Thursday, August 26, 2010

Pro-Israel Nonprofit Accuses IRS of Delaying Application Because Group's Activiities May Conflict with Administration's Policies

Z Street, a pro-Israel nonprofit corporation, has filed a complaint alleging that the IRS is delaying consideration of its application for recognition of section 501(c)(3) tax-exempt status because the Service is determining whether the group's activities contradict the Administration's policies.  Most specifically, the lawsuit alleges that a named IRS agent informed the group's corporate counsel that she had two concerns with respect to the application: "(1) the advocacy activities in general, and (2) the IRS's special concern about applications from organizations whose activities are related to Israel, and that are organizations whose positions contradict the US Administration's Israeli policy." 

The first point appears to reflect a common and legitimate concern raised by the IRS with respect to public policy groups seeking section 501(c)(3) status, as the complaint goes on to assert that the agent raised the question of lobbying and whether the group might be an "action organization," which under the applicable regulations would disqualify it from section 501(c)(3) status.  The second point is the more troubling one, although the complaint's conclusion that these "IRS's admissions" "make clear that the IRS maintains an Israel Special Policy governing the processing of applications for tax exemption by organizations which are believed to be operated by persons holding political views inconsistent with those espoused by the Obama administration" appears to read a lot into the agent's alleged comments.  Nevertheless, the possibility that even a single agent, much less perhaps the agent's supervisor or others within the IRS as well, would consider denying an exemption application because an organization takes positions contradictory to that of the current administration is extremely troubling.  The second concern appears to be a far cry from the contrary to established public policy concern that ultimately led to the revocation of tax-exempt status for Bob Jones University for engaging in racial discrimination in education.

Another interesting aspect of this lawsuit is its timing.  Code section 7428 only permits a suit for declaratory judgment that an organization qualifies for section 501(c)(3) status if either the IRS has denied the application or the application has been pending for more than 270 days.  Here neither event has occurred because Z Street only filed the application on December 29, 2009, according to the complaint, or less than eight months ago (thanks to Ellen Aprill for noting this point).  Perhaps for this reason Z street does not ask for such a declaratory judgment, but instead for a declaration that the asserted 'Israel Special Policy" is a violation of the First Amendment and for other relief that would prevent the application of this policy to Z street.

As early coverage of this story, linked to below, already has revealed, the IRS' ability to respond to these accusations is limited by its inability to comment publicly on any specific pending application.  Given this limitation, general statements about how all applications are considered fairly under the applicable law will almost certainly be forthcoming shortly, however.

For further coverage: The Jewish Daily Forward; Politico (Ben Smith); TaxProf Blog; Wall Street Journal Law Blog; Weekly Standard Blog.


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