The IRS Campaign Against Israel and US (content behind pay wall)

The first IRS viewpoint discrimination case to be filed, Z Street v. IRS, has been settled, with disturbing revelations about how the Internal Revenue Service treated pro-Israel organizations applying for tax-exempt status.

I founded Z Street in 2009 to educate Americans about the Middle East and Israel’s defense against terror. We applied for tax-exempt status under Section 501(c)(3) of the tax code in December 2009—a process that 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.

So in August 2010 we sued the IRS for violating Z Street’s constitutional rights, including the First Amendment right to be free from viewpoint discrimination—government treatment that differs depending on one’s political position. The IRS Campaign Against Israel—and Us Photo: iStock/Getty Images

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
Z STREET, )
)
Plaintiff, )
)
v. ) Civil No. 1:12-cv-401-KBJ
)
DAVID KAUTTER, )
IN HIS OFFICIAL CAPACITY AS )
ACTING COMMISSIONER OF INTERNAL )
REVENUE, )
)
Defendant. )
)
CONSENT ORDER
In December 2009, Z STREET submitted an application for recognition of tax-exempt
status under Section 501(c)(3) of the Internal Revenue Code. In August 2010, Z STREET filed
this suit, alleging that the Internal Revenue Service (“IRS”) had a so-called “Israel Special
Policy” (“ISP”) under which it applied heightened scrutiny to applications connected in any
way with Israel. Specifically, Z STREET alleged that, on July 19, 2010, its counsel was
informed by an IRS employee reviewing Z STREET’s application that “approval of Z Street’s
application for tax-exempt status [was] delayed, and [might] be denied, because of a special IRS
policy in place regarding organizations in any way connected with Israel, and further that the
applications of many such Israel-related organizations have been assigned to ‘a special unit in
the D.C. office to determine whether the organization’s activities contradict the
Administration’s public policies.’” Z STREET sought a declaratory judgment that the ISP was
unconstitutional. Z STREET also sought injunctive relief: (1) barring the IRS from applying
Case 1:12-cv-00401-KBJ Document 116-1 Filed 02/01/18 Page 1 of 15
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the ISP to its application; (2) requiring that its application be processed expeditiously and fairly;
and (3) requiring the IRS to publicly disclose the origin, development, approval, substance, and
application of the ISP.
The parties submit this proposed Consent Order in resolution of this action:
STIPULATION OF AGREED FACTS
The parties hereby stipulate to the following agreed facts:
1. This Court has jurisdiction to enter this consent order.
2. On or about December 29, 2009, Z STREET applied to the IRS for recognition of taxexempt
status under section 501(c)(3) of the Internal Revenue Code.
3. In email correspondence produced in discovery, a Treasury Department employee
stationed in Israel asked the IRS in spring 2009, at the request of a State Department
employee, whether organizations’ tax-exempt status could be revoked for funding Israeli
settlements in the West Bank. The Treasury Department employee asked whether such
activity could be deemed illegal or in violation of established public policy based on
executive branch policy as stated in a 2005 Congressional Research Service report that no
U.S. assistance to Israel can be used in the occupied territories because the United States
does not want to foster the appearance of endorsing Israel’s annexation of the territories
without negotiations. The Treasury Department employee further asked whether this
would be enough to revoke the tax-exempt status of organizations that provide funds to
“Israeli occupied territories.”
4. As reflected in email correspondence produced in discovery, a number of IRS employees
evaluated the questions raised by the Treasury Department employee in an effort to
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respond to the inquiry. An IRS employee ultimately referred the Treasury Department
employee to the IRS hotline for reporting violations of the Internal Revenue laws.
5. On May 15, 2010, Z STREET received from the IRS requests for additional information.
Z STREET supplied this information on June 17, 2010, including copies of Z STREET’s
postings on its website.
6. According to a July 5, 2010, New York Times article entitled, “Tax-Exempt Funds Aid
Settlements in West Bank,” and discussing U.S tax-exempt funds being used to support
settlements in the West Bank, a senior State Department official anonymously told the
New York Times: “It’s a problem…It’s unhelpful to the efforts that we’re trying to
make.” According to the article, the IRS declined to discuss donations for West Bank
settlements.
