his public relations firm. Also based in that office are the four tax-exempt organizations for which IRS tax forms show he is executive director: the Center for Consumer Freedom, the Employment Policies Institute Foundation, the Center for Union Facts and the Enterprise Freedom Action Committee. A trade group for restaurants, the American Beverage Institute, is also based there, and Berman is its president.

Targets Bloomberg

The groups advocate against measures to make it easier to form a union, or limit what food or drink restaurants can sell. They also keep tabs on health and animal rights’ activists, running websites including ActivistCash.com, which tracks who funds those groups; and PetaKillsAnimals.com, which criticizes PETA for euthanizing adoptable pets.

The Center for Consumer Freedom has an advertising campaign that opposes New York Mayor Michael Bloomberg’s ban on the sale of soft drinks larger than 16 ounces. The mayor is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.

IRS rules say that charities may keep secret the donors to their cause, and so, while evidence from court filings and the tobacco documents link companies such as Smithfield, Bloomin’ Brands Inc. (BLMN) and Wal-Mart Stores Inc. (WMT) to Berman’s groups, the full scope of the companies or individuals funding these groups is not available.

Secret Donors

“Private organizations have a constitutionally protected right to keep their memberships confidential if there is good reason to ensure anonymity,” the Berman fact sheet said. “Considering the history of threats made by animal rights organizations, environmental extremists, and labor unions against opponents, it is an important right worth upholding.”

Pacelle said “one can only surmise” that companies fund Berman’s non-profits, and then those innocuous-sounding groups wage public campaigns on behalf of the corporation’s interests.

In a 2007 court deposition, Berman said of the tax-exempt organizations: “I did set up most of them at the request of clients.”

IRS regulations place restrictions on charities known as 501(c)(3) organizations, named after a section of the tax code. IRS rules state that the groups must be set up for “exempt purposes,” can’t provide excessive benefits to a private shareholder or individual. They may not “attempt to influence legislation as a substantial part of its activities.” To be a public charity, the group must have a “broad base of support.”

Tax Rules

Three of Berman’s charitable groups are such 501(c)3s and each violates most of those rules, the Humane Society said in its complaint. The two other tax-exempt groups, classified under related sections of the IRS code, have similar violations, it said.

Many companies have used trade associations or business groups such as the U.S. Chamber of Commerce to make controversial lobbying or public relations pitches for them. Others just hire a lobbyist or public relations’ firm themselves, and don’t try to hide their identity.

“I don’t think it’s unusual, but nobody does it like Berman does,” Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington, said in an interview. Sloan’s group filed the IRS complaint against one of Berman’s groups in 2004. There is no indication that the IRS took action on it, she said.

Services Agreement

Berman’s relationship with the Center for Consumer Freedom illustrates how the tax-exempt groups work with his public relations firm. In 2002 Berman created an “Administrative and Technical Services Agreement,” which established that the Center for Consumer Freedom would pay Berman and Co. a monthly fee for its work.

Individual Berman and Co. employees were to be paid their hourly rate, which is “multiplied by a factor of three” to cover overhead costs, taxes, salaries and profits, according to the agreement that was included in the Humane Society complaint. Berman signed the agreement both on behalf of his firm and the Center for Consumer Freedom, or CCF.

“Who on the side of CCF determines whether to pay a bill or not pay one?” Berman was asked by lawyer Steve Heikens in a July 2007 court deposition.

Billable Hours

“I look at the hours billed to see if they’re reasonable,” Berman explained.

“If you consider them reasonable, you have CCF pay Berman and Company?”

“Correct,” Berman said.

The fees paid to Berman’s firm are similar to those for advertising or law firms, and cover the cost for advertising campaigns or to “keep the office lights on” and pay for the firm to employ 30 people, the Berman fact sheet said.

CCF had about $2.2 million in revenue in 2010, the most recent year for which tax returns are available, tax records filed with the IRS show. CCF paid Berman and Co. $1.7 million in compensation for management services, or about two-thirds of its total spending for the year. The group gave out $1,700 in grants.

Berman’s position as director of the tax-exempt organizations that then hire his firm does raise “red flags,” Miriam Galston, a professor of law at George Washington University in Washington, said in an interview.

