Second in a three-part series

C. Boyden Gray, former White House counsel to President George H.W. Bush, filed a civilian complaint with the IRS against the nonprofit Media Matters on July 27, demanding the agency yank its "tax-exempt status."

Citing a pattern of "unlawful conduct," Gray writes in his petition, which FOX Business has obtained, that the nonprofit has "executed a partisan strategy" in violation of U.S. tax law as it exists "no longer to educate the public but, rather, to declare 'war on FOX'," Gray says, quoting from an interview its founder, David Brock, gave to the website Politico.

Also unlawful, Gray says, is the nonprofit's reported goal to "disrupt" the commercial interests of News Corp. 

(News Corp. is the parent of FOX News and FOX Business.)

None of these activities are sanctioned, or even found, in nonprofit tax law, Gray says, adding in an interview with FOX Business: "I filed the complaint pro bono. I have no official ties with FOX News or News Corp., the company doesn't pay me a dime, I'm not on its payroll, and no one there asked me to do this. I filed it on my own."

Media Matters did not return calls or emails for comment over a month-long period.

Gray, who now runs his own law firm in Washington, D.C., says: "I have never seen any tax-exempt organization getting into the kind of partisan activity Media Matters is now engaging in."

Gray says he has "known" the nonprofit's founder, Brock, "favorably," but filed the IRS complaint "because of the potential abuse of tax-exempt funds."

He adds:"No one would begrudge what they're [Media Matters] doing with non-exempt funds, but it's different when they have tax-exempt status -- it's like a government stamp of approval because of this government subsidy."

The petition arose after Gray had written an opinion piece about the Media Matters controversy in June for the Washington Times.

Gray cites as evidence in his IRS complaint Media Matters' reported attempt to disrupt News Corp's purchase of BSkyB, a British satellite broadcaster, and its efforts "to turn regulators in the U.S., U.K. and elsewhere against the network"

And Gray writes that aside from Media Matters, "unsupportable attempt to tie FOX News to the Republican Party, the fact that Media Matters equates FOX News with the GOP shows the nonprofit's own partisan intent."

And sure to ignite further debate, Gray says the nonprofit's activities do "not merely violate" the tax code, they also raise "grave first amendment concerns," because the government is subsidizing Media Matters "attacks on FOX News' speech, and FOX News employees' speech, all antithetical to the First Amendment," Gray says.

Gray adds in his IRS complaint: "If the IRS continues to allow Media Matters to leverage its tax-exempt status to continue its partisan attacks, then the IRS's failure to rescind Media Matters' tax-exemption will violate the First Amendment."

The Media Matters controversy has sparked debate among tax professionals about the first amendment rights of nonprofits. Marcus Owens, a former IRS official who ran the IRS's nonprofit division and is now with Caplin & Drysdale in Washington, D.C., says the First Amendment protects Media Matters' activities, as it has other nonprofits. 

Robert Kamman, a former IRS official and tax attorney, disagrees when it comes to certain partisan activities, given the effective taxpayer subsidies: "It sounds like it is crossing the line."

Owens says only an IRS probe could ascertain whether Media Matters' partisan activity takes up a substantial part of the charity's operations and whether it is using its tax-free revenues for educational and not political activity. The IRS allows limited political activity at nonprofits, so long as it does not take up a substantial amount of their operations. 

The agency has a colorful history of battling political activity at nonprofits since the 1930s. Both sides of the political aisle have come under fire for pushing the law. Through the years, the nonprofits American Crossroads, the Christian Coalition, and various Christian ministries and churches, including Pat Robertson's Christian Broadcasting Network, as well as charities run by Republican politician Newt Gingrich, have been alleged to have run through the red lights of nonprofit tax law.

The IRS tries to be strict about nonprofit politicking. But nonprofits often get away with questionable activity via tortured readings of an already tortured tax law. Moreover, the IRS only has several thousand workers to cover an estimated 1.5 million nonprofits with $1.4 trillion in revenues and an estimated $4.3 trillion in assets, roughly the size of India.

