Case Study on How Not to Apply for Exemption Recognition

Date01 August 2019
Published date01 August 2019
August 2019 3
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
between the two definitions because it found that RERI
“failed substantially to comply [with the substantiation
requirements] because it did not disclose its basis in the
donated property.”
RERI contended the basis number was not neces-
sary in computing the property’s fair market value. But,
the appellate court stated, the “requirements have the
broader purpose of assisting the IRS in detecting and
deterring inflated valuations.” The court of appeals also
took note of the 17-month period, stating that the Tax
Court did not merely “hypothesize” that provision of the
basis amount “would have alerted the IRS to a potential
Much of this opinion is devoted to the court’s rejec-
tion of RERI’s four arguments as to why the gross valu-
ation misstatement penalty should not be imposed. The
court observed that the stated value of the contributed
property, $33 million, is more than 400 percent of the
true value of the property, $3 million, as determined by
the Tax Court. [10.14(a), 21.4]
The US District Court for the District of Columbia, by
decision dated May 30, held that the lawyers for one
of the organizations discriminated against by the IRS
during the application-for-recognition process, True the
Vote, are entitled to payment of reasonable legal fees
and costs under the Equal Access to Justice Act (True the
Vote, Inc. v. IRS).
The consent order signed by the court in early 2018
stated (1) “it is wrong to apply the United States tax
laws . . . to any tax-exempt application or entity based
solely on such entity’s name, any lawful positions it
espouses on any issues, or its associations or perceived
associations with a particular political movement, posi-
tion or viewpoint”; (2) “any action or inaction taken by
the IRS must be applied evenhandedly and not based
solely on a tax-exempt applicant or entity’s name, politi-
cal viewpoint, or associations or perceived associations
with a political movement, position, or viewpoint”; and
(3) “discrimination on the basis of political viewpoint in
administering the United States tax code violates funda-
mental First Amendment rights” (order referenced in the
March 2018 issue).
The first issue for the court to resolve was whether
True the Vote was the prevailing party in this case. The
court found that because there is a court-ordered mate-
rial change in the legal relationship between the parties,
the judgment was in favor of the party seeking the fees,
and the judicial pronouncement was accompanied by
judicial relief, True the Vote was the prevailing party. The
consent order was held to create this change in the legal
relationship and the organization was accorded some of
the relief it sought. Indeed, the court issued a declaratory
judgment in the organization’s favor.
The government argued at the outset that this case
was moot due to the IRS’s promises of rectified behavior.
(This court agreed with that position but was reversed
(opinion summarized in the October 2016 issue).) This
time around, the court decided that the defendants
“virtually ignored their conduct underlying the litiga-
tion” and focused primarily on their mootness defense.
The court held that this position of the IRS was “not
substantially justified.” Moreover, the defendants failed
to satisfy their burden to demonstrate that any “special
circumstances” exist that would render an award of
lawyers’ fees unjust.
Therefore, the court ordered payment of lawyers’
fees to the organization. Moreover, the court ruled that
the defendants’ pre-litigation conduct rises to a level
of “bad faith sufficient to justify” an award of fees
above the EAJA cap on fees. The court found that the
IRS employees “were confronted with a clear judicially
imposed duty not to engage in viewpoint discrimination
as required by the First Amendment.” True the Vote was
held entitled to an award of lawyers’ fees calculated
at prevailing market rates pursuant to this “bad faith
The court requested more evidence from the plaintiff
as to the reasonableness of the lawyers’ fees sought
and the qualifications of the nonlawyers who rendered
services in this case; the court thus stayed the award.
Note: Assuming this decision stands and at least as to the
facts of this case, and based on phraseology in the DC
Circuit’s opinion in the fall of 2016, it should be clear that
what happened at the IRS in the processing of the appli-
cation for recognition of exemption was not the result of
mere “bad management” but occurred because of “bad
faith” actions, including viewpoint discrimination.
A nonprofit corporation was formed to “provide
economic aid, resources, and literacy to distressed home-
owners victimized by the foreclosure epidemic plaguing
America” by providing a “myriad of services to help
America’s homeowners who are struggling with mort-
gage debt to get relief.” This entity has a “homeowner
foreclosure bailout program,” a job-creation program,
and a “transition assistance program.”
The IRS first rejected this organization’s assertions it
is operating in an educational and charitable manner.

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