TaxNewsFlash-Exempt Organizations

April 9, 2008
No. 2008-37

Federal District Court Rejects IRS Retroactive Revocation of Exemption

The U.S. District Court for the District of Columbia granted a motion for summary judgment by the Democratic Leadership Council, Inc. (DLC), finding that the IRS violated its regulations when it revoked DLC's exempt status retroactively. The federal district court held that DLC is entitled to a refund of taxes paid for the years at issue. Democratic Leadership Council, Inc. v. United States, Civ. No. 05-1067 (LFO) (D. D.C., April 4, 2008).

For an electronic version of the federal district court’s order: DLC

Summary

In 1986, the IRS ruled favorably on DLC's application for recognition of exemption under section 501(c)(4). In 1999, the IRS opened an examination of DLC; and in 2002, the IRS revoked DLC's tax-exempt status under section 501(c)(4) for the years 1997, 1998, and 1999 on the grounds that DLC provided an impermissible level of private benefit to officials of the Democratic Party during those years.

Subsequently, the IRS sent to DLC notices of federal income deficiencies for 1997, 1998, and 1999. DLC paid the taxes and claimed a refund on the grounds that: (1) it qualified for tax-exempt status under section 501(c)(4) during those years; and (2) the IRS violated the regulations concerning when revocation of a favorable ruling will be retroactive.

The federal district court held that it was not necessary to determine whether DLC qualified for exempt status under section 501(c)(4) during those years because even if the DLC did not so qualify, the IRS improperly revoked that status retroactively. Reg. section 601.201(n)(6)(i) generally provides that revocation of an IRS favorable ruling may be retroactive if the organization omitted or misstated a material fact. The district court found that DLC did not omit or misstate a material fact or operate in a manner materially different in the years in question from that originally represented in its application for IRS recognition of its exemption. Thus, the court concluded that the IRS abused its discretion by retroactively revoking DLC's exempt status, and granted DLC's claim for refund.

For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or rspeizma@kpmg.com

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