By David Ingram and Nanette Byrnes

WASHINGTON (Reuters) - A conservative group that promotes legislation in state capitals is mainly a lobbying organization and should not benefit from a special tax status meant for charities, a liberal group says in a complaint to the U.S. Internal Revenue Service.

The complaint, released on Monday, challenges the tax-law status of the American Legislative Exchange Council (ALEC) as a not-for-profit 501(c)(3) charity. That status lets ALEC avoid paying taxes and lets its supporters deduct their contributions.

Common Cause, a liberal group that has criticized ALEC for other reasons, says in the IRS complaint that ALEC violates the tax rules that prohibit charitable organizations from engaging in a substantial amount of lobbying.

ALEC called the complaint frivolous and false. "The purpose of the organization is not to lobby, and it tries assiduously to avoid lobbying in compliance with the IRS regulations," said ALEC's legal counsel Alan Dye on a conference call with reporters.

The complaint is the latest in a string of fights between ALEC and liberal critics. Common Cause is part of a coalition that wants corporations to drop their participation in ALEC because of its support of voter-identification laws and "stand your ground" self-defense laws like the one at issue in the shooting death of 17-year-old Trayvon Martin in Florida.

After the criticisms began, corporations including The Coca-Cola Co said they were cutting ties to ALEC, and ALEC announced it would stop work on any legislation not related to the economy.

On Monday, Procter & Gamble Co became the latest corporation to confirm it is dropping its ALEC membership. A spokesman said the decision followed a regular review, and that the company dropped its membership in another not-for-profit, the National Conference of State Legislatures.

ALEC serves as a meeting point for lobbyists, corporations and mostly Republican state lawmakers, churning out model bills on hundreds of topics.

Common Cause lawyer Eric Havian said it is not plausible for ALEC to pose as a non-partisan, educational organization as the IRS requires. "Anybody looking at these materials knows that's a joke, and the IRS is not likely to find it humorous," said Havian, of the law firm Phillips & Cohen.

Any organization may lobby, but lobbying is not tax deductible and not-for-profits are generally permitted a very small amount of lobbying, around 5 percent of spending, before their status is jeopardized, Havian said.

Whistleblowers are entitled to a cut of any money recovered by the government, but in this case Common Cause said it would return any award to taxpayers.

An IRS spokesman declined to comment on the ALEC matter, citing privacy laws.

The IRS has come under scrutiny for its examination of 501(c)(4) groups, which are also non-profits but can spend some funds on some political advocacy.

(Additional reporting by Jessica Wohl and Patrick Temple-West; Editing by Kevin Drawbaugh and Eric Walsh)