ISN'T IT IRONIC? THE UNDERMINING OF
AMERICAN PUBLIC POLICY BY AMERICAN
TAX LAW, AND THE RAMIFICATIONS
ON MIDDLE EAST PEACE
Amanda Berman*
INTRODUCTION ..............................................
I.
CHARITABLE ORGANIZATIONS .........................
A.
B.
II.
82
HISTORICAL TRANSFORMATION TO MODERN LAW OF
Underlying Purposes of Tax Exemption and Tax
Deduction ...................................
Determining When an Organization May Qualify
Under § 501(c)(3) or § 501(c)(4) of the Internal
Revenue Code................................
86
88
90
DESIGNATION AS A CHARITABLE ORGANIZATION
UNDER THE MODERN INTERNAL REVENUE CODE .....
93
Applying For and Maintaining CharitableStatus
Under the Code..............................
B. The Revocation of a Grant of Tax Exemption ........
C. Bob Jones and the Public Policy Exception ...........
95
96
99
A.
111.
CHARITABLE ORGANIZATIONS PURSUING
INTERNATIONAL MISSIONS ............................
A.
B.
Requirements for Domestic Charitable Organizations
Sending Tax-Exempt, Tax-Deductible FundsAbroad..
Z STREET................................
Introduction to Z STREET...............
Public Policy Exception as Applied to the Z
STREET Case
........................
iii. Z STREET is the Easy Case ...............
i.
ii.
IV.
101
102
106
106
108
113
ABUSES OF THE DOCTRINE OF CHARITABLE EXEMPTION
BY ORGANIZATIONS VIOLATING THE PUBLIC POLICIES
OF THE UNITED STATES AND THE SOVEREIGN
PREROGATIVES OF THE STATE OF ISRAEL ..............
A.
EstablishedIsraeli Public Policy Against SettlementBuilding in Certain Territory ....................
115
115
Candidate for J.D., 2012, Benjamin N. Cardozo School of Law; M.G.A., Fels Institute of
Government, University of Pennsylvania; B.A., University of Pennsylvania
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B. The Circumvention of the IRS and Contravention of
Established Israeli Policy by "Charitable"American
........... 121
Organizations ..................
C. Why this Abuse of the American System and
Subversion of Israel's EstablishedPolicy is so Dangerous
.................. 124
to Israel's Sovereign Existence
CONCLUSION..
...............................................
126
INTRODUCTION
In allowing tax exemption to charitable organizations and deducting charitable contributions from the taxable income of beneficent
Americans, the United States government incentivizes charitable giving
and stamps charitable organizations with government approval. However, in failing to properly define "charitable" in the relevant provisions
of the Internal Revenue Code (IRC), Congress and the Internal Revenue
Service (IRS) tolerate the unrestricted licensing of organizations that receive these very desirable tax benefits while acting in a manner that cannot possibly be considered "charitable" under any understood
definition. The courts too are complicit in their failure to provide a
definition of "public policy" that can effectively limit the granting of
charitable exemption based on the obvious notion that the government
should not subsidize organizations that act to contravene its established
policies. This Note will examine the unjustifiable result of the broad
definition of "charitable" in the United States tax laws in light of the
ability of domestic organizations to act overseas in furtherance of their
exempt purposes. The failures of Congress and the IRS to create a
working definition of this term and many other elusive, imprecise terms
throughout the IRC, and the failure of the courts to create any applicable check on the grant of charitable status through proper application of
a well-defined public policy exception, literally invite nonprofit groups
to receive the direct endorsement of the United States government while
they act to deliberately violate the critical policies of both the United
States government and the foreign governments in whose territories they
act.
Charitable, or nonprofit, organizations' are community groups organized with a social mission that have long received preferential tax
1 The term "nonprofit organization" refers to the requirement in the Internal Revenue
Code § 501(c)(3) (LexisNexis 2011), that "no part of the [organization's] net earnings . . .
inures to the benefit of any private shareholder or individual." See also Treas. Reg. § 1.501(c)(3)-
2011]
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treatment under the IRC. The IRS's treatment of charitable organizations encourages philanthropic donations and allows those groups to
operate to better their surrounding communities in a way that relieves
municipal, state, and federal government entities from obligations they
may otherwise be compelled to address. There are a variety of justifications for the tax benefits afforded to these groups, but the underlying
purpose of tax exemption and tax deductibility is to allow them to continue operating to achieve important social purposes. 2 The consequence
of these benefits, though, is that the American taxpayers directly subsidize nonprofit groups: like government entitlement programs, where the
taxpayers themselves cannot direct their taxes toward programs they prefer and away from programs they oppose, the grant of tax-exempt status
to a charitable organization puts that organization in a consortium receiving undiscriminating government-provided financial advantages. In
other words, once a group is deemed "charitable" under the IRC, it may
operate in controversial ways, offend one or more particular classes of
society, or act in ways contrary to the desires of many Americans, yet its
activities will continue to be subsidized by Americans.
This treatment of tax-exempt organizations is a necessary evil-if
one considers it evil-for the underlying perception that these organizations are important to the welfare and general livelihood of American
society. Logically, then, it would seem inconsistent with this purpose
for groups to obtain the coveted "charitable" status if they are acting
contrary to established public policy, in opposition to general goodwill,
or in a manner that conflicts with the sovereignty, independence, and
reasoned judgment of the government at large.
Congress has delegated authority to the IRS to make determinations regarding which organizations are considered charitable under the
IRC and are therefore are able to claim tax exemption. Groups applying
for this designation undergo a fairly simple process, declaring their mission and purposes, as well as the activities in which they intend to engage in order to pursue their objectives. To be granted tax-exempt
status, a group "must be both organized and operated exclusively" for
one of the purposes listed in § 501(c)(3) of the IRC: its objectives must
be religious, charitable, scientific, testing for public safety, literary, or
1 (2011). Nonprofit organizations do not distribute surplus funds to directors or employees,
but use all available funds to pursue their charitable purposes. See infra text accompanying note
26.
2 See infra Part IA; see also infra note 5.
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educational, or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals. 3 Section
170, which allows personal contributions to 501(c)(3) groups to be deducted from an individual's annual taxable income, requires the recipient groups to be organized under identical headings in order for
contributors to claim tax deductions. As this Note will explore in
depth, the definitions of "charitable" and "educational" are so broad as
to essentially allow any group acting legally and able to describe any
organizational actions as socially beneficial to request, and receive, charitable status. The lax application of the vague guidelines means that
groups have incorporated as nonprofit organizations, and continue to do
so, while simultaneously subverting the public policy of the United
States and pursuing objectives that, plainly, do not contribute to social
betterment in any way. Even more disturbing, some of these organizations operate to subvert the public policies of foreign sovereign states
who are in alliance with the United States and to critically impair these
states' ability to pursue their sovereign prerogatives.
One blatant and very troubling illustration of this problem is the
existence of domestic charitable organizations, exempt from taxation
and to which contributions are tax-deductible for the contributing individual, which funnel money directly to organizations in Israel which
advocate a hard-right position against a two-state solution to the IsraeliPalestinian peace process. The peace process is obviously highly controversial, and hard-line positions remain polarizing on both sides of the
debate. However, the established public policy of the State of Israel-as
understood through the media, the statements of government leaders,
and the actions of departments within the Israeli government-is to
freeze settlement-building in disputed territories for purposes of the possible conclusion of a peace treaty.' This position is considered necessary
in order to keep Palestinian leaders at the bargaining table, as construction in certain West Bank locations is seen as an attempt by Israel to
unilaterally predetermine complex questions regarding the delineation
of the borders of a future Palestinian state. The funds being disbursed
to settlers acting directly in contravention of this established policy,
building settlements and outposts in some of the most disputed territories in the entire Middle East region, have the stamp of American ap3 Treas. Reg. § 1.501(c)(3)-1(a)(1) (2011); I.R.C. § 501(c)(3) (2006).
§ 170(c)(2)(B) (LexisNexis 2011).
5 See infra Part IV.A (establishing Israeli public policy against settlement construction).
4 I.R.C.
2011]
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proval as a result of the tax-exempt process through which these funds
are acquired and these organizations maintained. With a salient definition of "charitable" in the IRC, an applicable public policy exception, or
more engaged, consistent oversight by the IRS, organizations acting so
ignominiously would face almost certain revocation of their tax-exempt
status. Without these critical safeguards on the charitable system, however, the government continues to both sanction and subsidize these
activities.
Z STREET is an organization recently embroiled in a highly publicized controversy with the IRS regarding the IRS's delay of its application for exempt status. Z STREET was allegedly told by an IRS official
that its application was sent to a unit making determinations according
to an "Israel Special Policy."' Z STREET brought suit against the IRS
claiming that any such policy would be unconstitutional under the free
speech clause of the First Amendment, and analysts have attempted to
determine what potential defenses the IRS might raise if the suit proceeds as planned. 7 For one, under the so-called "public policy exception" to tax-exempt status, an organization acting contrary to
established United States policy will either be denied tax-exempt status,
or its status will be revoked if previously granted." This argument
would assume that the public policy of the United States, or at least of
the Obama administration, is in pursuit of a moratorium on construction in disputed West Bank territories-construction that Z STREET
openly and enthusiastically promotes. This Note will assess the likelihood of success if that defense is raised. But more importantly, this
Note will address the problem with focusing on organizations like Z
STREET, which, although controversial in some non-controversial
ways, engage in activities identical to those of hundreds of existing nonprofit organizations. While potentially controversial for its more
hardline position on the conflict, Z STREET does not engage in any
actions or pursue any goals that would be considered controversial or
objectionable under the IRC's guidelines for nonprofit groups. In fact,
the action verbs in the Z STREET charter mirror the IRC provisions for
charitable and educational 501(c)(3)-designated organizations. 9 AlSee infra note 100 and accompanying text.
Complaint, Z STREET v. Comm'r, No. 2:10-cv-04307-CMR (E.D. Penn. Aug. 25,
2010) [hereinafter Z Street Complaint], 2010 U.S. Dist. Ct. Pleadings LEXIS 3230.
8 See infra Part IIB-C.
9 Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) (2011) ("The term educational, as used in section
501(c)(3), relates to: (a) The instruction or training of the individual for the purpose of improv6
7
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though Z STREET's mission is to advocate on behalf of a particular
ideological position with regard to the Middle East peace process-obviously an internationally-oriented goal-its activities (at least so far)
remain entirely domestic, pursuing a purely educational campaign.
In contrast to Z STREET's explicitly American-focused activities, a
variety of domestic charitable organizations engage directly in the same
conflict, but act abroad in a way that, firstly, contravenes American public policy, secondly, contravenes Israeli public policy, and thirdly, cannot be considered "charitable" under any definition, anywhere. The Z
STREET example serves to highlight the perilous inconsistencies that
can so easily result from the failures of the current system of charitable
exemption; to illuminate the stark contrast between those activities that
should and should not be designated as "charitable" for purposes of
United States government endorsement and financial assistance; and to
demonstrate the urgent necessity for changes in each branch of government in order to address this escalating danger.
