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Z Street, Inc. v. Koskinen

United States District Court, D. Columbia.

May 27, 2014

Z STREET, INC., Plaintiff,
v.
JOHN KOSKINEN, IN HIS OFFICIAL CAPACITY AS COMMISIONER OF INTERNAL REVENUE, Defendant

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[Copyrighted Material Omitted]

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For Z Street, Plaintiff: Jay M. Levin, LEAD ATTORNEY, REED SMITH, LLP, Philadelphia, PA; Jerome M. Marcus, LEAD ATTORNEY, PRO HAC VICE, MARCUS & AUERBACH LLC, Jenkintown, PA.

For Douglas H. Shulman, IN HIS OFFICIAL CAPACITY AS COMMISSIONER OF INTERNAL REVENUE, Defendant: Deborah Starr Meland, Norah Elizabeth Bringer, LEAD ATTORNEYS, U.S. DEPARTMENT OF JUSTICE, Tax Division, Washington, DC; Andrew C. Strelka, DEPARTMENT OF JUSTICE, Washington, DC.

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MEMORANDUM OPINION

KETANJI BROWN JACKSON, United States District Judge.

Plaintiff Z Street (" Plaintiff" or " 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. Z Street originally filed this lawsuit in the Eastern District of Pennsylvania in December of 2010, naming the Commissioner of the Internal Revenue Service, in his official capacity, as the defendant.[1] The complaint alleges that the Internal Revenue Service (" IRS" or " Defendant" ) 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.[2]

Before this Court at present is Defendant's motion to dismiss the complaint pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. With respect to Plaintiff's contention that this case raises a federal question and is thus subject to this Court's jurisdiction under 28 U.S.C. § 1331, Defendant presses three arguments that the Court nevertheless lacks subject-matter jurisdiction over Plaintiff's constitutional claim. Defendant maintains, first, that the Anti-Injunction Act (" AIA" ), 26 U.S.C. § 7421 (2013), precludes this Court from exercising jurisdiction; second, that the Court cannot grant the relief that Plaintiff requests under the Declaratory Judgment Act (" DJA" ), 28 U.S.C. § 2201 (2013); 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

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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. Accordingly, Plaintiff is correct that it is permitted to press its constitutional claim in federal court, and Defendant's motion to dismiss the complaint must be DENIED. A separate order consistent with this opinion will follow.

I. BACKGROUND AND PROCEDURAL HISTORY

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." (Amended Complaint (" Am. Compl." ), ECF No. 10, ¶ ¶ A, 3.) 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, 26 U.S.C. § 501(c)(3) (2013). ( Id. ¶ 4.)[3]

On May 15, 2010, IRS Agent Diane Gentry, who was handling Z Street's Section 501(c)(3) application, sent a letter to Z Street requesting additional information to aid her review. (Am. Compl. ¶ 16.) The amended complaint does not specify what particular information Agent Gentry requested, but it does allege that Z Street's counsel provided additional information to the IRS on June 17, 2010. ( Id. ) Z Street's counsel then attempted to follow up with Agent Gentry on several occasions to find out about the status of the organization's Section 501(c)(3) application, and was finally able to reach her by phone on July 19, 2010. ( Id. ¶ ¶ 17-18.) The complaint alleges that during that conversation, Agent 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. ( Id. ¶ 18.) 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." ( Id. ¶ ¶ 24-25.)

On August 25, 2010, just over one month after the telephone conversation between Z Street's counsel and Agent Gentry, Z

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Street filed an initial complaint in the Eastern District of Pennsylvania; it filed an amended complaint in that court on December 17, 2010. ( See ECF Nos. 1, 10.) Based upon Agent Gentry's statements to Z Street's counsel, the amended complaint alleges that the IRS maintains an " Israel Special Policy" with respect to the Section 501(c)(3) applications of organizations whose stance on Israel differs from that of the Obama administration, and that such applications are subject to additional review procedures not otherwise applicable. (Am. Compl. ¶ B.) Z Street's sole claim in this action is that the so-called Israel Special Policy constitutes viewpoint discrimination in violation of the First Amendment, ( id. ¶ ¶ 42-44) and Z Street requests both a declaration that this policy is unconstitutional, and an injunction that orders the IRS to disclose information about the policy and that also bars the agency from employing the policy when it " expeditiously and fairly" adjudicates Plaintiff's Section 501(c)(3) application. ( Id. at 16.)

Defendant filed a motion to dismiss the amended complaint on August 8, 2011 (ECF No. 19)--the motion that is the subject of this Opinion. However, after Defendant's motion was fully briefed, the presiding judge in the Eastern District of Pennsylvania sua sponte ordered the case transferred to this Court. ( See Transfer Order of February 13, 2012, ECF No. 28.) The Transfer Order stated that Z Street's case " is best construed as a controversy arising under 26 U.S.C. § 7428, which provides for declaratory judgments in suits related to the classification of organizations under Section 501(c)(3)." ( Id. ) The Transfer Order also noted that only three courts have jurisdiction over suits arising under Section 7428: the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia. ( Id. at n. 2); see also 26 U.S.C. § 7428 (" [U]pon the filing of an appropriate pleading, the United States Tax Court, the United States Court of Federal Claims, or the district court of the United States for the District of Columbia may make a declaration with respect to" an organization's classification under Section 501(c)(3)). However, the Transfer Order was also careful to observe that " [t]he Court shares Plaintiff's view that this is a case about constitutionally valid process, and finds that 26 U.S.C. § 7428 is the statute which establishes Plaintiff's right to challenge the IRS's 503(c) [sic] classification process." (Transfer Order at 1.)