7. As reflected in email correspondence produced in discovery, other internal discussions
similar to those identified in paragraphs three and four occurred in 2009, 2010, and 2012,
during which IRS employees considered whether organizations’ tax-exempt status could
be denied or revoked for funding Israeli settlements in the West Bank. The IRS contends
that no policy or procedure was ever developed by anyone at the IRS addressing these
questions. The IRS contends that none of these discussions resulted in the denial or
revocation of an organization’s tax-exempt status on the basis of supporting or funding
Israeli settlements in the West Bank.
8. Z Street attached a partial copy of a 2010 letter to its Amended Complaint, signed by by
an Internal Revenue agent, containing questions addressed to an organization that, among
other things, operated an “online Judaica store that sells merchandise associated with the
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Jewish religion and culture,” relating to the organization’s application for tax-exempt
status. The letter contained the following questions: “Does your organization support the
existence of the land of Israel? Describe your organization’s religious belief system
toward the land of Israel.” In September 2010, that agent was instructed not to ask
applicants questions relating to their views or beliefs regarding Israel in the future. That
agent was not involved in any way in Z STREET’s application for tax-exempt status.
Documents produced by Z Street in discovery reflect that similar questions appear in
letters addressed to other applicants, prepared by the same agent, before the agent was
asked to stop: “Describe your organization’s beliefs regarding the State of Israel” (Jul. 20,
2010), “Describe your organization’s beliefs regarding the land of Israel” (Aug. 26,
2010).
9. On July 19, 2010, Z STREET’s counsel spoke by telephone with an IRS employee who
was then reviewing Z STREET’s application. In its Complaint in this case, Z STREET
alleges that during that conversation, the IRS employee “informed Z STREET’s counsel
that the IRS is carefully scrutinizing organizations that are in any way connected with
Israel.” Z STREET alleges in its Complaint that the IRS employee further informed
“counsel for Z STREET: ‘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.’”
10. On August 25, 2010, Z STREET filed a Complaint in this action.
11. On December 17, 2010, Z STREET filed an Amended Complaint.
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12. The Complaint and the Amended Complaint allege that the IRS had a so-called “Israel
Special Policy” under which it applied heightened scrutiny to applications connected in
any way with Israel, and disparate treatment on the basis of the viewpoint expressed by
the applicant. Z STREET alleged that the ISP resulted in extensive delay and potential
denial of tax-exempt applications including Z STREET’s, and constituted viewpoint
discrimination in violation of the First Amendment.
13. The Complaint sought, and the Amended Complaint seeks, a declaratory judgment that
the alleged ISP was unconstitutional and constituted viewpoint discrimination in
violation of the First Amendment. Both pleadings also seek injunctive relief: (1) barring
the IRS from applying the alleged ISP to its application; (2) requiring that its application
be processed expeditiously and fairly; and (3) requiring the IRS to publicly disclose the
origin, development, approval, substance, and application of the alleged ISP.
14. In its Answer, filed on June 26, 2014, the defendant denied the allegations described in
paragraphs 9, 12 and 13.
15. While processing Z STREET’s application, certain procedures, as set forth in the Internal
Revenue Manual 7.20.6 “EO Touch-and-Go Determination Case Procedures,” applicable
to applications for tax-exempt status at that time, were not followed.
a. Specifically, the Terrorism Checksheet (revision date 06/2007) referenced with
respect to Z STREET’s application was outdated and contained a non-exclusive
list of exemplar countries including Israel that, while not designated as state
sponsors of terrorism, raised potential concerns regarding discretion and control of
funds to prevent diversion to terrorists. The revised Terrorism Checksheet
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(revision date 04/2009) that should have been referenced to process Z STREET’s
application did not contain a list of any such countries, including Israel.
b. Under the outdated Terrorism Checksheet used in processing Z STREET’s
application, applicants “organized, operated in, or [having] affiliations to” Israel
were to be coordinated with the TAG Group, and possibly referred to the EO
Technical Unit in Washington, D.C. for additional processing.
c. The Internal Revenue Manual at the time required that certain steps be followed
when applications were referred to the TAG group. See I.R.M. 7.20.6.4.1 (rev.
4/28/09). Z STREET’s application was referred to the TAG group, but the
referral did not follow all of the steps enumerated in IRM 7.20.6.4.7. A written
referral was not prepared when Z STREET’s application was referred to the TAG
group. Consequently, a written referral was not provided to either the TAG group
manager or to the area manager.
16. The government was aware by October 12, 2010, that the Checksheet that had been used
in connection with transferring Z STREET’s application to the TAG group was outdated.