I. HISTORICAL TRANSFORMATION TO MODERN LAW
OF
CHARITABLE ORGANIZATIONS
The concept of charitable organizations is derived from the English
law of trusts, whose Restatement quotes Lord MacNaghten in stating
that "'[c]harity' in its legal sense comprises four principle divisions:
trusts for the relief of poverty; trusts for the advancement of education;
trusts for the advancement of religion; and trusts for other purposes
beneficial to the community, not falling under any of the preceding
heads."o This overview forms the basis for the modern American system under which organizations created for these and some other particular categories of social functions are considered "charitable" for
purposes of tax law.
ing or developing his capabilities; or (b) The instruction of the public on subjects useful to the
individual and beneficial to the community. An organization may be educational even though it
advocates a particular position or viewpoint so long as it presents a sufficiently full and fair
exposition of the pertinent facts as to permit an individual or the public to form an independent
opinion or conclusion. On the other hand, an organization is not educational if its principal
function is the mere presentation of unsupported opinion."). The Code gives examples of educational organizations under § 501(c)(3), the second of which is "an organization whose activities consist of presenting public discussion groups, forums, panels, lectures, or other similar
programs." Treas. Reg. § 1.501(c)(3)-I(d)(ii) (2011).
10 Comm'rs for Special Purposes of Income Tax v. Pemsel, 1 A.C. 531, 583 (H.L. 1891)
(appeal taken from Eng.).
ISN'T IT IRONIC?
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In 1877, the United States Supreme Court quoted favorably Counselor Binney's definition of charity as "whatever is given for the love of
God or for the love of your neighbor in the Catholic and universal
sense . . . free from the stain or taint of every consideration that is
personal, private or selfish."" This broad, barely-defined understanding
continued through the end of the nineteenth century, when Supreme
Court Justice Haynes Swayne said that "[a] charitable use, where neither
law nor public policy forbids, may be applied to almost anything to
promote the well-doing and well-being of social man."' 2 The only specific limitation on this expansive definition was the "established principle of American law, that courts of chancery will sustain and protect ...
a gift .
.
. to public charitable uses, provided the same is consistent with
local laws and public policy .
. "'
The public policy limitation remained, and still remains, a critical part of the law of charitable organizations through the decades, while most other laws surrounding
charitable entities underwent significant transformation. With the passage of the revised IRC,
the agency moved rapidly towards a definition of charity based not on
designated purposes or activities, but on such formal and fiduciary
criteria relating to private benefit and the destination of surplus revenues. In effect, all an entity applying for charitable tax-exempt status
needed to demonstrate was that its proposed purposes were legal and
that its revenues would not be distributed in the form of dividends."
The 1954 Code established rules regulating charitable organizations including general requirements for the determination that a group
serves a charitable purpose and is thus justified in receiving tax treatment that reflects its charitable activities. It codified the definition of
"charitable" in a way almost identical to Lord MacNaghten's 1891 articulation. Section 501(c)(3) of the IRC defines "charitable" to include
activities devoted to "[rielief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or sciI Ould v. Wash. Hosp. for Foundlings, 95 U.S. 303, 311 (1877) (quoting Counselor Binney's argument in Vidal v. Girard's Ex'rs, 43 U.S. 127 (1844)); see also GEORGE GLEASON
BOGERT ET AL., THE LAW OF TRUSTs AND TRUSTEES § 366 (2011).
12 Ould, 95 U.S. at 311.
13 Perin v. Carey, 65 U.S. 465, 501 (1861) (emphasis added).
14 Peter Dobkin Hall, What is a Charity?Mixed Signals from the IRS, HAUSNER CTR. FOR
NONPROFIT
ORGS.
npnews/?p=371.
HARVARD
UNIV.
(Sept. 22, 2009, 4:52 PM), http://hausercenter.org/
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ence; erection or maintenance of public buildings, . . . lessening of the
burdens of Government; and promotion of social welfare .... " Since
then, the IRS has consistently maintained that the "common element of
all charitable purposes is that they are designed to accomplish objects
which are beneficial to the community." 16
The generality of the IRC's provisions may address concerns that a
system intended to limit the exempt-designation to groups based on any
particular characteristics might run afoul of a variety of constitutional
principles: namely, the religious and speech clauses of the First Amendment. It may also be based on the idea that community groups themselves, and not elite, institutionalized, and bureaucratic government
entities, are best equipped to decide what constitutes a public good.' 7
In any case, having determined that exempt status is an appropriate way
to encourage Americans to engage in socially beneficial community activities, Congress and, by proxy, the IRS, left judgments about particular groups to an objective, almost unlimited test. By eliminating the
need for "explicit government judgments about the value of a charity's
output . . . [c]haritable law eliminates case-by-case evaluations of a char-
ity's worth for fear that controversial, unpopular or novel endeavors
would be judged harshly by the powers that be."' 8 But while the removal of intrusive government monitoring of the charitable sector may
be a laudable goal, the fear of oversight that evidently permeated the
IRC's drafting led to the implementation of a paradoxical system of
charitable organizations that do no charity work at all.
A.
Underlying Purposes of Tax Exemption and Tax Deduction
The purpose of the tax-exempt designation is to help organizations
devoted to social progress and charitable purposes effectuate their goals
with a little help in the form of tax dollars from the communities they
serve. The Supreme Court has said "a tax exemption has much the
same effect as a cash grant to the organization of the amount of tax it
would have to pay on its income. Deductible contributions are similar
to cash grants of the amount of a portion of the individual's contributions." 9 While the primary benefit of tax-exempt status is that the in15 Treas. Reg. § 1.501(c)(3)-1(d)(2) (2011).
16 RESTATEMENT (SECOND) OF TRUSTS § 368 cmt. a (1959).
17 See infra note 25 and accompanying text.
18 Brian Galle, Keep Charity Charitable, 88 TEx. L. REv. 1213, 1228-29 (2010).
19 Regan v. Taxation With Representation of Wash., 461 U.S. 540, 544 (1983).
ISN'T IT IRONIC?
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come and property of these organizations is nontaxable, there are several
other fiscal advantages as well.20
The concept of tax deductibility for contributions to charitable organizations allows individuals to subtract the value of their donations
from their taxable income when they file federal income tax returns
every April. The IRC addresses charitable contributions and gifts in
§ 170, where it outlines the circumstances under which an individual
can claim tax deductibility for amounts contributed to organizations
created under § 501(c)(3). 2 1 The charitable deduction is one of the
strongest tools that a charitable organization has to continue existing
and pursuing the ends it was created to accomplish. "[A]ppearance on
the [IRS's] Cumulative List [of tax-exempt organizations] is a prerequisite to successful fundraising for most charitable organizations, since any
contributors simply will not make donations to an organization that
does not appear on the Cumulative List,"22 and "[tihe program of exemption by letter ruling, therefore, is tantamount to a licensing procedure." 2 3 In McGlotten v. Connally, the United States District Court for
the District of Columbia said that "[t]here is no question that allowing
the deduction of charitable contributions in fact confers a benefit on the
organization receiving the contribution," and the Supreme Court in
Green v. Kennedy described the tax-deductible concept as a "[government] matching grant. "24
As mentioned above, there are a variety of justifications for the
preferential tax treatment of charitable organizations that may explain
the government's willingness to forgo revenue it would otherwise be
entitled to collect, 2 5 and Congress has explained that the exemption "is
20 The IRS manual describing the process of application for tax-exempt status says that
"state officials may grant exemption from state income, sales, and property taxes; and the U.S.
Postal Service offers reduced postal rates to certain organizations." INTERNAL REVENUE SERVICE,
U.S.
DEP'T OF TREASURY, PUBL'N
No. 4220,
APPLYING FOR
501(c)(3)
TAX-EXEMPT
STATUS (2009), available at http://www.irs.gov/publirs-pdf/p4220.pdf.
21 I.R.C.
170 (LexisNexis 2011).
§
22
23
24
Bob Jones Univ. v. Simon, 416 U.S. 725, 729-30 (1974).
Alexander v. Ams. United Inc., 416 U.S. 752, 774 (1974) (Blackmun, J., dissenting).
McGlotten v. Connally, 338 F. Supp. 448, 456 n.37 (D.D.C. 1972); Green v. Kennedy,
309 F. Supp. 1127, 1136 (D.D.C. 1970).
25 The so-called moralistic approach maintains that during the process of the creation of
modern tax laws, "certain value judgments were made by Congress that it was simply wrong to
tax certain types of organizations" and that "it seemed anomalous ... to discourage the growth
of educational, civic, charitable, or other similar organizations which . .. form the moral fiber of
the young nation." James J. McGovern, The Exemption ProvisionsofSubchapter F 29 TAX LAw.
523, 526 (1976), available at http://heinonline.org/HOL/Page?handle=hein.journals/xlr29
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based upon the theory that the government is compensated for the loss
of revenue by its relief from financial burden which would otherwise
have to be met by appropriation from public funds . . . ."26 The big
picture illustrated by the amalgamation of these theories is that of a
legislative body endorsing the creation of groups that contribute positively-directly or indirectly-to American society and culture, either
by their activities or through the diversity they promote by their simple
existence. This endorsement takes the form of financial assistance and
thus incentivizes the creation of charitable groups, as well as individual
contributions toward their continued viability.
B.
Determining When an Organization May Qualify Under
5 501(c)(3) or 5 501(c)(4) of the InternalRevenue Code
To obtain tax exemption under § 501 (c)(3), an organization must
"be organized and operated exclusively for exempt purposes set forth in
[that] section," meaning that it must pursue a religious, charitable, educational, or scientific purpose.2 7 Section 501(c)(3) also requires that "no
part of the organization's net earnings benefit[ I any private shareholder
or individual; and no substantial part of the organization's activities
consists of carrying on propaganda, or otherwise attempting to influence
legislation; and the organization must not participate in any political
campaigns." 2 8 These regulations prohibit 501(c)(3) organizations from
lobbying or otherwise pressuring or attempting to influence the political
branches to effectuate their tax-exempt goals.
&div=35&g-sent= 1&collection=journals. Morally speaking, the government's support of nonprofit groups reflects a vision that charity, philanthropy, and volunteerism contribute to a more
ethical society and culture. The government function analysis is based on the presumed purpose
of charitable organizations to "perform functions that, in the [organization's absence], government would have to perform," concluding that the "government is willing to forego tax revenues
it would otherwise receive in return for the public interest services rendered . . . ." BRUCE
HOPKINS, THE LAW OF TAX EXEMPT ORGANIZATIONS 13 (John Wiley & Sons, Inc., ed., 10th
ed. 2011). The pluralistic approach is based on the notion that "[c]haritable organizations,
maintained by tax exemption and nurtured by the ability to attract deductible contributions,
reflect the American philosophy that not all policy-making and problem-solving should be reposed in the government sector." Id. at 16.
26 HOPKINS, supra note 25, at 16.
27 EXEMPTION REQUIREMENTS -
SECTION
501(c)(3)
ORGANIZATIONS,
IRS.GOV (Nov.
[hereinafter
15, 2010), http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html
T501(c)(3) CAMPAIGN RESTRICTIONS); Green, 309 F. Supp. at 1127.
28 Aitlie Found. v. IRS, 283 F. Supp. 2d 58, 62 (D.D.C. 2003) (citing I.R.C. § 501(c)(3)
(2006)).
