Amid Media Matters Backlash, IRS Has Precedent for Stripping Tax-Exempt Status

The IRS isn't saying much about calls to investigate claims that Media Matters may be violating the terms of its tax-exempt status for waging "guerilla warfare and sabotage" against Fox News. But while the agency rarely revokes nonprofit status over political advocacy concerns, there is precedent for such punishment.

Those who charge Media Matters is running afoul of the rules point most commonly to a 1989 ruling in which an organization was stripped of its 501(c)3 designation because of ties to Republican entities. The organization, the American Campaign Academy, was set up to train people for careers in political campaigns. But the U.S. Tax Court found the Republican-backed group was generally training people to work on GOP campaigns -- and ruled the academy served the private interest of GOP entities and candidates.

The case underscored a key distinction for nonprofits. They should serve the public, not private, interest. That rule was hammered home again in 1998 when a federal judge let the IRS strip a GOP-backed commission of its tax-exempt status. The judge determined the group, The Fund for the Study of Economic Growth and Tax Reform, was supporting a particular agenda and did not meet nonprofit criteria.

C. Boyden Gray, White House counsel during the George H.W. Bush administration, has cited the American Campaign Academy case in arguing that Media Matters is on thin ice with its IRS designation. Recent questions about the group's activities stem from a campaign against Fox News which founder David Brock described in an interview earlier this year.

Under IRS rules, nonprofits like Media Matters formed for "charitable" and "educational" purposes are free to engage in advocacy. But they are also required to offer "full and fair exposition of pertinent facts" and, in most cases, avoid "use of inflammatory and disparaging terms." They also are prohibited from advocating on behalf of campaigns for or against political candidates, and are mostly restricted from lobbying.

Jeffrey Hurwit, founder of the nonprofit-focused Hurtwit & Associates law firm, suggested Media Matters was above board on those two standards. Where the group runs into trouble, he said, is the public interest standard.

"Though I .... abhor what the right-wing talk show hosts say, to me this crosses the line in a subjective way of deciding what is public benefit versus private benefit," Hurwit said. "By attacking a single entity or network and utilizing such adversarial terms as 'guerrilla warfare' and 'sabotage,' that may well cross the line moving from public benefit to private agenda."

The IRS revokes tax-exempt status for dozens of organizations every year. In a unique case, the IRS also just stripped nonprofit status for 275,000 groups -- though for paperwork violations, many involving already-defunct groups.

"It is important for the service to be vigorous in its oversight of the tax-exempt sector," former IRS Commissioner Mark Everson said, noting these cases often start after an agent notices a red flag. "The service has wide latitude in these areas."

But the agency rarely revokes nonprofit status over political advocacy concerns. More common are cases where the IRS scrutinizes a nonprofit over suspicions that it's being used to financially benefit stakeholders. Everson recalled how, during his tenure in the George W. Bush administration, the IRS moved against a number of credit counseling companies after charging they were geared more toward generating income than doling out credit advice.

In the case of Media Matters, Everson noted that while IRS rules clearly prohibit "advocacy related to candidates," there's more wiggle room when it comes to "issues advocacy."

"It doesn't matter if you have a particular orientation," he said. "It's hard to draw a clear line in a lot of those areas."

The IRS, citing agency procedure, declined to say what action it might be taking with regard to Media Matters.

James King, a tax attorney with Jones Day, reiterated that nonprofits can advocate a point of view, "and you may do so strongly."

"But you can't have it just be unsubstantiated opinion," he said. "And you have to be reasonably objective about the way you present your views. So an excessive use of inflammatory language would be one factor that the Internal Revenue Service could look at."