Z Street v. John Koskinen

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 4, 2015 Decided June 19, 2015
No. 15-5010
Z STREET,
APPELLEE
v.
JOHN A. KOSKINEN, IN HIS OFFICIAL CAPACITY AS
COMMISSIONER OF INTERNAL REVENUE,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 1:12-cv-00401)
Teresa E. McLaughlin, Attorney, U.S. Department of
Justice, argued the cause for appellant. With her on the briefs
were Gilbert S. Rothenberg and Ellen Page DelSole,
Attorneys.
Jerome M. Marcus argued the cause for appellee. On the
brief was Jay M. Levin.
H. Christopher Bartolomucci and Stephen V. Potenza
were on the brief for amicus curiae Liberty Institute in
support of appellee.
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Before: GARLAND, Chief Judge, TATEL, Circuit Judge,
and SENTELLE, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: Z Street, a nonprofit organization
“devoted to educating the public about Zionism” and “the
facts relating to the Middle East,” applied for a section
501(c)(3) tax exemption. Based on a conversation its lawyer
had with an IRS agent, Z Street alleges that the agency 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 Commissioner, alleging that
the “Israel Special Policy” violates the First Amendment. The
Commissioner 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, assuming the truth of Z Street’s allegations—as
it must at this stage of the litigation—denied the 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. We affirm.
I.
Because of the “danger that a multitude of spurious suits,
or even suits with possible merit, would so interrupt the free
flow of revenues as to jeopardize the Nation’s fiscal stability,”
Cohen v. United States, 650 F.3d 717, 724 (D.C. Cir. 2011)
(en banc) (internal quotation marks and citations omitted), the
Anti-Injunction Act provides that “no suit for the purpose of
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restraining the assessment or collection of any tax shall be
maintained in any court by any person, whether or not such
person is the person against whom such tax was assessed,” 26
U.S.C. § 7421. “The manifest purpose of [the Act] is to
permit the United States to assess and collect taxes alleged to
be due without judicial intervention . . . .” Enochs v. Williams
Packing & Navigation Co., 370 U.S. 1, 7 (1962); see also
Cohen, 650 F.3d at 727 (discussing the tax exception to the
Declaratory Judgment Act, 28 U.S.C. § 2201(a), which is
“coterminous” with the Anti-Injunction Act).
Despite this prohibition, taxpayers have several avenues
to challenge the assessment and collection of taxes, including,
according to the Commissioner, three that are relevant here.
Under section 7422, they can pay and then sue for a refund on
the grounds that the tax was “erroneously or illegally assessed
or collected.” 26 U.S.C. § 7422(a). Nonprofit taxpayers may
use section 7422 to challenge the denial or revocation of their
tax-exempt status. See Bob Jones University v. Simon, 416
U.S. 725, 746 (1974) (“[A] suit for a refund . . . offer[s]
petitioner a full, albeit delayed opportunity to litigate the
legality of the Service’s revocation of tax-exempt
status . . . .”). Under section 6213, a taxpayer who receives a
deficiency notice “may file a petition with the Tax Court for a
redetermination of the deficiency.” 26 U.S.C. § 6213(a). This
provision also allows a nonprofit organization to litigate its
eligibility for a section 501(c)(3) exemption. See Bob Jones,
416 U.S. at 730 (“[T]he organization may litigate the legality
of the Service’s action by petitioning the Tax Court to review
a notice of deficiency.”). Finally, section 7428 creates an
option expressly designed for section 501(c)(3) applicants. If
the IRS denies an application, or if it fails to act within 270
days and the organization has taken “all reasonable steps to
secure [a] determination,” then the applicant can bring a
declaratory judgment action in the Tax Court, the Court of
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Federal Claims, or the United States District Court for the
District of Columbia. 26 U.S.C. § 7428. Designed to ensure
“that a taxpayer ha[s] prompt judicial review,” Centre for
International Understanding v. Commissioner of Internal
Revenue, 84 T.C. 279, 283 (1985), section 7428 authorizes the
court to “make a declaration with respect to [an
organization’s] initial qualification or continuing
qualification” for a tax exemption, 26 U.S.C. § 7428(a).
Z Street alleges that after it applied for a tax exemption in
December of 2009, an IRS agent informed its lawyer that the
agency has “special concern about applications from
organizations whose activities are related to Israel, and that
are organizations whose positions contradict the US
Administration’s Israeli Policy.” First Am. Compl. 9 ¶ 18.