2011]
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Under § 501 (c)( 4 ), however, organizations may engage in what are
called "political action" activities and remain tax-exempt, but, unlike
groups organized under § 501(c)(3), individual contributions made to
§ 501(c)(4) groups are not tax-deductible and therefore not eligible for
the "government matching grant" that § 501(c)(3) organizations receive.2 9 As the Supreme Court identified, unlike § 501(c)(4) organizations, § 501(c)(3) organizations may not "attempt to influence
legislation as a substantialpart of [their] activities and may not participate in any campaign activity for or against political candidates."o3 In
making this distinction, the IRS's mandate is to isolate tax-deductible
public funds to be used exclusively on activities that Congress chooses to
subsidize, considered beneficial to the public in an apolitical sense.3 1
Lobbying and political action groups are therefore unable to receive contributions that convert otherwise taxable funds, putting the government
at a financial loss. 3 2
To determine whether a group may qualify under § 501(c)(3) or
§ 501(c)( 4 ), one must first examine whether the organization was organized for an exempt purpose. If so, the "operational test requires both
that an organization engage 'primarily' in activities that accomplish its
exempt purpose and that not more than an 'insubstantial part of its
activities' further a non-exempt purpose."3 3 If the first prong is not
satisfied, an organization will not be designated under either provision
and will not be tax-exempt nor receive tax-deductible contributions. If
29 Green, 309 F.Supp. at 1127.
30 T501(c)(3) CAMPAIGN RESTRICTIONS, supra note 27 (emphasis added).
31 Regan v. Taxation with Representation of Wash., 461 U.S. 540, 544 (1983) ("The system
Congress has enacted provides this kind of subsidy to nonprofit civic welfare organizations generally, and an additional subsidy to those charitable organizations that do not engage in substantial lobbying. In short, Congress chose not to subsidize lobbying as extensively as it chose to
subsidize other activities that non profit organizations undertake to promote the public
welfare.").
32 Once a group is designated as a § 501(c)(3) organization, the political restrictions are
seemingly straightforward: the groups are "[aibsolutely prohibited from directly or indirectly
participating in, or intervening in, any political campaign on behalf of . . . any candidate for
elective public office." T501(c)(3) CAMPAIGN RESTIucTIONs, supra note 27. In application,
though, the analysis is infinitely more complicated since "[c]ertain activities or expenditures may
not be prohibited depending on the facts and circumstances. For example, certain voter education activities . . . conducted in a non-partisan manner do not constitute prohibited political
campaign activity." Id. Determining what constitutes a "non-partisan manner," where the category of "voter education activities" begins and ends, and exactly what activities are legitimate
and illegitimate for § 501(c)(3) designated organizations has become increasingly blurred, potentially allowing infinite manipulation of the terms of the law.
33 Airlie Found., 283 F. Supp. 2d. at 62 (citing Treas. Reg. § 1.501(c)(3)-1(c)(1) (2008)).
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the first prong is satisfied but the second prong is not, that organization
can be exempt under § 501(c)(4) but not under § 501(c)(3), and thus
individual contributions will remain taxable. If both prongs are satisfied, the organization can qualify for a § 501(c)(3) designation, benefitting from both its own tax-exempt status and the tax-deductibility of
contributions made to advance its exempt purpose.
To qualify as "educational" under § 501(c)(3), the organization's
advocacy activities must align with the methodology the IRS established
in Revenue Procedure 86-43.34 According to that document, the viewpoint of the organization is irrelevant and the only appropriate inquiry
regards the organization's approach to the dissemination of its views. "It
has been, and it remains, the policy of the Service to maintain a position
of disinterested neutrality with respect to the beliefs advocated by an
organization."3 1 Certain listed circumstances might indicate that the organization's activities do not qualify as educational under § 501(c)(3),
although none are dispositive and the IRS may look at all the facts and
circumstances of each application: if the presentation of viewpoints is
unsupported by facts, or those facts are distorted; if the presentations are
emotional and inflammatory instead of objective; or if the organization
does not attempt to "develop[ ] an understanding on the part of the
intended audience or readership because it does not consider their background or training in the subject matter," the IRS retains discretion to
question the "educational" purpose of the organization.
Under § 501(c)(4), a group can identify as a "social welfare" organization while engaging in entirely political activities such as the dissemination of materials advocating for an unpopular or controversial
political opinion. In General Counsel Memorandum 33,495, the IRS
held that "a social welfare organization is one whose activities can reasonably be regarded as providing some consequential benefit of broad
social interest to the community, and are not patently illegal or detrimental."3 6 This view was affirmed in General Counsel Memorandum
34,212, where the IRS declared that an organization engaged in this
type of activity could satisfy the educational requirement of the first
prong of the test, as its activities "serv[e] to stimulate intelligent thought
and discussion." 37 The analysis requires that the organization's activities
34 Rev. Proc. 86-43, 1986-2 C.B. 729.
36 Id.
36 I.R.S. Gen. Couns. Memn. 33,495 (Apr. 27, i967).
3
Id
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serve a true public interest, that the organization has the ability to present its objective case, and that the activities are not "confined to
presenting a continuing series of one-sided and . . . intense and/or intemperate arguments"3 8 nor the "mere presentation of unsupported
opinion." 3 9
In Revenue Ruling 68-656, the IRS ruled that an organization that
circulated speeches, reprints, and pamphlet material concerning a controversial subject and proposed legislation advocating a change in the
law with regard to that subject qualified for exemption as a social welfare
organization under § 501(c)( 4 ).40 An organization that is organized and
operated under the educational heading may be tax-exempt under that
provision "even though the subject evokes controversy and even though
the organization advocates a particular viewpoint and seeks changes in
law to reflect such viewpoint. The education of the public on such a
subject is deemed beneficial to the community because society benefits
from an informed citizenry."4
II.
DESIGNATION AS A CHARITABLE ORGANIZATION UNDER THE
MODERN INTERNAL REVENUE CODE
As could reasonably be expected, considering the loose definition
of "charitable organization" and the benefits to be accrued by such a
designation, the size of the class of nonprofit organizations has grown
and continues to grow in an unprecedented fashion. "By 2000, [the]
IRS ... recognized 1.35 million tax-exempt organizations under Section
501(c), of which 820,000 (60 percent) were charities . . . . At the end of
1999, the assets of Section 501(c) (3) organizations approached $1.2 trillion and their annual revenues approached $720 billion." 4 2 The influx
of nonprofit groups brought an increased need for an oversight function
with the capacity to ensure that the purpose of the 501(c)(3) designation was not being circumvented. Unfortunately, the opposite is occurring: "the IRS appears to be growing more lax in applying even the most
general kind of public benefit considerations in granting charitable sta38 I.R.S. Gen. Couns. Mem. 36,218 (Mar. 31, 1975).
39 Treas. Reg. § 1.501(c)(3)-1 (2011).
40 Rev. Rul. 68-656, 1968-2 C.B. 216.
41 Id
42
U.S. GEN. ACCOUNTING OFFICE, TAX
IRS, AND STATE OVERSIGHT
BLE IN PUBLIC,
EXEMPT ORGANIZATIONS: IMPROVEMENTS
OF CHARITIES
4
POSSI-
(2002) [hereinafter TAx EXEMPT
ORGANIZATIONS], available at http://www.gao.gov/new.items/d02526.pdf.
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tus .. . . [F]ederal charities law is notable for its willingness to give this
status for any purpose not 'illegal, impossible, or impracticable .
.'"
The process for determining whether an organization can be considered "charitable" under the IRC has been outlined via regulations and
judicial precedent, which provide that the term "'charitable organization' is to be construed in its legal sense and is not to be limited by the
listing of activities approved by the IRS."
And while the purpose of
granting nonprofit status to an organization is so intertwined with the
community benefit that organization pursues, "in weighing the benefit
rendered, the court does not decide whether the organization is taking
the wisest course in trying to help the community; nor is the popularity
of the organization's cause determinative. "4 As one commentator put
it, "all an entity applying for charitable tax-exempt status needed to
demonstrate was that its proposed purposes were legal and that its revenues would not be distributed in the form of dividends." 6 Comment B
of the Restatement of Trusts says that "there is no fixed standard to
determine what purposes are of such social interest to the community;
the interests of the community vary with time and place . . . [and] no
definite rule can be laid down."4 7
Seemingly then, the determination of when an organization may or
may not qualify as "charitable" under the IRC varies discriminately by
judicial jurisdiction since the courts have wide latitude and discretion in
interpreting the provisions of the IRC and determining the "legal sense"
of the term "charitable." But, instead of the IRS or the courts denying
exemption to groups for not appropriately identifying under any IRC
provision, both entities have allowed the unbridled proliferation of exempt organizations to continue. Because a term like this is so malleable
and can take on different meanings in different contexts, an organization with leadership confident in its understanding of the IRC and the
application of these important IRC provisions can easily model the organization's purpose to fit some established definition of "charitable."
The simplicity inherent in the request process facilitates the grant of
exemption to many groups that have organized under the IRC and enHall, supra note 14.
Nat'l Right to Work Legal Def. and Ed. Found., Inc. v. U.S. Dep't of Labor, 487 F.
Supp. 801, 807 (D.N.C. 1979) (citing Duffy v. Birmingham, 190 F.2d 738 (8th Cir. 1951)).
45 Id.; see also supra note 27 and accompanying text.
46 Hall, supra note 14.
43
44
47 RESTATEMENT (SECOND) OF
TRUSTs
§
368 cmt. b (1959).
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ISN'T IT IRONIC?
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gaged in activities which could, under no circumstances, be considered
beneficial to any identifiable population of Americans.
A.
Applying For and Maintaining CharitableStatus Under the Code
Form 1023 is the initial filing in the process of attaining tax exemption under the IRC, and the information provided is used by the
IRS to determine whether the organization qualifies as charitable under
the applicable provisions. In filing a Form 1023, an applicant must
"provide a detailed narrative description of all the activities of the organization-past, present, and planned . . . including . . . (a) a detailed
description of the activity including its purpose; (b) when the activity
was or will be initiated; and (c) where and by whom the activity will be
conducted.""' This is clearly not an onerous burden on any group applying for exemption, especially in light of the massive financial benefits
that accrue from the IRS's grant of tax exempt status. Almost any activity can be described to satisfy these generally undefined requirements.
Whether a purpose is "incidental" and/or "not substantial" so as to prohibit the grant of exemption is an entirely subjective standard, and an
entirely futile standard to apply-that is, if the standard is intended to
draw a line between permissible and impermissible purposes of charitable organizations.
Exempt organizations must also file annual returns with the IRS
showing their income and expenses, and under some circumstances,
they are required to file other returns and pay employment taxes.4 9 Organizations typically exceeding $25,000 in gross receipts must also file a
Form 990 (Return of Organization Exempt from Income Tax) or Form
990-EZ (Short Form Return of Organization Exempt from Income Tax)
at the end of each fiscal year. These forms require a detailed "Statement
of Program Service Accomplishments" showing accumulated revenues
from the organization's three "most significant program services, as well
as an evaluation of what they deem to be their most significant program
service accomplishments for the year."'o Again, this requirement's sub48 United States v. Mubayyid, 476 F. Supp. 2d 46, 49 n.4 (D. Mass. 2007); Hall, supra note
14. As is clearly dictated by § 501(c)(3), the form affirmatively "requires the organization to
demonstrate that it is organized and operated exclusively for charitable purposes, and that any
non-exempt purpose is incidental and not substantial to its operation." Mubayyid, 476 F. Supp.
2d at 49.
49 U.S. INTERNAL REVENUE SERVICE, EXEMPT ORGANIZATIONS REQUIRED FILINGS
(2011), http://www.irs.gov/charities/charitable/article/0,,id= 12331 0,00.html.