The IRS did not resume processing of Z STREET’s application when it became aware of
this error, or disclose this error to Z STREET when it became aware of it. The IRS
contends that the error was immaterial to the IRS’s processing of Z STREET’s
application. The IRS disclosed that error to Z STREET through discovery in 2016.
17. The government has maintained in its defense in this case that Z STREET’s application
was transferred to the TAG group because of the possibility that Z STREET might have
been providing resources to Israel and, if so, the IRS needed to determine whether
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Z STREET had sufficient procedures in place to maintain discretion and control over
such resources. On December 9, 2010, the IRS submitted to the court in this case the
sworn statement of an IRS employee stating that Z STREET’s “application indicated that
Z STREET could be providing resources to organizations within Israel or facilitating the
provision of resources to organizations within the state of Israel,” and that “Israel is one
of many Middle Eastern countries that have a ‘higher risk of terrorism.’ (I.R.M.
7.20.6.7.5.2(1).”
18. At no time since Z STREET filed its application for recognition of tax-exempt status has
the government ever requested any information from Z STREET regarding its
expenditure of any funds or regarding the existence or content of any internal procedures
governing Z STREET’s disposition of any funds.
19. Also on December 9, 2010, the IRS submitted to the court in this case the sworn
statement of the IRS employee referred to in paragraph nine herein, which employee had
been reviewing Z STREET’s application in July, 2010. In this sworn statement, the IRS
employee stated that, in July, 2010, the employee was advised that Z STREET’s
application might “…be transferred to E.O. Technical or the Touch and Go (TAG)
group.”
20. The IRS Exempt Organizations Technical Unit was, in 2010, located in Washington, D.C.
21. The Treasury Inspector General for Tax Administration (“TIGTA”) conducted audits of
the IRS’s treatment of applications for tax-exempt status during the time period in which
Z STREET’s application was pending. The 2013 TIGTA Report states that TIGTA
performed the 2013 audit “…based on concerns expressed by members of Congress and
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reported in the media regarding the IRS’s treatment of organizations applying for taxexempt
status.”
22. In a 2013 TIGTA report entitled Inappropriate Criteria Were Used to Identify Tax-
Exempt Applications for Review, TIGTA found that early in calendar year 2010, the IRS
began using inappropriate criteria to identify organizations applying for tax-exempt status
to review for indications of significant political campaign intervention. Specifically,
TIGTA found that the IRS used inappropriate criteria that identified for review Tea Party
and other organizations applying for tax-exempt status based upon their names or policy
positions instead of other indications of an impermissible level of potential political
campaign intervention. TIGTA further found that ineffective management: (1) allowed
inappropriate criteria to be developed and stay in place for more than 18 months; (2)
resulted in substantial delays in processing certain applications; and (3) allowed
unnecessary information requests to be issued. Z STREET was not addressed in the 2013
TIGTA report.
23. In a 2017 TIGTA report entitled Review of Selected Criteria Used to Identify Tax-Exempt
Applications for Review, TIGTA provided a historical account of the IRS’s development
and use of 17 criteria other than the criteria that were the subject of the 2013 TIGTA
report. One of the criteria discussed in the report was Occupied Territory Advocacy.
24. According to the 2017 TIGTA report, in August of 2010, the IRS began using a list called
“Be on the Lookout” (“BOLO”) to identify similar applicants for tax-exempt status for
consistent treatment.
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25. According to the 2017 TIGTA report, on August 10, 2010, a BOLO list with the entry
“Occupied Territory Advocacy” was circulated for the first time to IRS employees. The
entry cites to an email or memorandum dated August 6, 2010. Each BOLO list that was
subsequently circulated and contained this category makes reference to this email or
memorandum. According to the 2017 TIGTA report, the EO function could not locate
the August 6, 2010 memorandum. The IRS acknowledges that, if the August 6, 2010,
memorandum or email is located before the Court’s entry of this Consent Order, the IRS
must produce it to Plaintiff, as it is responsive to outstanding discovery requests.
26. As set forth in the 2017 TIGTA report, the “Occupied Territory Advocacy” BOLO list
criterion, as it appeared on BOLO lists issued between August and December, 2010,
described applications that may fall into this category as follows: “Applications deal with
disputed territories in the Middle East… Applications may be inflammatory, advocate a
one sided point of view and promotional materials may signify propaganda.”
