February 16, 1999

Mr. Larry Rogers
Acting Treasury Inspector General for Tax Administration
Internal Revenue Service
1111 Constitution Ave. NW Room 3031
Washington, DC 20224
via telecopier (202) 622-6513

RE: Request for Inquiry into the IRS Memorandum on the Progress & Freedom Foundation

We request an inquiry into the Internal Revenue Service's (IRS) Technical Advice Memorandum on the Progress & Freedom Foundation (PFF), which is affiliated with ex-House Speaker Newt Gingrich. According to the Memorandum, the IRS issued its ruling to exonerate PFF of tax law violations based on an incomplete factual record, although relevant facts were apparently within the IRS's investigative reach. IRS admits that this incomplete record may have affected its ruling in what it called a "close case." The IRS Memorandum and flawed investigation raise questions about whether political considerations, meddling or intimidation improperly affected the IRS's investigative and decision-making processes in the PFF case.

Consequently, we request an inquiry into the investigative and decision-making process in the PFF case to determine whether any IRS or Treasury Department employee engaged in misconduct involving violation of any standard imposed by law, or applicable rules of professional conduct, or Treasury Department or IRS policy.

This request for inquiry is pursuant to Treasury Order 115-01, which states that "The Treasury Inspector General for Tax Administration (TIGTA) shall exercise all duties and responsibilities of an Inspector General with respect to the Department and the Secretary on all matters relating to the Internal Revenue Service (IRS)."
 

A: Why Did the IRS Issue Its Memorandum on PFF Based on an Incomplete Factual Record?

The IRS Memorandum states:

Despite requests to the Ethics Committee, the Service has not been allowed access to the transcripts by the Ethics Committee. Therefore, we are unable to evaluate the context in which these statements were made.

We base our conclusions in this memorandum upon the facts available to us....our factual record does not include transcripts of witness statements before the Ethics Committee....part of our analysis of whether PFF had a substantial nonexempt purpose to serve private interests is the determination of the purposes for forming and operating PFF. In determining the purposes of PFF, evidence of the purposes and roles of PFF's officers and directors acting in their official capacities and of Mr. Gingrich acting in his capacity as teacher of the RAC course is relevant. Information was obtained from these persons under oath by the Ethics Committee's Special Counsel. It is precisely this information to which we have been denied access by the Ethics Committee. It is possible that if the Ethics Committee had rendered full cooperation with our examination, the transcripts might have affected our conclusion.

We do not have unofficial statements by PFF's officers and directors (internal memos, unofficial statements of officers and directors) evidencing a purpose to benefit private interests. We have considered a number of quotes from depositions of key figures reported in the Ethics Committee Report but have not been allowed access to the complete deposition. Only one quote raises a question of improper purpose, and we were unable to examine the quote in context without the complete deposition.⁽¹⁾

But the IRS appears to use the Ethics Committee as a scapegoat for its own investigative failures. Irrespective of credible allegations of Ethics Committee intransigence, the Memorandum does not explain why the IRS apparently did not obtain relevant testimony, documents and PFF "internal memos" from PFF and its employees and officers. Upon what evidentiary materials did the IRS base its Memorandum? The Internal Revenue Manual states that when investigating a tax exempt organization, an IRS investigator:

should obtain evidence bearing upon the organization's status or tax treatment by inspecting its premises (where relevant), examining its books and records, and questioning its representatives and officers.⁽²⁾

You are expected to pursue the examination to the extent necessary to ensure that all significant items necessary for a proper determination of exempt status (and tax liability where appropriate) can be made.⁽³⁾

That appearance is heightened given the IRS's treatment of then-Speaker Gingrich's longtime advisor, Steve Hanser. The IRS Memorandum states:

Also, Mr. Hanser made a statement to the Ethics Committee that raises a question of PFF's purpose for its involvement with the course. He is cited at pp. 49-50 of the Ethics Committee Report as saying that the vision, language, and concepts of the RAC movement were being developed in the course, and that "a specific political end" is "one of the purposes, remember, for the course." However, it is not clear from the statement that the "purpose" referred to is PFF's purpose (as opposed to GOPAC's purpose or Mr. Gingrich's purpose). We note that without access to the complete Ethics Committee transcript of Mr. Hanser, we are unable to evaluate the context in which his statement was made.

A Roll Call article on the IRS Memorandum quotes Professor Fran Hill, a tax expert at the University of Miami, questioning the IRS's apparent investigative sluggishness in the PFF case:

"The striking thing about this ruling is the curious lack of curiosity by the IRS. They say that the House ethics committee didn't give them the documents. The response to that is you're the IRS. You don't need their finding of fact.

"Ordinary taxpayers caught in an IRS audit would be forced to provide all types of information and would be subject to subpoena," she said. "But here, all of a sudden, the IRS cannot find facts when it is the Speaker of the House of Representatives."⁽⁶⁾

Given the IRS's incomplete investigation of PFF, and the implication of possible political interference with the investigation, we believe that an inquiry into the IRS's investigative and decision-making process is in order. TIGTA should investigate whether any improper political intervention did, in fact, occur. Furthermore, the public deserves a full report explaining why the IRS was so deferential that it did not settle basic questions of fact in the PFF case, and why the IRS took a position on the legality of PFF actions without all the facts.

Finally, the IRS Memorandum on the PFF case seems to enunciate a broad policy shift, allowing 501(c)(3) organizations to engage in activities with apparently substantial non-exempt purposes to benefit private interests. However, the Memorandum does not directly affect organizations other than PFF. Consequently, the appearance is that PFF is held to a less restrictive standard than other 501(c)(3) organizations. Does the IRS intend to issue a ruling applying this new, less restrictive standard to all 501(c)(3) organizations? Or, if not, why is the Progress & Freedom Foundation, with its close ties to ex-House Speaker Newt Gingrich, seemingly treated differently than other charitable organizations?
 

Sincerely,
 

Gary Ruskin
Director
 
 

cc: Senator Daniel Patrick Moynihan
Representative Charles Rangel

2. Internal Revenue Service, Manual Handbook, HB 7(10)69-4, 153, 11/18/83.

3. Internal Revenue Service Manual Handbook, HB 7(10)69-6, 161.2, 11/27/91.

4. Internal Revenue Code §§7602-7609.

5. Damon Chappie, "Gingrich Enlists Army, But Top Official 'Wary.'" Roll Call, October 3, 1996.

6. Damon Chappie, "IRS, Ethics Disagree on Ethics; Gingrich Ruling May Create New Campaign Options." Roll Call, February 8, 1999.