50 Hall, supra note 14.
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jectivity makes subversion of its purpose so simple-an intolerable accomplishment can easily go unmentioned in place of an activity that
could fall more easily under one of the IRC categories of religious, charitable, or educational purposes. A report by the United States General
Accounting Office states that "Inlo measures are available on the accuracy of the expense data and substantial discretion in allocating the expenses makes use of the data problematic."" If the form required
information on the single largest, or even the three largest, activities that
financially burdened the organization each year, instead of the "most
significant," it would be easier for the IRS to identify activities undertaken inconsistently with the IRC's requirements. The critical factor
should be the percentage of charitable funds expended on an activity or
set of activities, not just whether those activities are undertaken at all. If
anything less than a certain predetermined percentage of charitable
funds are spent on the activities for which the organization is granted
tax exemption, the exemption should be revoked.
The information provided in the Form 990 "is used by the IRS to
determine, among other things, whether an organization that has been
granted tax-exempt status remains so qualified. If the IRS determines
that an organization is no longer operating consistently with its taxexempt status, that status will be revoked."5 2 But, because it is highly
unlikely that an organization would disclose activities that could potentially qualify it for revocation, and because the textual requirements of
the form make it technically legal to forgo a description of any questionable activities, there are no teeth to the Form 990 threat.
B.
The Revocation of a Grant of Tax Exemption
Once their status is officially granted, tax-exempt organizations
must conform to continued IRC requirements to avoid being subject to
revocation. Exempt groups cannot engage in illegal activities nor may
they use their status to pursue or encourage activities that are illegal or
contrary to public policy.5 3 Otherwise, revocation can potentially occur
either by "omission or misstatement of a material fact in the process of
acquiring recognition of exemption5 1 or in connection with the filing of
51
TAx
EXEMPT ORGANIZATIONS, supra note
42, at 8.
F. Supp. 2d at 49.
See infra note 68 and accompanying text; Rev. Rul. 75-384, 1975-2 C.B. 204.
See supra Part II.A (discussing Form 1023).
52 Mubayyid, 476
53
54
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ISN'T IT IRONIC?
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an annual information return." 5 The IRS can also revoke exempt status
if the organization "operat[es] in a manner materially different from that
originally represented [or engages in] prohibited transactions, entered
into for the purpose of diverting a substantial part of an organization's
corpus or income from its exempt purpose."5
Importantly, however, third parties do not have standing to challenge the tax-exempt status of an organization under the Supreme
Court's holding in Allen v. Wright.7 The only way to challenge an
organization's tax-exempt status as a third party (usually, a member of
the public, watchdog organization, or otherwise a victim of an organization's actions) is to refer an organization complaint via an IRS Form
13909. The submission of this form gives notice to the IRS, which can
then reevaluate the organization's status, starting with a "reasonable belief' standard-a standard highly deferential to the already-exempt organization whereby the authority determines whether the "facts create a
reasonable belief that the allegations may be true when considered fairly
and in light of other reliable information."5' Referrals received by the
IRS are responded to with a letter of acknowledgement, however "Section 6103 of the Internal Revenue Code prohibits the IRS from disclosing whether it has initiated an examination or the results of any
examination,"5 9 so a third party with concerns about the continued exempt status of a questionable organization has no way of knowing if that
request for review is ever seriously undertaken. And the IRS review process has four potential outcomes, only one of which is an immediate
examination of the organization. 60 Ironically, then, those communities
most exposed to the organization's actual activities-and more importantly, the supposed beneficiaries of those activities-are effectively ex55
See supra Part II.A (Rule 4.1) (discussing Form 990).
56
BRUCE HoPKNs, THE LAW OF TAx-EXEMPT ORGANIZATIONs
57
89 (5th ed. 1987).
Allen v. Wright, 468 U.S. 737 (1984) (holding that respondents' challenge to an IRS
grant of tax exemption to some racially discriminatory schools lacked standing because the injury complained of was too remote to be directly attributable to the schools' charitable status).
"A plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful
conduct and likely to be redressed by the requested relief." Id. at 751. "The line of causation
between that conduct and desegregation of respondents' schools is attenuated at best. From the
perspective of the IRS, the injury to respondents is highly indirect and 'results from the independent action of some third parry not before the court."' Id. at 757 (citing Simon v. E. Ky.
Welfare Rights Org., 426 U.S. 26, 42 (1926)).
58 IRS ComplaintProcessfor Tax Exempt Organizations,IRS (Feb. 2008), http://www.irs.gov/
irs/article/0,,id=178241,00.html (emphasis in original).
59 Id.
60 Id
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cluded from the process that is theoretically intended to positively affect
them.
Oversight of previously designated tax-exempt organizations, then,
is extremely difficult, requiring any interested party outside the Treasury
to fill out and file a form with one of the largest and most complicated
bureaucracies in the United States government. Internal oversight by
the IRS is similarly ineffective: it is limited by the bureaucratic character
of the organization, the lack of substantial information collected about
each charity's activities, the time-consuming nature of extensive organizational review, and the enormous number of tax-exempt groups operating across the country. 1 In a section entitled "Multiple Priorities and
Limited Resources Contribute to Fewer Examinations," the Government Accountability Office reported that the "IRS has many other priorities as the agency that collects the proper amount of revenue to fund
the programs that Congress and the executive branch have approved." 62
Real surveillance would require a commitment of time and resources
that the IRS simply does not have. In fact, oversight has been decreasing instead of increasing: the "IRS has not kept up with growth in the
charitable sector [and] . . . staffing for overseeing tax-exempt organizations fell between 1996 and 2001 while at the same time the number of
new applications for tax exemption and the number of Forms 990 filed
increased. "63
In view of the low threshold for a claim of religious, charitable, or
educational purpose, the essentially nonexistent executive or judicial
process for determination of a true social purpose, the empirical difficulties in measuring community benefit, and the ease with which charitable
status is granted, a working oversight mechanism would be one of the
only ways to effectively curtail the grant of exempt status. The other
possible mechanism is the enduring notion of a "public policy exception" to the otherwise expansive concept of charitable activity.
61 "Comparing fiscal years 1996 through 2001, the number of annual returns (Form 990)
increased from about 228,000 to 286,000 (25 percent) while the number examined dropped
from 1450 to 1237 (15 percent). Thus, [the] IRS examined a smaller percentage of returns and
charities." Moreover, "examinations are taking longer. For fiscal years 1996 through 2001, the
time required to examine charity returns nearly tripled when a charity agreed to changes proposed by [the] IRS and increased about seven times when a charity disagreed." TAX EXEMPT
ORGANIZATIONS, supra note 42, at 21-22.
62 Id. at 22.
63
Id
ISN'T IT IRONIC?
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C.
99
Bob Jones and the Public Policy Exception
In the landmark case Bob Jones University v. United States, the Supreme Court held that the IRS retained the authority to revoke the taxexempt status of an evangelical Christian school in Greenville, North
Carolina.' Bob Jones University discriminatorily denied admission to
interracial couples and had an official school policy against interracial
dating and marriage.' "Based on the 'national policy to discourage racial discrimination in education,' the IRS ruled that 'a private school
not having a racially nondiscriminatory policy as to students is not
'charitable' within the common law concepts reflected in §§ 170 and
501(c)(3) of the Code."' 66 The case set an important precedent, albeit
one which had been unofficially attached to charity law since its English
inception centuries before: organizations whose missions and/or functions are contrary to established public policy cannot receive charitable
status.67
The BobJones Court knew that this decision had the potential to
lead to inconsistency and confusion in its future application-an application promising to be fraught with immense variation in facts and contexts. To address this concern, the majority took painful steps to limit
the holding and humbly acknowledge "full awareness that determinations of public benefit and public policy are sensitive matters with serious implications for the institutions affected." 68 The determination that
an organization will be denied tax-exempt status under the Bob Jones
public policy exception, the Court said, "should be made only where
there can be no doubt that the activity involved is contrary to a fundamental public policy."6 9
By 1983, there could be no doubt that the United States government was dedicated to the abolition of all forms of racial discrimination,
especially in institutions of education. Actions taken by all three
branches of government-the Fourteenth Amendment and the Civil
64
Bob Jones Univ. v. United States, 461 U.S. 574, 605 (1983).
65
Id.
Id. (quoting Rev. Rul. 71-447, 1971-2 C.B. 230).
An examination of the IRC's framework and its background reveals unmistakable evidence that underlying all relevant parts of the IRC is the intent that entitlement to tax exemption depends on meeting certain common-law standards of charity-namely, that an institution
seeking tax-exempt status must serve a public purpose and not be contrary to established public
policy. See Bob Jones, 461 U.S. at 587.
68 Id. at 592.
69 Id. (emphasis added).
66
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Rights Acts by Congress, the Supreme Court's holding in Brown v.
Board of Education,70 and numerous Executive Orders 7 '-clearly
demonstrated the vigor with which the government intended to pursue
this goal. And Justice Thomas, dissenting in a denial of certiorari in
Swanner v. Anchorage Equal Rights Commission,7 2 stated that the Bob
Jones Court
held that 'the Government has a fundamental, overriding interest in
eradicating racial discrimination in education.' We found such an interest fundamental and overriding - in a word, 'compelling,' - only
because we had found that '[o]ver the past quarter of a century, every
pronouncement of this Court and myriad Acts of Congress and Executive Orders attest a firm national policy to prohibit racial segregation
and discrimination in public education. 73
The Bob Jones standard, then, is impossibly high: no matter how
fervently the government pursues a particular agenda, without action
taken by all three branches, that agenda will not be considered established public policy sufficient to warrant application of Bob Jones. Considering the extremity of the facts and circumstances surrounding the
desegregation of education systems in this country, it is hard to imagine
how they will be replicated to produce an "established public policy"
worthy of protection under the Bob Jones holding. Although we know
Brown v. Bd. of Educ., 347 U.S. 483 (1954).
71 See, e.g., Exec. Order No. 11,197, 29 Fed. Reg. 1721 (Feb. 5, 1965) (establishing the
70
President's Council on Equal Opportunity); Exec. Order No. 11,478, 34 Fed. Reg. 12,985
(Aug. 8, 1969) (making equal employment opportunity the official policy of the federal government); Exec. Order No. 11,764, 39 Fed. Reg. 2575 (Jan. 21, 1974) (establishing an official
policy of nondiscrimination in federally assisted programs); Exec. Order No. 12,250, 45 Fed.
Reg. 72,995 (Nov. 2, 1980) (coordinating leadership and implementation of federal nondiscrimination laws including Title VI of the Civil Rights Act of 1964 and Title IX of the Education Amendments of 1972). Executive Orders 11,197 and 11,764 have subsequently been
revoked.
72 Swanner v. Anchorage Equal Rights Comm'n, 513 U.S. 979 (1994).
73 Id. at 981 (Thomas, J., dissenting) (quoting Bob Jones, 461 U.S. at 604). According to
the Ninth Circuit:
[H]ad it opted to do so, the Bob Jones Court might easily have further elaborated, and
cited as support for its 'firm national policy' the Civil War and the Thirteenth, Fourteenth and Fifteenth Amendments that followed on its heels. The post-Reconstruction history of this country leaves little room for argument as to the existence of a
national commitment to the elimination of race discrimination.
Thomas v. Anchorage Equal Rights Comm'n, 165 F.3d 692, 715 (9th Cir.), reh'granted,192
F.3d 1208 (9th Cir. 1999).
ISN'T IT IRONIC?
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what does not constitute official public policy, the term remains undefined, leaving the public policy exception powerless to stop abuses of the
charitable exemption system.
