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.
In February 1999, the DLC held an orientation for newly elected members of Congress but again invited only Democrats.
The court’s ruling said that during a July 1999 political convention, DLC Chief Executive Officer Al From said the New Democrat agenda “has been so successful that the Republicans are trying to parrot our politics.” The ruling also quoted Mr. From saying, “After all we went through, we’re not going to sit idly by and let the Republicans reclaim the political center on the cheap.”
On June 28, 2002, the IRS sent a letter to the DLC proposing to revoke its nonprofit status.
“We finally note that the fact that elected officials from one named political party were dominant in the creation, control and policies of the DLC are the key factors in our conclusion that DLC is not described in section 501(c)(4),” the letter said.
In the DLC’s lawsuit that followed, its attorneys argued the organization is a “think tank that makes the fruits of its labor publicly available” and it “has never had any relationship, formal or otherwise, with the Democratic National Committee or any other Democratic Party organization.”
Judge Oberdorfer’s ruling touched mainly on whether the IRS could charge back taxes after revoking the DLC’s nonprofit status for previous years.
The IRS code allows the tax-exempt status to be revoked for previous years “if the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented.”
Judge Oberdorfer’s ruling said the evidence was too weak to prove the deceit necessary to charge back taxes. He did not rule conclusively on whether the DLC had become an advocacy organization for Democrats.
IRS officials would not comment yesterday on whether they plan to try again to revoke the DLC’s tax-exempt status.
“We have to decline comment due to federal law prohibiting us from discussing individual taxpayers,” IRS spokesman Dean Patterson said.
IRS challenges to the tax-exempt status of public-policy foundations are nothing new.
In the late 1990s, the IRS challenged the nonprofit classification of the conservative Heritage Foundation after the organization sent out fundraising letters signed by former Sen. Bob Dole, Kansas Republican.
The Heritage Foundation maintained its tax-exempt status but only after a three-year audit and an agreement to pay a fine to settle the case.
Please read our comment policy before commenting.