That, along with having to annually match 230 million returns with 1.4 billion information documents, has turned many IRS service centers into neurotic paper factories that look like something out of an anxiety dream.

Former IRS nonprofit head Owens adds that "nonprofit oversight is often an afterthought at the IRS" because the IRS is a debt collector, while its nonprofit division also is a regulator, which is a 'bad fit.'

And Owens says: "U.S. society doesn't want a hyper-efficient IRS, because that starts to smack too much of a police state."

Also, tax returns come in a year or more after alleged abuses, Owens notes. So the IRS often has to "play catch up with abusive nonprofits."

And that means judgment calls through the years on letting taxpayers effectively subsidize questionable nonprofit activity, judgment calls which can lead to equivocation and quibbling.

"One can argue that most corporations don't pay taxes either," Owens says. "Like nonprofits, they're taking advantage of the code to not pay taxes. The tax code is full of incentives for anyone to arrange their affairs to not pay taxes."

Background

Media Matters was founded by Brock, a former conservative journalist for American Spectator magazine and book author, who wrote, "The Republican Noise Machine: Right-Wing Media and How It Corrupts Democracy," and "Blinded by the Right: The Conscience of an Ex-Conservative," among other works.

In his confessional memoir, "Blinded by the Right," Brock disclosed that he had falsified details in his coverage at American Spectator of  Anita Hill's sexual harassment allegations against then U.S. Supreme Court Justice nominee Clarence Thomas.

Brock wrote: "No respectable publication, not even the Spectator, had ever seen the likes of the sexist imagery and sexual innuendo I confected to discredit Anita Hill."

Brock also wrote: "There was no evidence, I concluded in the Spectator, that Thomas had rented even one pornographic video, let alone that he was a habitual consumer of pornography. When I wrote those words, I knew they were false. I put a lie in print."

In a coruscating piece for TheNation.com, columnist Christopher Hitchens wrote: "How could he, asks the author of himself, have possibly gone on so long in telling lies, smearing reputations and inventing facts?"

Hitchens adds: "Brock's new story--that he was taken in by a vast right-wing conspiracy--is just as much of a lie as his earlier ones."

Timothy Noah, the "Chatterbox" columnist for Slate, also wrote at the time that "[t]he more Brock insists that he has lied, and lied, and then lied again, the more one begins to suspect Brock of being, well, a liar."

Brock also courageously blasted the hypocrisy and bigotry of conservatives toward gay people, as well as the right-wing attack machine launched against the Clintons in the 90s, among other things. But his attempt to take conservatives on toe-to-toe via debate, by pleading to their hearts and minds, got overshadowed by his vicious, personal attacks.

A Time magazine review of Brock's book "Blinded by the Right" notes his "gratuitous sniping" and mean-spirited, personal attacks on conservatives. Time cites as examples Brock's description of his former boss John Podhoretz, "an overbearing know-it-all with the looks, manners, and all the subtlety of John Belushi."

The magazine notes his description of the late Robert Bartley, former editorial page editor of The Wall Street Journal, as having "the beady eyes of someone who never saw daylight." And Time adds that Brock characterized the late William F. Buckley's wife Pat, also now deceased, as "mummified."

In "The Republican Noise Machine,"  Brock attacked the "lies, smears, and vicious caricatures leveled against Bill and Hillary Clinton by this right-wing media," and wrote that the right wing is essentially a dangerous group in American society that won't stop "until its capacities to spread filth are somehow eradicated."

Time Magazine wrote: "This has to be one of the most important stories of the past decade, but Brock's single-minded desire to inflict as much damage on his former friends as possible indicates that in his heart, and certainly in his tactics, he's still a hatchet man."

Building a Tax-Free Operation

At the time of Media Matters launch in 2004, Democrats had decried the fact that right-wing conservative groups had an extensive infrastructure of think tanks and nonprofits to support their views and candidates.

Media Matters now operates in a constellation of Democratic organizations that exist in the Beltway echo chamber alongside right wing groups, a liberal trellis that includes MoveOn.org and the Center for American Progress, created by former President Clinton's chief of staff John Podesta.