Because of these limitations placed on the Bob Jones holding, application of the exception has been triggered extremely rarely, if ever, and
in its twenty-eight year history, has never been used to deny exemption
to an applicant for tax exemption outside the context of discrimination
in education. In defining "charitable purposes" in such sweeping terms
and forgoing a more concrete understanding of what constitutes "public
policy," the federal government has become either unable or unwilling
to actively pursue a more reasonable standard for the grant of tax-exempt status, and it is not only the American taxpayers who, in the end,
pay the price-both literally and figuratively. With the growth of organizations being granted tax-exempt status whose missions are primarily
devoted to international advocacy of various (and often controversial)
positions, the federal government has become a direct subsidizer of organizations who do no charity work-in fact, these organizations do no
domestic work at all, and many of them are engaged in the frustration
of the sovereign policies of foreign democratic states. More importantly,
as discussed above, there is minimal, if any, oversight of these organizations after their initial application has been reviewed and their status
granted, leading to an eclectic group of "charitable" organizations pursuing agendas not only contrary to American public policy, but interfering
with the functioning of sovereign foreign governments on matters critical to their own fundamental domestic interests."
111.
CHARITABLE ORGANIZATIONS PURSUING
INTERNATIONAL MISSIONS
As Thomas Friedman so perfectly articulated, the world is flat-
and becoming more so every day.7 6 Institutions across the globe are
74 This was further expanded in the Jewish Daily Forward-
'We don't have a really well-defined concept of what established public policy is,' said
Widener University Law Professor Nicholas Mirkay. Mirkay and other legal experts
said the Bob Jones ruling didn't go far in defining what it meant by 'public policy,'
and that neither the courts nor Congress had elaborated significantly since the 1983
decision.
Josh Nathan-Kazis, Can Tax-Free Donations Fund Settlements?, JEWISH DAILY FORWARD (Jan.
15, 2010), http://www.forward.com/articles/122779/#ixzzl0fKO951V.
75 See infra Part IV.B.
76 THOMAS L. FRIEDMAN, THE WORLD IS FLAT (Farrar, Straus & Giroux eds., 2005).
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joining together to advocate for change in every sector, from economic
globalization to improvement in human rights to technological advancement and beyond. "Congress and the Supreme Court have explicitly
recognized the benefits of domestic altruism. With a rise in globalization, international charitable participation became an imperative component to the development and promotion of 'civil society.' 7 7
However, in the absence of a bilateral tax treaty,78 an individual making
a charitable contribution directly to a foreign organization cannot claim
an income tax deduction under § 170 of the IRC. If, on the other
hand, the same individual donates to a domestic charitable organization
organized under § 170, which disburses funds to the same foreign organizations, he may claim a deduction on those contributions. As long as
a domestic organization exercises control over its funds and disburses
them independently of contributors' earmarks, any contributions remain tax-deductible, no matter where in the world those funds end up.
Thus, the American government directly subsidizes international activities without any oversight of what activities are being undertaken, leaving that oversight entirely within the discretion of the domestic
organizations funneling tax-deductible and tax-exempt American dollars
around the world.
A.
Requirementsfor Domestic Charitable Organizations Sending TaxExempt, Tax-Deductible Funds Abroad
Under the law of charitable trusts prior to 1938, individuals were
free to make tax-deductible contributions to charitable organizations regardless of their place of incorporation.7 9 The Revenue Act of 1938,
however, instituted a change whereby a deduction could only be claimed
for a donation to a "domestic" organization, and in 1939 those provisions defined "domestic" to require the receiving organization to have
77 Christine Holland Anthony, The Responsible Rolefor InternationalCharitableGrantmaking
in the Wake ofthe September 11, 2001 TerroristAttacks, 39 VAND. J. TRANSNAT'L L. 911, 920-21
(2006).
78 Bilateral tax treaties provide for reciprocal deductions of international charitable contribu-
tions to participating nations. However, a deduction is only allowed on foreign-source income.
A bilateral tax treaty does exist between the United States and Israel. See generally Convention
Between the Government of the United States of American and the Government of the State of
Israel With Respect to Taxes on Income, U.S.-Isr., Jan. 1, 1995, http://www.irs.gov/pub/irs-try/
israel.pdf. However, this treaty is focused on contributions to domestic organizations that are
used abroad as opposed to contributions directly to foreign charitable organizations.
79 See Rev. Rul. 63-252, 1963-2 C.B. 101.
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103
been "created or organized in the United States.""o In 1954, this requirement was memorialized in § 170(c)(2)(A) of the IRC." Since the
theory of charitable exemption is based at least in part on the idea that
the government is relieved of a financial burden when organizations undertake activities that produce domestic benefits and would require government action in the absence of these groups, it seems incompatible
with this purpose to allow a charitable deduction for contributions to
organizations acting to the benefit of aliens abroad. But, an IRS memo
written in 1958 established that "certain kinds of activities may be carried on in a foreign country without adversely affecting their exempt
charitable status under our income tax laws." 82 To address this discrepancy, the IRS distinguished between groups that operate solely on foreign soil and those "domestic organization[s] [devoting] some portion of
[their] funds . . . [to] other countries for charitable and other purposes
(such as missionary and educational purposes), [which] will not affect
the deductibility of the gift." 3 This language, allowing "some portion"
of tax-deductible organizational funds to be employed in international
charitable work, has been incorporated into § 170(c)(2)(a) and reaffirmed in countless Revenue Rulings."
In application, these requirements are construed to relate only to
the location where the receiving organization was created, but not to
restrict where the use of those funds may ultimately be permitted. Like
the IRC provisions previously analyzed, there is no attempt by its drafters or by IRS authorities empowered to interpret and apply the IRC to
determine what portion of those funds being used abroad is permissible,
consistent with the theory that charitable deductions are a sensible policy in view of the direct domestic social benefits those organizations provide. In fact, the "some portion" text of § 170 is read out of the statute
entirely and replaced with a requirement that the domestic organization
exercise control over those funds. Proper control was found where 1)
Revenue Act of 1938, ch. 289, 52 Stat. 448 (1938); I.R.C. § 224 (LexisNexis 2010).
Rev. Rul. 63-252, 1963-2 C.B. 101; I.R.C. § 170(c)(2)(A) (LexisNexis 2010).
82 I.R.S. Gen. Couns. Mem. 34,062 (Mar. 3, 1969).
83 Id. (emphasis added) (quoting H.R. REP. No. 1860, 75th Cong., 3d Sess. 19 (1938)).
84 I.R.C. § 170(c)(2)(A) (2006); Rev. Rul. 71-460, 1971-2 C.B. 231; see also I.R.S. Gen.
80
81
Couns. Mem. 34,062 (Mar. 3, 1969) ("Although the particular wording ["some portion"] could
have been read as a limitation, it appears to have been consistently construed as allowing deductions for contributions to a domestic organization substantially all of whose expenditures are
made abroad so long as the ultimate disposition of these contributions will actually be controlled
by such domestic organization.").
85 The recognized IRS interpretation is that:
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the "trustee reviewed and approved the project and contributions were
solicited specifically. . . and 2) the domestic charity retained full control
of the donations for this project and discretion as to their particular
use . . . evidenced by its reservation of the right to . . . withdraw its
support at any time at its discretion.""
Two other qualifications are relevant in outlining an individual's
ability to deduct charitable contributions to organizations with international missions. First, the activities abroad must be "in furtherance of'
the mission of the domestic organization disbursing its funds overseas.8 7
Second, domestic contributions may not be earmarked for specific purposes in exchange for the contribution." The IRS vests the domestic
organization's director-and not the contributing individual-with exclusive authority to determine the quantity and value of grants it makes
to international organizations as well as "the responsibility to review
projects prior to funding . . . and refuse earmarked or designated
funds . . . ."9 Certainty that funds are not "earmarked" for purposes of
exemption requires a determination that the domestic organization is
not acting as a "mere conduit" through which a contribution is funneled
to a specific overseas project while allowing a tax write-off at home.9 0 If
the funds are earmarked or the domestic organization is not the "real
beneficiary" of the contribution, maintaining sufficient discretion over
the organization's expenditures, the IRS retains the right to disregard
the status of the domestic charitable organization and instead look to
the recipient of those funds to determine the deductibility of the contribution since "[i]t is well established in the law of taxation that '[a] given
although the particular wording could have been read as a limitation, it appears to
have been consistently construed as allowing deductions for contributions to a domestic organization substantially all of whose expenditures are made abroad so long as the
ultimate disposition of these contributions will actually be controlled by such domestic organization.
I.R.S. Gen. Couns. Mem. 34,062 (Mar. 3, 1969).
86 Relationship of a Domestic Charity Organization to Certain Charitable Foreign Activities,
THOMPSON & THOMPSON, P.C., http://www.t-tlaw.com/foreign-2.htm (last visited March 3,
2011).
87 Rev. Rul. 66-79, 1966-1 C.B. 48.
88 Rev. Rul. 62-113, 1962-2 C.B. 10.
89 Relationship of a Domestic Charity Organization to Certain Charitable Foreign Activities,
supra note 86.
90 Rev. Rul. 63-252, 1963-2 C.B. 101; Rev. Rul. 66-79, 1966-1 C.B. 48.
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105
result at the end of a straight path is not made a different result because
reached by following a devious path."' 9 '
In a private letter ruling, the IRS imposed several new requirements for domestic organizations sending money to charities abroad,
none of which are any more vigorous than those previously mentioned.
Contributions to these domestic organizations required satisfaction that
1) no member of the domestic charity's board of directors was a member of the foreign organization's board; 2) the domestic charity's decisions as to the disposition of contributions were wholly independent
of the foreign organization; 3) the domestic charity's board reviewed
and approved each specific project; and 4) the domestic charity monitored the use of funds given to the foreign organization.92
The IRS is seemingly blind to the possibility that domestic charities are created for the sole purpose of fundraising for foreign projects,
and that other individuals around the globe can legally receive tax-deductible funds as long as the domestic decision-maker is physically distinct from the international recipient who shares the same goal. Abuse
of this system is not just easy-it is practically invited.
As long as the American organizations exercise sufficient oversight
and control to ensure that the projects undertaken fall in line with the
agenda of those domestic organizations, the IRS retains no oversight authority to determine which foreign organizations should be collecting
tax-deductible American funds." This procedure does nothing to proRev. Rul. 66-79, 1966-1 C.B. 48; Minn. Tea Co. v. Helvering, 302 U.S. 609, 613
(1938). According to the IRS,
the requirements of section 170(c)(2)(A) of the Code would be nullified if contributions inevitably committed to go to a foreign organization were held to be deductible
solely because, in the course of transmittal to the foreign organization, they came to
rest momentarily in a qualifying domestic organization. In such cases the domestic
organization is only nominally the donee; the real donee is the ultimate foreign
recipient.
Rev. Rul. 63-252, 1963-2 C.B. 101. Revenue Ruling 63-252 gives five examples of domestic
organizations pursuing missions or activities abroad to outline under which circumstances the
contributions to those domestic organizations can be considered tax deductible under I.R.C.
§ 170. The first example-deemed nondeductible by the IRS-details a situation where a foreign entity organized a domestic charitable organization with the express purpose of soliciting
funds, all of which would be used by the foreign entity in foreign territory. Rev. Rul. 63-252,
1963-2 C.B. 101.
