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Texas Nonprofit Is Cleared After GOP-Prompted Audit
Group Says Probe Was 'Political Retaliation' by DeLay Allies

By R. Jeffrey Smith
Washington Post Staff Writer
Monday, February 27, 2006

The Internal Revenue Service recently audited the books of a Texas nonprofit group that was critical of campaign spending by former House majority leader Tom DeLay (R-Tex.) after receiving a request for the audit from one of DeLay's political allies in the House.

The lawmaker, House Ways and Means Committee member Sam Johnson (R-Tex.), was in turn responding to a complaint about the group, Texans for Public Justice, from Barnaby W. Zall, a Washington lawyer close to DeLay and his fundraising apparatus, according to IRS documents.

Johnson, a member of the subcommittee responsible for oversight of the tax agency, sparked the IRS's interest by telling IRS Commissioner Mark W. Everson in a letter dated Aug. 3, 2004, that he had "uncovered some disturbing information" and received complaints of possible tax violations.

Johnson said he was sure the IRS would follow up. "I ask you to report back your findings of each of these investigations directly to me," he told Everson in the letter, according to a copy obtained by The Washington Post.

The IRS sent two auditors last year to comb the 2003 books of Texans for Public Justice and an affiliated foundation that collected donations for the organization. No tax violations were found, according to a letter the IRS sent the group.

But the circumstances behind the effort -- which were uncovered by the group's director and founder, Craig L. McDonald, using the Freedom of Information Act -- prompted him to allege that the audit was an abuse of the IRS's mandate. He said there was no evidence of wrongdoing in the complaints.

"This audit was political retaliation by Tom DeLay's cronies to intimidate us for blowing the whistle on DeLay's abuses," McDonald said. "Enlisting the IRS to intimidate critics is a dirty trick reminiscent of Richard Nixon. . . . It is not a crime to report a crime, as we did with DeLay."

IRS spokesman Terry Lemons said that federal law barred him from providing a detailed response. But he said, "The IRS makes its audit decisions based on the law. Political considerations do not play a role. We are an agency of career civil servants," excluding Everson and the IRS chief counsel.

Steven T. Miller, the senior IRS official in charge of tax-exempt organizations, said that though he could not address how Johnson's request was handled, referrals related to improper political activity generally must be judged reasonable by two career employees before an audit can proceed.

Texans for Public Justice, based in Austin, has been a thorn in the side of the state's politicians since its founding in 1997. It bills itself as "a non-partisan, non-profit policy and research organization which tracks the influence of money and corporate power in Texas politics." According to McDonald and the group's tax returns, about 45 percent of its $310,000 budget in 2003 came from individual donors. The rest came from an affiliated, tax-exempt group the IRS also audited, the Public Justice Foundation of Texas.

The group regularly publishes detailed reports on campaign spending and corporate lobbying. It is perhaps best known for its March 2003 allegation of illegal spending by corporations during DeLay's successful 2002 campaign for a Republican takeover of the Texas legislature -- claims that culminated last year in the indictment of DeLay and two campaign aides for money laundering and conspiracy to hide corporate donations.

The events leading to the IRS probe are laid out in documents the agency released to McDonald in response to his request for all records related to allegations of wrongdoing by the foundation. It began when Zall wrote a July 19, 2004, letter to Johnson complaining about the Texas nonprofit group and noting that the lawmaker had "jurisdiction to review the Internal Revenue Service's supervision of tax-exempt organizations," according to a copy.

Zall's biography on his law firm's Web site notes that he was "of counsel" from 1990 to 1998 to the Williams & Jensen law firm, which has long represented DeLay's leadership political action committee, Americans for a Republican Majority (ARMPAC). Barbara Bonfiglio, a principal at Williams & Jensen, was subpoenaed in January 2004 by Travis County District Attorney Ronnie Earle as part of his inquiry into DeLay.

Contacted by telephone on Friday, Zall declined to say if he had done legal work for ARMPAC, explaining that "I don't ordinarily discuss my clients." He said he was not representing the committee when he wrote his letter.

Zall said he could not recall exactly why he became involved, but added that "maybe somebody said something to me." He also confirmed that Bonfiglio was "a longtime friend," and when asked if she had requested his assistance, replied that "anything is possible."

Bonfiglio did not return several phone calls for comment Friday.

In his letter to Johnson, Zall was clear about his desire to protect DeLay.

"The continuing investigation led by . . . Earle against Texas Republicans is becoming a national problem," Zall wrote. "Recent news reports indicate a growing concern in Washington that Earle is attempting to use his local office as part of a calculated scheme to remove a federal elected official from a position of authority in Congress."

The problem, Zall explained, is that Earle "is not acting alone" but with the assistance of "an ostensibly tax-exempt organization." The IRS, he said, "should investigate organizations whose public records indicate . . . apparent noncompliance with tax laws at a time when they are engaging in an apparent attempt to influence national politics."

Portions of Zall's letter were redacted in the copy obtained by McDonald and The Post. But parts that were disclosed included an allegation that the group "may have been engaging in activities which are forbidden by the Internal Revenue Code, and may not have filed" accurate tax returns. It also alleged -- without providing evidence in the IRS-released portions -- improper links between the group and the Texas Democratic Party.

Johnson sent his letter to the IRS requesting the probe on Aug. 3, 2004, and two weeks later, the tax policy adviser on his personal staff, Kathleen Black, sent what she described as "follow-up info" to Floyd Williams, the head of the IRS Office of Legislative Affairs.

In his letter, Johnson said he had "uncovered some disturbing information" about the two Texas nonprofit groups on his own, "as a member of the oversight subcommittee." He added that "coincidentally, I have received a letter from an attorney experienced in tax-exempt law raising significant questions about exemptions and activities of these organizations."

Asked to cite specific information about the groups that the chairman had learned through his service on the oversight committee, Johnson's spokeswoman McCall Cameron said she would look into the matter but did not call back. Neither group has been investigated by the subcommittee, McDonald said.

Everson responded in a letter to Johnson on Sept. 16, 2004, that he had sent the complaint to the IRS office in Dallas -- the national headquarters for examination of nonprofit groups -- under "our standard procedure when we receive referrals for information from third parties."

He wrote that although no results could be provided directly to Johnson, the results could be legally requested by the House Ways and Means committee chairman, Bill Thomas (R-Calif.). Those requests are not subject to public disclosure, according to the IRS.

In December 2004, the IRS's Austin office informed the group that the agency had received an allegation that it may have jeopardized its tax-exempt status "by intervening in a political campaign." McDonald denied it categorically, but the IRS audit went forward from January 2005 until early this month.

Examiners from Austin and Oklahoma City looked at minutes from the group's meetings, its files of correspondence, contracts, donor records and other documents before concluding in a letter dated Feb. 3, 2006, that the group's tax return for 2003 required no change.

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