Copyright (c) 1995 Tax Analysts Exempt Organizations Text SEPTEMBER 6, 1995 WEDNESDAY DEPARTMENT: Other Court Documents (CTO) CITE: 95 EOT 36-20 LENGTH: 2900 words HEADLINE: #20 95 EOT 36-20 PLAINTIFF TAX ANALYSTS' REPLY TO DEFENDANT IRS's RESPONSE TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT. (Tax Analysts v. IRS) ( 94-CV-0220) (United States District Court for the District of Dist. of Columbia) (Section 6104 -- Exempt Organization Information) (Release Date: August 15, 1995) (Doc 95-7970) CODE: Section 6104 -- Exempt Organization Information SUMMARY: Plaintiff filed its reply to defendant IRS's response to plaintiff's motion for summary judgment in the case of Tax Analysts v. IRS, a suit seeking release of all exempt organization closing agreements entered into by the IRS after Dec. 31, 1992. AUTHOR: Hogan, Thomas GEOGRAPHIC: United States INDEX: exempt organizations, disclosure REFERENCES: Subject Area: Exempt Organizations TEXT: TAX ANALYSTS, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant. Release Date: August 15, 1995 PLAINTIFF TAX ANALYSTS' REPLY TO DEFENDANT INTERNAL REVENUE SERVICE'S RESPONSE TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT I. THE IRS HAS CONCEDED THAT CLOSING AGREEMENTS RELATING TO AN ORGANIZATION'S EXEMPT STATUS ARE SUBJECT TO PUBLIC DISCLOSURE UNDER IRC 6104 Buried on the last page of its Response to Plaintiff's Motion for Summary Judgment ("Opposition") is the IRS' concession that closing agreements which relate to its determination to recognize an organization as exempt from tax under IRC 501(a) are subject to public disclosure under IRC 6104. (See, Opposition, p. 20.) The IRS argues, however, that this disclosure requirement only applies to closing agreements which relate "exclusively" to its determination to recognize an organization as exempt. The Opposition states: "Plaintiff asserts that [the testimony of Marcus Owens, Director, Exempt Organizations Technical Division, stating that it is the policy of the Exempt Organizations Technical Division to disclose closing agreements relating to the IRS' determination to recognize an organization as exempt] supports that the closing agreements at issue in this case must be disclosed under the FOIA. To the contrary, this testimony concerns closing agreements which solely embodies [sic] the basis for the granting of a tax exemption application. (See McGovern Tr. 109/18 - 110/6.) As noted above, none of the closing agreements at issue deals EXCLUSIVELY with an application for exemption. Accordingly, these six documents are protected from disclosure pursuant to Section 6103." (Id. (Emphasis in italics added).) According to the IRS, since the agreements identified by it contain information regarding both exempt status and other issues, the agreements, which the IRS concedes contain provisions relating to its exemption determination, are exempt from disclosure under IRC 6104. The Service's contention that closing agreements in their entirety fall outside the ambit of IRC 6104 if they do not deal "exclusively" with exemption issues is wholly without merit. This supposed standard is a complete fiction apparently created by the IRS following Mr. Owens' deposition testimony which undermined the Service's position in this case. This standard has no support in the Internal Revenue Code, IRS regulations or the Internal Revenue Manual and the IRS cited no authority in its Opposition in support of this purported standard. (See, Opposition, p. 20.) The IRS' spin on Mr. Owens' testimony and assertion that it relates only to agreements that deal "exclusively with an application for exemption" is baseless. To interpret Mr. Owens' prior testimony, the IRS cites the testimony of a later deponent, James McGovern. Not only is it remarkable that the IRS would attempt to interpret deposition testimony of one of its top officials through the testimony of a subsequent witness, but Mr. McGovern's cited testimony has no bearing on, or relation to, Mr. Owens' statements regarding his Division's closing agreement disclosure policy. The Opposition's reference to Mr. McGovern's deposition is a futile attempt by the Service to explain away "smoking gun" testimony which eviscerates its position in this case. In advancing the proposition that to be subject to disclosure a closing agreement must deal "exclusively" with exemption issues, the IRS ignores the fact that it often ties resolution of other issues (i.e., liability for tax and/or resolution of an ongoing investigation) to its determination to recognize an organization as exempt. (See, e.g., attached Exhibit "A".) Because re-qualification for tax exemption is the goal of all revoked entities, IRS leverages concessions on tax paying issues by its demands during re- qualification. (See, e.g., Greenwalt, "Hermann Hospital Closing Agreement: The View From Ground Zero," 22 Health Law Digest 11, at 3-5 (promises and commitments to future behavior demanded along with income tax payment, as explained by Hermann's counsel).) The IRS also ignores the fact that under IRC 6104, any document submitted by an applicant or issued by the IRS with respect to an approved exemption application is subject to public disclosure, whether it contains material typically classified as "return information" or not. The statute requires the disclosure of "any" document submitted to or issued by the IRS with respect to an approved exemption application regardless of its content or subject matter. /1/ Although the IRS argues that the agreements in their entirety are exempt from disclosure, IRC 6104 compels the exact opposite result. Further, if the