Media Matters tax-exempt status may face new scrutiny from Congress

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Congressional Republicans are now interested in examining the Media Matters For America‘s tax-exempt status, The Daily Caller has learned. Doing so would cause the GOP to wade into the complex world of tax laws that govern “exempt organizations” such as Media Matters and more than 1 million other charitable organizations that are exempt from federal income tax.

Media Matters’ critics have questioned its tax-exempt status for some time. The Internal Revenue Service has a series of requirements that must be met before organizations can qualify. Successful applicants pay no federal income tax because the government presumes such charities perform services that benefit the public. Donors also may deduct their charitable contributions.

One central requirement before an organization like Media Matters can achieve the gold-standard nonprofit status — known by its place in the tax code, Section 501(c)(3) – is that it may not “attempt to influence legislation as a substantial part of its activities” or “participate in any campaign activity for or against political candidates.”

But the law, and how it is implemented, is complex.

“Tax benefits to charitable organizations are three-fold: exemption from federal income tax, tax-deductible contributions, and tax-exempt bonds,” said Iowa Republican Sen. Chuck Grassley.

TheDC sought comment from Grassley before becoming aware that other members of Congress were talking about examining Media Matters’ tax status. “The standards for tax exemption deserve review as a matter of good stewardship on the part of Congress,” he said, “and should be considered as part of any comprehensive tax reform.” (INSIDE MEDIA MATTERS: Follow the investigative series here)

The Fox News Channel, a frequent Media Matters target, has aired dozens of broadcast segments on the organization and its tax-exempt status. The stories often cite comments made by Media Matters CEO David Brock, who described his organization’s efforts against the news channel as “guerilla warfare and sabotage” in a 2011 interview with Ben Smith, then a reporter with Politico.

According to C. Boyden Gray, White House Counsel under President George H.W. Bush, Media Matters’ tax-exempt status combined with its campaign against Fox News amounts to taxpayers subsidizing broadsides directed at the cable news channel.

“I think there’s nothing wrong, generally speaking, with anyone attacking any news outlet,” Gray told The Daily Caller. “But whether it’s okay to get a tax subsidy for it, that’s another question.”

Gray also argued that Media Matters’ political activities are unique and differentiate it from similar research organizations on the right.

“[The] Heritage [Foundation] and the Media Research Center provide material, as does Media Matters, to networks about alleged factual inaccuracies,” Gray said. “That’s completely fair game and everybody does that. But I don’t think any of these other ones target individuals or engages in what is political training.”

The political training Gray refers to is the Media Matters “Progressive Talent Initiative,” a program designed to instruct left-leaning pundits on how to effectively bring the liberal gospel to the airwaves.

Gray said trainees could easily bring these newly acquired talents to Democratic campaigns, which he believes could be problematic for the legal status of their training organization.

“It seems to be only Democrats who get the training,” he explained.

Critics also point to Media Matters’ still mysterious calls and meetings with White House officials, which could prove problematic if the organization is privately sharing information with President Obama’s staff.

“If a section 501(c)(3) organization is privately providing to the Democratic Party information for their use in their political activities, that’s a contribution to the party. Maybe not for FEC purposes, but certainly for IRS purposes, and would violate their 501(c)(3) status,” one tax law expert told The Daily Caller.

“If, on the other hand, they are compiling information and publishing it for anyone to use, including the Democratic Party, that’s a different thing.”

“But if they are privately providing something to the Democratic Party, that’s a revocation issue.”

If a tax-exempt organization were to publish the information but also provide it advance to a candidate, the expert continued, the issue becomes more complex but still arguably “grounds for revocation.”

Last July, Gray filed a formal petition with the IRS asking it to revoke Media Matters’ tax-exempt status. He argued that the organization’s campaign against the “commercial interests” of News Corporation, the parent company of the Fox News Channel, is not in keeping with its classification as an “educational” organization, and that its attacks against Republicans demolish the pretense that it is not explicitly partisan.

However, Marcus Owens, the former head of the Exempt Organizations Division of the IRS, told TheDC that Media Matters appears to still be acting within its rights as a 501 (c)(3) and pushed back against Gray’s argument that the tax exemption amounts to a subsidy in its “war on Fox.”

“The difficulty with that argument is that, if you look at the subsidies that exist in the internal revenue code, we’re all subsidized to one extent or another,” Owens said. “That’s where that argument, I think, ultimately falls apart.”

“And putting aside tax exemption, if you’re a corporation and you get a tax credit … you’re subsidized by the government as well.”

To lose its 501(c)(3) status, Owens said, Media Matters would likely have to have broken the relatively strict IRS financial rules about excessive compensation and transactions with related parties.

“The state of the political campaign proscription is in flux,” he said, because of the Supreme Court’s “Citizens United” decision regarding campaign financing. And while Owens said it would be conceivable for “speech that said ‘vote for’ or ‘vote against’ a candidate for an elected office would be sufficient” to strip the group of its preferred tax status, the IRS now tends to stop short of actually revoking 501(c)(3) status for such actions.

Because Brock has referred to Fox News as a political organization and the “de facto” leader of the GOP, Gray and other critics have argued that Media Matters is engaged in the kind of direct political activity forbidden by IRS regulations.

Experts contacted by The Daily Caller, however, point out that the regulations are generally not interpreted strictly enough to forbid such language, and that similar organizations are typically given a rather wide berth when it comes to interpreting the law.

Brock has also said Media Matters is intent on disrupting the “commercial activities” of News Corp. chairman Rupert Murdoch. This could constitute a serious regulatory violation if any Media Matters donors compete with Murdoch.

While some of its contributors have been publicly identified, such as billionaire George Soros, Media Matters is not required to disclose its donors to the public and does not do so. Other groups run by Brock, such as Media Matters Action Network, and his American Bridge 21st Century super PAC, likewise to do not provide information about their funders.

When Brock announced the formation of American Bridge in 2010, his decision to rely on an undisclosed donor list was criticized even by erstwhile allies on the left, such as Washington Post writer Greg Sargent.

“The bottom line is that undisclosed donations are bad for democracy, period — whether coming from right or left,” Sargent wrote at the time. “Brock’s decision to try to beat the right at its own game is a sign that the big money power lefties have essentially given up, for the time being, on fixing the collapse of the campaign finance regime.”

Also troubling to Brock’s critics is the fact that American Bridge shares a Washington, D.C. office with Media Matters, on the sixth floor of 455 Massachusetts Avenue.

As a super PAC, American Bridge is not subject to the same rules that prohibit Media Matters from explicitly partisan activity. It can even do research for the Democratic Party. Brock is currently the chairman of both groups.

While an employee can legally work for both organizations, the time spent working for one or the other must be cataloged and is subject to IRS audit. But if Media Matters employees are directly working to support American Bridge with research or human resources, without being legally employed by the latter and providing the necessary paperwork, that could qualify as a serious violation.

Chip Watkins, an attorney who specializes in tax-exempt organizations at Webster, Chamberlain & Bean LLP in Washington, D.C., told The Daily Caller that it is rare for an organization like Media Matters “to actually have its exemption revoked.”

“The general rule is you can’t intervene in support of or opposition to someone who is running for elective public office. Unfortunately, beyond that, there are only a few things that are really clear.”

“The rules become very vague and very murky very quickly. And I’m not sure any lawyer can tell you this, that or the other thing violates the prohibition on campaign intervention.”

Gray, meanwhile, continues to challenge Media Matters’ tax-exempt status, while admitting that getting it rescinded will be an uphill battle.

“I don’t think there’s much of a precedent for this,” Gray said.

Alex Pappas contributed reporting to this story.

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