Brock reportedly then largely staffed his new nonprofit media watchdog not with trained journalists and economists, but with Democratic veterans from places such as the presidential campaigns for John Edwards and Al Gore, as well as the Democratic Congressional Campaign Committee.

Columnist Joe Klein reported that Media Matters had received a generous grant from a group called the Democracy Alliance, launched "by a group of wealthy liberals in 2005 to act as a funding clearinghouse for progressive groups, led by former Clinton Treasury official Rob Stein."

Klein added that the "Democracy Alliance has received significant support from some of Hillary Clinton's most important backers," as well as financier George Soros.

Media Matters continues to draw on an extensive group of backers in the Democratic party. The New York Times reported that "the various groups associated with Media Matters had raised a combined $23 million" in 2010.

The Times added that backers of Media Matters' operation "include major Democratic donors like George Soros, the billionaire who recently announced he had given $1 million to the group," and "Peter B. Lewis, the billionaire chairman of Progressive Insurance, who, like Mr. Soros, gave more than $20 million to Democratic-oriented groups in 2004."

Intrinsic to Media Matters' Operation

Media criticism plays an important, vital role as it is necessary for a truthful, balanced debate in society.However, from the get-go, intrinsic to its media watchdog operation are judgment calls on what constitutes "conservative misinformation."

With great difficulty, the IRS and the U.S. tax court have tried to erect bright lines around such subjectivity to avoid partisanship on both sides of the political aisle.

IRS officials and tax lawyers add that nonprofits who offer media criticism do not have to pay income taxes on their donations because they are supposed to serve the public, and not private, interests, in that they exist to educate the public about mistakes in the media. Political activity or acting on behalf of partisan donors cannot comprise a substantial part of a nonprofit's activity, IRS spokesman Eric Smith says.

Joseph DeTrane, a nonprofit expert at Grant Thornton, agrees. "If political activity is the primary purpose of nonprofit, it risks losing its exempt status," he says.

Partisanship in Presidential Elections

The partisanship at Media Matters appears to have begun right from the start.

Tim Chavez, a columnist for The Tennessean says he got an email in 2004 from a Media Matters employee, Melissa Salmanowitz, in which Salmanowitz suggested Chavez cover Media Matters' efforts to get chain book retailers to stop selling "Unfit for Command: Swift Boat Veterans Speak Out Against John Kerry" because of accuracy issues.

The book had questioned then-presidential candidate Kerry's claim that he had spent Christmas of 1968 "sitting on a gunboat in Cambodia," among other things. Chavez reportedly emailed Salmanowitz telling her he would write about the nonprofit's efforts, "if they'd make the same appeal to the movie theaters to stop showing Michael Moore's documentary, Fahrenheit 9/11. There was no reply," he says. 

Rather than give the Kerry debate full airing, Media Matters dismissed such attacks on Kerry's record as "unfounded, contradictory, and discredited." 

Advocated for Legislation

Media Matters says in its tax returns that it has not engaged in political campaign activities or lobbying. But Media Matters has run items that advocate for legislation, which would violate the tax law if it became a substantial part of the nonprofit's activities.

For example, in an October 2004 column on Media Matter's website, Media Matter's columnist Jamison Foser first dropped this headline into an article: "Fairnessdoctrine.com launches petition calling for return of the Fairness Doctrine." He then wrote:

"Tired of imbalanced political discourse on our airwaves? Media Matters for America has joined with Democracy Radio and the Media Access Project in calling on Congress to restore the Fairness Doctrine."

Moreover, Foser then urged readers to support this legislation by signing a petition for it. He wrote: "Learn more, and sign a petition in support of the Fairness Doctrine, at www.fairnessdoctrine.com."

Legislation resurrecting the Fairness Doctrine at that time in 2004 was sponsored by Rep. Louise Slaughter [D-NY]. The legislation sought to restore a policy at the Federal Communications Commission that would require broadcasters to report all sides of issues of public importance, and to do so in what the FCC would determine would be an honest, fair and balanced view.