92 I.R.S. Priv. Ltr. Rul. 83-40-031 (June 29, 1983).
93 The IRS's only internal oversight consists of review of an organization's initial application
for tax-exempt status and an annual examination of Form 990 returns. However, the IRS only
91
106
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tect the agenda of the United States government, which grants the tax
exemption and deduction, or the governments under which these activities are being performed. Foreign organizations can simply incorporate
in the United States under the IRC's charitable provisions for the exclusive purpose of soliciting contributions that would otherwise be taxable,
thus increasing their revenue base and operating with no tax liabilities.
A crucial example is the activity of American organizations receiving taxdeductible contributions, exempt from taxation under § 501(c)(3) of
the IRC, to directly defy the Israeli government under a policy articulated for nearly a decade in both domestic and international media.
B. Z STREET
i.
Introduction to Z STREET
Z STREET is an organization established in response to its founders' apprehension with the dissemination of information about the Israeli-Palestinian crisis they consider prejudiced and deceitful.9' Z
STREET describes itself as a "nonprofit organization devoted to educating the public about the facts relating to the Middle East, and that relate
to the existence of Israel as a Jewish State, and Israel's right to refuse to
negotiate with, make concessions to, or appease terrorists."" The "inyour-face facts war" 96 its founders intended to pursue would be "devoted to changing the terms of the public debate [using] tools includ[ing] humor . . . straight talk, and physical energy to imprint the
facts" and employing "accurate words and historical facts currently eschewed for fear of offending."9 7
Z STREET's Charter provides a list of twelve proclamations and
several definitions, the first proclamation being that "Z STREET
proudly asserts the right of the Jewish people to a state." The remaining proclamations demonstrate that the organization will pursue its educational goals through "reclaiming . . . words," "maintaining . . .
reviews a small percentage of the Form 990s submitted each year and "in this oversight framework, IRS has a limited role in considering how well charities are spending funds or accomplishing charitable purposes." TAx EXEMpr ORGANIZATIONs, supra note 42, at 20, 33.
94 About Us, Z STREET, http://www.zstreet.org/index.php?option=com-content&view=article&id=l&Itemid=2 (last visited March 3, 2010).
95 Z Street Complaint, supra note 7, at 1.
96 About Us, supra note 94.
9 Id
98 Z STREET Charter, Z STREET, http://www.zstreet.org/index.php?option=com
view=article&id=7&Itemid=4 (last visited March 3, 2010).
content&
2011]
ISN'T IT IRONIC?
I07
right[s]," "rejecting and refuting . . . actions," "declaring and affirming
the facts," and "insist[ing] that terrorist or other threats against Israel be
unequivocally condemned."9 9 There is nothing in the Charter, or the
existing publications put out by Z STREET or Z STREET founder Lori
Lowenthal Marcus, to indicate that the organization intends to pursue
any international action, any political lobbying, or any other mission
except to educate the population on its positions and disseminate information it finds effective in support of those positions.
Z STREET filed a Form 1023 application to the IRS requesting
tax-exempt charitable status, but after four months, its corporate counsel was allegedly informed by an IRS agent that its application was
delayed indefinitely due to an "Israel Special Policy" requiring stricter
review of Israel-related organizations seeking exemption.1 00 According
to the complaint,'
the agent in communication with Z STREET said
that these requests went to a "special unit in the D.C. office to determine whether the organization's activities contradict the Administration's public policies"-a process which Z STREET deems "the crudest
form of viewpoint discrimination, and one which is both totally unAmerican and flatly unconstitutional under the First Amendment."102
Z STREET's complaint further claims that the delay in its grant of
charitable status is costing it valuable fundraising time, since
[i]f Z STREET had tax-exempt status, its donors would be able to
deduct contributions from their taxable income. The IRS's refusal to
grant tax-exempt status to Z STREET has inhibited the organization's
fundraising efforts, and therefore impeded its ability to speak and to
educate the public regarding the issues that are the focus and purpose
of Z STREET. 0 3
Considering the nature of tax-deductible contributions as a "government matching grant," the financial harm resulting from the IRS
delay is plain.'
The question, then, is whether, under any circumstances, any precedent or legal procedure would support any branch of
the federal government's refusal to grant charitable status to Z STREET.
99 Id.
100
101
102
103
104
Z Street Complaint, supra note 7, at 2.
Id 1.
Id.
Id at 3.
See supra Part L.A-B.
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[
Revenue Procedure 86-43 concludes that "the long-standing Service position [is] that the method used by an organization in advocating
its position, rather than the position itself, is the standard for determining whether an organization has educational purposes.""o' Moreover, in
Technical Advice Memorandum 1999-07-021, the IRS held that an organization pursuing an agenda of educating the public on certain national and foreign policy matters was a charitable organization since the
organization included discussion of the opposing position, factually supported its own position, and cited independent, unbiased sources to
support its position.o 6
Items 6, 7, and 8 in the Z STREET complaint explain that Z
STREET was incorporated exclusively for charitable and
educational purposes:
Z STREET's website, public awareness campaigns, and all other activities are educational. Z STREET's website and other education
materials provide a full and fair exposition of the pertinent facts
to permit an individual or the public to form an independent opinion
or conclusion. Z STREET's positions are supported by research, original documents, facts, and opinions from recognized academic and
other knowledgeable sources, which sources are provided in its materials and on its website and therefore, Z STREET's activities are educational and charitable in nature [under the relevant provisions of the
IRC].1or
Applying IRS guidelines like Revenue Procedure 86-43 and Technical Advice Memorandum 1999-07-021, Z STREET is correct that,
absent application of the public policy exception, its activities are undoubtedly educational in nature to the extent required for charitable
status under § 501(c)(3). The only way the government can sustain the
"Israel Special Policy," then, is through application of the public policy
exception of Bob Jones University v. United States.
ii.
Public Policy Exception as Applied to the Z STREET Case
The question of whether the Bob Jones holding can be applied to
the circumstances surrounding Z STREET's application for tax-exempt
status is a not a particularly complicated one. The debate surrounding
105
106
107
Rev. Proc. 86-43, 1986-2 C.B. 729.
I.R.S. Tech. Adv. Mem. 99-07-021 (May 20, 1998); About Us, supra note 94.
Z Street Complaint, supra note 7, at 4-5.
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ISN'T IT IRONIC?
109
this question is currently centered on whether an organization advocating for settlement construction in disputed territories, as Z STREET
does, is acting contrary to established public policy. That debate is inapposite to the legal question, though, because, as discussed above, the
IRS has never used Bob jones to deny tax-exempt status to any organization outside the context of race discrimination in education, and it certainly has not denied that status to nonprofits that act in divergence
from American foreign policy, as opposed to domestic policy.os
Professor Johnny Buckles, from the University of Houston Law
Center, argues that "Bob Jones requires a very broad - across the various
branches - violation of policy [to justify the denial of tax exemption].
I'm not sure you would have that [in the Z STREET situation]," he told
the Jewish Daily Forward.'0 9 Other legal experts maintain that the IRS
would never actually revoke the exempt status of groups advocating for
settlement construction, since "[rievocation of exemption is an enormous and extreme sanction, one the IRS is loath to impose . . . .
Whatever settled or firm national public policy may mean, the IRS is
not going to interpret it to mean the current position of a particular
administration.""'o Ori Nir, spokesman for Americans for Peace Now, a
left-wing organization opposed to the funding of settlement construction by American nonprofit groups, admitted that the IRS would be
"going down a very slippery slope" by repealing an organization's exemption under these circumstances."
Without any precise definition of what constitutes "public policy"
other than the impossibly restrictive Bob Jones test, it is difficult to ascertain United States public policy vis-t-vis the West Bank settlements.
Nevertheless, the Obama administration and State Department have actively and vociferously called for a moratorium on Israeli construction in
the disputed territories. In a May 2011 speech at the State Department,
the President said that the "United States believes that negotiations
should result in two states, with permanent . .. borders . . . based on the
108 See supra Part II.C.
109
Nathan-Kazis, supra note 74.
110 Id. (quoting Loyola Law School professor Ellen Aprill).
I I Id. (using the example of abortion and asking, "[i]s it right when there is a conservative
administration that opposes abortion to apply that kind of litmus test to organizations that deal
with issues of reproductive rights?").
110
CARDOZO PUB. LAW POLICY &'ETHICS j
[Vol. 10:81
1967 lines . . . ."2 The "1967 border" phrase refers to the prevailing
borders before the 1967 Arab-Israeli war, during which time Israel took
control of the disputed territory where settlements have since been constructed." 3 According to one analyst,
[w]hile the 1967 borders have long been viewed as the foundation for
a peace agreement .
.
. Mr. Obama's statement represented a subtle,
but significant shift, in American policy . .. [signaling that] the Americans back [the Palestinians'] view that new Israeli construction will
have to be reversed, or compensated for, in talks over the borders for a
new Palestinian state.' 14
One article claimed that "State Department spokesperson Darby
Halladay said in no uncertain terms: 'The United States is opposed to
Further, Stewart Tuttle, spokesman for the
settlements, period.' ""
U.S. Embassy in Tel Aviv, announced that the United States "policy is
the same across the board. Israel, like the Palestinians, has obligations
under the Road Map." 6 Israel's is to cease settlement activity and dismantle illegal outposts."" 7 Former Obama State Department spokesman P.J. Crowley offered to "provide Israel written guarantees
describing the incentives it would offer [Israeli Prime Minister] Netanyahu in exchange for . . . the proposed freeze [extension] . . . including
the steeply discounted sale to Israel of twenty F-35 stealth aircrafts,
worth an estimated $3 billion.""' A Haaretz article revealed that Secretary of State Hillary Clinton
blasted Israel's plans to demolish Palestinian homes in East Jerusalem
as a violation of its international obligations and 'unhelpful' to Middle
112 Barack Obama, President, United States of America, Remarks by the President on the
Middle East and North Africa (May 19, 2011), available at http://www.whitehouse.gov/thepress-office/2011/05/19/remarks-president-middle-east-and-north-africa.
113 Interview by Robert Siegel with Aaron David Miller, former Middle East negotiator, U.S.
Dep't of State, for NPR (Oct. 13, 2011), text available at http://www.npr.org/2011/05/20/
136506960/what-are-the-1967-borders.
114 Mark Landler & Steven Lee Meyers, Obama Sees '67 Borders as Starting Pointfor Peace
Deal, N.Y. TIMES (May 19, 2011), http://www.nytimes.com/2011/05/20/world/middleeast/
20speech.html?pagewanted=l &-r= 1&emc=eta 1.
115 Nathan-Kazis, supra note 74.
116 See infra Part IV.A.
117 Scott Wilson, War Turns the Tidefor Israeli Settlers, WASH. POST (Sept. 25, 2006), http://
www.washingtonpost.com/wp-dyn/content/article/2006/09/24/AR2006092400757.html.
118 Netanyahu Faces 'Freeze' Opposition, AL JAZEERA (Nov. 21, 2010), http://english.al-
jazeera.net/news/middleeast/2010/11/201011218472795442.html.
2011]
ISN'T IT IRONIC?