IRS was allowed not to disclose closing agreements relating to exempt status solely on the basis that such agreements contained information not related to its exemption determination, the IRS could shield all such agreements from disclosure by purposefully including provisions relating to other issues in the agreement and, in so doing, thwart public oversight of exempt organizations. /2/ If the closing agreements at issue contain IRC 6103 material wholly unrelated to the Service's processing of papers in its determination to recognize the organization which is party to the agreement as exempt from tax, the IRS can redact such information from the agreement available for public inspection. /3/ II. THE IRS HAS USED A CLOSING AGREEMENT TO GRANT TAX-EXEMPT STATUS TO AN ORGANIZATION Throughout the course of this litigation, the IRS has denied that a closing agreement can be used to recognize an organization as exempt from tax or that it has agreed to recognize an organization as exempt prior to the date the organization's exemption application was filed. (See, e.g., McGovern Deposition, p. 87, ll. 16-20 (IRS has not agreed to recognize organization as exempt prior to date of filing of exemption application); pp. 109-110, ll. 14-6 (Closing agreement cannot establish exempt status); Schoenfeld Deposition, p. 25, ll. 5-8 (IRS has not agreed to recognize organization as exempt prior to date of filing of exemption application); p. 114, ll. 5-9 (Closing agreement cannot grant exempt status).) /4/ However, plaintiff has recently discovered new facts which indicate that these assertions are apparently false and that, in at least one instance, IRS may have used a closing agreement to grant exempt status to an organization prior to the date its exemption application was filed. A. THE OLD TIME GOSPEL HOUR CLOSING AGREEMENT One of the closing agreements at issue herein involves the Old Time Gospel Hour, an organization exempt from tax under IRC 501(c)(3). This closing agreement was entered into by the Service following the revocation of OTGH's exempt status for improper political activities. In a public statement issued by OTGH on February 17, 1993, the charity acknowledged that the IRS had revoked its exempt status for 1986 and 1987 for using its personnel and assets to raise funds for a political action committee. The public statement further indicated that the IRS had agreed to recognize OTGH as exempt from tax under IRC 501(c)(3) for years after 1987. As a condition precedent to the Service's recognition of OTGH's exempt status for 1987 forward, OTGH was required to pay the IRS $ 50,000 in taxes and make certain undisclosed changes to its organizational structure. (A copy of OTGH's public statement is attached hereto as Exhibit "A".) On July 26, 1995, pursuant to IRC 6104(e)(2)(A), plaintiff's counsel inspected the exemption application filed by OTGH following the revocation of its exempt status and which was allegedly relied upon by the IRS to recognize the charity as exempt for years after 1987. OTGH's exemption application, filed December 7, 1992, contains the following statement: "The effective date of recognition of exemption under Section 501(c)(3) of the Code is effective July 1, 1987 pursuant to a closing agreement entered into with the Internal Revenue Service under Section 7121 of the Code." (See, Supplemental Declaration of Bruce L. Stern, filed concurrently herewith, paragraph 5.) This statement contravenes the IRS' assertion that it never agreed to recognize an organization as exempt prior to the date its exemption application was filed. OTGH's statement clearly indicates that prior to the filing of its application, the Service entered into (or agreed to enter into) a closing agreement with the organization under which it promised to recognize OTGH as exempt under IRC 501(c)(3), retroactive to July 1, 1987. In addition, counsel for plaintiff learned that the IRS did not issue a favorable determination letter to OTGH in response to this application, but that the closing agreement serves as the de facto determination letter since it contains the terms of OTGH's exemption. (See, Supplemental Stern Declaration, paraghraph 4.) Notwithstanding IRS contentions to the contrary, closing agreements have been used by the Service to grant exempt status (prior years) or recognize exempt status (future years) prior to the filing date of an exemption application. III. CLOSING AGREEMENTS ARE "ISSUED" BY THE IRS In its Opposition, IRS contends that plaintiff's statement that a document is "issued" by the IRS for purposes of IRC 6104 when it is mailed to the taxpayer to which it pertains "challenges common sense". (Opposition, pp. 16-17.) In light of this assertion, it is worth restating the applicable IRS regulation: "'Issuance' of a [document for purposes of IRC 6104(a)(1)(A)] occurs, . . ., upon the mailing of the [document] to the person whom it pertains." (Reg. section 301.6110-2(h), applicable to IRC 6104 by Reg. section 301.6104(a)-1(b).) Notwithstanding the Service's hyperbole, plaintiff's statement does not "challenge common sense", but is instead based squarely upon the IRS' own regulations. Further, by admitting that closing agreements which relate "exclusively" to its determination to recognize an organization as exempt from tax are subject to disclosure under IRC 6104 (see, Section I, infra.), the IRS has tacitly conceded that for purposes of this statute closing agreements are "issued" by it when mailed to the taxpayer to which they pertain. If closing agreements were not "issued" by the Service when mailed, there would be no basis for the