First Amendment advocates, though, feared the government would be setting the boundaries of free speech.

Nowhere in the column did Jamison deliver both sides of the debate about the Fairness Doctrine, much less fully explain what the law would entail.

And what was this website www.fairnessdoctrine.com?

Reportedly, Brock, Tom Athans of Democracy Radio and Andrew Jay Schwartzman of the Democracy Access Project in 2004 launched www.fairnessdoctrine.com to support Rep. Slaughters legislation to reinstate the Fairness Doctrine.

The website www.fairnessdoctrine.com has since been taken down.

Kamman, the tax attorney and former IRS official, says: "This sounds like lobbying. They [Media Matters] may be walking fairly close to the edge here."

Advocated Against Bush's Social Security Privatization Reform

In an April 2005 column, Media Matters' Foser said that the media had given "short shrift" to the Democrats "responses on then President George W. Bush's Social Security reform. He directed readers to "www.mediamatters.org for details and for the latest on conservative misinformation about Bush's plan."

Foser wrote: "During his prime-time press conference April 28, President [George W.] Bush began to outline his Social Security privatization plan. Media coverage of Bush's remarks have glossed over the benefit cuts his plan would cause; failed to note that Bush contradicted himself about the trust fund; and gave short shrift to Democratic responses to Bush's plan."

Nowhere in the column did Jamison deliver the other side of the debate -- what Bush's Social Security reform entailed.

Critics Allege Bias Toward Presidential Candidate

Columnist Joe Klein in January 2007 also criticized Media Matters for advocating for then-Democratic presidential candidate Hillary Clinton.

Klein wrote that "a progressive media-monitoring organization with Clinton ties known as Media Matters for America is standing watch for her."

Klein added the nonprofit "helped to sponsor an online petition drive back in 2005 to renew the Fairness Doctrine," which Democrats at the time believed was necessary to help balance coverage in an increasingly partisan media environment.

Klein noted: "Interestingly, Media Matters also has a whole section on its website dedicated specifically to tracking anti-Hillary stories but none specifically devoted to any of her Democratic competitors."

Suggests Debate Questions Favoring Presidential Candidates?

In November 2007, Media Matters posted a list of "suggested don'ts" in terms of questions for CNN hosts Wolf Blitzer, John Roberts, Campbell Brown and Suzanne Malveaux for the network's televised Democratic presidential debate.

The perceived bias in the list of questions was so jaw-dropping, Chuck Todd, NBC's chief White House correspondent and co-host of "The Daily Rundown" on MSNBC, wrote on NBC's political blog a piece headlined "Calling Out Media Matters' Bias."

Todd wrote that he couldnt tell whether the nonprofit's posting was filled with "facetious attacks on Edwards and Obama -- right out of the oppo shop of either the RNC or, say, opponents of Edwards and Obama" or whether it constituted a favor for "[Hillary] Clinton or other opponents of Edwards and Obama."

Here are some of the nonprofits suggested debate questions: 

--Don't say that Obama's position on Pakistan is "very much in line with what President Bush says regarding Pakistan."
--Don't suggest that former Sen. John Edwards' (D-NC) work "for financial markets might contradict his anti-poverty message."
--Don't adopt GOP framing and ask Edwards about his "flip-flop" on Iraq "to win the vote."
--Don't ask about former Arkansas Gov. Mike Huckabee's (R) "pretty interesting" quip that "[w]e've had a Congress that's spent money like John Edwards at a beauty shop."

Calling the suggestions "seriously stunning," NBC's Todd noted: "We're guessing Edwards and Obama partisans don't believe they need any more 'help' from David Brock and his team."

NBC's Todd asked whether Media Matters needed to fully disclose their relationship with Hillary Clinton? After all, at the YearlyKos Convention in Chicago on Aug. 4, she touted her involvement with the group."

