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Federal Appeals Court Chimes In: IRS Not Above Constitution

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“Pummeled,” “raked over the coals,” and “almost laughed out of court” – these are news descriptions of the recent judicial thrashing of the IRS during oral argument inZ Street v. Koskinen. It is rare for judges to speak so harshly to government officials, but, then again, the IRS’s argument that it should be allowed to engage in viewpoint discrimination hardly seems worthy of respect.

The case was filed last year by Z Street, Inc., a nonprofit corporation dedicated to educating the public about issues related to Israel and the Middle East. Z Street filed an IRS Form 1023 application with the IRS, seeking tax-exempt recognition as a Section 501(c)(3) public charity. An IRS agent later allegedly told Z Street that the IRS was questioning the substance of Z Street’s advocacy efforts, particularly whether and to what extent its views clashed with positions taken by the Obama Administration. As a result, Z Street’s exemption application was being sent to a special IRS unit in charge of the IRS’s “Special Israel Policy” and therefore would be delayed.

Z Street sued the IRS, claiming the agency violated its First Amendment rights by not processing its application free from consideration of Z Street’s specific positions taken about Israel – i.e., “viewpoint discrimination.” At the trial court level, the IRS filed a motion to dismiss the case, asserting among other things that it did not have to defend the constitutionality of its internal processes. The federal district court for the District of Columbia resoundingly disagreed, denying the IRS’s motion and recognizing the IRS’s accountability for potential free speech constitutional violations.  

The next step for the trial court litigation thus should have been discovery, when Z Street would be allowed to ask probing questions about the IRS’s internal processing of its tax-exempt application. But instead, the IRS appealed the trial court’s denial of its preliminary motion to the D.C. Circuit Court of Appeals. 

During oral argument on May 7, 2015, IRS attorney Teresa McLaughlin argued that, had Z Street simply waited 31 more days at the initial IRS review level, Z Street would have been eligible to sue for judicial approval of tax-exempt status of its application. Such suit is authorized under Internal Revenue Code Section 7428 for exemption applications that remain pending at the IRS after 270 days. The IRS attorney argued that such suit should have been an acceptable alternative for Z Street, rather than seeking a constitutionally fair process internally from the IRS.

The three judges on the appellate panel were genteel but obviously incredulous (David Sentelle, David Tatel, Chief Judge Merrick Garland). Judge Sentelle barely let IRS attorney McLaughlin begin her oral argument before opining that the IRS’s “Special Israel Policy,” if it existed as alleged, would be highly problematic as a First Amendment constitutional matter. Judge Tatel added that a subsequent tax refund or relief through a Section 7428 “alternative” lawsuit, as proposed by the IRS, could neither satisfactorily resolve the constitutional defect with the IRS’s approach nor remedy the resulting harm to Z Street and other tax-exemption applicants from such viewpoint discrimination. 

Judge Garland continued the grilling on the IRS’s argument that a Section 7428 suit was an acceptable alternative for tax-exemption applicants like Z Street: "You don’t really mean that, right? Because the next couple words would be the IRS is free to discriminate on the basis of viewpoint, religion, race [for 270 days].” He continued: “Imagine the IRS announces today a policy that says as follows: ‘No application by a Jewish group or an African-American group will be considered until one day short of the period under the statute . . . Is it your view that that cannot be challenged?” He then concluded, “I think if I were you I would go back and ask your superiors whether they want us to represent that the government’s position in this case is that the government is free to unconstitutionally discriminate against its citizens for 270 days.” 

In response, IRS attorney McLaughlin pointed out that, indeed, many of her supervisors were in the courtroom. She also argued, albeit briefly (and incorrectly under binding legal precedent), that tax exemption applicants may not be “unduly biased” in their advocacy. Thankfully, the appellate panel quickly shot down her viewpoint-related contention and, doing so, expressed great concern over excessive IRS scrutiny of religious beliefs and other areas of conscience rightfully belonging to nonprofit voices. 

The judges also resoundingly rejected the IRS’s back-up argument that, as a procedural matter, the case was precluded under the federal Anti-Injunction Act. Continuing their concerns, they asked why the government had buried a key legal precedent in a footnote of its brief. According to that case, such issue was already firmly decided – against the IRS’s position – and therefore should not have been raised. Under applicable rules, all attorneys – even those from the IRS – must bring to light any adverse authority and are prohibited from engaging in such obfuscation with respect to controlling legal precedent.

The IRS’s apparent indifference to exemption applicants’ constitutional rights are disturbing. But it is encouraging to witness the judiciary’s capacity for vigorously guarding those rights. Little doubt exists that the D.C. appellate court will deny the IRS’s appeal, thereby paving the way for Z Street to engage in discovery and search for fuller accountability regarding the IRS’s processing of its tax-exemption application. But such justice comes at a significant price – money needed to fight the government, extensive delays, and further tarnishing of the IRS’s reputation. 

The audio link from the Z Street oral argument is as$file/15-5010.mp3

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