According to the lawyer, the IRS agent went on to say that
“the IRS is carefully scrutinizing organizations that are in any
way 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. at 10 ¶¶ 24–25 (internal quotation marks
omitted). Based on this conversation, Z Street alleges that the
IRS has an “Israel Special Policy,” which “mandates that []
applications [from organizations holding views about Israel
inconsistent with those espoused by the Obama
administration] be scrutinized differently and at greater
length, and therefore that they take longer to process than
those made by organizations without that characteristic.” Id.at 11 ¶ 27.
Eight months later—just 32 days shy of the date on
which it could have proceeded under section 7428—Z Street
sued the Commissioner “[p]ursuant to the Declaratory
Judgment Act, 28 U.S.C. § 2201,” claiming that the “Israel
Special Policy” constitutes “blatant viewpoint discrimination
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in violation of the First Amendment,” First Am. Compl. 15;
id. at 15 ¶ 44. It sought a declaration to that effect, as well as
an injunction “[b]arring application of the Special Policy to its
pending application” and requiring that the IRS adjudicate the
application “expeditiously and fairly and without any
consideration of whether the positions espoused by the
Plaintiff or its officers are or are not consistent or inconsistent
with the policy positions taken by the Obama administration.”
Id. at 16. Although Z Street filed its complaint in the Eastern
District of Pennsylvania, that court, believing that the suit “is
best construed as a controversy arising under [section] 7428,”
transferred the case to the United States District Court here.
See Order Transferring Case to the District Court of the
United States for the District of Columbia.
The Commissioner moved to dismiss pursuant to Federal
Rules of Civil Procedure 12(b)(1) and 12(b)(6). He argued
that the court lacked jurisdiction both because the Anti-
Injunction Act barred the suit and because the doctrine of
sovereign immunity protected the government. Mot. to
Dismiss Am. Compl. 1–2; see also Memorandum of Law in
Support of Mot. to Dismiss Am. Compl. 14–16 (making same
argument based on the Declaratory Judgment Act).
Additionally, he maintained that the complaint failed to state a
claim for injunctive relief since the plaintiff had adequate
remedies at law, i.e., a refund suit, or, if Z Street had simply
waited another 32 days, a section 7428 action. Mot. to
Dismiss Am. Compl. 1. On the merits, the Commissioner
disputed Z Street’s allegations, contending that “there simply
was no viewpoint discrimination” because “there is no ‘Israel
Special Policy’ and Z Street’s application has not been subject
to ‘heightened scrutiny.’” Memorandum of Law in Support of
Mot. to Dismiss Am. Compl. 7. But because the
Commissioner moved to dismiss under Rules 12(b)(1) and
(6), the district court was required to assume that the IRS in
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fact has an “Israel Special Policy” that delays the processing
of section 501(c)(3) applications from organizations whose
views on Israel differ from the administration’s. See American
National Insurance Co. v. FDIC, 642 F.3d 1137, 1139 (D.C.
Cir. 2011) (at the motion to dismiss stage a court must
“assume the truth of all material factual allegations in the
complaint” (internal citations and emphasis omitted)).
The district court denied the Commissioner’s motion to
dismiss, concluding that “Z Street’s First Amendment
claim . . . cannot properly be characterized as a lawsuit
implicating the ‘assessment or collection’ of taxes” because
the organization “seeks only to have a ‘constitutionally valid
process’ used when its application for Section 501(c)(3) status
is evaluated—nothing more and nothing less.” Z Street, Inc. v.
Koskinen, 44 F. Supp. 3d 48, 59, 67 (D.D.C. 2014) (citations
omitted). Likewise, the court held, Z Street stated a claim for
injunctive relief because “none of the[ other] paths to the
courthouse”—a refund suit, a deficiency petition, or a section
7428 action—“would in fact provide Z Street with an
adequate remedy for the harm that it has alleged.” Id. at 66.
