Z Street, the pro-Israel group that says it was denied 501(c)(3) tax status because of its views, got its day in court last week. While the outcome of the case is far from certain, during oral arguments, a three-judge panel from the D.C. Circuit Court of Appeals criticized the IRS and the Justice Department for its handling of the organization’s application.
Z Street was founded in 2009 in a self-declared effort to counter the influence of the liberal, pro-Israel and Democratic Party-allied J Street. Z Street says its mission is Zionist education. Nonetheless, when the organization sought tax-exempt status, its application was flagged for scrutiny by the IRS. The group then sued the IRS, claiming that the investigation violated Z Street’s freedom of speech. The IRS’s motion to dismiss the suit was rejected last year by a federal judge.
Last week, the judges reviewing the case came down hard on the IRS’s assertion that it could delay granting tax-exempt status because of Z Street’s policy views. And they questioned the IRS contention that groups may only sue to obtain their tax-exempt status if no action has been taken for 270 days. In other words, Chief Judge Merrick Garland said, the IRS is saying that it “is free to discriminate on the basis of viewpoint, religion, race” for 270 days.
It was a mistake for the IRS to “investigate” the tax-exempt status entitlement of Z Street, which says it does no lobbying, just as it was wrong for the IRS to probe groups with “tea party” or “progressive” in their names — both of which have been cause for criticism of the IRS in the past. But in arguing that it has a statutorily protected ability to delay an application for at least 270 days, the IRS has revealed itself to be far from the apolitical arbiter it was intended to be.
A group’s viewpoint should not be the criterion on which to judge its qualification for tax-exempt status. That’s not just wrong from a constitutional point of view — speech should be protected, not burdened by the government — it’s also bad policy.
Our political environment is polarized enough without the government getting into the business of deciding winners and losers. We look forward to a decision from the D.C. Circuit that makes clear to the IRS that in determining the bona fides of a tax-exempt applicant, the focus needs to be on what the applicant does, rather than what it says.