Today, the US Court of Appeals for the District of Columbia Circuit ruled in Z Street v. Koskinen that Z Street, a pro-Israel group, can proceed with its lawsuit contesting the IRS’s process for determining the group’s tax-exempt status.  According to the opinion issued today, “Z Street alleges that the IRS has an ‘Israel Special Policy’ under which applications from organizations holding ‘political views inconsistent with those espoused by the Obama administration’ receive increased scrutin[y] that results in such applications ‘tak[ing] longer to process than those made by organizations without that characteristic.’”  

Z Street sued the IRS, alleging that the “Israel Special Policy” violates the First Amendment.  The IRS moved to dismiss, arguing that the action is barred by the Anti-Injunction Act, which prohibits suits to “restrain[] the assessment or collection of any tax.”  The district court denied the IRS’s motion, explaining that “Z Street was not seeking to restrain the ‘assessment or collection’ of a tax, but rather to prevent the IRS from delaying consideration of its application in violation of the First Amendment."

The Circuit Court affirmed the district court’s decision on the ground that the Anti-Injunction Act does not apply where a plaintiff has no other remedy for its alleged injury.  Section 7428 generally entitles an organization applying for tax-exempt status under section 501(c)(3) to a court determination of its qualification for such status after 270 days.  The Circuit Court found, however, that section 7428 could not provide Z Street with an adequate remedy because the “only thing [it is] suing about . . . is delay,” not whether it is entitled to a section 501(c)(3) exemption.  The Circuit Court did not reach the issue of whether Z Street’s action would indirectly restrain the assessment or collection of tax by implication.