A hawkish pro-Israel activist group has filed a lawsuit alleging that the Internal Revenue Service is impeding or denying applications for tax-exempt status from nonprofit organizations that oppose the Obama administration’s Israel policies. But experts in nonprofit tax law say that the allegations seem far-fetched.
In a complaint filed in federal court in Pennsylvania on August 25, the group, called Z Street, alleged that an IRS agent told an attorney for the organization that delays in the processing of its application for tax-exemption were due to the case receiving extra scrutiny over whether it would oppose administration policy on Israel.
As the Forward reported in January, some argue that the 1983 U.S. Supreme Court decision in the case of Bob Jones University v. United States could be interpreted to deny nonprofit status to organizations that oppose established American foreign policy. The Bob Jones decision, which found that “an institution seeking tax-exempt status must… not be contrary to established public policy,” was written to bar tax exempt groups from participating in racial discrimination.
Legal experts were split on the question of longstanding foreign policy, such as America’s opposition to Jewish settlements in the West Bank, could fall within the realm of “public policy” as described in Bob Jones. All agreed, however, that the IRS had never used Bob Jones to deny tax-exempt status to nonprofits that oppose American foreign policy.
A July story in The New York Times drew attention to the issue of tax-exempt American organizations that support settlements in the West Bank.
The Z Street lawsuit alleges that its application for tax-exempt status, which was filed last December, has been held up due to an IRS procedure specifically targeting groups opposing administration policy on Israel.
According to Z Street’s complaint, IRS agent Diane Gentry said that applications for tax-exempt status from nonprofits working on Israel-related issues “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.”
A spokesperson for Z Street said that there was no recording of the conversation with Gentry and declined to provide notes from the exchange. That conversation was purportedly held between Gentry and an attorney handling Z Street’s application for exemption. That attorney is not involved in the lawsuit, which was filed by another attorney, Jerome M. Marcus, who did not respond to a request for comment.
Gentry also did not respond to a request for comment.
In response to a request for comment from the Forward, IRS spokesman Bruce Friedland wrote: “The IRS, by law, cannot comment on specific charities or even confirm whether a specific exemption request exists.”
He continued: “When any organization applies for tax exempt status, it is the responsibility of the IRS to ensure that the organization’s funds will be used to accomplish charitable purposes.”
The allegations of the existence of the special IRS unit described in the quote attributed to Gentry aroused skepticism from experts. Sheldon S. Cohen, a former IRS commissioner, said he doubted there was any such unit. “We’d know about it,” he said. “Revenue agents are not bashful about talking about what they work on…. The U.S. government is a sieve. This is not top-secret stuff.”
Other experts suggested that Z Street’s application for tax exemption could have been forwarded to the central office in Washington, D.C. for other reasons. The Internal Revenue Manual describes a broad set of reasons why exemption applications could be automatically referred to agency’s quality assurance department, including cases involving “terrorist countries, and cases where the IRS has received third-party contact requesting that the applicant be denied exemption.”
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