Organization Finally Obtains IRS Recognition, Then Fails to Have Costs Awarded Due to Statutory “Gap”

• DOI: http://doi.org/10.1002/npc.30449
• Published date: 01 April 2018
• Date: 01 April 2018

Bruce R. Hopkins’ NONPROFIT COUNSEL

April 20184THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

In general, the appellate court was willing to accept

restraints on associational rights where the government’s

and the public’s interests outweigh those rights. The

“small extent of speech chilling,” it wrote, “is more than

commensurate with the government’s goals.”

The other arguments offered by the appellants, such

as the rise in the extent of enforcement by the New York

attorney general constituting a violation of due process

rights and the notion that federal tax disclosure law pre-

empts state law disclosure, were admittedly weak.

The appellants also did not prove their damages,

enabling the court to reference “unsupported claims,”

“conclusory allegations,” and “conjur[ing]” of “specter[s].”

Commentary: Except in the rare instances where plain-

tiffs can show material damage to themselves and their

supporters, and repeated government wrongdoings (see

the case summarized in the July 2016 issue), the courts

are not going to come to the aid of organizations where

their donors are afraid to contribute because of repri-

sals—true “speech chilling.”

What is most galling about these opinions is the

courts’ unquestioning acceptance of the attorneys gen-

eral’s arguments about the power of Schedule B. These

writings make one wonder if the courts look at Schedule

B. It is hard to accept the notion that staring at Schedule

B will reveal fraud, self-dealing, excessive salaries, and

the like. Other parts of the Form 990, by contrast, can

smoke out any nefarious behavior.

The Schedule B is not worth the negative impact its

use by some states is having on charitable fundraising.

The schedule should be abandoned. ◆

ORGANIZATION FINALLY

OBTAINS IRS RECOGNITION,

THEN FAILS TO HAVE

COSTS AWARDED DUE TO

STATUTORY “GAP”

An organization pursued recognition of tax exemption

for more than 14 months, finally obtained it after filing a

lawsuit, sought administrative and litigation costs before

the US Tax Court, and failed in that regard because of fall-

ing into a gap in the award statute (Friends of the Benedic-

tines in the Holy Land, Inc. v. Commissioner, February 21).

Facts

This organization filed an application for recogni-

tion of exemption, as a charitable and religious entity,

with the IRS. Other than acknowledging receipt of the

application, the IRS did not respond for over a year. The

organization filed for a declaratory judgment as to its

exemption. Two days later, the IRS issued a favorable

determination letter (dated on a Sunday).

The organization filed a motion for an award of reason-

able litigation or administrative costs. The administrative

costs totaled $8,478; the litigation costs were $60,512.

Law

In any administrative or court proceeding that is

brought by or against the United States in connection

with the determination, collection, or refund of any tax,

interest, or penalty, the prevailing party may be awarded

reasonable administrative and litigation costs incurred

in connection with the proceeding (IRC § 7430). The

proceedings include exempt organizations declaratory

judgment actions (IRC § 7428). To recover costs, the

taxpayer must establish that (1) it is the prevailing party,

(2) it did not unreasonably protract the proceedings, (3)

the amount of the costs requested is reasonable, and (4)

it exhausted the administrative remedies available.

Analysis

The IRS did not dispute that the organization satis-

fied the second and fourth of the four requirements to

recover costs. The IRS first contended that the orga-

nization’s costs were not incurred in connection with

an administrative proceeding, on the grounds that the

seeking of recognition of tax exemption is not such a

proceeding. The court rejected that assertion, apparently

on the basis that the law required the organization to

seek recognition to be exempt (IRC § 508).

The IRS also contended that the organization was not

the prevailing party in the administrative proceeding. The

organization countered that it prevailed, in that it received

the determination letter as to its exemption. The court

noted the statutory rule that a party cannot be the prevail-

ing party if the government establishes that its position in

the proceeding was substantially justified (IRC § 7430(c)

(4)(B)(i)). Tax Court precedent has it that identification of

the government’s position is a precondition for determin-

ing whether a taxpayer is the prevailing party. The court

then held that when the government fails to take a

position at all, a taxpayer cannot be the prevailing party.

The court also held that this organization did not provide

any evidence as to administrative costs and thus was not

entitled to an award of those costs.

The government contended that the organization

was not entitled to litigation costs because the govern-

ment’s position in the judicial proceeding was substan-

tially justified. The court held that by conceding the case,

the government showed that its position in the litigation

was substantially justified, so that the organization can-

not be treated as the prevailing party.

The organization (understandably) contended the gov-

ernment’s concession was insufficient to establish that its

position was substantially justified because it followed gov-

ernment “inaction or arbitrary positions taken during the

administrative phase.” It pointed to a similar case, where

a district court reasoned that the government could not