At the Commissioner’s request, the district court certified
its order for interlocutory appeal, see Order Granting Mot. to
Certify for Interlocutory Appeal; 28 U.S.C. § 1292(b)
(allowing district judges to certify orders for immediate
appeal when they are “of the opinion that [an] order involves
a controlling question of law . . . and that an immediate appeal
from the order may materially advance the ultimate
termination of the litigation”), and this court granted the
requisite permission, see Order Granting Petition for
Permission to Appeal; 28 U.S.C. § 1292(b) (“The Court of
Appeals . . . may . . . in its discretion[] permit an appeal to be
taken from such order . . . .”). Here, the Commissioner
reiterates his arguments that the Anti-Injunction Act and the
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doctrine of sovereign immunity bar this suit. He adds that Z
Street’s claim is “not yet justiciable” because the alleged
policy “has not been ‘formalized and . . . felt in a concrete
way.’” Appellant’s Br. 56 (quoting Abbott Laboratories v.
Gardner, 387 U.S. 136, 148 (1967)). Given that we are
reviewing the denial of a motion to dismiss, “we make legal
determinations de novo,” American National Insurance Co.,
642 F.3d at 1139, and, like the district court, assume the truth
of Z Street’s allegations.
II.
Before considering the parties’ arguments, we think it
helpful to summarize the cases they debate and that control
the ultimate disposition of this case.
In Bob Jones University v. Simon, 416 U.S. 725 (1974),
after the IRS moved to withdraw Bob Jones’ section 501(c)(3)
status because it refused to admit African-American students,
the University sued to maintain its exemption. In a companion
case, Alexander v. “Americans United” Inc., 416 U.S. 752(1974), a non-profit group challenged its reclassification from
a section 501(c)(3) to a section 501(c)(4) organization due to
its lobbying activities. The Court found both suits barred by
the Anti-Injunction Act, explaining in Bob Jones that “prior to
the assessment and collection of any tax, a court may [not]
enjoin the Service from revoking [tax-exempt status].” Bob
Jones, 416 U.S. at 727. The Court brushed aside the
challengers’ counterarguments. “[T]he constitutional nature of
a taxpayer’s claim,” the Court explained, “is of no
consequence under the Anti-Injunction Act.” “Americans
United”, 416 U.S. at 759. And even though Bob Jones
insisted that it had sued the IRS to ensure “the maintenance of
the flow of contributions, not [to] obstruct[] . . . revenue,” the
Court saw the situation differently, stating that the
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University’s “complaint and supporting documents filed in
the District Court belie any notion that this is not a suit to
enjoin the assessment or collection of federal taxes.” Bob
Jones, 416 U.S. at 738; see also “Americans United”, 416
U.S. at 760–61 (“The obvious purpose of respondent’s action
was to restore advance assurance that donations to it would
qualify as charitable deductions under § 170 that would
reduce the level of taxes of its donors.”). That said, the Court
emphasized that “[t]his is not a case in which an aggrieved
party has no access at all to judicial review.” Bob Jones, 716
U.S. at 746. “Were that true,” it continued, “our conclusion
might well be different.” Id.
That scenario came to pass in South Carolina v. Regan,
465 U.S. 367 (1984), where the state challenged an
amendment to the Internal Revenue Code that altered the
taxation of certain state-issued bonds. Because South Carolina
paid no taxes, it was “unable to utilize any statutory procedure
to contest the constitutionality of [the tax].” Id. at 380. Under
these circumstances, the Court held, South Carolina’s suit was
not barred by the Anti-Injunction Act. The “Act’s purpose and
the circumstances of its enactment indicate that Congress did
not intend the Act to apply to actions brought by aggrieved
parties for whom it has not provided an alternative remedy.”
Id. at 378. Put another way, “the Act was intended to apply
only when Congress has provided an alternative avenue for an
aggrieved party to litigate its claims.” Id. at 381.
This circuit has also considered the Anti-Injunction Act,
though in a very different situation. In Cohen v. United States,
650 F.3d 717 (D.C. Cir. 2011) (en banc), taxpayers
challenged a special procedure the IRS had established for
refunding an unlawfully collected tax. We rejected the
government’s argument that the case was barred by the Anti-
Injunction Act, explaining that the case did not involve the
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“assessment or collection” of taxes because “[t]he IRS
previously assessed and collected the excise tax at issue[,]
[t]he money is in the U.S. treasury[, and t]he legal right to it
has been previously determined.” Id. at 725. In so ruling, we
rejected the IRS’s view of “a world in which no challenge to
its actions is ever outside the closed loop of its taxing
authority.” Id. at 726. Instead, the Anti-Injunction Act, “as its
plain text states, bars suits concerning the ‘assessment or
collection of any tax[,]’ [and] is no obstacle to other claims
seeking to enjoin the IRS, regardless of any attenuated
connection to the broader regulatory scheme.” Id. at 727.
