This is a rush transcript from "Special Report," June 28, 2011. This copy may not be in its final form and may be updated.


JAMES KING, TAX ATTORNEY: You may advocate a particular point of view, and you may do so strongly, but you can't have it just be unsubstantiated opinion and you have to be reasonably objective about the way you present your views.

C. BOYDEN GRAY, FORMER WHITE HOUSE COUNSEL: When you start to accuse Fox News of being the spokesman for the Republican Party and the Republican Party, which is demonstrably false. There is no basis for that. Brock or Media Matters makes no effort to substantiate any of that. That's when it crosses a line.


BRET BAIER, ANCHOR: Well, before the break, we asked you should Media Matters' tax exempt status be revoked? 99 percent of you said yes, one percent said no. We had more than 5,000 votes in this unscientific poll on the website.

The issue is, this liberal advocacy group Media Matters, in March, the founder, David Brock, a conservative turn liberal, said in multiple interviews that the organization had changed its mission from a -- quote -- "media monitoring organization," to launch a - quote -- "War on Fox" by conducting opposition research against FNC personnel.

In an interview with NPR he was talking about his book, "Blinded by the Right" and he said this, "I am coming forward to tell the truth now and that truth is I lied, it was a terrible lie. So it's perfectly understandable that many people may not know whether to believe me now." He is talking then about what he did in the Anita Hill hearings and the Clarence Thomas hearings back on the Hill.

Back with the panel. Charles, the question here is, tax exempt status. Is this a charitable and educational organization?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Well, it's -- obviously is not. But is it so within the interpretation of the law? So on the legality of this, I think the strongest argument against them, against Media Matters, is that as we heard in the James Rosen report, 12 years ago the IRS ruled that a Republican run academy to train people to be pundits and speak against the Democrats on the air was ruled non-charitable, and thus not eligible for any charitable exemptions.

I think you can strongly argue that Media Matters which ran as a the Washington Post had reported exactly the same kind of camp, training academy if you like, for its liberal advocacy, would be subject to exactly the same ruling. So legally speaking I think it would be denied charitable status.

As a matter of sort of not law, but the democratic practice, Media Matters is obviously not a media investigative organization that looks at everything. It's in a war on Fox. And you're allowed to do that in a democracy. You can be nasty as you want. The only thing is don't ask for a government subsidy. Nobody wants to stop them or to shut Media Matters down. It's a question of whether your tax money and mine ought to be supporting it.

BAIER: Susan?

SUSAN FERRECHIO, WASHINGTON EXAMINER: The way the laws are currently written according to tax attorneys who specialize in this, they've told me that Media Matters will really probably be able to keep its tax exempt status. It's hard to lose your tax exempt status.

BAIER: Although many do. Year to year the IRS kicks people off the list.

FERRECHIO: True. That's true, for various infractions.

Now excluding the boot camp issue which I think could really be troublesome--

BAIER: The liberal boot camp.

FERRECHIO: -- based on what Charles was just saying that the law is written so the laws are written broad and wide and they allow groups like this to exist. There are groups who exist solely to take down the Humane Society because they think they are trying to make -- turn everyone into a vegetarian or who go after MADD because they think that's, ya know, prohibition that they are trying to put in place through these, the interlock devices that you put on the car if you are caught drunk driving. So there are lots of groups like this that exist.

The question is whether the tax code should be written differently, more narrowly and whether the donors should have to disclose themselves after they give a certain amount of money. There is a big question about whether that should change.

BAIER: Quickly, Juan.

JUAN WILLIAMS, SENIOR EDITOR, THE HILL: Well, I just think that when you see George Soros funding this and you understand they declared a war on Fox, are engaged in something so nefarious as opposition research on people who work at Fox and Fox executives, then you understand they are out there to defame Fox. They say they are in a war on Fox, and yet at the same time they are asking for government support. I just don't -- I can't put the two together. Susan may be right about the legalities, but I think that's going to be a major legal fight.

BAIER: That is it for the panel. But stay tuned to see a unique response to an Obama campaign contest.

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