Tax Exempt Status Wrongfully Revoked By The IRS

IRS wrongfully revoked DLC’s tax-exempt status

Democratic Leadership Council, Inc. v. U.S., 101 AFTR 2d ¶ 2008-661

Mike Habib, EA

myIRSTaxRelief.com

A district court has held that IRS violated its own regs when it retroactively revoked the tax exempt status of the Democratic Leadership Council (DLC) as a Code Sec. 501(c)(4) social welfare organization.

Facts. In ’85, several prominent Democrats, including then-Governor Bill Clinton, formed the DLC. Specifically, on Nov. 8, ’85, the DLC filed its Form 1024 application with IRS for tax-exempt status as a “social-welfare” organization under Code Sec. 501(c)(4). The application included the DLC’s Articles of Incorporation. It further explained that the DLC was organized by certain elected officials and others who were concerned with the formulation of national policy and with the direction of policy debate within the Democratic Party.

The application stated that “the organization was conceived as an active forum for the development of fresh policy options and approaches which could spark and advance public debate.” To further this purpose, the application stated, the DLC intended to: create task forces; hold town meetings and issue forums with business, labor, civic, student, and other audiences; hold policy meetings; contract for studies; initiate public-affairs programs (including press conferences, meetings with editorial boards, and press releases); and host fund-raising receptions.

The application also represented that the DLC would “not intervene in campaigns on behalf of any public candidate,” nor “seek to influence voter perceptions indirectly, such as by establishing voting records or other ratings of candidates.”

On Feb. 7, ’86, based on the DLC’s application for exempt status, IRS recognized the DLC as a tax-exempt organization under Code Sec. 501(c)(4).

In 2002, IRS revoked the DLC’s tax-exempt status for the years ’97, ’98, and ’99, concluding that the DLC rendered an impermissible level of private benefit during those yearsnamely, support to Democratic officials.

The DLC paid approximately $20,000 in total taxes and interest for those years, but filed a suit for a refund.
IRS didn’t revoke the DLC’s tax-exempt status for any time period since tax year ’99. Accordingly, since that time, the DLC has filed each year as a tax-exempt, Code Sec. 501(c)(4) organization.

Parties’s arguments. Under Reg. § 601.201(n)(6), the revocation or modification of a determination letter or ruling recognizing exemption may be retroactive if the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or engaged in a prohibited transaction of the type described in the regs. The DLC contended that it was entitled to summary judgment because (1) it qualified as a Code Sec. 501(c)(4) organization during the years at issue and (2), even if it did not so qualify, IRS improperly revoked the DLC’s Code Sec. 501(c)(4) status retroactively in violation of Reg. § 601.201(n)(6) because the DLC did not omit or misstate a material fact, or operate in a manner materially different from that originally represented.

IRS countered that it was entitled to summary judgment because (1) the DLC did not qualify as a Code Sec. 501(c)(4) organization during the years in issue; and (2) the retroactive revocation of Code Sec. 501(c)(4) status was permissible because the cited reg does not apply in refund suits and, in any event, IRS complied with the reg.

Wrongful revocation. The district court acknowledged that there could be legitimate questions as to whether the DLC was entitled to Code Sec. 501(c)(4) status. However, it held that because the DLC did not omit or misstate a material fact in its ’85 application for that status or operate in a manner materially different from that originally represented when the IRS granted it that status, IRS violated its regs when it retroactively revoked the DLC’s tax-exempt status. Accordingly, the court granted summary judgment to the DLC and ordered a refund of the taxes the DLC paid for the years in question.