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Normally, the IRS will grant tax-exempt, 501(c)3 status to non-profit organizations that serve an educational purpose.  Such an organization can usually expect to wait around six months for status to be granted (or denied).  The regulatory scheme is set up so that organizations must meet certain tests to obtain exempt status.

If one is to take the current federal court case between Z-Street and the IRS at face value, it seems that under some specific circumstances, the IRS is escalating certain tax-exempt petitions because of the political beliefs of the organization.  Not to be an alarmist, but this brings to mind, for me, the famous Niemöller quote: “First they came for...”  Though I’m not a Zionist by any means, I am concerned about this alleged viewpoint discrimination with regard to the tax exempt status petitions of non-profit organizations and the chilling effect it could have on free speech and educational non-profits.

Originally posted at D. J. Marcus's Law Blog

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However, this escalation may be entirely justified, given the nature of the organization, and the IRS may not in fact be discriminating at all.  There are a plethora of possible reasons that Z-Street’s file was transferred, the most mundane of which being that the original examiner was simply not equipped to evaluate the organization given its political nature.

In a complaint filed in the District Court for the Eastern District of Pennsylvania, Z-Street alleges that the IRS maintains an “Israel Special Policy”:

   governing applications for tax-exempt status by organizations which deal with Israel, and which requires particularly intense scrutiny of such applications and an enhanced risk of denial if made by organizations which espouse or support positions inconsistent with the Obama administration’s Israel policies, constitute an explicit admission of the crudest form of viewpoint discrimination, and one which is both totally un-American and flatly unconstitutional under the First Amendment.

    View the Complaint here.

Z-Street says that it learned of this special policy from an IRS agent in charge of examining it’s petition.  The agent allegedly informed the organization that it’s petition had been sent to a special office in Washington, D. C., for consideration.

Z-Street (the Z stands for Zion), by its own charter, is an organization

dedicated to constantly and consistently declaring and affirming the facts which fully support the legal, moral and historical right of the Jewish State to exist in peace and security without physical or verbal assault against its sovereignty or legitimacy as well as revealing the fallacious narratives which undermine those rights.  This necessarily entails adamantly opposing the dismantling of and/or handing over territory to any other entity or entities.
Agree with Z-street or not, nothing in the charter is “so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred.” That quote is from the U.S. Supreme Court decision Bob Jones Univ. v. U.S., 461 U.S. 574 (1983) in which the Supreme Court decided that the IRS was justified in denying Bob Jones University tax-exempt status because the school practiced racial discrimination.  The Court was very specific in noting, however, that
[w]e are bound to approach these questions with full awareness that determinations of public benefit and public policy are sensitive matters with serious implications for the institutions affected; a declaration that a given institution is not “charitable” should be made only where there can be no doubt that the activity involved is contrary to a fundamental public policy.
Z-street seems to think that the IRS has singled out pro-Israel organizations for heightened scrutiny because they advocate positions that run against the Obama administration’s public policy.  Specifically, an IRS agent told Z-street’s counsel that the IRS is carefully scrutinizing organizations that are in any way connected with Israel and “these cases are being sent to a special unit in the D.C. office to determine whether the organization’s activities contradict the Administration’s public policies.”  Given the language of Bob Jones Univ. v. U.S., it would seem that the IRS is, in fact, directly following the law and determining whether the activity in contrary to public policy.  Why the petition needs to be sent to a special office is still a mystery – one which is not illuminated in the government’s memo in support of its motion to dismiss.

One can judge Z-street, however, by the indignity with which it responded to the government’s motion – a motion that requests dismissal because “1) Z Street has failed to identify a waiver of sovereign immunity; 2) equitable relief is inappropriate because Z Street has an adequate remedy at law; and 3) the Anti-Injunction Act and the Declaratory Judgment Act bar this Court from granting the declaratory and injunctive relief Z Street seeks.”  Although Z-street sued under the wrong law and in the wrong court, its counsel ignores the fact that he screwed up and plods along, arguing the case in his memo.

The fact that the IRS has not yet denied Z-street’s petition makes me wonder at the motivation of Z-street to sue.  Its petition has not been denied due process – it is receiving more process than a normal.  Were I to petition for tax-exempt status, I’d want someone with proper knowledge of the law and regulations to be examining my petition.

When I first read about this on Charles Rubin’s tax blog, I thought that maybe the IRS had overstepped its bounds.  Upon further research and review, while I think the situation may be taken as a warning and could benefit from some explanation from the IRS, I also think that Z-street has overreacted with its lawsuit and, given a little extra time, would have received its tax exemption.  After working with the IRS for years, I recognize that a request for extra documentation – which, according to Z-street, is what initiated this inquiry and lawsuit – is normal procedure and means nothing in the grand scheme of things.  While I share the Supreme Court’s concern for the sensitivity of exempt organization determinations and will be keeping an eye on these things in the future, I’m not concerned that the Obama administration is singling out pro-Israel non-profits for heightened scrutiny.

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Originally posted to Dave Marcus on Fri Dec 03, 2010 at 02:21 PM PST.

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