A mistaken belief regarding the Obama administration’s IRS scandal was that it only targeted Tea Party and conservative groups. One of the organizations targeted by the IRS for denial of tax-exempt status was a pro-Israel organization called Z Street. After a seven-year court battle, Z Street won its lawsuit against the IRS.
During the Obama presidency, the IRS was a political tool bent on quieting organizations that disagreed with its the administration’s policies. The only reason Z Street was able to see its lawsuit through to completion is that its founder, Lori Lowenthal Marcus, and her husband were both attorneys, so they had no lawyer fees.
Representing the IRS, the Department of Justice entered into a settlement with Z Street, a non-profit corporation dedicated to educating the public about various issues related to Israel and the Middle East. The IRS delayed Z Street’s 501(c)(3) tax-exempt application because its viewpoint regarding Israel was different from that of the administration. For example, the Obama administration called territory outside he 1949 armistice lines “occupied territory,” Z Street had the nerve to call it “disputed territory.”
In August of 2010, almost three years before Lois Lerner announced at a law conference that the IRS had indeed targeted certain groups, Z Street filed a lawsuit contending they were being targeted by the IRS because they disagreed with the president’s policy on Israel. They filed their suit against the IRS after an agent allegedly told them his direction was to “give special scrutiny to organizations connected to Israel,” and that the files of some of those “organizations were sent to a special unit in Washington to determine whether the activities of the organization contradicted the public policies of the administration.”
In a consent order that is part of the settlement, a series of facts are agreed to by Z Street and the Department of Justice. Most of the information in this column comes from that consent decree, and some comes from conversations with Ms. Marcus.
The IRS claims the Z Street application was flagged because Z Street’s mission related to Israel, a country with terrorism. The IRS manager in their case said in sworn testimony that the IRS needed to investigate whether Z Street was funding terror.
However, Z Street discovered that between 2009 and 2016, while their application was being delayed, the IRS granted numerous applications for tax-exempt status that explicitly proclaimed donations would be spent in Gaza — a territory formally under the jurisdiction of Hamas, which the U.S. State Department designates as a terror organization.
And during the time they were supposedly investigating whether Z Street was funding terror, the IRS never asked how or where the organization spent its money. Even when the IRS finally granted Z Street a 501 (c)(3) tax-exempt status in October 2016, they didn’t anything about terror, money, or anything else it hadn’t known seven years earlier.
Z Street and other applications for tax-exempt status were sent to IRS headquarters in Washington for more intense scrutiny. They were selected because of the organizations’ viewpoint.
In 2010, Z Street spoke by telephone with the IRS employee who was reviewing its application. The IRS employee informed Z Street that the IRS is carefully scrutinizing organizations that are in any way connected with Israel. The employee further informed 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.”
During the trial, Z Street provided proof that four Jewish cultural or Israel-related organizations including Z Street applying for tax-exempt status were asked by the IRS to “explain their religious beliefs about the Land of Israel.”
Within weeks of President Obama’s inauguration, IRS and State Department officials began considering whether they could deny or revoke the tax-exempt status of organizations that provided material support to Jews living across the 1949 armistice line. The theory was that a Jewish presence in those areas is inconsistent with U.S. policy. The IRS drew up lists of such organizations based on information from anti-Israel websites such as Electronic Intifada and MondoWeiss.
While no formal policy was released barring U.S. tax-exempt entities from supporting Jewish activity over the Green Line, Obama IRS officials tried three times between 2009 and 2012 to create such a policy, and IRS employees made sure the effort wasn’t documented. One official emailed her supervisor saying that she would answer his questions about IRS policy relating to Israeli settlements only orally. “Not doing email on this,” she explained.
Even if the IRS could legitimately institute such a policy, it would not have applied to Z Street. Their mission is to educate Americans about Israel and thus have never spent a penny outside the U.S.
The most important part of the court’s ruling was that even the IRS has to obey the First Amendment to the Constitution. The judge wrote “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.”
Lori Lowenthal Marcus has shown herself to be a tireless advocate, not just for Israel but more broadly for the freedoms guaranteed in the Constitution. As someone who has known her for years, long before Z Street, I am proud of the work that Lori and her husband have put into this effort to set the IRS straight, to protect the rights of pro-Israel organizations and all 501 (c)(3) tax-exempt applicants with a viewpoint.