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The documentary record strongly suggest that the NAIC management violated 18 U.S.C. § 1001, whether or not it is in violation of the tax code through lobbying and other activities.

Public Policy Analysis & Opinion

18 U.S.C. section 1001

You cannot fool Mother Nature and you cannot lie to the IRS—legally

By Kevin P. Hennosy

You might not have ever heard of a federal statute called 18 U.S.C. § 1001, but rest assured, it provides a short and direct path to incarceration in federal prison.

When federal officers mouth the citation "18 U.S.C. § 1001," the clip of their speech increases because they are so familiar with legal blood in the water that follows piercing a misleading tale told to a federal official.

At the same time, a quiet confidence comes over federal prosecutors' faces, like what Captain Quint in Jaws describes: "Y'know, the thing about a shark, he's got lifeless eyes, black eyes, like a doll's eyes."

This section of federal law criminalizes lying, tricking or misleading federal officers in the completion of their charge through the concealment or alteration of material information presented to those officials.

The statute is so expansive, and so clear, it is informative to include the text of the section:

(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully:

1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

2) makes any materially false, fictitious, or fraudulent statement or representation; or

3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry . . .

The exceptions concern judicial proceedings, where constitutional protections against self-incrimination as well as perjury apply, and certain legislative branch inquiries. Otherwise the statute makes it clear that it is criminal to lie to federal officials in the lawful performance of their duties.

Armed with this door to federal prison, federal investigators find it much easier to leverage "cooperation" from persons of interest to help them build and prove criminal cases, even in exceedingly complex, or vague, areas of the law—such as taxation.

A learned source advised me not to write about the tax-exempt status of the Delaware-chartered-corporation doing business as the National Association of Insurance Commissioners (NAIC). To differentiate this corporation from the association of insurance commissioners that operated between 1871 and 1999, this column refers to the corporation by the name "NAIC-Newco."

The source explained that tax law is so convoluted and vague that there is no way to pin down a tax law violation; therefore, there is no reason to write about it. Logically proving a tax-law violation, without a team of attorneys and other investigators, is akin to nailing jello to the wall.

Nevertheless, no matter how complex federal tax law is designed to be under the corrupting pressure of corporate lobbying, one does not have to be a legal philosopher like the late Edmond Cahn to possess what he termed "a sense of injustice."

Professor Cahn observed that even the proverbial average citizen could look at some schemes and immediately sense: "That is injustice." A quick review of NAIC-Newco's compliance with statutes governing tax-exempt institutions must send Professor Cahn spinning in his grave.

On or about October 6, 1999, the management of the old NAIC sought and received an opinion letter from the IRS Cincinnati Office. Based on the information provided to the IRS official charged with the assessment, the NAIC-Newco was deemed exempt from federal income taxes under 26 U.S.C. § 501(c)(3).

In order to receive the public subsidy of a federal income tax exemption, 501(c)(3) corporations must comport with the following attributes and prohibitions.

First of all, Congress created the exemption to subsidize "Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals." At the very least, it is difficult to classify the NAIC-Newco as "organized and operated exclusively" for the any of the purposes noted in the statute.

In addition, the statute provides that "no part of the net earnings of which inures to the benefit of any private shareholder or individual." In the June 2013 issue of Rough Notes, we reviewed some (but not all) of the NAIC-Newco's largess in travel-related gifts and "goodies" provided to officers, members and senior staff.

Furthermore, "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

In the July 2013 edition of Rough Notes, we examined the NAIC-Newco's extensive activity which can reasonably be defined as lobbying.

First of all, NAIC-Newco's membership consists of policymaking officials, who are the recipients of travel and other things of value. In some cases, all members of the association receive trips paid for by NAIC-Newco, which shapes and influences the membership's view of the corporation and policy proposals. Budget documents created by the NAIC-Newco also noted that the corporation planned to spend hundreds of thousands of dollars on travel expenses for state legislators.

In addition, certain members receive greater or lesser levels of travel gifts, based on the NAIC-Newco management's assessment of the officials' loyalty to management goals, according to former insurance commissioners who still fear retribution from the corporation and its management.

An NAIC-Newco news release dated May 4, 2007, asserts that the corporate "executive committee approves new model law framework; new streamlined process to help focus association's top priorities."

The release states: "This Framework will inject enhanced discipline at all phases of the Model Law process, including identification, development, adoption and state implementation."