Accordingly, the Act “requires a careful inquiry into the
remedy sought, the statutory basis for that remedy, and any
implication the remedy may have on assessment and
collection.” Id. (discussing We the People Foundation, Inc. v.
United States, 485 F.3d 140 (D.C. Cir. 2007)).
A final series of cases informs our analysis. In Regan v.
Taxation with Representation of Washington, 461 U.S. 540(1983), the Supreme Court held that the tax code may not
“discriminate invidiously . . . in such a way as to aim at the
suppression of dangerous ideas.” Id. at 548 (internal quotation
marks and alteration omitted). That decision, the Court later
explained in Rosenberger v. Rector and Visitors of University
of Virginia, 515 U.S. 819 (1995), “reaffirmed the requirement
of viewpoint neutrality in the Government’s provision of
financial benefits.” Id. at 834.
These cases, then, stand for the following basic
propositions. First, outside of certain statutorily authorized
actions, like those brought pursuant to section 7428, the Anti-
Injunction Act bars suits to litigate an organization’s tax
status (Bob Jones and “Americans United”). Second, the Act
does not apply in situations where the plaintiff has no
alternative means to challenge the IRS’s action (South
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Carolina) or where the claim has no “implication[s]” for tax
assessment or collection (Cohen). Finally, in administering
the tax code, the IRS may not discriminate on the basis of
viewpoint (Regan).
III.
The Commissioner argues that Bob Jones and
“Americans United” govern this case. Z Street argues that
Cohen controls. Neither is correct, though Z Street is much
closer to the mark.
Contrary to the Commissioner’s contention, Bob Jones
and “Americans United” are quite different from this case
given that the plaintiffs there sought to litigate their tax status,
see supra at 7–8, whereas Z Street seeks to prevent the IRS
from unconstitutionally delaying consideration of its
application—“not to obtain tax exempt status.” Appellee’s Br.
18. Indeed, even if Z Street obtains all the relief it seeks, the
IRS could, as counsel for the Commissioner conceded at oral
argument, see Oral Arg. Rec. 6:05–16, still deny its
application for any number of reasons. See 26 C.F.R.
§ 1.501(c)(3)-(1) (describing the requirements for the
501(c)(3) exemption). In other words, unlike the plaintiffs in
Bob Jones and “Americans United”, Z Street does not have
the “obvious purpose” of securing “assurance that donations”
will “qualify as charitable deductions.” “Americans United”,
416 U.S. 760–61.
The Commissioner nonetheless insists that Bob Jones and
“Americans United” require a broad approach to what
constitutes prohibited “tax litigation.” Appellant’s Br. 30. As
explained above, however, in Cohen we rejected this view of
“a world in which no challenge to [the IRS’s] actions is ever
outside the closed loop of its taxing authority.” Cohen, 650
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F.3d at 726. The Commissioner points out that even after
Cohen, this court described the Anti-Injunction Act as
“barr[ing] suits that interfere with ancillary functions to tax
collection.” Seven-Sky v. Holder, 661 F.3d 1, 10 (D.C. Cir.
2011), cert. denied, 133 S. Ct. 63 (2012). But that language is
simply shorthand for what we said in Cohen, i.e., that the Act
“requires a careful inquiry into the remedy sought, the
statutory basis for that remedy, and any implication the
remedy may have on assessment and collection.” Cohen, 650
F.3d at 727.
Our rejection of the Commissioner’s broad reading of the
Act finds support in the Supreme Court’s recent decision in
Direct Marketing Association v. Brohl, 135 S. Ct. 1124(2015). There, interpreting the Anti-Injunction Act’s cousin,
the Tax Injunction Act, which serves a similar function for
federal court challenges to state taxes, the Court read
“restrain” in that statute as having a “narrow[]
meaning . . . captur[ing] only those orders that
stop . . . assessment, levy and collection” rather than “merely
inhibit” those activities. Id. at 1132 (internal quotation marks
omitted). True, the two statutes differ: the Tax Injunction Act
pairs “restrain” with “‘enjoin’ and ‘suspend’” suggesting that
the word is used “in its narrow[] sense,” id., while the word
“restraining” stands alone in the Anti-Injunction Act. Yet
Brohl’s holding is significant here because the Court
“assume[s] that words used in both Acts are generally used in
the same way.” Id. at 1129.
