Originally published on Forbes.com July 10th, 2013
Melanie Sloan of Citizens for Responsibility And Ethics in Washington (CREW) has filed an Application for Award for Original Information – Form 211 with the IRS concerning the James Madison Center for Free Speech, James Bopp Jr. and The Bopp Law Firm. The media alert that CREW sent out about the matter indicated that:
For the past six years, as the head of JMCFS, Mr. Bopp has diverted nearly all of the non-profit’s funds to pay his own law firm, the Bopp Law Firm. These self-dealing transactions violate prohibitions on using charitable organizations for private inurement and private benefit, suggesting Mr. Bopp may be liable for over $6 million in back taxes.
Seems like big stuff. I try to have an open mind about things, but I have to say that when I looked up what the Bopp law firm has to say about itself, I was kind of starting to root for CREW.
Founding the Bopp Law Firm in 1992, and practicing law for over 30 years, Jim is dedicated to the advancement of conservative Republican principles, policies, politics, and defending individual liberties by providing focused legal guidance for the management of political campaigns, campaign finance, public policy initiatives, First Amendment rights and litigation strategies. During his storied career, Jim has continually proven his prowess in the courtroom by representing clients with vigorous advocacy and expert guidance through a myriad of red-tape, excessive government regulations and politically motivated pressures.
I’m really not a big fan of what currently passes for conservative Republican principles. I don’t think the world is a better place now that corporations can make political contributions. Nonetheless, when I looked at the Form 990 of James Madison Center For Free Speech, I was a little puzzled. JMCFS did not strike me as being substantial enough to rack up “$6 million in back taxes”. I figured it would all become clear at the tele-press conference.
When I logged on to the call, there were fourteen people on. From what I could gather, I think three of them were with CREW. That left either nine or ten journalists (depending on how you count me) and one other person who made the call really entertaining. That was Mr. Bopp, himself, who indicated that he thought the whole thing was totally bogus. It was George Soros out to get him because he has been so effective. There must be conservative Republicans who thank God every day for giving them Georg Soros. Without Soros, where would conservative Republicans turn when they felt the need to present themselves as plain folk being picked on by a rich guy ?
Melanie Sloan told Mr. Bopp that he could have his own conference call some other time. There was some mumbling and I think they figured out how to mute him. When asked follow-up questions the CREW team did allow as how they have received money from the Open Society Foundation, but it is not one of their major donors and Mr. Soros does not call them up and tell them what to do. I found that pretty credible. I felt duty bound to look at CREW’s 990 and the OSF 990, but did not come up with anything real juicy.
At any rate CREW was kind enough to post all the related material, which I studied as well as I could. The essence of the complaint is that JMCFS spends most of the money that it takes in paying the Bopp law firm to litigate cases. Engaging in litigation to advance your cause is a perfectly legitimate exempt activity. That is what ACLU does. So what is the problem ? On Page 6 of the attachment to Form 211 there is a table that shows the expenditures of JMCFS for 2006 – 2011. Total expenditures are $2,133,268 of which $2,129,014 was paid to the Bopp Law Firm according to the table. The data is drawn from the JMCFS Forms 990 which are included in the exhibits.
The source of the information greatly weakens CREW’s contention that there might be something criminal going on. They make a big deal out of there being a statement in some of the 990s that there were no independent contractor payments, when you can tell from other information in the 990s that there were. Generally speaking, to convict you of a tax crime the government has to prove willfulness. Putting information on the wrong line or checking the wrong box is sloppy, not criminal. I have to tell you that I would have been embarrassed if those 990s had come out of my office. I should also tell you that it is pretty hard to do 990s perfectly. 990s like those of JMCFS are what you get when you try to run your charity too lean, which appears to be what is going on.
How Do They Get to Over $6,000,000 in “Back Taxes” ?
As the head of JMCFS, Mr. Bopp diverted nearly all of JMCFS’s funds to his own law firm in violation of prohibitions against using charitable organizations for private inurement and private benefit.
As a result, JMCFS and the Bopp Law Firm now owe the IRS more than $6.2 million in back taxes. Further, by repeatedly signing and submitting to the IRS inaccurate tax forms, Mr. Bopp may have made false statements in violation of federal criminal law.
I’m not going to go through the math, but the way CREW gets there is by treating all the money that was paid to the Bopp Law Firm by JMCFS as an “excess benefit” subject to excise tax under Code Section 4958. It is a nasty excise tax 25% for taking the benefit and an additional 200% if you don’t fix it.
The term “excess benefit transaction” means any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit.
You should read CREW’s argument, because based on my own experience with small to medium size not-for-profits, I may be a little too tolerant of failures to dot the i’s and cross the t’s and operation in a fairly loosey-goosey manner that provides inadequate oversight of the founder. The problem is that with a couple of hundred thousand a year, which is what JMCFS has been running on it is very tempting to skimp on infrastructure, which they appear to have been guilty of.
Mr. Bopp and his firm, however, should not be subject to the extremely punitive 4958 excise tax, if they gave JMFCS its money worth. Unfortunately, I think that Mr. Bopp and his firm did give JMFCS its money worth, which is why CREW is so pissed at him. I don’t like the Citizens United decision any better than CREW does. I almost wish that Mr. Bopp was a sleaze ball running a phony not for profit and taking people’s money and not doing anything. Instead he ran his not for profit very lean, put almost all the money that came in into litigation and won some important cases supportive of the causes that JMFCS advocates.
One of my fantasies is to be appointed the common sense czar with the ability to direct IRS enforcement and overrule Tax Court decisions that I don’t like. In my fantasy position, here is my response to CREW’s Form 211 – Nothing to see here folks. We are going to go fight crime someplace else.
You can follow me on twitter @peterreillycpa.
Afternote:
The comment from Linda Smith below confirms my fear that I may have been a little too easygoing in assessing the penalty exposure. It is possible that Mr. Bopp might have a really hard time if he is audited on these issues.