Media Matters Puts Tax-Exempt Status in Jeopardy

First of a three-part series

David Brock, chairman and chief executive of Media Matters for America, told a news website earlier this year that his nonprofit is now moving to sabotage FOX News because it says the network is now the de facto head of the GOP, among other things.

Anchors and guests appearing on FOX News have said because of such statements, the nonprofit is violating U.S. tax law.

There is no indication the IRS is auditing or probing Media Matters for these alleged violations.

However, interviews with current and former IRS officials, tax lawyers and tax experts, as well as a review of Media Matters IRS documents and its activities indicate the nonprofit has put its tax-exempt status in jeopardy for reasons beyond those allegations.

But these charges are serious. Given that Media Matters is a tax-free nonprofit, the government is effectively supporting its efforts to disrupt the commercial enterprises of a taxpaying business. The government is also effectively supporting its partisan activities that the nonprofit was ostensibly created to monitor in the first place, a problem also at right-wing nonprofits.

Taxpayers have effectively been 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. Such activities are nowhere to be found within the scope of U.S. tax law covering nonprofits.

Taxpayers are also effectively supporting a boot camp Media Matters operates to train liberal media pundits. And the U.S. government has effectively supported the nonprofit's "hyperpartisanship" and "bias" on behalf of former presidential candidate Hillary Clinton, bias which was so blatant that Media Matters has been called "an adjunct" of Clinton's campaign, among other things.

Moreover, taxpayers effectively support Media Matters' petitions on its website advocating for federal legislation such as the Fairness Doctrine. Never mind that it failed to adequately explain both sides of this debate, despite its nonprofit educational mission to do so, among other things.

Although it touts its fundraising prowess, Media Matters has been a profligate spender. The nonprofit spent an eye-popping $18.5 million on office costs, salaries, travel, entertainment and other undisclosed items for 2008 and 2009, causing it to report $3.5 million in losses to the IRS for the period. Brock pays himself a handsome salary, about $300,000 annually, which includes a $20,100 "bonus," according to his nonprofit's 2009 tax returns.

As he reportedly wants to be a "kingmaker" in Democratic politics, Media Matters Brock has also helped launch a political action committee on the side that reportedly is getting fundraising help from his nonprofit, in possible violation of the law, tax experts note.

Media Matters did not respond to repeated phone calls and emails over a month-long period asking for comment.

Media criticism plays an important, vital role in American society, as journalists across the spectrum should be corrected when making mistakes.

Tax laws on the books since the 1930s support nonprofit media watchdogs so long as they serve the public and not private interests, are educational and present both sides of an issue, are not inflammatory, do not mislead and do not try to influence politicians or legislation to a substantial degree, says IRS spokesman Eric Smith.

But as it pursues its nonprofit purpose of correcting conservative misinformation, Media Matters has often blurred the line between facts and opinion, where the nonprofit immoderately depicts as factual errors political differences, despite noting in its tax returns that it "is not concerned with criticisms relating to editorial opinions."

And although it has vowed in its tax returns to investigate the "hard facts" and not to "distort," Media Matters often touts opinions masked as corrections that are incomplete, not educational, and are overwrought even by the standards of modern cable television, such as the lurid, risible claim that FOX News is the "de facto head" of the GOP.

For example, in its criticism of FOX News' debt ceiling coverage, Media Matters failed to tell its readers that the credit ratings agencies Moody's Investors Service and S&P are threatening to downgrade the U.S.'s top-notch, triple-A status because they say they are concerned that the U.S. government cannot rein in spending, as the federal deficit is now hovering around 100% of the country's GDP, and that they fear tax revenues won't be enough to service its debt.

Instead, the nonprofit attacks FOX News and FOX Business for reviving a "GOP talking point" that the deficit is a "spending problem, not a revenue problem."

In other columns Media Matters does not note that both credit ratings agencies say the U.S. must present a credible plan to cut spending by $4 trillion over the next decade to avoid a downgrade.

Despite being a nonprofit that seeks to educate, it virtually never raises China's deepening concern over U.S. government spending (China is the biggest foreign owner of U.S. debt with more than a trillion dollars of U.S. treasuries), how eurozone officials are fighting rampant spending that has hurt its economies, and how eurozone bonds have spiked higher due to spending problems there.

Media Matters also failed to note that a U.S. downgrade  would cause borrowing costs to rise for both the government and taxpayers. Meanwhile, Politifact, another media watchdog, noted the ratings agencies actions. Media Matters also fails to report that FOX commentators have expressed all of these concerns about a downgrade on air.

Although Brock claims to "think" about "tolerance in the debate," his nonprofit's skewed and incomplete oversight, as well as its bias against conservative media--including pressuring National Public Radio to stop panelist Mara Liasson from appearing on FOX News--have marginalized Media Matters as a media watchdog and undermined its legitimacy and credibility.

Media Matters' Brock started out as a conservative writer, but had a come-to-Jesus liberal conversion after he admitted to lying in his coverage at American Spectator magazine of Anita Hill's sexual harassment allegations against then U.S. Supreme Court Justice nominee Clarence Thomas, among other things.

The fabrications predated instances of lying in print by Stephen Glass at The New Republic and Jayson Blair at The New York Times.

"I put a lie in print," Brock had confessed, referring to his reporting that Justice Thomas was a habitual consumer of pornography, among other things. Brock also admitted to and apologized for participating in right-wing hatchet jobs on former President Bill Clinton and then First Lady Hillary Clinton.

The courage of his confessions apparently ruptured Brock's marketability as a journalist. Brock then moved to redeem himself as a right-wing hit man who had lied in print by building a tax-free nonprofit to correct conservative media, an operation which raised a reported $23 million last year.