Bob Jones and “Americans United” thus do not mean
that the Anti-Injunction Act bars Z Street’s suit. Contrary to Z
Street’s argument, however, we are unpersuaded that Cohen
squarely permits it. Recall that Cohen requires that we
examine Z Street’s complaint to determine, among other
things, “any implication the remedy [it seeks] may have on
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assessment and collection.” Supra at 9. In Cohen, the remedy
sought could have no possible “implication” for assessment
and collection because the IRS had already assessed and
collected the tax—it was in the Treasury. Id. By contrast, Z
Street’s suit arguably could have “implication[s]” for
assessment and collection. If, for example, Z Street prevails in
this case and obtains a tax exemption earlier than it otherwise
would have, contributions to it will be tax deductible earlier,
thus reducing the overall assessment and collection of taxes.
In the end, however, we have no need to decide whether
such an implication is sufficient to trigger the Anti-Injunction
Act. As the Court explained in South Carolina, the Act does
not apply at all where the plaintiff has no other remedy for its
alleged injury—precisely the situation in which Z Street finds
itself.
Consider section 7428. According to the Commissioner,
if Z Street had just waited an additional 32 days it could have
filed suit under this provision and obtained an “adequate
remedy.” Appellant’s Br. 48. But as the Commissioner
concedes, section 7428 authorizes a court to issue only “a
declaration with respect to [an organization’s] qualification”
for a section 501(c)(3) exemption, 26 U.S.C. § 7428, and Z
Street is not seeking to establish its eligibility for a tax
exemption, supra at 10. Instead, it seeks an order prohibiting
the IRS from delaying consideration of Z Street’s section
501(c)(3) application because of the organization’s views on
Israel. The “only thing we’re suing about,” Z Street’s counsel
told us at oral argument, “is delay.” Oral Arg. Rec. 51:14–38;
see also id. at 41:57–42:57 (statement of Z Street’s counsel
agreeing that all Z Street seeks is an order barring application
of the “Israel Special Policy” insofar as it causes delay). In
other words, although section 7428 provides a remedy, that
remedy cannot address Z Street’s alleged injury.
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The same is true with respect to the remedies offered by
sections 6213 (deficiency petition) and 7422 (refund suit).
Under either provision, the court would be limited to
reviewing the taxpayer’s tax liability—the “deficiency” in the
case of section 6213, or whether the tax was “erroneously or
illegally collected” in the case of section 7422. 26 U.S.C.
§ 6213; id. § 7422. Neither provision would allow the court to
review the allegedly unconstitutional delay in processing Z
Street’s section 501(c)(3) application.
In the words of South Carolina, then, Z Street is “unable
to utilize any statutory procedure to contest the
constitutionality,” South Carolina, 465 U.S. at 380, of the
delay allegedly caused by the IRS’s “Israel Special Policy.”
Under these circumstances, the Anti-Injunction Act does not
bar this suit. Id. Were it otherwise, the IRS would be free for
at least 270 days—the period of time taxpayers must wait to
invoke section 7428—to process exemption applications
pursuant to different standards and at different rates
depending upon the viewpoint of the applicants—a blatant
violation of the First Amendment. See Rosenberger, 515 U.S.
at 834 (“Regan . . . reaffirmed the requirement of viewpoint
neutrality in the Government’s provision of financial
benefits. . . .”). Indeed, in situations where a taxpayer elects
not to sue under section 7428, the IRS would have even
longer since the taxpayer would be unable to invoke either
section 6213 or section 7422 until the agency actually denies
an exemption and assesses liability.
IV.
We can easily resolve the Commissioner’s remaining
arguments. The district court lucidly explained why sovereign
immunity presents no bar to Z Street’s suit: section 702 of the
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Administrative Procedure Act “waives sovereign immunity
with respect to suits for nonmonetary damages that allege
wrongful action by an agency or its officers or employees,
and the instant lawsuit fits precisely those criteria.” Z Street,
44 F. Supp. 3d at 63. Although the Commissioner never
raised his justiciability argument in the district court, that
argument fails for the same reason the district court and we
have rejected his Anti-Injunction Act argument: Z Street
seeks not to restrain “the assessment or collection” of a tax,
but rather to obtain relief from unconstitutional delay, the
effects of which it is now suffering.
V.
For the foregoing reasons, we affirm.
So ordered.