27. The first BOLO list on which this criterion appeared was issued August 10, 2010, and this
criterion continued to appear on BOLO lists issued through December 13, 2010. No
BOLO list, issued after December 13, 2010, has been located on which this criterion
appeared. On June 20, 2013, the IRS issued a memorandum suspending the use of the
BOLO lists.
28. After this case was filed, the IRS suspended processing of Z STREET’s application. Z
STREET was informed of this suspension in a filing in this case on January 14, 2011.
The IRS took this step in an exercise of discretion pursuant to an IRS revenue procedure
which provided that a “ruling on exempt status will not ordinarily be issued if an issue
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involving the organization’s exempt status under § 501 or § 521 is pending in litigation.”
Rev. Proc. 2010-9, § 4.04.
29. The 2017 TIGTA report confirmed that three political cases were processed using the
Occupied Territory Advocacy criterion. The report did not state whether these
applications referenced or contained the terminology “Disputed Territories.” The report
found that each of these three cases was opened in June 2010 or earlier, before the
criterion appeared on the BOLO list. The 2017 report indicates that the criterion was
removed from the BOLO list while these three cases remained open.
30. As reflected in documents exchanged in discovery in this case, in September 2012, IRS
employees expressed concern as to whether a favorable resolution of the remaining open
case processed under the Occupied Territory Advocacy criterion “…would impact the
litigation in the Z Street case.”
31. The 2017 TIGTA report further provided that one additional political case was processed
during the time period the Occupied Territory Advocacy criterion was in use. The report
found that this case was opened in December 2009, before the criterion appeared on the
BOLO list. The report could not confirm whether that case was or was not identified or
processed based upon the Occupied Territory Advocacy criterion discussed in the report.
The report indicates that the criterion was removed from the BOLO list while the case
remained open. The report does not state whether the processing of the application was
suspended when this criterion was removed from the BOLO list. This case was opened
December 28, 2009, and was approved 2,488 days later. Z STREET’s application was
filed December 28, 2009, and was approved 2,488 days later.
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32. Z STREET used the term “Disputed Territories” to refer to areas in the Middle East. Z
STREET contends that organizations opposed to Israel’s presence in lands east of the
1949 Armistice Line, commonly referred to as the Green Line, never refer to such areas
as “Disputed Territories,” and instead refer to such areas as “Occupied Territories” or
“Palestinian Territories” or “the West Bank and Gaza.” Z STREET further contends that,
at least during the period between January 20, 2009, and January 20, 2017, neither the
United States Department of the Treasury, the Internal Revenue Service, nor the United
States Department of State referred to such areas as “disputed territories.”
33. According to the 2017 TIGTA report, the TAG group manager in Cincinnati, Ohio,
recommended that consideration be given to transferring the applications from the three
organizations described in the entry “Occupied Territory Advocacy” to the EO Technical
Unit in Washington, D.C., on October 20, 2010, which was almost two months after Z
STREET filed this case and a little over two months after the entry was added to the
BOLO list. Referring to a contemporaneous email, the 2017 TIGTA report noted that
“the cases had been transferred to […] in the Determinations Unit and the TAG group
manager suggested transferring the cases to the Technical Unit because the cases (1)
involved anti-Israeli sentiment claiming, among many items, violation of international
law as well as ethnic cleansing by Israel; (2) mentioned activities and funding going to
Israel and related areas such as the Gaza Strip as well as West Bank areas, which could
involve settlement issues; (3) mentioned support [in two of the three applications] for
various hospitals in the Gaza Strip, […]; (4) involved elevated rhetoric that would likely
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draw media attention if the applicants ultimately disagree with the IRS’s decision; and (5)
involved high-impact or sensitive issues that could generate publicity.”
34. Of the applications identified on page 62 of the 2017 TIGTA report, one was approved in
875 days, and two were denied for failure to establish.
35. The 2017 TIGTA report determined that Z STREET received a request for information
from the IRS during the processing of its application that TIGTA determined, in its 2013
report, to be unnecessary.
36. The EO Technical Unit within the IRS responsible for assisting with the development of
many of the applications referenced in the 2013 and 2017 TIGTA reports was located in
Washington, DC at the time these cases were processed.
37. The 2017 TIGTA report confirmed that the EO Technical Unit was not involved in the
processing of Z STREET’s application.
