Last of a three-part series

Interviews with current and former IRS officials reveal what the agency would consider if it moved to pull the nonprofit Media Matters tax-exempt status for stepping beyond its charitable mission of educating the public on conservative misinformation.
The nonprofit Media Matters for America has been accused of violating U.S. tax law by former White House counsel C. Boyden Gray under President George W. Bush in a formal petition he filed with the IRS on July 27.
Gray says the IRS should yank Media Matters tax-exempt status because David Brock, its chairman and chief executive, told a news website that his nonprofit has launched a campaign of guerilla warfare against FOX News and News Corp., because FOX, he says, is now the de facto head of the GOP.
As reported, because it is a nonprofit, the U.S. government is also effectively supporting Media Matters in its campaign to get advertisers to "Drop FOX--words billboarded on its website along with "NewsCorpwatch" that link viewers to form letters to send to advertisers to get them to stop advertising on the network.
The U.S. government is also effectively supporting the website's attacks on News Corp's attempt to buy Great Britain's BSkyB, a satellite broadcaster.
And taxpayers are effectively supporting the nonprofit's demands to Congress to investigate News Corp. and its head, Rupert Murdoch.
Also, the U.S. government now effectively supports the nonprofit's purchase of a full-page ad in the International Herald Tribune urging James Murdoch to use his "power" to "usher in a new era for News Corp."
And Brock is reportedly working behind the scenes to get disgruntled ex-employees to file suit against FOX News. He has also reportedly hired a political activist to pressure investors to divest their holdings in News Corp., including Saudi Prince Al-Waleed bin Talal Alsaud.
The nonprofit failed to report all of these activities to the IRS on its tax returns. While nonprofits often declare free speech rights when they push the code, as Media Matters likely will here, former IRS officials and tax lawyers say speech is one thing--urging action is another.
None of these activities fall within the scope of nonprofit tax law, tax lawyers and former IRS officials tell FOX Business.
News Corp. is the parent of the FOX Business Network.
The nonprofit, which launched in May 2004, has also operated a boot camp aimed at training progressive media pundits, has engaged in partisanship during presidential races, and has advocated in favor of legislation, among other things
So, what will the IRS turn to if it had to decide whether to bring a lawsuit to revoke Media Matters tax-exempt status?
The agency gave FOX Business the history of tax and case law covering nonprofit activity in politics.
As far back as before World War I, when the federal income tax was enshrined in the law, charities by law were supposed to serve the publics interest, not private interests, in their charitable and educational activities.
Joseph DeTrane, the partner with Grant Thornton, says: With political issues, the IRS draws the line on education and advocacy of an issue. It tends to err on the side of education.
As of 1919 the US Treasury had law on its books a regulation that says: Associations formed to disseminate controversial or partisan propaganda are not educational within the meaning of the statute, and are in violation of US tax law.
Later, in 1920, the Solicitor of the IRS ruled that, for nonprofits, the prime purpose of education is to benefit the individual, including the fair and balanced dissemination of information.
http://www.irs.gov/charities/article/0,,id=163392,00.html
Starting in and around 1954, the IRS issued regulations that made it clear that a nonprofit can advocate a particular position or viewpoint, so long as it presents a sufficiently full and fair exposition of the pertinent facts so as to permit an individual or the public to form an independent opinion or conclusion.
IRS regs also note: An organization is not educational if its principal function is the mere presentation of unsupported opinion.
But since then, numerous nonprofits have asserted their First Amendment free speech rights, and have beaten back IRS lawsuits alleging they were attempting to influence legislation or advocating the adoption or rejection of legislation as a substantial part of their activities, says a former IRS official.
For instance, 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 womens 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.
In IRS revenue procedure 86-43, the agency said any nonprofit will lose its tax-exempt status if, among other things, a significant portion of its communications consist of viewpoints or positions unsupported by facts; if the facts the nonprofit uses to support its positions or viewpoints are distorted; and if the nonprofit makes substantial use of inflammatory and disparaging terms and expresses conclusions more on the basis of strong emotional feelings than of objective evaluations.
The IRS pulled the tax-exempt status of another unnamed nonprofit for these very reasons (revenue ruling 68-263). This nonprofit was formed to promote the education of the public on the dangers of an extreme, unnamed political doctrine because it had distributed materials that contained attacks on individuals and institutions based on unsupported facts.
The IRS noted in pulling the groups tax-exempt status that these attacks were not supported by a sufficiently full and fair exposition of the pertinent facts to permit the public to form opinions or judgments independent of those presented.
And since the Big Mama Rag case, the IRS has hauled in nonprofits that violated the educational section of the nonprofit tax law, because the agency found they really werent educational, but instead had engaged in partisan advocacy.
An outfit called the American Campaign Academy did not get tax-exempt status in 1989, IRS documents show, because it ran a boot camp school similar to what Media Matters has funded and ran.
In his petition with the IRS asking it to yank Media Matters tax-exempt status, former White House Counsel C. Boyden Gray cites the American Campaign Academy case to back up his complaint, because he says the IRS had concluded that a purportedly nonpartisan institution serving as a de facto supporter of a political party cannot maintain its tax exemption.
The Academy ran a school that trained men and woman wanting to work as campaign professionals, the majority of whom ended up working at campaigns for Republican candidates.
Additionally, the IRS found that the Academy had modeled its program after one designed by the Republican National Committee, that Republican officials sat on its governing board, and that GOP donors funded its operation.
But Marcus Owens, former head of the IRSs nonprofit division, says not so fast. He says Media Matters training camp for people who want to be liberal pundits is like a liberal arts college, and doesnt threaten Media Matters tax-exempt status.
However, Politico reports that Media Matters new strategy involves guerilla warfare and sabotage of Fox News, which means it is turning itself into an action group.
And that means another famous tax case could come into play here if the nonprofit ever gets hauled on the carpet.
Less than ten years after the American Campaign Academy decision, a federal district court judge ruled in 1998 that the IRS could reject the tax-exempt status for another group, the Fund for the Study of Economic Growth and Tax Reform, headed by the late Republican Congressman Jack Kemp.
The IRS nixed the Funds nonprofit application, saying it was an action group that existed solely to advance a particular agenda in violation of the law, meaning, the reform or repeal of the U.S. tax system, and the establishment of a flat tax.
Is Media Matters acting as an agent for the Democratic party, as C. Boyden Gray says in his complaint to the IRS?
The IRS might look to yet another case, dating back to 1934, the World League Against Alcoholism, formed in part by prohibition groups, almost lost its tax-exempt status because the IRS ruled it operated as an agent to its members, serving their prohibition or anti-prohibition causes.
But the Fourth Circuit reversed, because this nonprofit had adequately disseminated information showing both sides of the prohibition debate.