Israel-Specific Tax Policy Faces Legal Challenge

WASHINGTON (CN) - The Internal Revenue Service must face claims that it subjects Israel-related groups to more rigorous review for tax-exempt status, a federal judge ruled.

Z Street, a nonprofit dedicated to educating the public about Zionism, sued IRS Commissioner John Koskinen in 2012 after it was denied tax-exempt status under Section 501(c)(3) of Title 26 of the U.S. Code.

The group claimed that an IRS agent told it that "the IRS had special concerns about applications from organizations whose activities relate to Israel, and whose positions with respect to Israel contradict the current policies of the U.S. government," according to the Wednesday ruling.

Z Street alleged that the agency's special policy on Israel-related groups violates the First Amendment, but the IRS claimed that it had sovereign immunity. It also cited the Anti-Injunction Act and failure to state a claim as reasons for dismissal.

U.S. District Judge Ketanji Jackson shot each attempt down, saying the agency was trying to spin Z Street's claims into a tax-liability issue.

"Because this court does not accept defendant's core contention that Z Street seeks a determination of whether or not it is entitled to Section 501(c)(3) tax status through this action - which underpins each of defendant's grounds for dismissal - the court rejects defendant's assertions that the [Anti-Injunction Act], the [Declaratory Judgment Act], or sovereign immunity bars plaintiff's request for equitable relief and that plaintiff has an adequate remedy at law," Jackson wrote.

Z Street's claim doesn't rest on a tax liability issue, as the IRS alleges, the court found, saying the issue at hand is instead discrimination.

"Defendant struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement," Jackson wrote.

Z Street will press its constitutional claim in federal court.

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