Steven Emerson has made his reputation by scrutinizing American Muslim organizations and individuals, trying to uncover their possible ties to terror groups. But lately he is being scrutinized himself, by a Nashville, Tenn., daily newspaper digging into the finances of his operation.

Image by LUKEFORD.NET Emerson: ?All of this was approved by outside legal and accounting experts.?

Now, under pressure to introduce more transparency to his tax-exempt charitable organization, Emerson is attempting to explain how and why the Investigative Project on Terrorism Foundation avoids revealing much of the information that charities are routinely required to disclose.

Emerson, it turns out, succeeds in veiling his foundation’s data by channeling the tax-deductible funds he raises into a for-profit company that he controls.

Emerson said security considerations have forced him to avoid disclosing a lot of information that is usually made public by tax-exempt charities. Such disclosures include the names of his group’s board members, the names and salaries of its highest-paid employees and detailed information on the group’s finances.

A key figure in the national discourse on issues relating to Islamic terrorism, Emerson first emerged as a commentator and researcher on the topic in 1994, when his documentary, “Jihad in America,” shown on the Public Broadcasting Service, exposed fundraising for terror activities by Muslims in America, following the 1993 World Trade Center bombing. He subsequently set up the Investigative Project, an earlier, for-profit predecessor of the IPTF that evolved into a robust operation devoted to tracking and documenting alleged connections of American Muslims to international terror groups. He is also a frequent commentator on Fox News.

The spotlight pointed at Emerson, and his foundation’s business activity comes as the IPTF has injected itself into the heated debate over the Park51 Islamic center in New York, publishing reports highly critical of the Muslim leaders behind the project. But it is his criticism of the leaders of another planned mosque, this one in Murfreesboro, Tenn., that drew the interest of The Tennessean, Nashville’s sole daily newspaper, and led to the paper’s [October 24 investigative report][1] on Emerson’s tax status.

“Emerson is a leading member of a multi-million-dollar industry of self-proclaimed experts who spread hate toward Muslims in books and movies, on websites and through speaking appearances,” the report claimed.

In its wide-ranging article, The Tennessean reported that while the IPTF is recognized by the Internal Revenue Service as a tax-exempt charity, it in fact distributes almost all of its contributions to SAE Productions, a for-profit company that Emerson founded in 1994 and continues to control, as he does the IPTF.

Citing publicly available tax filings, the paper reported that Emerson’s foundation paid $3,390,000 to SAE in 2008 — the foundation’s only significant expenditure. It was the Emerson-controlled for-profit firm that then made all expenditures on the foundation’s behalf.

This is how Emerson’s foundation avoided the IRS’s detailed disclosure requirements for charities regarding their expenditures. Indeed, under this setup, even the IRS’s own tax-exempt division is in the dark on how Emerson uses his revenues.

Yet a careful look at Emerson’s correspondence with the IRS shows that the tax authority in fact approved Emerson’s IPTF for tax exemption only after Emerson assured the tax agency that “there are no, and will be no, financial/business transactions between officers, board members or relatives” of the IPTF and its subcontractor.

In an e-mail response to questions from the Forward, Emerson stated that at the time he made that commitment, “I was considering a number of options” and had not yet settled on contracting with SAE — a company he founded years earlier. Emerson noted that since gaining its tax-exempt status from the IRS, the IPTF has informed the tax agency, in annual tax reports, of his controlling role in both groups.

Emerson also said that salaries for SAE employees, who number 20 including himself, average between $65,000 and $70,000. “I can guarantee you that no one is becoming rich at IPTF,” he said. His own annual compensation amounts to $116,000, he reported.

“All of this was approved by our outside legal and accounting experts,” he wrote.

But William Josephson, a former head of the New York State Department of Law’s Charities Bureau, told the Forward, “Donors to IPTF get a tax deduction for in fact supporting a taxable entity. In effect, it’s just whitewashing the contributions.”

And Bruce Hopkins, a nationally recognized expert on charities law, said that Emerson’s later disclosure of the relationship between the ITPF and SAE in annual tax reports “does not mean that the IRS is okay with this practice.” Due to staff shortages, he explained, the IRS does not usually review these returns and does not compare them with the original request for tax exemption.

“Normally, the agency doesn’t like exempt organizations using taxable entities to carry out their programs,” Hopkins said. “As you can imagine, this is exacerbated where there is common control, as is the case here.”

Emerson’s communications with the IRS reveal a trail of contradictory and inaccurate statements.

In his original application for tax exemption, submitted May 6, 2006, long after SAE was created, Emerson replied “Yes” when asked if IPTF would have contracts or agreements with any other organization in which IPTF officers or directors also served as officers or directors. But asked to identify with whom IPTF would be contracting, he replied, “The subcontractor has yet to be decided upon.”

