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IRS Reversal Could Spark ‘Notorious Abuse’

The Internal Revenue Service used a novel, secretive procedure to undo a series of decisions that revoked the tax-exempt status of two charitable groups whose political activity became the subject of a House ethics investigation of former Speaker Newt Gingrich (R-Ga.).

The process was initiated by the IRS in 2001 under political pressure by Howard “Bo” Callaway, an influential, well-connected Gingrich ally who had headed the two charities while he served as chairman of GOPAC, the political action committee that served as Gingrich’s financial base during his rise to power in the mid-1990s.

Tax law experts were surprised not only by the decision to reverse what was considered a settled matter but also at the procedure used, which they said has brought the integrity of the IRS into question and opened the tax agency up to charges of political motivations in its decision-making.

In addition, experts said the IRS rulings threaten to unravel the reforms of the new campaign finance law, which sought to plug sources of unregulated money into the political process. The restoration, which was likened to a blessing by the IRS, now makes it more attractive for political groups to operate through highly desirable charitable fronts that have the added advantage of offering donors the opportunity to claim tax deductions for their contributions.

Already, some Democratic and Republican operatives have formed nonprofit organizations to begin raising large amounts of anonymous contributions in the wake of a ban on soft money in the McCain-Feingold law.

“If this is a precedent for other actors in the political field it could very easily become a notorious abuse,” said Gregory Colvin, a San Francisco-based tax attorney who advises charitable and nonprofit organizations. “There will be an escalation of that sort of weaponry on both sides. If that happens none of us will be very happy, either left or right,” he said.

Based on extensive findings uncovered during the lengthy ethics investigation, the IRS revoked the tax-exempt status of the Abraham Lincoln Opportunity Foundation in December 1998 in a move widely considered inevitable because of the evidence showing that the charity had been used by GOPAC to train Republican activists with a series of television programs and national workshops.

The ethics probe revealed how GOPAC, the political committee chaired by Gingrich, captured and dominated ALOF, using it to raise funds and pay costs for an ambitious cable television show featuring Gingrich. The two groups, in essence, merged, sharing the same staff, resources and office. GOPAC went as far as offering its members the chance to pay their $10,000 dues by contributing to ALOF, which provided the donors with the benefit of a tax-deductible expense.

The IRS decision to revoke ALOF’s status was upheld by the U.S. Tax Court and the 11th Circuit Court of Appeals, which had both dismissed pleas to review the IRS revocation.

Separately, the IRS revoked the tax-exempt status of Callaway’s private foundation because it had improperly contributed to ALOF. That decision had financial implications for Callaway, whose foundation was found to owe more than $100,000 in back taxes and fines.

Callaway, a former House Member and Army secretary, refused to give up despite the series of rulings against him.

“So few people do what I did,” Callaway said in an interview last week “Every lawyer I had was telling me that I would never win, that it was a lost cause.”

In Callaway’s view, the IRS had never considered the merits of the case when it decided to revoke the status and had instead relied on the findings of the Committee on Standards of Official Conduct investigation. He complained bitterly that the IRS agent who had made the initial revocation decision did so without considering Callaway’s contention that the activities of ALOF were entirely educational in nature and had no partisan component.

The agent who made the initial determination has retired from the IRS and could not immediately be located.

“Callaway became extremely frustrated,” said Amber Hsu, his attorney. “He met with very high-level people at the IRS, and Bo Callaway wanted to get Congress involved. He wanted to get the Ways and Means Committee to do some sort of hearing on it.”

“He pressed for a review on the merits,” Hsu said. “It was Bo Callaway’s persistence that resulted in its referral to the independent review office.”

That independent review office became operational in 2001 and grew out of the reforms pushed by the Republican-controlled Congress to make the tax agency more responsive to complaints by taxpayers.

“In general, any substantive or procedural case or matter that involves Cases and especially difficult or complex issues that could result in an adverse Issues Subject impact on tax administration, or that raise Issues of unfairness or to Independent inconsistency of treatment, is a candidate for Independent review,” according to a description of the office in the IRS Manual.

The very existence of the independent review office appeared to be a well-kept secret even among the cadre of tax lawyers who pore over the agency’s every move. A half-dozen attorneys contacted by Roll Call said they had been unaware of the existence of the office until word of the decision to reverse the IRS revocations on the Callaway foundations spread.

In the summer of 2001, Steven Miller, the IRS director of exempt organizations, told Callaway that he would refer the revocation to the independent review office. Both Callaway and Hsu said they believed it was the first and only case to be assigned to the new office.

But Thomas Terry, the IRS official who conducted the review, insisted in an interview that the office has handled other matters besides the Callaway revocation. “The process is pretty new, but this office has handled more than one case,” Terry said.

Terry and other IRS officials cited the confidentiality provisions of tax law in refusing to discuss the specifics of the Callaway case.

Terry joined the IRS in March 2001 after 25 years spent mostly in private practice. “I am not a political appointee,” he said, adding that “none of the actions and none of the considerations that go into my decisions are in the slightest bit political.”

Terry said that he has wide latitude in choosing the information to consider during the review process. According to Hsu and Callaway, they were allowed to present extensive evidence supporting their case, including material that does not seem to have been turned over to the ethics committee during its inquiry.

One key piece of evidence cited by Hsu was a tape of one of the programs produced by ALOF in its series “American Citizens Television.” Hsu said the program, which focused on the issue of school choice, demonstrated that there was no overt partisan component and that the purpose was entirely educational.

She said that a number of ALOF records were recreated and produced to the review office by several former ALOF and GOPAC officials.

While the Callaway side was allowed to present its evidence, it appears no effort was made by the IRS to contact the special counsel who conducted the House ethics committee investigation that uncovered evidence of partisan intent for the programs funded by ALOF. James Cole told Roll Call last week that he was never contacted by the IRS and was surprised by the agency’s reversal.

“Based on what we found about ALOF, if that’s not political and partisan, then I don’t know what is,” Cole said.

Cole stressed that his investigation never doubted that the projects funded by ALOF had an educational component. “The question was what are you doing with this and how are you using educational component. Is it just being used for education, or is it being used for partisan political goals?”

After Terry considered Callaway’s evidence, he produced a report with a recommendation that was sent to Miller, the IRS director of exempt organizations. That report, he said, is secret and cannot be released to the public. “I make a recommendation, but I am not the decision-maker,” Terry said.

Requests to interview Miller about the case were denied.

Callaway said he was extremely pleased with the outcome and that the decision to restore the status of ALOF was even more than he expected. The moves mean that Callaway may win back up to $300,000 in back taxes, penalties, and lawyers fees from the IRS.

He said he informed Gingrich of the decision and described the former Speaker as being “very pleased.”

Tax law experts, though, questioned the process that was used and suggested it had the appearance of a political decision.

“This is an extraordinary decision,” said Fran Hill, a University of Miami tax law professor. “The IRS does not go back and fix things like this. In a reasonable system of tax administration this would not happen. But we of course have a system of tax administration that from time to time is subject to political influence.

“It certainly wouldn’t be the first time there was political influence going on at the IRS,” she said.

Colvin also questioned the process. “The main thing about the Gingrich case is that there was so much evidence of partisan intent and the House ethics committee didn’t miss that, they saw that and the fact that the IRS wasn’t able to confirm that there had been a violation by those organizations is disappointing. It contributes to a more general sense that the system can be gamed. If you are well-connected enough, if you are patient enough you can come through this.”

She called ALOF “a slush fund for GOPAC,” noting that it was “no different than the special purpose entities set up by Enron to achieve a favorable tax result. So what it was was a shelter for political money.”

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