38. TIGTA did not make any recommendations in its 2017 report because the procedures in
place when the 17 criteria were potentially used by the IRS are no longer in effect.
39. Z STREET did not initiate this litigation to obtain tax-exempt status, as both the District
Court for the District of Columbia and the Court of Appeals for the D.C. Circuit have
found in this case. Under section 7428 of the Internal Revenue Code, all organizations
seeking tax-exempt status have the right to bring a court action seeking a declaratory
judgment regarding their tax-exempt status upon the expiration of 270 days after
submitting their application. The United States District Court for the Eastern District of
Pennsylvania held that that this suit “is best construed as a controversy arising under 26
U.S.C. §7428, which provides for declaratory judgments in suits related to the
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classification of organizations under Section 501(c)(3).” The court also stated: “[t]he
Court shares Plaintiff’s view that this case is about constitutionally valid process, and
finds that 26 U.S.C. § 7428 is the statute which establishes Plaintiff’s right to challenge
the IRS’s 503(c) [sic.] classification process,” thereby requiring that it be transferred from
that court to the United States District Court for the District of Columbia. Once the case
reached this Court, the defendant again moved to dismiss on the grounds that this suit
should have been filed as a declaratory judgment action under 26 U.S.C. § 7428 if the
IRS had not, within 270 days of Z STREET’s application being submitted, made a final
determination on it. However, the defendant’s position was rejected, first by this Court
and then by the D.C. Circuit. Z Street v. Koskinen, 44 F.Supp.3d 48 (D.D.C. 20014),
aff’d, 791 F.3d 24 (D.C. Cir. 2015).
40. In True the Vote v. Internal Revenue Service, 831 F.3d 551 (D.C. Cir. 2016), the Plaintiffs
alleged, among other things, that the IRS engaged in viewpoint discrimination in the
processing of applications for exemption under Section 501(c)(4) of the Internal Revenue
Code. In that decision, the Court of Appeals referred to the IRS policy of suspending
processing of applications if the applicant initiates litigation against the IRS challenging
the manner in which the applications are being processed as a “Catch 22” under which the
applicant can only obtain tax-exempt status if the applicant does not file a lawsuit
challenging the manner in which its application is being processed. Following that
decision, which was issued on August 5, 2016, the IRS began processing the applications
of litigants whose applications remained pending, including Z STREET’s application,
which had been pending but suspended.
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41. On August 16, 2016, the government notified Z STREET that the government would
resume processing of Z STREET’s application. After the IRS resumed processing of
Z STREET’s application, the IRS did not seek any additional information from
Z STREET, beyond what the IRS possessed as of the filing of this lawsuit. The IRS
granted Z STREET’s application for tax-exempt status under section 501(c)(3) of the
Internal Revenue Code on October 19, 2016.
42. By the time the IRS began processing the applications of litigants whose applications
remained pending in August 2016, the IRS’s procedures for processing applications for
recognition of tax-exempt status had been substantially revised, as set forth in I.R.M.
7.20.2 (last rev. Oct. 22, 2015). This included the procedures for issuing development
letters.
43. The government’s decision to suspend the processing of Z STREET’s application as a
result of the filing of this action by Z STREET resulted in the application not being
approved for six years and ten months, until October 19, 2016, substantially longer than
would otherwise have been the case. For this delay, the government expresses its sincere
apology.
44. IRS Exempt Organizations Division is responsible for administering the tax code
provisions related to tax-exempt organizations, including processing applications
submitted by organizations seeking tax-exempt status and determining whether they are
entitled to such status.
45. The IRS is charged with the responsibility to exercise its power in a fair and
impartial way as a neutral administrator of the tax laws.
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46. The IRS acknowledges that criteria for selecting tax-exempt applications and/or taxexempt
entities for IRS review should focus on the activities of the organizations and
whether they fulfill the requirements of the law, and not on the applicants’ political
viewpoints.
47. Z STREET agrees that, in light of the parties’ agreed stipulations of fact and the
Court’s entry of this Order, and the parties’ separately memorialized agreement, all
remaining claims in this action should be dismissed.
DECLARATORY
JUDGMENT
48. 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.
49. The declaration in paragraph 48 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.
In light of the parties’ agreed stipulations, and the foregoing Declaratory Judgment, IT IS
HEREBY ORDERED that Plaintiffs’ remaining claims are dismissed with prejudice.

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