Question 13

The NAIC-Newco management clearly knew that they courted disaster with their clear and extensive lobbying activities, because they hinted at them in the Form 1023.

On Page 4 of Form 1023, Question 13 asks the applicant whether the organization "will try to influence legislation?" Page 4 of the NAIC-Newco's Form 1023 carries the answer "yes." Less than 5% of applicants for tax exemptions under 26 U.S.C. § 501(c)(3) answer "yes" to Question 13.

In addition, NAIC-Newco explained, "It has no current plans, but it filed [an election to authorize lobbying activity] so that any potential legislative activity would appear on a percentage of expenditure list." Nonprofits may elect to cap their lobbying expenditures at a fixed dollar amount, which generally equates with 20% of expenditures capped at $1 million.

If IRS investigators, or federal law enforcement, would demonstrate just the smallest amount of intellectual curiosity, the NAIC-Newco would have a very difficult time explaining its extensive lobbying activity as a non-profit entity.

Of course, in the case of most non-profit organizations, it is easier to monitor compliance, because every May 15, those organizations file a Form 990. That form provides basic financial and business operations information, which must be attested to by an officer of the corporation under penalty of perjury. One interesting bit of information included on the report discloses the total compensation for the top five executives of the association.

The NAIC-Newco does not file a Form 990 because, based on information that the corporation's representatives provided to the IRS, the opinion letter does not require such a filing. Nothing precludes the NAIC-Newco from filing a Form 990 in the public interest, but it does not choose to do so.

So despite all this evidentiary smoke, a learned source argues that there is no reason to write about the potential fire, which consumes NAIC-Newco's claim to tax-exempt status.

Making the case that the NAIC-Newco does not comply with, and even flaunts, the statutory requirements for tax-exempt organizations is more difficult than shooting down a moving drone with a BB gun, so why try? If the source is correct, it is that way because corporate attorneys have corrupted the system while collecting fees.

Willfully concealed

Sometimes injustice begs for prosecution under 18 U.S.C. § 1001. What if the NAIC management violated that federal statute in the process of securing tax-exempt status from the IRS for NAIC-Newco? The documentary record strongly suggests that the NAIC management did violate 18 U.S.C. § 1001, whether or not it is in violation of the tax code through lobbying and other activities.

The NAIC-Newco's Form 1023 filing for tax exempt status includes one previous IRS opinion letter issued December 23, 1955, which deemed the unincorporated NAIC to be an "instrumentality of the states" and exempt from making common financial filings with the IRS. The letter was issued at a time when the NAIC had one full-time employee to coordinate correspondence and meeting planning. So, at that time, the opinion letter probably represented the legal nature of the old-NAIC.

However, what if the managers in Kansas City held other, more recent, IRS opinion letters? Would withholding recent opinions leveled by the IRS while communicating an older contradictory opinion from the federal officers charged with opining on the new corporation, be knowingly and willfully misleading, and material information concerning the officials' jurisdiction?

What if those other letters resulted from IRS assessments conducted decades after the letter that the management provided to the IRS for consideration in the 1999 review?

What if the most contemporary IRS opinion letter, issued November 2, 1989, establishes that you have been recognized as exempt from federal income tax under the provisions of section 501 (c) (6) of the Code? [Emphasis added] The most recent IRS opinion on the NAIC found it to be a trade association.

That section of the code governs "business leagues, chambers of commerce, real-estate boards and boards of trade not organized for profit and no part of the net earnings of the which inures to the benefit of any private individual or shareholder."

Furthermore, according to an IRS publication, the purpose of such organizations: "must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining."

The NAIC management provided the half-century-old IRS opinion letter, while withholding at least two more recent opinion letters, including the most recent letter which authoritatively established that the unincorporated NAIC met a different legal standing than the management represented on the Form 1023 filed in October 1999.

Providing the IRS with information that could be viewed as misleading, and withholding contradictory information in support of securing tax treatment and financial oversight raises the issue of 18 U.S.C. § 1001.

The United States Attorneys Manual establishes a three-part test to determine whether an individual acted in criminal violation of the 18 U.S.C. § 1001:

Whether the above acts are criminal depends on whether there is an affirmative response to each of the following questions:

1) Was the act or statement material?

Was the act within the jurisdiction of a department or agency of the United States?

Was the act done knowingly and willfully?

That's something for the former executive vice president of the NAIC Catherine J. Weatherford to consider because her signature appears at least six times on the Form 1023 filing.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.

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