The case was transferred to the United States District Court for the District of Columbia on March 15, 2012. (ECF No. 29.) On April 20, 2012, the Court ordered the parties to supplement their existing briefing with legal authority from the D.C. Circuit. ( See Minute Order of April 20, 2012.) On April 5, 2013, the case was reassigned to the undersigned, who subsequently ordered additional briefing on the question of whether the parties themselves viewed this action as one arising under Section 7428, and if so, whether that interpretation had any effect on the pending motion to dismiss. ( See Minute Order of May 13, 2013.) This Court held a hearing on Defendant's motion to dismiss and the supplemental briefing on July 19, 2013, and subsequently took the matter under advisement.

II. LEGAL LANDSCAPE

A. Standards For A 12(b)(1) Or. 12(b)(6) Motion To Dismiss

1. Lack Of Subject-Matter Jurisdiction Under Rule 12(b)(1)

Federal courts are courts of limited jurisdiction. See GMC v. EPA, 363 F.3d 442, 448, 361 U.S. App.D.C. 6 (D.C. Cir. 2004) (" As a court of limited jurisdiction, we begin, and

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end, with an examination of our jurisdiction." ) The law presumes that " a cause lies outside [the Court's] limited jurisdiction" unless the plaintiff establishes otherwise. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). When a defendant files a motion to dismiss a complaint for lack of subject matter jurisdiction, the plaintiff bears the burden of establishing jurisdiction by a preponderance of the evidence. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992); Shekoyan v. Sibley Int'l Corp., 217 F.Supp.2d 59, 63 (D.D.C. 2002).

In evaluating a motion to dismiss under Rule 12(b)(1), the Court must " assume the truth of all material factual allegations in the complaint and 'construe the complaint liberally, granting plaintiff the benefit of all inferences that can be derived from the facts alleged[.]'" Am. Nat'l Ins. Co. v. FDIC, 642 F.3d 1137, 1139, 395 U.S. App.D.C. 316 (D.C. Cir. 2011) (quoting Thomas v. Principi, 394 F.3d 970, 972, 364 U.S. App.D.C. 326 (D.C. Cir 2005)). Nevertheless, " 'the court need not accept factual inferences drawn by plaintiffs if those inferences are not supported by facts alleged in the complaint, nor must the Court accept plaintiff's legal conclusions.'" Disner v. United States, 888 F.Supp.2d 83, 87 (D.D.C. 2012) (quoting Speelman v. United States, 461 F.Supp.2d 71, 73 (D.D.C. 2006)).

Finally, when the court considers a motion to dismiss for lack of subject-matter jurisdiction under Rule 12(b)(1), the court " is not limited to the allegations of the complaint." Hohri v. United States, 782 F.2d 227, 241, 251 U.S. App.D.C. 145 (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64, 107 S.Ct. 2246, 96 L.Ed.2d 51 (1987). Rather, " a court may consider such materials outside the pleadings as it deems appropriate to resolve the question [of] whether it has jurisdiction to hear the case." Scolaro v. D.C. Bd. of Elections & Ethics, 104 F.Supp.2d 18, 22 (D.D.C. 2000) (citing Herbert v. National Academy of Sciences, 974 F.2d 192, 197, 297 U.S. App.D.C. 406 (D.C. Cir. 1992)).

2. Failure To State A Claim Under Rule 12(b)(6)

A Rule 12(b)(6) motion tests the legal sufficiency of a complaint. Browning, 292 F.3d at 242. " To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks and citation omitted). " The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (citation omitted). Although a plaintiff may survive a Rule 12(b)(6) motion even where " recovery is very remote and unlikely[,]" the facts alleged in the complaint " must be enough to raise a right to relief above the speculative level[.]" Bell A. Corp. v. Twombly, 550 U.S. 544, 555-56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (internal quotation marks and citation omitted). Moreover, a pleading must offer more than " labels and conclusions" or a " formulaic recitation of the elements of a cause of action[.]" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). If the facts as alleged, which must be taken as true, fail to establish that a plaintiff has stated a claim upon which relief can be granted, the Rule 12(b)(6) motion must be granted. See, e.g., Am. Chemistry Council, Inc. v. United States HHS, 922 F.Supp.2d 56, 61 (D.D.C. 2013). Finally, unlike in a motion under Rule 12(b)(1), in deciding a 12(b)(6) motion, a court may " consider only the facts alleged in the complaint, any documents either attached to or incorporated in

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the complaint and matters of which [the Court] may take judicial notice." EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624, 326 ...


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