Greater Leeway

The complaint’s allegations against Berman’s American Beverage Institute may go too far because its status as a trade group gives it greater leeway under tax rules, she said. Overall, the complaint does make “a good case that the IRS needs to investigate” the charitable groups, said Galston, who is not involved in the complaint.

Berman’s dual role is “not on its face a no-no, but it raises questions,” Roger Colinvaux, an associate professor at the Columbus School of Law at Catholic University who is not involved in the complaint, said in an interview. “If I was at the IRS, I would want to investigate.”

A separate lawsuit provides a few clues at how Smithfield, the world’s largest pork producer, used Berman to fend off a union organizing effort in 2007 at the Tar Heel plant, which is the world’s largest pork-processing plant.

As the union drive accelerated, Berman, identified as a Smithfield PR consultant, fired off a series of e-mails to company executives, according to court records in a case that was filed in federal court in Richmond, Virginia, by Smithfield against the United Food and Commercial Workers union.

Sealed Records

While the e-mails themselves were subsequently sealed in the court records, the subject lines are not: “offense game plan,” said a message between Berman and Smithfield Executive Vice President Richard Poulson. A similar e-mail string between the two men on July 7 was titled: “have to orchestrate this and have a script.” A third, undated e-mail added: “I am preparing the nuclear strike.”

In mid-July, the Center for Union Facts had television advertisements that ran and were posted online. A narrator asked: “What do you love about the UFCW?” and then had workers offering a few retorts.

You know what I love? Paying union dues just so I can keep my job,” said one cashier in the ad. And the ads showed a website to visit: UFCWExposed.com. The site is no longer active.

Smithfield isn’t working with any of Berman’s groups now, company spokeswoman Keira Lombardo said in an e-mail. She declined further comment. Smithfield settled the lawsuit with the UFCW and the workers at the Tar Heel facility have voted to form a union.

PETA Documentary

Berman also targeted animal-rights activists, who have criticized meat-packing plants and livestock producers, a separate court case shows.

In 2005, filmmakers Maura Flynn and Curt Johnson approached Berman to do a documentary movie about animal-rights activists, including PETA. Berman agreed to underwrite a film “exposing the excesses” of PETA, and to provide $300,000, he testified in a 2007 case he filed against Johnson. The case in federal court in Alexandria, Virginia, alleged breach of contract and fraud.

Berman got Hormel Foods Corp. (HRL) to chip in $50,000 to the filmmakers, according to a copy of a canceled check included in the court documents. He pitched the film to executives from Tyson Foods Inc. (TSN) and Bloomin’ Brands’ Outback Steakhouse for their support as well, he testified.

‘Mommy Kills’

That arrangement went awry when an edit of the film, “Your Mommy Kills Animals,” was shown to Berman. Berman testified in his deposition that the film gave animal rights’ activists “a sympathetic portrayal that I didn’t think was justified.” He said that portrayal caused damage to his reputation among the corporate executives he worked with.

The film was completed, but not widely distributed. Berman was awarded $370,000.

“Berman thought he was going to get a hit piece on PETA,” Heikens, who was Johnson’s lawyer in the case, said in an interview. “Curt was making a neutral film instead.”

Johnson couldn’t be reached for comment. Rick Williamson, a spokesman for Hormel, didn’t return three telephone and three e- mail messages. Gary Mickelson, a spokesman for Tyson, declined to comment.

The Humane Society also alleges that financial transfers between organizations established by Berman let the groups “create the illusion of public support” required for non- profit status.

Health Care

The Center for Consumer Freedom in 2009 received $8 million in income and provided a grant of $6.9 million to another organization run by Berman and Co., the Employment Policies Institute Foundation, according to tax records filed with the IRS. That same year, the Foundation spent $7 million -- about 64 percent of its $10.9 million in total revenue -- on a publicity campaign asserting that health-care reform would raise costs for consumers.

As a result, each of the groups can falsely appear to legitimately qualify for tax-exempt status, the Humane Society complaint said.

“This mess of Berman and his empire of non-profits has gone on for too long,” Francis Hill, a professor of law at the University of Miami law school and author of the treatise, Taxation of Exempt Entities, said in an interview. It “seems like an appalling abuse of tax-exempt status.”

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net; Brian Wingfield in Washington at bwingfield3@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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