111
East peace efforts and quoted her as saying that illegal West Bank
construction is 'an issue that [the State Department] intend[s] to raise
with the government of Israel and the government at the municipal
level in Jerusalem.' 9
In fact, an internal Israeli report on the extent of illegal settlements
demonstrating excessive, uncontrolled construction through disputed
West Bank territories was initially suppressed for fear of a "crisis with
the U.S. government" if that report was made public.12 0 And according
to many in the media, the Obama administration's "emphasis on Israel
ending settlement expansion is not a departure from U.S. policy in the
past."' 2 1
A presidential speech, a State Department incentives program coupled with various Department statements, historical discussions regarding the United States position, and declarations by American leaders
past 1 2 2 and present seem to indicate a strong likelihood that the confirmed American foreign policy position is in opposition to continued
construction-at least until the "peace process" succeeds or definitively
fails. But, even these statements and facts do not create the presumption required to apply the Bob Jones public policy exception, since all
three branches of the federal government have not taken affirmative action to pronounce a particular policy. And, even if the public policy
exception under the Bob Jones precedent could be applied, the critical
difference here is that Z STREET does not actually undertake settlement
construction. It was the affirmative discriminatory actions undertaken
119 Barak Ravid, Clinton: Israel's Demolition of East Jerusalem Harms Peace Efforts, HAARETZ
(Mar. 4, 2009), http://www.haaretz.com/print-edition/news/clinton-israel-s-demolition-of-eastjerusalem-homes-harms-peace-efforts-i1.271377.
120 Amos Harel, Settlements Grow on Arab Land, Despite Promises to U.S., HAARETZ (Oct. 24,
2006), http://www.haaretz.com/news/settlements-grow-on-arab-land-despite-promises-made-tou-s-1.203258.
121 Netanyahu to Lay Out 'Peace Plans', AL JAZEERA (June 8,
2009), http://english.aljazeera.net/news/middleeast/2009/06/200967202652160475.html.
122 According to Mideast Peace Envoy George Mitchell, "[o]pposition to the government of
Israel's policies and practices regarding settlements ... has been consistent through the Carter,
Reagan, Bush, Clinton and Bush administrations." George Mitchell, U.S. Special Envoy for
Middle East Peace, Commencement Address at the Massachusetts Institute of Technology (June
9, 2003) (transcript available at http://web.mit.edu/newsoffice/2003/comm-mitchellspeech.html). "Presidents Johnson to Carter all endorsed a much more severe formulation with
respect to June 1967." Interview by Robert Siegel with Aaron David Miller, former Middle East
negotiator, U.S. Dep't of State, for NPR (Oct. 13, 2011), text available at http://www.npr.org/
2011/05/20/136506960/what-are-the- 1967-borders.
112
CARDOZO PUB. LAW POLICY &'ETHICSJ.
[[Vol. 10:81
by Bob Jones University that were found contrary to established United
States policy, not the idea that interracial couples were abhorrent: no
matter how repugnant this opinion, the public policy exception cannot
be applied unless a public policy is defied, and there is no public policy,
nor could there be under the Constitution, against discriminatory beliefi
or discriminatory language. Similarly, there is no public policy against
settlement advocacy, as distinct from any indeterminate policy against
settlement construction.
Further, even stipulating that a cessation of West Bank construction was determined to be the official public policy of the United States,
that fact could not be used to invalidate Z STREET's exempt status
since "an incidental non-exempt purpose will not automatically disqualify an organization" from charitable exemption. 12 3 According to Z
STREET's mission statement, settlement building in the West Bank is
but a part of its overall Zionist position, and cannot be considered a
sufficiently substantial part of its intended activities to warrant disqualification of an otherwise perfectly acceptable application for tax exemption under § 501(c)(3). And the IRC itself states that "the fact that an
organization, in carrying out its primary purpose, advocates social or
civic changes or presents opinions on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from
qualifying under section 501(c)(3)" as long as it does not use tax-exempt
funds to lobby or to influence legislation.' 2 4 There is no indication that
Z STREET currently engages in political action or activities, nor that it
intends to do so in the future. But even if Z STREET did use funds to
lobby the political branches, it could, as many other nonprofit organizations do, create a bifurcated organization whereby political action activities could be funded under a tax-exempt § 501(c)( 4 ) division, and all
other activities funded under a tax-deductible § 501(c)(3) organization.' 2 5 In the implausible event that a dual structure did not satisfy
critics within and outside the IRS, there is no question that Z STREET
Airlie Found. v. IRS, 283 F. Supp. 2d 58, 62 (D.D.C. 2003).
Teas. Reg. § 1.501(c)(3)-1(d)(2) (2011).
125 Regan v. Taxation With Representation of Wash., 461 U.S. 540, 544 (1983) (discussing
the ability of a charitable organization to create a dual-structured entity under both §§ 501(c)(3)
and 501(c)(4), the former entity being for non-lobbying activities and the latter for political
activities).
123
124
ISN'T IT IRONIC?
2011]1
could qualify as an educational social welfare organization
§ 501(c)( 4 ).126
iii.
I113
under
Z STREET is the Easy Case
As is explored below, there are domestic organizations that have
incorporated under § 501(c)(3) for decades while sending substantially
all their collected, tax-deductible funds to settlement construction
projects in disputed West Bank territories, acting in direct opposition to
the proclaimed public policy of the Israeli government.12 7 The Z
STREET request for tax exemption and § 501(c)(3) qualification,
though, is the least of the IRS's problems. The irony of the Z STREET
situation is that, regardless of the IRS's explanation for its delayed grant
or denial of tax exemption, the idea of a potential "Israel Special Policy"
that actually scrutinizes organizations acting directly within Israeli territory may be more logical than the Z STREET allegations suggest. But
even if that policy did exist-which it seems it does not-it would not be
applicable to Z STREET in any case.
Jon Waddell, manager of the IRS's Exempt Organizations Determinations Group (Touch and Go, or TAG) said that "Z STREET's application was not referred to the TAG group because its viewpoints on
Israel contradict the viewpoints espoused by the Obama administration," but because of an IRS policy giving amplified attention to organizations that could potentially provide services in nations at "high risk of
terrorism."28 However, the State of Israel has never been accused of
engaging in acts of terrorism by the United States. In fact, Gillian
Christiansen, a spokeswoman for the U.S. Immigration and Customs
Enforcement Division of the Department of Homeland Security, said
that the "U.S. does not and never has considered Israel to have links to
terrorism, but rather they are a partner in our efforts to combat global
terrorism."l 2 9 Assuming arguendo that this stated counterterrorist policy
refers only to geographic locations at high risk of terrorism (such as the
Middle East), it is still unlikely that the Z STREET application's delay
126
127
See supra text accompanying notes 37-41.
See infra Part IV.A.
IRS: No 'Special' Policy for Pro-Israel Groups, JEWISH
128
TELEGRAPHIC AGENCY (Dec. 15,
2010), http://jta.org/newslarticle/2010/12/15/2742185/irs-no-special-policy-for-pro-israelgroups.
129 IsraelInclusion on TerrorList Was Mistake, Says ICE, JEWISH WEEK (July 6, 2011), hrtp://
www.thejewishweek.com/news/breaking-news/israel-inclusionterrorlistwasmistake-saysice.
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is a result of this supposed counterterrorist policy. First, as previously
mentioned, Z STREET's activities would not provide services in any
country other than the United States.13 0 Second, the Department of
Treasury in 2005 issued a release entitled Anti-TerroristFinancingGuidelines: Voluntary Best Practicesfor U.S. -Based Charities'3 ' to "provide valuable recommendations for the charitable sector to consider in adopting
practices that better protect it from the risk of abuse or exploitation by
terrorist organizations." 13 2 The report was issued in response to a Treasury investigation that revealed "consistent abuse of the charitable sector
through the diversion of charitable funds and services to terrorist organizations such as al-Qaeda and Hamas."13 3 With regular revisions of the
release, and a full system of civil and/or criminal liability for any domestic charity directly or indirectly financing terrorist operations, it seems
the Treasury has already acted to prevent transmission of American taxdeductible funds to these groups. Although it is possible for the Treasury to engage in further investigation and further action beyond the
scope of the release and existing laws, there has been no indication that
is the case.
The assertion that the IRS is channeling specific requests for charitable status to an office dealing only with countries with increased risk
of terrorism seems moot, since the Treasury has already acted in this
capacity, and since the Z STREET case is the first time this special
inquiry has ever been exposed. Additionally, the government's oversight
capacity of charitable funds being funneled abroad was increased substantially in the wake of the September 11, 2001 attacks.134 Consider130
See supra Part III.B.ii.
131
US
DEP'T OF THE TREASURY, U.S. DEPARTMENT OF THE TREASURY ANTI-TERRORIST
FINANCING GUIDELINES: VOLUNTARY
BEST PRACTICES FOR
U.S.-BASED
CHARITIES (2006),
http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/
guidelines charities.pdf.
132
US
DEP'T OF THE TREASURY, INTRODUCTION TO TREASURY'S UPDATED ANTI-TERROR-
IST
FINANCING GUIDELINES (2010), http://www.treasury.gov/resource-center/terrorist-illicit-finance/Pages/protecting-charities-intro.aspx.
133 Id.
134 Anthony, supra note 77, at 915 ("These executive, legislative, and administrative actions
have significantly impacted the operation and participation of international grant-making organizations. Early allegations against the Afghan Support Committee, the Revival of Islamic Heritage Society, and the Holy Land Foundation indicated the potential for the diversion of
charitable monies to terrorist organizations. Consequently, the Government enacted Executive
Order 13224 and the USA PATRIOT Act to allow more stringent punishment and to increase the
risk of civil liability associated with grant funds diverted to terrorist organizations, even without
knowledge of such diversion.").
2011]
ISN'T IT IRONIC?
115
ing the scope and depth of regulations enacted specifically to counter
the possibility of tax-deductible funds ending up in the hands of terrorists, it is rather implausible to suggest that an organization applying
for exempt status that advocates domestically for the Zionist cause, no
matter how "right-wing," be subjected to this sort of intensified review.
Ironically, the media spectacle surrounding the Z STREET lawsuit has
illuminated the conflict between recent IRS statements and decades-old
exemption grants to organizations that are far more active-and far
more dubious-than Z STREET.
IV.
ABUSES OF THE DOCTRINE OF CHARITABLE EXEMPTION BY
ORGANIZATIONS VIOLATING THE PUBLIC POLICIES OF THE UNITED
STATES AND THE SOVEREIGN PREROGATIVES OF THE STATE
OF ISRAEL
A.
EstablishedIsraeli Public Policy Against Settlement-Building in
Certain Territory
Whatever debatable policy the United States has with regard to
West Bank settlement construction, the official policy of the State of
Israel through the last several Israeli administrations is undisputed. In
1984, under a right-wing Likud government, Israel allowed tax breaks
for donations toward settlement-building in the West Bank."' However, Israel's consistent public policy since the Labor Party took control
of the Knesset (Israeli legislature) in 1995 denies funding for outposts
and contributions to groups devoted exclusively to settlement-building,
and staunchly opposes any new construction in disputed West Bank
territory.1 3 6 For such expenditures to be funded by tax-exempt American dollars in contravention of both American foreign policy and Israel's
own declared sovereign interests is simply inexplicable.
Prime Minister Yitzhak Rabin campaigned in 1992 on a platform
of stopping settlement construction, and once in office, his cabinet froze
all new construction, stopped the promotion of plans for settlement expansion, and halted existing construction.13 7 Government Resolution
135 Jim Rutenberg, Mike McInetire & Ethan Bronner, Tax-Exempt FundsAid Settlements in
6
the West Bank, N.Y. TIMEs (July 5, 2010), http://www.nytimes.com/2010/07/0 /world/middleeast/06settle.html?_r=3.