But as noted, Media Matters is a big spender and isn't running itself in a fiscally-responsible way, its 2009 tax return shows. Despite raising $14.8 million in 2008 and 2009, it overspent by $18.3 million for those years, causing it to report $3.5 million in losses for the period. The nonprofit paid a high $210,000 in travel costs in 2009, the latest return available, up nearly tenfold from just $25,500 in 2003. It also shelled out nearly $346,000 for undisclosed "other" costs in 2009.

Meanwhile, the controversy about Media Matters has touched off debate among former IRS officials and tax experts over whether free-speech rights should continue to trump tax law curtailing such activity at nonprofits.

Nonprofits, or 501(c)(3) or (c)(4)s, have in the past won in tax court asserting first-amendment rights to protect their statements, as well as their tax-exempt status.

What Media Matters is doing is generally protected by the first amendment, says Marcus Owens, former head of the IRS nonprofit division who is now with the Washington, D.C., law firm Caplin & Drysdale.

Robert Kamman, a former IRS official, disagrees. Media Matters' threats to "sabotage" FOX News "doesn't sound like a 501(c)(3) to me, attacking a for-profit corporation," Kamman says. "You as a nonprofit are raising money to, what sabotage companies because you disagree with what they say? And is that educational, is that a charity?"

Free speech is also reined in by defamation and libel laws, which even reporters must abide by, tax lawyers interviewed by FOX Business note.

Tax pros who spoke to FOX Business say a chronic problem is whether the IRS has the manpower to probe a nonprofit sector that has gone industrial, including whether nonprofits may be using tax-free donations from political operatives to back partisan activity, in violation of the law.

The IRS has only "several thousand" workers to oversee 1.5 million nonprofits, notes IRS spokesman Smith, a nonprofit sector that is now the size of Spain just on the basis of its $1.4 trillion in estimated annual revenues alone.

And while the IRS is often mistakenly regarded as a denatured, acultural thing, like a sewing machine, in reality it is populated by overworked and overwhelmed human beings struggling with a tax code that at an estimated 71,000 pages makes War and Peace look like a church pamphlet.

Since the 1930s, nonprofits have abused the law and lived off the taxpayers nickel by hiding in the shadowy corners of a shambolic U.S. tax code and tax system.

Tax pros say nonprofits often engage in questionable activities via tortured readings of an already-tortured tax law, notably by declaring free speech rights.

And the IRS has found executives at nonprofits abusing their tax-exempt status via personal enrichment, by overcharging their tax-free operations for personal expenses like meals and travel.

With the IRSs limited staff and quixotic oversight, youre going to have difficulty overseeing nonprofits, given the first amendment issues, Owens, the former IRS official, says.

Kamman, the former IRS official, says the problem is, "donors with a political axe to grind get to deduct donations they give to nonprofits that are really political organizations. And that means they're paying less in taxes. That's the whole ball of wax, because if Media Matters is in reality a political organization, its tax-exempt status benefits political donors with an axe to grind."

Owens, the former IRS official, adds that "a charity can't act as a stalking horse for the donors' benefit, all of that would only be discovered in an audit."

In a controversial move, The New York Times reported last November that David Brock, a prominent Democratic political operative, says he has amassed $4 million in pledges for a new political action committee, American Bridge 21st Century, to back Democratic candidates and progressive issues.

The Times reports that the PAC may be assisted by one of Media Matters nonprofits for political fundraising, which "would be in violation of the law," says Owens, the former IRS nonprofit official.

The Times says: Certain to set off debate, however, is that Mr. Brock appears to be positioning his new organization so that fund-raising consultants can raise money for Democratic-oriented media efforts not just through American Bridge but also via one of the nonprofit organizations Mr. Brock currently runs, Media Matters Action Network, which does not disclose its donors. Media Matters Action Network is a 501(c)(4) nonprofit.

Owens, the former head of the IRS's nonprofit division, says: That would be problematic. Nonprofits have to be very careful to be constructed to avoid benefiting non-charitable donors. Nonprofits cant be used in any way for political fundraising, that is an improper use of the charity.

Owens adds that the IRS could only discover problems here if it did an audit of the nonprofit, or a state attorney general conducted a probe. Thats the only way that the IRS has to look into it, he says.

Ironically, Media Matters Brock is possibly engaging in the same partisan activity that caused Democracy 21 and the Campaign Legal Center to petition the IRS on July 27 to pull the tax-exempt status for the nonprofit Crossroads GPS, which shares staff and office space with the nonprofit American Crossroads, run by Republican operatives from the Bush Administration and informally counseled by Karl Rove, former President George W. Bush's top adviser.

American Crossroads reportedly plowed tens of millions of dollars into the 2010 midterm elections for Republican candidates.

The IRS recently dropped a push to force donors to pay gift taxes on donations to such groups, citing "limited guidance" that is "almost thirty years old."

There is a broader policy issue at stake.

Swap out the words FOX News with the words MSNBC, CNN, CSpan, PBS, National Public Radio, or The New York Times.

Should the U.S. government let any nonprofit operate on your nickel, tax free, by running an organization that has engaged in partisan activity and that exists as it says to sabotage and conduct "guerilla warfare" to "disrupt" the commercial interests of a tax-paying business?

In an eyebrow-raising move, the IRS recently rejected the bids for tax-exempt status at three nonprofits because they were working "primarily for the benefit of a political party and for a group of private individuals," in violation of the law.

The move comes after the IRS reportedly backed down from an effort launched last spring to force political donors to pay gift taxes on their donations to 501(c)(4) nonprofits. The IRS's decision here arose after the U.S. Supreme Court ruled in 2010 that the conservative nonprofit Citizens United had a first amendment, free speech right to fund political broadcasts in U.S. elections.

Next: Media Matters' controversial activities.