Originally published on Forbes.com July 16th, 2013
Last week Melanie Sloan of Citizens for Responsibility and Ethics in Washington filed a complaint with the IRS concerning James Bopp Jr., the Bopp Law Firm and James Madison Center for Free Speech. Mr. Bopp is best known for his work on the Citizens United decision, which opened the floodgates of corporate money into political campaigns. This link will bring you to a summary and further links to supporting material on Ms. Sloan’s complaint. I would encourage you to dig into the information, if you find this interesting. Ms. Sloan asserts that Mr. Bopp and the related entities could be liable for over $6,000,000, because of the manner in which JMCFS operated. My own assessment of CREW’s complaint was that it was pretty weak. Ms. Sloan thinks that I got it wrong and has put her criticisms in a letter to Forbes. Here it is, in its entirety:
From Melanie Sloan:
Peter Reilly’s column, “Claim Citizens United Attorney Broke Charity Tax Law Doesn’t Hold Up,” about an IRS whistleblower complaint I filed with regard to campaign finance litigator James Bopp, Jr., a section 501(c)(3) tax-exempt organization Mr. Bopp controls called the James Madison Center for Free Speech (JMCFS), and Mr. Bopp’s private law firm, is rife with inaccuracies and misinformation.
The complaint is based primarily on information in the public record, including JMCFS’s website, its annual tax filings, and public statements by JMCFS and Mr. Bopp. On its face, this information suggests that, between 2006 and 2011, Mr. Bopp directed JMCFS to pay 99.5 percent of its revenue to his private law firm, the Bopp Law Firm. Assuming JMCFS’s tax filings — which Mr. Bopp signed under penalty of perjury — are accurate, it appears JMCFS is nothing more than the Bopp Law Firm’s alter ego. Because this sort of arrangement appears to violate numerous provisions of the tax code, the complaint urges the IRS to investigate the relationship between JMCFS and Mr. Bopp/the Bopp Law Firm.
As I explained both in the complaint and an easy-to-read accompanying fact sheet, the facts strongly suggest, among other things, that (1) Mr. Bopp engaged in “private inurement,” meaning he used his insider status to siphon virtually all of JMCFS’s income to his firm and himself; (2) JMCFS provided a substantial benefit to a private interest, namely Mr. Bopp and his law firm; (3) Mr. Bopp and JMCFS engaged in repeated acts of self-dealing; and (4) Mr. Bopp and JMCFS engaged in numerous “excess benefit transactions.” Over the course of many years, virtually all of JMCFS’s income was diverted to the Bopp Law Firm. Mystifyingly, Mr. Reilly attributed the entire $6.2 million tax debt to only the last violation, though the debt is actually derived from the all the violations.
Mr. Reilly also appears not to understand the concept of excess benefit transactions. Because, in his view, “Mr. Bopp and his firm did give JMCFS its money worth,” he claims there were no excess benefit transactions. This is wrong. When an insider like Mr. Bopp receives economic benefits without “contemporaneous written substantiation” by the charity that the payments are intended to be compensation (e.g., on its Form 990 or a Form W-2 or 1099), the tax law treats the payments as “automatic” excess benefits that are subject to excise taxes regardless of whether the charity “got its money’s worth.”
Here, JMCFS did not report its payments to Mr. Bopp or the Bopp Law Firm on its Form 990s as compensation paid to an employee or independent contractor. This indicates the payments likely were not reported to the IRS as compensation and thus are “automatic” excess benefit transactions, subject to excise taxes.
Mr. Reilly also is wrong to dismiss any possible criminal liability by calling Mr. Bopp’s misrepresentations on JMCFS’s tax returns merely “sloppy.” Deliberately filing an inaccurate return is a criminal offense. Mr. Bopp holds himself out as an expert on non-profit tax law, making it unlikely his repeated assertions on JMCFS’s returns that the organization paid no independent contractors were innocent mistakes. Indeed, on the press conference call on July 11th in which Mr. Reilly participated,
Mr. Bopp said he and his firm had “a contract” with JMCFS to provide services, making him either an employee or an independent contractor of JMCFS. Further, Mr. Bopp later told another reporter his law firm is not an independent contractor, but that he is JMCFS’s paid general counsel. This simply cannot be squared with JMCFS’s tax returns, which indicate the group has no paid staff.
Undoubtedly, tax law is complex. But Mr. Reilly should have done his due diligence before writing on a subject he does not fully comprehend.
Melanie Sloan is the Executive Director of Citizens for Responsibility and Ethics in Washington (CREW).
My Response
Wow. That last sentence really stung, considering I’m a CPA with more than 30 years of tax experience and have indeed prepared non-profit tax returns. I wonder whether others who write stories based on exactly what was in the CREW press release will be chastised in the event that they don’t uncritically accept CREW’s conclusions. The CREW argument focuses on the payments from JMCFS to the Bopp Law Firm being unsubstantiated and therefore automatic excess benefit transactions, because questions on the 990 were answered incorrectly. That strikes me as a weak case. Anyway, I hope I can get a few other tax people to take a look at this. Maybe they will set me straight, but I remain unconvinced.
You can follow me on twitter @peterreillycpa.
Afternote:
My friend Linda Smith, who has a very strong not for profit practice has indicated to me that if Mr. Bopp were audited, he might have a tough time:
This is a classic case of private benefit. Whether or not the law firm provided valuable services, they may not have met the criteria for the safe harbor and rebuttable presumption required by the IRS. The attorney could have exercised a few precautions to avoid the allegations, such as – following conflict of interest policies; holding competitive bids for the legal services and perhaps using more than one law firm. If, on the other hand, the benefit to the law firm is incidental to the benefit to the charity, Bopp may have an argument. Following the safe harbor rules shifts the burden of proof to the IRS, while failure to follow the protocols puts Bopp in a position of being guilty until proven innocent. Ultimately, if it is determined that Bopp used the charity to fund his own practice, not only does he have to repay the funds to the charity, but he is then subject to these IRS penalties — with additional fines for any board member who authorized the transactions and failed to follow the protocols. Having gone through an intermediate sanction audit, I can tell you that the IRS may not even argue about whether or not the compensation was reasonable, because they automatically win if the safe harbor process wasn’t used. We work with our nonprofits for best practices to protect them from this exact predicament.
So CREW may in fact be on to something.
CREW Director Insists Case Against Citizens United Attorney Is Strong
