PRESS STATEMENT AND FAX ALERT TO FREE SPEECH MEMBERS
Seventh Circuit Court of Appeals
On February 10, 1999, a unanimous panel of the U.S. Court of Appeals for the Seventh Circuit reversed the U.S. Tax Courts Decision in United Cancer Council, Inc. v. Commissioner, which had upheld the IRS revocation of UCCs tax-exempt status. The Tax Court decision approved the IRS retroactive revocation of a 501(c)(3)s tax-exempt status, based onan unprecedented, attempted IRS expansion of the tax codes prohibition against inurement(or improper benefit to those who run the nonprofit organization).
In the UCC case, the IRS alleged the presence of impermissible inurement to outside fundraisers who were not directors, officers, or even employees of UCC. The IRS and Tax Court ignored the fact that the charitys board of directors had negotiated the contract at arms length with the fundraiser, and the charity received substantial benefit from the contract. The IRS concluded, after the fact, that the contract worked out too favorably for the fundraiser.
The IRS now has been checked in its efforts to press its new definition of control of nonprofits by their outside fundraisers - a definition that the Court of Appeals slammed: The Service and the Tax Court are using control in a special sense not used elsewhere, so far as we can determine, in the law, including federal tax law.
UCC was in bankruptcy as a result of the IRS actions and could not defend itself against the IRS. The Free Speech Defense & Education Fund, Inc. (FSDEF) funded UCCs appeal to the Seventh Circuit to pursue the vital legal principles at stake for the benefit of the entire nonprofit community. Since UCC was in bankruptcy, this victory over the IRS would never have been obtained without FSDEFs invaluable support - James Curtis, Esquire, General Counsel of UCC.
The Court attacked the IRS argument in this case as making the tax status of charitable organizations and their donors a matter of the whim of the IRS. The Court observed that [i]t is hard enough for new, small, weak, or marginal charities to survive, because they are likely to have a high expense ratio, and many potential donors will be put off by that. The Tax Courts decision, if sustained, would make the survival of such charities even more dubious, by enveloping them in doubt about their tax exemption. The Court recognized that the inurement provisions in federal tax law are designed to prevent the siphoning of charitable receipts to insiders of the charity, not to empower the IRS to monitor the terms of arms length contracts made by charitable organizations with the firms that supply them with essential inputs, whether premises, paper, computers, legal advice, or fundraising services.
FSDEF is a nonpartisan educational organization - including liberal, conservative, and nonideological organizations and firms who help them raise public support - dedicated to the defense of First Amendment rights. FSDEF is exempt under section 501(c)(3) of the Internal Revenue Code ("IRC"). The Directors of FSDEF are Ron Robinson, Esquire, of Young Americas Foundation, Harriet Trudell of the Feminist Majority and Dick Dingman of Americas Voice. Legal Co-Counsel of FSDEF are William J. Olson, Esquire (703-356-5070) and Mark Weinberg, Esquire (301-468-5500). Lead counsel for the appeal was former Deputy Solicitor General of the United States, Andrew Frey of Meyer, Brown & Platt (212-506-2635). Leonard J. Henzke, Jr. Esquire, of Powell, Goldstein, Frazer & Murphy (202-347-0066), and MacKenzie Canter, III, Esquire of Copilevitz & Canter, P.C. (202-861-0740), were co-counsel with Mr. Frey. Assisting FSDEF in developing legal strategy was Herb Titus, Esquire, former Dean, Regent Law School (757-467-0616).
Mark Weinberg & Bill Olson, legal co-counsel for FSDEF, will testify on behalf of nonprofit organizations before the IRS at their previously scheduled hearings regarding the proposed Intermediate Sanctions regulations on March 16, 1999. According to Mark Weinberg, when we testify before the IRS regarding the Intermediate Sanctions regulations, we intend to urge the IRS to withdraw its proposed regulations which were drafted by the IRS during its state of euphoria after winning the UCC case in the Tax Court. The Seventh Circuit decision undermines the basis for the IRS expansion of authority in this area.
FSDEF Legal Co-Counsel Bill Olson stated that the UCC case may be properly viewed as the most important nonprofit tax law case of the decade. It is refreshing to see that the Seventh Circuit saw through the IRS effort to develop a new legal theory where it could exercise unbridled discretion to attack disfavored nonprofits.
A more extensive analysis on this case will be in the January-February issue of FREE SPEECH. The full opinion can be found on the Free Speech Coalitions website, http://www.freespeechcoalition.org.
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