March 9, 2012 Hon. Douglas H.

Shulman Commissioner Internal Revenue Service Room 3000 IR 1111 Constitution Avenue NW Washington, DC 20224 Lois Lerner Director of the Exempt Organizations Division Internal Revenue Service 1111 Constitution Avenue NW Washington, DC 20224 Re: Request for IRS Investigation into the Impact of the Koch Brothers’ Ownership Claims on the Cato Institute’s Tax-Exempt Status Common Cause respectfully requests that the Internal Revenue Service initiate an investigation into whether attempts by Charles G. Koch and David H. Koch, shareholders of the Cato Institute, to take control of and manipulate the Cato Institute for partisan political purposes expose a flaw in the Cato Institute’s structure that jeopardizes its tax exempt status under 26 U.S.C. 501(c)(3). On March 1, 2012, Charles and David Koch, shareholders of the Cato Institute, filed a lawsuit in the District Court of Johnson County, Kansas against three defendants: Kathryn Washburn, a Cato Institute Director and personal representative of the estate of deceased Cato shareholder William Niskanen; Edward Crane, Cato shareholder, director, and President of the Cato Institute; and the Cato Institute, a nonprofit corporation organized under the laws of Kansas and recognized by the Internal Revenue Service as a tax-exempt public charity described in 26 U.S.C. 501(c)(3). A copy of the complaint is appended to this letter. The litigation seeks a declaratory judgment concerning obligations under the Shareholders’ Agreement and the purchase and sale of Cato Institute capital stock. Taken together, Plaintiffs Charles and David Koch own a 50% stake in the Cato Institute, and if a court enters judgment in their favor, they stand to gain a 75% interest in the Cato Institute.

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This dispute raises grave questions about whether the Kochs are exploiting Cato’s corporate structure to transform the Cato Institute from its longstanding, storied reputation as a nonpartisan, libertarian think tank into a partisan organization in contravention of its educative and charitable purpose. Cato officials have expressed alarm concerning the litigation and the independence of the Cato Institute. Edward Crane, President of the Cato Institute and one of the shareholder defendants, is quoted in the New York Times describing this litigation as “an effort by the Kochs to turn the Cato Institute into some sort of auxiliary for the G.O.P.”1 The article goes on to state that the Cato Institute’s leaders say that the dispute is “threatening the institute’s identity and independence” because of a “long-simmering feud over efforts by Mr. Koch and his brother David Koch to install their own people on the institute’s 16-member board and to establish a more direct pipeline between Cato and the family’s Republican political outlets.”2 Another article quotes Mr. Crane as stating that the lawsuit is an attempted “hostile takeover” of the Cato Institute.3 As of March 8, 2012, the Cato Institute has launched a “Save Cato” webpage, stating that “[t]he officers and all the non-Koch directors of the Cato Institute are determined to resist this takeover attempt.”4 It also states that Charles and David Koch have told the Cato Institute’s chairman Robert A. Levy that they “wanted Cato to work more closely with their organization Americans for Prosperity [AFP]. As the New York Times reported on October 30, 2011, AFP works closely with Karl Rove’s American Crossroads and American Action Network and with official Republican organizations ‘to make further gains in the Congressional elections next year and defeat President Obama . . . [T]hey collaborate and divide up duties where possible.’”5 Common Cause also writes to bring to your immediate attention the analysis of Marcus Owens, a former director of the Exempt Organizations Division of the Internal Revenue Service. Mr. Owens is quoted in the Chronicle of Philanthropy as stating that the litigation exposes a “fatal flaw” in the Cato Institute’s structure.6 In the Washington Post, Mr. Owens states that the “Cato Institute is at risk of retroactive revocation of its tax-exempt status back to 1977.”7 The article states that Cato’s “unusual structure … raises questions about whether it meets the requirements for a nonprofit under federal tax law since the board could essentially agree to allow control of the organization to be sold to the highest bidder” which Mr. Owens says is “completely at odds with the requirements for [a nonprofit].”8 For these reasons, the Internal Revenue Service should open an investigation into the impact of the Kochs’ attempt to control the Cato Institute to advance their own political and economic interests, and whether Cato can maintain its charitable, tax-exempt status without changing its ownership structure.
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See Eric Lichtblau, “Cato Institute is Caught in a Rift Over Its Direction,” N.Y. Times, March 6, 2012. Id. 3 See T.W. Farnam and Dan Eggen, “In Suit, Koch Brothers Seek Bigger Control over D.C. Think Tank,” Wash. Post, March 1, 2012. 4 See Save Cato, http://www.cato.org/SaveCato/ (last visited March 8, 2012). 5 Id. 6 See Debra E. Blum, “Think Tank in Koch Brothers Dispute Could Find Its Tax Status at Risk,” Chronicle of Philanthropy, March 4, 2012. 7 See T.W. Farnam, “Battle for Control of Cato Institute Highlights Unusual Structure,” Wash. Post, March 3, 2012. 8 See id.

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Respectfully,

Bob Edgar President & CEO, Common Cause

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