Did Crossroads GPS “Bamboozle” the IRS?

Would you let Lois Lerner decide if your nonprofit organization deserved a tax exemption? The answer may depend on whether you recognize the woman who headed the Internal Revenue Service’s Exempt Organizations Division at the time it targeted conservative organizations (and some liberal ones). And, of course, whether your organization might be considered conservative or not.

The worst damage done by the IRS’s clumsy attempts to quash “Tea Party” and similar organizations is that both tax professionals and average Americans no longer trust the IRS to be fair.

For many years, the IRS worked closely with tax-exempt organizations’ lawyers to make common sense decisions that worked in the real world. The IRS’s own experts were so respected that their speeches and even their internal training manuals were mandatory reading for tax-exempt organizations and their counsels. When we had a question, we would simply call someone we knew in the IRS and ask, knowing we could rely on the answers. We even went to the IRS’s office and retirement parties. When there was a media scandal in the 1990’s about whether the Clinton Administration was using the IRS to go after the National Rifle Association, for example, the head of the IRS Exempt Organizations Division called me early one morning to complain about the coverage.

And for the most part, these organizations did try to comply with the laws as they understood them, with gentle guidance from the IRS. If you’re treated with respect, you tend to try to live up to the privilege.

Like much comity in Washington, D.C., unfortunately, that collegial and professional working relationship has forever changed. Now it’s adversarial. If you want information from the IRS, you have to file a formal request. Or sue them. And the lawsuits are nasty. A federal judge in Ohio just certified a class action lawsuit against the IRS and its employees on behalf of more than two hundred organizations caught up in the Tea Party scandal.

Which explains why, last year, Congress changed the law to put an impartial review process between the IRS Exempt Organizations Division and the organizations whose tax exemption it regulates. That process, known informally as Appeals, takes a fresh and independent look whenever the IRS is charged with improperly denying or revoking an organization’s tax exemption.

So when The New York Times editorialized recently that an IRS Appeals process had resulted in Crossroads GPS “bamboozling” the IRS into recognizing its tax exemption, people who had followed the evolving relationship between conservative organizations and the IRS were left confused. After all, Crossroads GPS had filed an application for tax exemption that was more than 1,000 pages long, with extensive explanations of what it would be doing and why its plans complied with the IRS’s rules. And a careful and objective review of the file shows that it should have been granted tax exemption under the IRS’s own rules.

Sure, Crossroads GPS was openly conservative. And it sprang up soon after the Supreme Court’s decision in Citizens United to allow independent political speech by tax-exempt organizations and other corporations. Speech rights that Crossroads GPS used. But that seemed to trigger a meltdown in the IRS. For five years. The same five years that the IRS’s scandal had bloomed, and spectacularly exploded. For example, the IRS leaked the Crossroads GPS tax-exempt application materials to outside organizations, including ProPublica, a liberal “investigative” organization started at about the same time as Crossroads GPS, and funded in its early years by organizations backed by financier George Soros. In other words, an organization not expected to be friendly to Crossroads GPS. It is a federal crime to leak those documents, but somehow it happened.

Then, the IRS denied tax exemption to Crossroads GPS.

Of course, Crossroads GPS didn’t meekly accept the IRS’s denial. So in 2013, after the full dimensions of the IRS scandal were uncloaked, Crossroads GPS hired experienced, capable tax-exempt organization lawyers, led by Jeffery Yablon of the law firm of Pillsbury Winthrop Shaw Pittman, to fight the denial. And Jeff Yablon is no ordinary tax-exempt organization lawyer. A courteous, soft-spoken man, he is no conservative fire-breather. He has forty years’ of experience in tax-exempt organization law, representing, among others, the feminist publication “Big Mama Rag,” when the IRS tried to compel it to “abstain from advocating that homosexuality is a…preference,” among other things, if it wanted a tax exemption. Yablon won a landmark ruling in the publication’s lawsuit against the IRS in the 1970’s. He was ably assisted by Jason Torchinsky, a well-known litigator from the Virginia law firm of Holtzman Vogel Josefiak Torchinsky, and a number of other capable lawyers. Both Yablon and Torchinsky are regular participants in long-running bipartisan meetings of counsels to tax-exempt organizations. (I am co-founder of that coalition.)

The Crossroads GPS lawyers filed documents and legal arguments, in exacting detail, showing clearly how Crossroads GPS had tried to comply with the IRS’s ambiguous and rapidly-evolving rules and interpretations. The “protest” filings alone were 400 pages, and there were 212 pages of e-mails between the IRS’s Appeals case officer, Theron Wing (and his supervisor, Appeals Team Manager Nan Shimizu) and Crossroads GPS lead attorney Jeff Yablon.

Wing, as a “conferee” at IRS Appeals, was supposed to take an independent look at the IRS case against Crossroads GPS. Under new “ex parte” rules, he had access to all the IRS’s lawyers, except those who had set up the case against Crossroads, so he could tap the expertise he needed to make an in-depth review. He could even talk to those who made the case for denying tax exemption to Crossroads GPS, but he would have to give notice to the organization’s lawyers when he did. This all looked very much like a regular American legal appeal. That’s what Congress intended, and the IRS did a good job in providing the sort of protections needed to get independent review of an initial ruling. As it should have, since it wanted to rebuild the trust and confidence of Congress and the American people.

And last November, Crossroads GPS won, though this information became widely-known only in mid-February this year.

But The New York Times editorialized that the Appeals decision “bamboozled” the IRS and was “a farcical abuse of common sense and the American taxpayer.” Paul Streckfus, editor of the Exempt Organization Tax Journal, called the decision “the latest horror” and said that the IRS “is totally incapable of providing meaningful regulation of the [tax-exempt organization] sector.” Both assumed that Crossroads GPS was guilty.

Curiously, however, knowledgeable tax-exempt organization attorneys weren’t quite so sure. For example, Marc Owens, oft-quoted former predecessor to Lois Lerner as the head of IRS’s Exempt Organizations Division and no friend of Crossroads GPS, said “I can see why the Appeals people concluded there were hazards to litigation.” “Hazards to litigation” is a fancy way of saying the IRS would have faced a significant chance of not only losing any legal challenge Crossroads GPS could have brought, but that the IRS’s guidelines and regulations could have been significantly harmed by any such loss in court. That’s a core function of the Appeals process.

So, this was another example of an out-of-control IRS, but it was reined in by a new Appeals process, just as intended. The grant of the long-delayed tax exemption provides some hope that the IRS has turned a corner and can impartially review controversial applications.

Barnaby Zall is Of Counsel to the Bethesda, Maryland, law firm of Weinberg, Jacobs & Tolani, specializing in tax-exempt organizations and constitutional litigation.

The Center for Competitive Politics is now the Institute for Free Speech.