Todd quoted Clinton as saying at this Daily Kos meeting that "we are certainly better prepared and more focused on taking our arguments and making them effective and disseminating them widely and really putting together a network in the blogosphere in a lot of the new progressive infrastructure -- institutions that I helped to start and support like Media Matters and Center for American Progress"

Todd also noted Media Matters suggested these questions for Hillary Clinton:
--Don't base questions on premises that contradict available polling data, such as whether the Clinton campaign -- while leading all other candidates in head-to-head matchups -- is feeling desperate.
--Don't ask whether Clinton -- but not former New York City Mayor Rudy Giuliani (R) -- is "going too far" and "politicizing 9-11 in her campaign ads."

Todd asked: "Is Media Matters a liberal/Democratic media watchdog site or a Clinton watchdog site? Judging by this list of 'don'ts,' it's not easy for one to tell the difference."

"War on Fox," "Guerrilla Warfare" and "Sabotage"

Politico quotes Brock in a March 2011 article as saying that Media Matters' "new strategy..is a 'war on FOX.'"

Politico quotes from the nonprofit's internal memo: "Criticizing FOX News has nothing to do with criticizing the press..FOX News is not a news organization. It is the de facto leader of the GOP, and it is long past time that it is treated as such by the media, elected officials and the public."

Politico also reported that the nonprofit's "2010 planning memo offers a glimpse at Media Matters' shift from media critic to a new species of political animal."

Politico says that "[i]n an interview and a 2010 planning memo shared with Politico, Brock listed the fronts on which Media Matters -- which he said is operating on a $10 million-plus annual budget -- is working to chip away at FOX and its parent company, News Corp."

Politico says the nonprofit's strategy includes a "series of under-the-radar tactics, such as assembling a legal team to help people who have clashed with FOX to file lawsuits for defamation, invasion of privacy or other causes," among other things.

Politico reports that Brock's nonprofit may open "a United Kingdom arm in London to attack the company's interests there" which includes "looking for ways to turn regulators in the U.S., U.K., and elsewhere against the network."

And the article quotes Brock as saying the nonprofit intends to "focus on [News Corp. CEO Rupert] Murdoch and trying to [sic] disrupt his commercial interests."

First Amendment Debate

The article touched off debate among tax professionals, as unfounded statements such as FOX being the "de facto head of the GOP," "guerilla warfare" and "sabotage" are nowhere to be found within the scope of U.S. tax law covering nonprofits.

However, former IRS official Owens says the First Amendment protects Media Matters here.

"There's nothing that prohibits that activity in the code," Owens says. "The law essentially provides for speech that is confrontational in nature. I do know that that sort of activity is itself not going to jeopardize its tax-exempt status."

Gray disagrees, saying in an interview that none of this activity is covered by the tax code. He says inflammatory and emotional language such as "war on FOX,"  "guerilla warfare," and "Drop FOX" violate the tax law.

Kamman, the tax attorney and former IRS official, also disagrees with Owens, noting that Media Matters is seeking to disrupt a commercial business's activities.

The Big Mama Rag tax case in 1980 established a free-speech precedent for nonprofits. Big Mama Rag was a nonprofit that refused to publish in its newspaper material damaging to the women's movement.

A U.S. circuit court upheld its tax-exempt status on free speech grounds, even though it was publishing "unsupported opinion, innuendo and inflammatory, disparaging language."

Funds "Partisan Boot Camp to Train Forces on Fox News"

Media Matters also uses tax-free dollars to fund "the entire cost" for a "partisan boot camp," the Progressive Talent Initiative (PTI), a media training seminar that purports to turn attendees into "camera-ready liberals" who can then take to the airwaves to discuss Democratic and progressive issues, says a March 2011 Washington Post story.

Since Media Matters launched PTI in August 2009, it has "trained nearly 100 pundits who have appeared 800 times on television and radio," says the Post.

Media Matters officials though have said the institute trains attendees on progressive issues, and not for political campaigns.

Former IRS nonprofit head Owens says this, too, is acceptable under the tax law, due to First Amendment rights.

However, Owens says nonprofits work hard here to sway the IRS. "I spent 25 years at the IRS. It's fair to say organizations will always try to put their best foot forward," he says. "Sometimes it's an accurate representation of facts, sometimes it's aspirational."

Friday: The tax law debate continues.

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.