Z Street's Unconstitutionality Claim Against IRS Upheld by U.S. District Court

Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS.  Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination.  Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.  

In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds.  The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim.  First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction.  Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013).  Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity.   In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.

With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:

In this regard, looking at the requested remedy as the D.C. Circuit requires, Z  Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”

In the opinion's conclusion, Judge Brown opines:

Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.

 (Hat tip:  Daily Tax Report)

Nicholas Mirkay