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PRESS STATEMENT AND
FAX ALERT TO FREE SPEECH MEMBERS
Seventh Circuit Court of Appeals
Rebukes IRS,
Issues Most Important Nonprofit Tax Decision of the
Decade
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.
For information on how you can help
protect nonprofits First Amendment rights contact:
Free Speech Legal Defense and Education Fund, Inc.
8180 Greensboro Drive, Suite 1070
McLean, Virginia 22102-3860
(703) 356-6912 (telephone)
(703) 356-5085 (fax)
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