A federal judge has ordered the Internal Revenue Service to refund over $20,000 in taxes to the Democratic Leadership Council, saying the IRS broke its own rules by first granting tax-exempt status to the DLC and then revoking it.

The DLC had to pay $20,000 in taxes for 1997, 1998 and 1999. The IRS must refund that amount and may need to pay legal costs as well in the long-running case, according to the BNA Daily Tax Report.

The IRS revoked the DLC's tax-exempt status in 2002, concluding that the DLC rendered an impermissible level of personal benefit during the three years in question by giving support to Democratic officials. However, the DLC contended that it acted within the bounds of Section 501(c)(4) of the Tax Code and that the IRS's own regulations prohibited the retroactive revocation of tax-exempt status. The parties filed cross motions for summary judgment.

"Though there may be legitimate questions whether the DLC was entitled to 501(c)(4) status, the DLC did not omit or misstate a material fact in its 1985 application for that status or operate in a manner materially different from that originally represented when the IRS granted it that status," wrote U.S. District Judge Louis F. Oberdorfer in his ruling. "Accordingly, the IRS violated its regulations when it retroactively revoked that status, and the DLC is entitled to summary judgment and a refund of the taxes it paid for the years in question."

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