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Did IRS illegally specially scrutinize “Israel-related organizations”?

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That’s the ultimate question in the Z Street litigation; yesterday, the district court rejected some of the government’s preliminary procedural objections, and allowed the case to go forward (Z Street v. Koskinen (D.D.C. May 27, 2014)). Here’s a summary of the claim (some paragraph breaks added):

Plaintiff Z Street … is a non-profit corporation in Pennsylvania that is dedicated to educating the public about various issues related to Israel and the Middle East…. The complaint alleges that the Internal Revenue Service … violated the First Amendment when it implemented an internal review policy that subjected Israel-related organizations that are applying for tax-exempt status under Section 501(c)(3) of Title 26 of the U.S. Code to more rigorous review procedures than other organizations applying for that same status. Plaintiff maintains that this so-called “Israel Special Policy” represents impermissible viewpoint discrimination on the part of the federal government, and has requested declaratory and injunctive relief….
The allegations in Z Street’s complaint have roots that stretch back to the organization’s founding in late 2009. According to the complaint, Z Street was incorporated as a Pennsylvania non-profit corporation on November 24, 2009, for the purpose of “educating the public about Zionism; about the facts relating to the Middle East and to the existence of Israel as a Jewish State; and about Israel’s right to refuse to negotiate with, make concessions to, or appease terrorists.” Approximately one month after its formation, on December 29, 2009, Z Street filed an application with the IRS, seeking to be recognized as an organization that qualified for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code….
The complaint alleges that during [a telephone] conversation, [IRS] Agent [Diane] Gentry told Z Street’s counsel that she had two major concerns about approving the application …: first, that the organization engaged in “advocacy” activities that are not permitted under Section 501(c)(3); and second, 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 complaint, Agent Gentry told Z Street’s counsel that the IRS carefully scrutinizes all Section 501(c)(3) applications that are 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.” …

Here’s the court’s summary of the IRS’s procedural objections to the case, and of the court’s core reason for rejecting them:

[The IRS] presses three arguments that the Court nevertheless lacks subject-matter jurisdiction over Plaintiff’s constitutional claim. Defendant maintains, first, that the Anti–Injunction Act precludes this Court from exercising jurisdiction; second, that the Court cannot grant the relief that Plaintiff requests under the Declaratory Judgment Act; and third, that the doctrine of sovereign immunity bars Plaintiff’s suit. Defendant further argues that Plaintiff has failed to state a claim upon which relief can be granted because Plaintiff has an adequate remedy at law, thereby foreclosing the equitable relief that Plaintiff seeks.
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 AIA, the DJA, or sovereign immunity bars Plaintiff’s request for equitable relief and that Plaintiff has an adequate remedy at law….
Z Street alleges not that the IRS unlawfully denied it a preferred tax status, but only that the IRS subjected it to unconstitutional viewpoint discrimination in considering its application for that status. Thus, victory in this action would not provide an answer to the fundamental question of whether or not Z Street is entitled to Section 501(c)(3) status, and indeed, Z Street is not asking for any judicial determination to that effect. Rather, Z Street here seeks only to have its application — good or bad — be evaluated using the same standards are criteria that apply to other organizations that the IRS reviews.
In this regard, looking at the requested remedy as the D.C. Circuit requires, Z Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.” Neither the declaration nor the injunction, on their face, have direct implications for the assessment or collection of taxes — Z Street merely asks the Court to require the IRS to go about its usual business of evaluating Section 501(c)(3) applications in a manner that comports with the Constitution….
[In an earlier case, t]he en banc D.C. Circuit drew a clear line between suits that themselves seek to enjoin the assessment and collection of taxes — which the AIA and DJA prohibit — and other actions that could be brought against the IRS for a different purpose and to a different effect. Defendant has essentially ignored this critical line-drawing determination by insisting that, despite the fact that Z Street’s action has neither the purpose nor the effect of restraining the agency’s tax-collecting function, the instant constitutional claim should nevertheless be characterized as a “pre-enforcement” tax collection matter within the sweep of the AIA. This contention is clearly out of step with how the AIA and DJA have long been interpreted in this jurisdiction….