Emerson also answered “No” when asked specifically if anyone other than his employees or volunteers would “manage your activities or facilities.” Asked if any “officers, directors [or] highly compensated employees” would receive compensation “from any other organization related to you through common control,” Emerson again replied, “No.”

At the same time, Emerson assured the IRS that the arrangements between the IPTF and the unnamed subcontractor would be reviewed by an outside auditor to ensure that they were “at arm’s length” — a concern generally reserved for transactions in which there are common parties on both sides of an agreement. Such arm’s length arrangements are designed to guarantee that any goods or services exchanged between two related parties are transacted at market rates.

Unsatisfied, the IRS pressed Emerson in a letter dated December 8, 2006, on whether there would be “any financial/business transactions between officers, board members or relatives” of the still unnamed subcontractor and IPTF. It further requested a “signed/dated statement” attesting that the subcontractor would be “an unrelated third party” and, like the IPTF, a tax-exempt organization.

It was this question that prompted Emerson to respond that “there are no, and will be no, financial/business transactions between officers, board member or relatives” of SAE and the IPTF. But Emerson did not provide the IRS with the signed and dated statement it requested. He instead noted that the subcontractor would, in fact, not be a tax-exempt organization precisely to avoid the need for public disclosures, due to security concerns. The subcontractor would be, however, organized as a “not-for-profit organization,” Emerson wrote.

SAE is incorporated in the state of Delaware under its “general corporation” category, which is for for-profit firms.

On January 8, 2007, the IRS asked Emerson for additional explanations of this arrangement. Emerson replied that because of his work, he himself had been “the target of a death threat [that] can be confirmed by current and former U.S. government officials.” The proposed arrangement, Emerson argued, “furthers the legitimate business purpose of maximizing fundraising activities” for IPTF, while providing added security for “the staff conducting its work.”

It was the last follow-up the tax agency made. On January 26, 2007, the IRS approved Emerson’s application for tax exemption for the IPTF.

A Muslim group that has been a subject of Emerson’s investigations is now questioning that tax determination. The Council on American-Islamic Relations sent a letter to the IRS, claiming that the IPTF misused its tax-exempt status by paying millions to Emerson’s other company. According to Ibrahim Hooper, CAIR’s spokesman, the group has not yet received any response to its letter.

In his e-mail responses to the Forward, Emerson dismissed as “bogus” questions about SAE’s registration as a for-profit company after he told the IRS that it would be a not-for-profit. “The main issue for the IRS was whether the subcontractor would be tax exempt or not,” he wrote. He further stressed that despite being for-profit, “SAE spends all the money it receives from IPTF on IPTF’s stated mission and [on its] expenses in fulfilling that mission. No money is left over at SAE, so therefore SAE makes no profit.”

Asked to identify the third party that guaranteed the relationship between the ITPF and SAE was at “arm’s length,” as he had promised the IRS, and to provide that party’s certification of this, Emerson replied, “For security reasons, the firm [that] routinely monitors our transactions prefers not to be named publicly.” But he added, “They and my lawyers routinely reviewed all of our financial transactions and legal matters to ensure that everything was in order, including the relationship established between IPTF and SAE. They have continued to do so.”

Emerson added, “This is an unusual arrangement, but one that I had to implement because of the overriding needs of security. It was also fully disclosed to the IRS.

“I realize the opposite needs for disclosure. So I am trying to figure out another way in which we can disclose much more information without jeopardizing security. I have to take into account the fears of employees and our auditing firm and lawyers, who do fear that being publicly named, they will be targeted…. When they look at the threats I have endured, as well as the threats made against [the IPTF], I am morally bound to respect their fears.”

The controversy over Emerson’s financial practices does not seem to be an issue for at least one prominent IPTF donor. Kenneth Bialkin, who contributes annually to the group, said that Emerson could have been a target for smearing by the pro-Arab lobby.

“Of all those of us who labored in the vineyard in trying to help the Jewish people, there is no one who stands higher in the pantheon of honor than Steve Emerson,” said Bialkin, a former chairman of the Conference of Presidents of Major American Jewish Organizations, “for all of us — those of us who are hard-liners — feel this guy is worth his weight in gold.”

Contact Nathan Guttman at guttman@forward.com

Read a response to this article from the Investigative Project on Terrorism, along with a reply from our editors, here.

Additional reporting by Josh Nathan-Kazis

[1]: http://www.tennessean.com/article/20101024/[NEWS01 /10240374/Anti-Muslim-crusaders-make-millions-spreading-fear