IRS to make the agreements which relate "exclusively" to its determination to recognize an organization as exempt from tax available for public inspection under IRC 6104. IV. PLAINTIFF HAS NOT CHANGED ITS FOIA REQUEST In its Opposition, IRS argues that plaintiff is attempting to change its FOIA request by only seeking the production of a "sub-set" of the documents it originally requested in its Complaint. This contention is without merit. Plaintiff filed a very broad FOIA request with the IRS and, by only seeking some of the documents which it originally requested, is narrowing the scope of its request and the legal issues to be decided by the Court. Contrary to the IRS' assertion, plaintiff is not expanding its request, but instead is limiting it. Plaintiff has also abandoned its contention, first raised in its FOIA request, that the requested agreements are subject to disclosure under IRC 6110. V. THE COURT SHOULD ORDER THE IRS TO PRODUCE THE REQUESTED CLOSING AGREEMENTS FOR PLAINTIFF'S INSPECTION AND REVIEW Despite the mass of paper filed by the parties herein, the issue presented by this case is a simple one: are the closing agreements identified by the IRS subject to public disclosure? The applicable law (IRC 6104) is clear and unambiguous. If the agreements are 1) "issued" by the IRS; 2) with respect to an approved exemption application, they must be made available for public inspection. (IRC 6104(a)(1)(A).) Plaintiff has shown that the closing agreements at issue in this case (or some of them) satisfy both these criteria. The undisputed evidence shows that: 1) closing agreements are mailed to the taxpayers to which they pertain and, as such, are "issued" by the IRS (Reg. paragraph 301.6110-2(h)); and, 2) at least some of the agreements identified by the IRS directly relate to, and contain promises regarding future corporate behavior, which lead IRS to its determination to approve an exemption application. As such, pursuant to IRC 6104(a)(1)(A), these agreements must be made available for plaintiff's inspection. V. CONCLUSION Based upon the foregoing, plaintiff TAX ANALYSTS respectfully requests that its Motion for Summary Judgment be granted and that defendant INTERNAL REVENUE SERVICE's Motion for Summary Judgment be denied. /5/ Respectfully submitted, August 15, 1995 William J. Lehrfeld D.C. Bar No. 51292 Bruce L. Stern D.C. Bar No. 436231 WILLIAM J. LEHRFELD, P.C. 1250 H Street, N.W., Suite 740 Washington, D.C. 20005 Telephone: (202) 659-4772 Facsimile: (202) 659-8876 William A. Dobrovir D.C. Bar No. 030148 William A. Dobrovir, P.C. 65 Culpeper Street Warrenton, Virginia 22186 Telephone: (703) 341-2183 Facsimile: (703) 341-4329 Attorneys for Plaintiff TAX ANALYSTS EXHIBIT "A" PUBLIC STATEMENT ISSUED BY OLD TIME GOSPEL HOUR, DATED FEBRUARY 16, 1993 [See 93 TNT 81-45 for the text of Exhibit A.] CERTIFICATE OF SERVICE On August 15, 1995, I served the foregoing document on defendant INTERNAL REVENUE SERVICE by mailing a true and correct copy thereof to defendant's counsel, Margaret M. Earnest, Trial Attorney, Tax Division, U.S. Department of Justice, 555 Fourth Street, N.W., Washington, D.C. 20001. August 15, 1995 Bruce L. Stern D.C. Bar No. 436231 FOOTNOTES /1/ A limited exception (not applicable here) allows the IRS to withhold from public inspection information submitted during the application process which relates to trade secrets, patents, processes, styles of work or information which would adversely affect national security. See, Reg. section 301.6104(a)-5. /2/ In its Opposition, the IRS attempts to minimize the role of public oversight in ensuring that exempt organizations comply with the laws governing their exemption and ignores the fact that it currently only audits one-half of one percent of all such organizations. Evidence of the invaluable benefit public oversight provides is found in the fact that the most recent scandals involving public charities have all been uncovered by the news media and not the IRS. The press first reported the New Era scandal (Wall Street Journal), William Aramony's misuse of funds at the United Way (Washington Post and Regardie's) and financial irregularities at the N.A.A.C.P. (syndicated columnist Carl Rowan). (See, "Asleep on the Watch", The Chronicle of Philanthropy, July 27, 1995, p. 1.) /3/ Plaintiff intends to file a Motion for In Camera Inspection in this matter within 10 days of the filing of this reply. Such an inspection will allow the Court to review the agreements at issue, determine whether they relate to, or contain provisions regarding, the IRS' decision to recognize the party organizations as exempt from tax and rule whether the agreements contain any privileged, return information not subject to disclosure under IRC 6104 and which may be redacted. /4/ The IRS draws a very fine technical line here. Although it contends that "a closing agreement does not grant exempt status" (Opposition, p. 12), it has conceded that it has agreed to grant exempt status in a closing agreement. (See, Schoenfeld Deposition, p. 115, ll. 7-11.) /5/ In its Opposition, the IRS alleges that certain facts identified by plaintiff in its Brief should be stricken by the Court, that plaintiff alleges that the IRS routinely "destroys" documents and that plaintiff believes that ALL documents relating to exempt organizations are subject to disclosure under IRC 6104. Since these matters do not go to the central issue in this case and are not relevant to the determination to be made by the Court, they are not addressed in this reply, though disputed. END OF FOOTNOTES **************** End of Document ****************