Court Decrees Payment of Legal Fees in Application Discrimination Case

• Published date: 01 August 2019
• DOI: http://doi.org/10.1002/npc.30623
• Date: 01 August 2019

Bruce R. Hopkins’ NONPROFIT COUNSEL

August 2019 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

over-valuation.”

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] ◆

COURT DECREES PAYMENT OF

LEGAL FEES IN APPLICATION

DISCRIMINATION CASE

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

enhancement.”

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.

[26.17] ◆

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.

CASE STUDY ON HOW NOT

TO APPLY FOR EXEMPTION

RECOGNITION

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.