This case seems similar to the one where Fox news had to admit it does not actually care for the truth to win its court case.
The legal structure of the DLC forbids it from helping a party. Instead the DLC is forced to admit that its purpose is to promote its corporatist agenda rather than help promote real change.
DLC dismisses exempt status attack by IRS
"The Internal Revenue Service said the nonprofit organization became an advocacy group for elected Democrats and demanded payment for three years of back taxes."
"[T]he IRS could revoke the organization's nonprofit status for future tax exemptions if it benefited only one political party, namely Democrats. "
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Here is the core of the DLC's defense:
The court's ruling said that during a July 1999 political convention, DLC Chief Executive Officer Al From said the New Democrat agenda "has been so successful that the Republicans are trying to parrot our politics." The ruling also quoted Mr. From saying, "After all we went through, we're not going to sit idly by and let the Republicans reclaim the political center on the cheap."
Forbes has an article discussing the implications given that the DLC is not a typical 501(c)(3) charity:
The Democrats' Little Tax Secret
What's the practical value of a (c)(4) designation if it doesn't generate writeoffs for its donors? A (c)(4) isn't taxed as a for-profit business would be and doesn't have to disclose its donors, as a political action committee does.
The DLC responds that its exclusive purpose is to develop and promote its "Third Way" agenda and that some causes it has lobbied for--e.g., welfare reform, fast-track approval of free-trade agreements--got more Republican than Democratic votes in Congress.
Lastly, we get to hear again from Joe Lieberman and Ralph Nader. Lieberman may come to the rescue because as an Independent he may be their hope for "bi-partisanship." While Nader-inspired group will go after the DLC
The Justice Department has hired a researcher from Public Citizen, the watchdog group founded by Ralph Nader, to help make the case against the DLC.