The Trump administration continues to clean up the mess left by the Obama White House. Thursday, the Department of Justice announced it had reached a settlement in the last of the pending cases brought against the government “by groups alleging that their tax-exempt status was delayed by the IRS based on inappropriate criteria, including names and policy positions.”
Thursday’s announcement concerned the lawsuit brought by “Z STREET, a non-profit corporation dedicated to educating the public about various issues related to Israel and the Middle East.” A federal judge must still approve the parties’ consent decree, but that seems a mere formality, allowing the government to finally move past the scandal that began in 2010.
That year, as Kelly Phillips Erb detailed for Forbes, the Supreme Court held in Citizens United v. Federal Election Commission that the First Amendment guarantees “corporations, unions, and other organizations” the right to engage in political speech.
As a result of the ruling, the number of nonprofit organizations applying for tax-exempt status under section 501(c)(4) of the Tax Code increases dramatically. To deal with the increase, the IRS distributes its first formal BOLO (Be on the Lookout) listing for purposes of reviewing applications. Initially limited to Tea Party organizations applying for tax-exempt status, it widens over the next year to include more groups, and specific policy positions such as government spending and taxes. By 2011, acting Director of Exempt Organizations, Lois Lerner, is advised of the practice. The use of BOLO lists continues until June 12, 2013.
Z-STREET was one of the nonprofits caught up in the IRS’ targeting, having been flagged under “a BOLO category entitled ‘Occupied Territory Advocacy,’ which was described as comprised of those applications which ‘deal with the dispute territories in the Middle East,’” according to Z STREET founder Lori Lowenthal Marcus.
Details on the creation of the “Occupied Territory Advocacy” category remain murky, however, even after years of litigation because, as Marcus explained, “the IRS claims it was unable to find” the memorandum that prompted the IRS to flag Israeli-connected organizations. But the IRS’ description of "Occupied Territory Advocacy" organizations proves telling, stating that such organizations "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.”
Discovery also revealed several other shocking details of the IRS’ internal workings during the Obama administration. For instance, the government now admits that “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.” Why the State Department employee made this inquiry is unclear.
The following year, the New York Times ran an article entitled, "Tax-Exempt Funds Aid Settlements in West Bank.” This article discussed American nonprofit organizations supporting settlements in the West Bank with tax-exempt funds and quoted an anonymous senior State Department official as saying, “It’s a problem. … It’s unhelpful to the efforts that we’re trying to make.”
The obsession with Israel was not limited to high-level State Department officials. Rather, the team involved with Z STREET’s application seemed focused on the question of the Jewish state, with one IRS official asking Z STREET, as well as other applicants for nonprofit status: “Does your organization support the existence of the land of Israel?” and “Describe your organization’s religious belief system toward the land of Israel.”
While that IRS agent was not involved in reviewing Z STREET’s application, the agent involved “informed Z STREET’s counsel that the IRS is carefully scrutinizing organizations that are in any way connected with Israel” and that “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.’”
And the IRS had an interesting justification for this added review, as Marcus explained: “The IRS also claimed that it was permitted to stringently scrutinize our application for tax-exempt status because there is a heightened degree of terrorism in Israel, and therefore it needed to determine whether Z STREET might be funding terrorism in Israel. No joke.”
In all, Z STREET’s application was delayed nearly seven years, and only approved in the days leading up to the 2016 election. As part of the consent decree announced yesterday, the government expressed “its sincere apology.” Marcus responded to the settlement, telling the Jewish Press:
It is thrilling to actually wrestle the IRS to the ground and force it to admit that Z STREET was targeted because we support Israel and the right of Jews to live everywhere, and that the Obama administration’s IRS violated Z STREET’s constitutional rights by discriminating against us.
Whether Z STREET received more than satisfaction and an apology, however, is unclear. The consent decree remains silent on other remedies, while mentioning the existence of a “separately memorialized agreement.” Given that Z STREET presented a constitutional challenge to the IRS’ illegal targeting of applications from pro-Israel organizations, payment of the nonprofits’ attorney’s fees seems likely.
After seven-plus years of litigation, that bill will cost the government a pretty penny. And all because of the Left’s politicalizing of the IRS.
Margot Cleveland (@ProfMJCleveland) is a contributor to the Washington Examiner's Beltway Confidential blog. She served nearly 25 years as a permanent law clerk to a federal appellate judge, and is a former full-time faculty member and current adjunct professor for the college of business at the University of Notre Dame.
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