Taxation & Estate Planning

IS THE IRS IMPROPERLY EXAMINING THE RELIGIOUS AND POLITICAL DOCTRINE OF EXEMPT ORGANIZATION APPLICANTS?

By Charles Rubin

The Internal Revenue Code allows nonprofit educational organizations to be exempt from income tax under Code §501(c)(3). In making a determination whether an organization is ?educational,? the IRS will determine whether an organization actually is engaged in educational activities. While this is an appropriate line of inquiry, inquiries into the substance and political correctness of the items that the organization intends to teach should not be relevant.

According to pleadings filed in a civil action, Z Street is a nonprofit organization which educates the public about Zionism, and about the State of Israel and its battle with terror.  As a nonprofit educational organization, Z STREET has applied for certification that donations made to it are charitable, and therefore exempt from federal income tax, under Code §501(c)(3).

Z Street is contending that the IRS is asking improper questions and unduly delaying its exempt organization application. As part of its court filing, Z Street has indicated that an IRS agent has informed it that the IRS is ?carefully scrutinizing organizations that are in any way connected with Israel,? and that there are such ?cases? being sent to a special unit in the D.C. office to determine whether the organization?s activities contradict the Administration?s public policies.?

If true, such inquiries by the IRS should not be permitted (as not relevant to the ?educational? aspects of the organization). Further, it raises that the specter that the IRS may be denying exempt organization status because an organization?s activities are not in accord with the Administration?s policies ? an improper, if not unconstitutional, politicization of what should be a policy-neutral exempt organization review.

To support its claim, Z Street has indicated that another Jewish organization applicant has been asked questions such as (1) [d]oes your organization support the existence of the land of Israel, and (2) describe your organization?s religious belief system towards the land of Israel.

It is true that an institution's purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred. Bob Jones Univ. v. U.S., 461 U.S. 574 (1983). In Bob Jones Univ., Code §501(c)(3) status was denied to a school that imposed racial discrimination. However, in that case, the U.S. Supreme Court noted that ?[w]e are bound to approach these questions with full awareness that determinations of public benefit and public policy are sensitive matters with serious implications for the institutions affected; a declaration that a given institution is not ?charitable? should be made only where there can be no doubt that the activity involved is contrary to a fundamental public policy.? Merely disagreeing with the Administration on foreign or religious policy should not give rise to a clash with fundamental public policy justifying  denial of Code §501(c)(3) status.

Just because Z Street has made these factual allegations in its court filings does not mean they are true. However, if they are, it is hoped that further judicial attention will be focused on the appropriateness of the questions being asked and whether the IRS is improperly basing exempt organization determinations on whether an organization?s activities are in concert with Administration policies.

PLAINTIFF?S MEMORANDUM IN OPPOSITION TO THE GOVERNMENT?S MOTION TO DISMISS THE COMPLAINT FOR FAILURE TO STATE A CLAIM, Z Street v. Commissioner

Full post as published by Rubin on Tax on November 27, 2010 (boomark / email).