Justice Department Settles ‘Final’ Case in IRS Targeting Dispute

Pro-Israel nonprofit gets an apology for having its application dragged out for six years.

The Justice Department, in what a spokesman called the “final settlement” in a series of cases accusing the Internal Revenue Service of political bias, on Thursday announced an agreement with a pro-Israel nonprofit called Z Street.

Reflecting the signing of a consent order by Acting Internal Revenue Commissioner David Kautter, the Justice Department said the agency had issued an apology for the “heightened scrutiny” of the group’s application for tax-exempt status that took six years to process.

“Tax exemption eligibility should be based on whether an organization’s activities fulfill requirements of the law, not a group’s policy positions or the name chosen to reflect those views,” said Principal Deputy Assistant Attorney General Richard Zuckerman, who joined Justice as head of the Tax Division last month. “The attorneys at the Department of Justice work hard to ensure that all Americans receive equal treatment under the law. Today’s settlement further illustrates this commitment.”

(One more case, Freedom Path v. IRS, has been settled except for one regulatory question, which is on appeal in the Fifth Circuit Court of Appeals, Justice added.)

The decision was hailed by Z Street founder Lori Lowenthal Marcus, who published an op-ed in the Wall Street Journal titled “The IRS Campaign Against Israel—And Us.”

“I founded Z Street in 2009 to educate Americans about the Middle East and Israel’s defense against terror,” she wrote, noting that the application process for Section 501(c)(3) status usually takes three to six months. “Instead, the application languished. In late July 2010, an IRS agent truthfully responded to our lawyer’s query about why processing was taking so long: Z Street’s application was getting special scrutiny, the agent said, because it was related to Israel. Some applications for tax-exempt status were being sent to a special office in Washington for review of whether the applicants’ policy positions conflicted with those of the Obama administration.”

She brought a lawsuit in August 2010, learning later that “the IRS needed to investigate whether Z Street was funding terror.”

While claiming to be investigating Z Street’s funding of terror, Marcus continued, “the IRS never asked how or where Z Street spent its money. The IRS ultimately granted Z Street’s application, in October 2016, without asking anything about terror, or money, or anything else it hadn’t known in 2010.”

The government argued in its defense in this case that Z STREET’s application was transferred to a special lookout unit “because of the possibility that Z STREET might have been providing resources to Israel and, if so, the IRS needed to determine whether Z STREET had sufficient procedures in place to maintain discretion and control over such resources.”

The litigation and settlement seems “a waste of time and money,” wrote Paul Struckfus, a veteran of the IRS’s Exempt Organizations division in his tax newsletter. The litigation results in Z Street getting a “sincere apology” from “the government.” It also gets the following “truistic statement,” the editor noted:

“The court hereby declares that it is wrong to apply the United States tax laws, including any and all tax rules, regulations, policies, procedures, and standards of review, to any tax-exempt applicant or entity based solely on any lawful positions it espouses on any issues or its associations or perceived associations with a particular political movement, position, or viewpoint.”

But even this “bland” statement is followed by a caveat, Steckfus added: “The declaration . . . above does not constitute a finding by the Court that the IRS committed any violation of law or otherwise acted in bad faith in this case.”