DLC dismisses exempt status attack by IRS

The Democratic Leadership Council, the centrist group that propelled Bill Clinton, Joe Lieberman and Evan Bayh to national prominence, has rebuffed the latest attempt by the IRS to strip it of its tax-exempt status — but a federal judge left the door open for the government to continue its six-year quest.

The Internal Revenue Service said the nonprofit organization became an advocacy group for elected Democrats and demanded payment for three years of back taxes.

The U.S. District Court for the District of Columbia said the organization does not need to pay back taxes but that its ruling announced Monday “does not preclude the IRS from revoking prospectively the [Democratic Leadership Council’s] exempt status, should it conclude again that the DLC is not entitled to that status.”

The Democratic Leadership Council was organized in 1985 by centrist and conservative Democrats who identified themselves as “New Democrats.” Its current leaders include presidential candidate Sen. Hillary Rodham Clinton of New York and Sen. Thomas R. Carper of Delaware.

The DLC’s support played a significant role in the 1992 election of Mr. Clinton.

Mrs. Clinton is listed as the “chair of the DLC’s American Dream Initiative,” a program to create economic opportunities for middle-income households.

The organization’s chairmen have included Mr. Clinton, Mr. Lieberman of Connecticut and former Sen. Charles S. Robb of Virginia.

The council paid the $20,000 in back taxes demanded by the IRS plus interest but sued for a refund.

The court agreed the IRS lacked authority to revoke its nonprofit status to demand back taxes for 1997, 1998 and 1999. However, the IRS could revoke the organization’s nonprofit status for future tax exemptions if it benefited only one political party, namely Democrats.

“It may be that the DLC is unworthy of 501(c)(4) status,” said the ruling by District Judge Louis F. Oberdorfer. The 501(c)(4) status refers to the section of the IRS code that grants tax exemptions to “social welfare” organizations.

Bob Bauer, the lawyer who represented the DLC in the case, said the court’s ruling was a victory for the organization. “We had fully met all the terms of the exemption granted to us many years ago,” he said. “This case was litigated around specific years. There’s never been a larger attack on the exemption by the IRS. That was what the fight was about, and we won it.”

The DLC’s 1985 application for nonprofit status said, “the organization was conceived as an active forum for the development of fresh policy options and approaches which could spark and advance public debate.”

The group planned to use task forces, fundraising receptions and studies to advance public debates, but it would “not intervene in campaigns on behalf of any public candidate,” the application said. It also would not “seek to influence voter perceptions indirectly, such as by establishing voting records or other ratings of candidates.”

The IRS said the DLC’s promotion of New Democrat policies and efforts to defeat Republicans in elections indicate the organization no longer fits in the nonprofit category.

Examples the IRS uncovered during its investigation included workshops in 1998 to teach political leaders about the New Democrat agenda. Only Democrats were invited.

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