136 Id.
137 Freezing the Settlements - It Has Been Done Before: The Rabin Precedent, PEACENOW
(2010), http://peacenow.org.il/eng/content/freezing-settlements-it-has-been-done-rabin-precedent. An "Exceptions Committee" was created to review existing building and the stages of
construction in areas where private contracts existed between landowners and private contrac-
116
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[Vol. 10:8 1
360 of November 1992 "approve[d] cessation of construction in Israeli
communities in Judea and Samaria and the Gaza Strip, carried out pursuant to previous government decisions found in the government's secretariat."' 3 " According to PeaceNow, a left-wing organization opposed
to settlement construction, after the cabinet decision was issued, the
Israel Defense Forces' West Bank Central Command "then issued an
order prohibiting the advancement of any construction plans in the territories except for exceptional cases approved by the Exceptions
Committee. 139
In 2003, then-Prime Minister Ariel Sharon declared that "Israel
will meet all its obligations with regard to construction in the settlements. There will be no construction beyond the existing construction
line, no expropriation of land for construction, no special economic incentives, and no construction of new settlements." 14 0 In 2006, when
Prime Minister Ehud Olmert took office, he addressed the Israeli Knesset
with a speech claiming that "[c]ontinued scattered settlement throughout Judea and Samaria . . . endangers the existence of Israel as a Jewish
state."14 ' Even current Prime Minister Benjamin Netanyahu, founder of
the right-wing Likud party, gave a speech in 2009 declaring Israel's intention to stop "building new settlements or . . . expropriating additional land for existing settlements." 1 4 2 These declarations cannot mean
anything but that the Israeli government's position is against new settlement construction, at least while negotiations continue toward a twostate solution.
In June 2002, President Bush announced the "Road Map for
Peace" proposal by the "Quartet"-the United States, Russia, the United
tors. When a construction freeze caused specific harm to a settlement or the construction was
completed solely by private funds (as opposed to government funds), the committee could, on
rare occasions, approve of construction on a case-by-case basis. Id.
138 Talia Sasson, Interim Report on the Subject of UnauthorizedOutposts, 64-6 (Mar. 8, 2005),
http://www.pmo.gov.il/NR/rdonlyres/OAOFBE3C-C741-46A6-8CB5-F6CDC042465D/0/
sason2.pdf (in Hebrew).
'39 Id
140 Ariel Sharon, Prime Minister, State of Israel, Address at the Herzliya Conference (Dec.
18, 2003), available at http://www.pmo.gov.il/PMOEng/Archive/Speeches/2003/12/Speeches
7635.htm.
141 Gershom Gorenberg, Ehud Olmert's FailedPromises, L.A. TIMEs (Sept. 20, 2008), http://
www.latimes.com/news/opinion/commentarylla-oe-gorenberg20-2008sep20,0,7167754.story.
142 Benjamin Netanyau, Prime Minister, State of Israel, Speech at the Begin-Sadat Center at
Bar-Ilan University (June 14, 2009), available at http://www.mfa.gov.il/MFA/Government/
Speeches+by+Israeli+eaders/2009/Address-PM-NetanyahuBar-IlanUniversity 14-Jun-2009.
htm.
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ISN'T IT IRONIC?
117
Nations, and the European Union-to implement a plan toward a twostate solution to the Israeli-Palestinian conflict. On May 24, 2003,
Prime Minister Sharon approved the Road Map with fourteen reservations, none of which were even indirectly related to the freeze on settlement construction. 4 3 The Road Map stated that, "consistent with the
Mitchell Report, Government of Israel freezes all settlement activity (inIn addition, the Israeli govcluding natural growth of settlements)."'
ernment took steps to dismantle all the outposts built after March 2001,
a month after Sharon became prime minister, and "reiterated its commitment to the Roadmap on several occasions.""'
Prime Minister Ehud Olmert was elected in 2006 to lead the newly
formed, centrist Kadima political party, on the promise that Israel
would remain willing to give up most of the West Bank territory to a
future Palestinian state.' 4 6 A BBC profile of the former Prime Minister
explains that although "he caused [an] uproar in political circles in December 2003" when he publicly suggested a withdrawal from the West
Bank and Gaza Strip, "despite the initial controversy, the idea of disengagement became government policy, with a majority of Israelis backing
the process." 1 His whole life, he had advocated for increased construction in the territories, and as a young Knesset member he had even voted
against the historic Camp David Accords, a land-for-peace agreement
143 Israel's Roadmap Reservations, HAARETz (May 27, 2003), http://www.haaretz.com/printedition/news/israel-s-road-map-reservations-1.8935. The reservations involve the Palestinian
commitment to counterterrorist measures, the methods for determination of "full performance"
of the Roadmap commitments on both sides, the character of the provisional Palestinian state,
and the timeline for the determination of questions of a final status agreement, among other
concerns. Id. The ninth reservation, which deals with the question of the permanent agreement, expressly states that "there will be no involvement with issues pertaining to the final
settlement. Among issues not to be discussed: settlement in Judea, Samaria, and Gaza (excluding
a settlement freeze and illegal outposts)." Id; see also ISRAEL'S RESPONSE To THE ROAD MAP
(May 25, 2003), http://www.knesset.gov.il/process/docs/roadmap-response-eng.htm.
144 A PERFORMANCE-BASED ROADMAP TO A PERMANENT TWO-STATE SOLUTION TO THE
ISRAELI-PALESTINIAN CONFLICT (Apr. 30, 2003), http://www.un.org/media/main/roadmap12
2002.pdf.
145 Eyal Hareuveni, B Tselem, By Hook and By Crook: IsraelSettlement Policy in the West Bank,
B'TSELEM.ORG (2010), http://www.btselem.org/Download/201007_ByHookand_byCrook
Eng.pdf.
146 0/mert Claims Victory in Israeli Election, ASSOCIATED PRESS (Mar. 30, 2006), http://www.
msnbc.msn.com/id/ 12034819/ns/world-news-mideast_nafrica//olmert-claims-victory-israelielection/#.TpcOYpw7dps.
147 Profile: Ebud Olmert, BBC NEWS ONLINE (Aug. 30, 2009), http://news.bbc.co.uk/2/hi/
middle east/4135680.stm.
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returning the Sinai Peninsula to Egypt in exchange for a quiet border. 4
Olmert later concluded that including Palestinian-occupied territories
within Israel would threaten the existence of Israel as a Jewish state, and
pronounced,
I voted against Menachem Begin [on Camp David] ... I told him it
was a historic mistake, how dangerous it would be, and so on and so
on. Now I am sorry he is not alive for me to be able to publicly
recognize his wisdom and my mistake. He was right and I was wrong.
Thank God we pulled out of the Sinai.'"
Demographics and reality show-and Olmert came to realizethat at the rates of Palestinian and Jewish reproduction, the Jews would
ultimately become a minority of the electorate unless a two-state solution were accomplished. 5 o
In his speech to the Israeli parliament as he took office, Olmert
made clear that his policy would require "partitioning the land" with the
Palestinians."' In 2003, when Olmert was a member of the Knesset, a
group of his aides met with the U.S. National Security Council in both
Washington and Jerusalem to discuss formulas for continued building
within existing settlement blocs, but one aide explicitly acknowledged
agreement between members of the group "that in return there would
be no new settlements built, no expropriation of additional Palestinian
land, no construction beyond the 'built-up line' and no economic incentives from Israel to the settlers." 5 2
Camp David Accords, U.S.-Isr.-Egypt, Sept. 17, 1978, available at http://www.mfa.gov.
il/MFA/Peace+Process/Guide+to+the+Peace+Process/Camp+David+Accords.htm.
149 Scott Wilson, Pullout Focus Israel on Its Future, WASH. POST (Aug. 13, 2005), http://
www.washingtonpost.com/wp-dyn/content/article/2005/08/12/AR2005081201546.html?nav=
rss-print/asection.
150 Gorenberg, supra note 141. "To remain a democracy and a Jewish state, [Olmert] said,
Israel had to stop ruling over the disenfranchised Palestinians of the occupied territories. Otherwise, he said, Palestinians would give up on a two-state solution and instead demand the right to
vote in Israel," threatening the influence of the Jewish vote. Id. Referring to the right-wing
Israeli position that the return to the biblical "Greater Israel" will require Israeli control of all the
land acquired in the 1967 Six Day War, Olmert proclaimed that sometimes "[wihen you fight
for the impossible . .. you lose everything." Kevin Peraino, Olmert's Lament, NEWSWEEK (June
13, 2009), http://www.newsweek.com/2009/06/12/olmert-s-lament.html.
His position, then,
remained that the demographics left Israel too vulnerable to fight for everything, and some
painful concessions were required to protect it from an existential threat to its survival as a
Jewish state.
151 Gorenberg, supra note 141.
152 Id
148
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119
Israeli Prime Minister Benjamin Netanyahu was reelected a decade
after his first ministerial term, after a slight shift from his formerly hardright position, although he remains one of the most conservative Israeli
presidents in history. In 2008, he pronounced Israel's commitment to a
freeze on settlement construction while 10,000 settlers protested in
front of his home.1 53 Several months later, all construction, both public
and private, was frozen for ten months, with the exception of construction on buildings with existing permits and construction foundations
already laid."' In January 2009, Prime Minister Netanyahu told Middle East envoy Tony Blair that he had "no intention of building new
settlements in the West Bank,"' 5 5 and domestic Israeli news reported
that Netanyahu [had] evaluated a number of ways of freezing settlement construction, including issuing a temporary (several months)
hold on new construction starts in return for reciprocal measures on
the part of the Palestinians and Arab states [or] .
.
. declaring a freeze
on construction in Jerusalem, or in the settlement blocs.' 5 1
He was quoted in February 2011, addressing an assembly of rightwing Likud party leaders, telling them that "people don't understand
the reality they are living in," in response to complaints from West Bank
settlers that no new construction has been approved, even in some of the
largest settlements, and even though the formal moratorium expired
with the unsuccessful closure of the most recent round of peace talks.157
"'I suggest that you beware in order to protect the existing construction,
because that's what's on the agenda, not the new construction,' said the
Prime Minister."' 5 8 New construction is officially suspended. 5
153 Andrew Lee Butters, Protests Mount Against Israel's Settlement Freeze, TIME (Dec. 11,
2009), http://www.time.com/time/world/article/0,8599,1946898,00.htmi.
154 Prime Minister Benjamin Netanyahu, Statement on the Cabinet Decision to Suspend
New Construction in Judea and Samaria (Nov. 25, 2009), available at http://www.mfa.gov.ii/
MFA/Government/Speeches+by+Israeli+1eaders/2009/Statement+by+PMNetanyahu-suspend.
new-construction-judeaSamaria_25-Nov-2009.htm.
155 Likud Allows Settlement Expansion, BBC NEWs ONLINE (Jan. 26, 2009), http://
news.bbc.co.uk/2/hi/middleeast/7851140.stm.
156 Barak Ravid & Aluf Benn, Netanyahu 's Speech: Yes to Road Map, No to Settlement Freeze,
HAARETZ (June 11, 2009), http://www.haaretz.com/print-edition/news/netanyahu-s-speech-yesto-road-map-no-to-settlement-freeze-1.277711.
157 Isabel Kershner, Netanyahu Warns on Settlements, N.Y. TIMES (Feb. 28, 2011), http://
www.nytimes.com/2011/03/01/world/middleeast/01netanyahu.html?_r= 1&emc=etal.
I58
Id.
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In August 2011, after a long legal battle, the Israeli Supreme Court
ordered the State to dismantle the largest West Bank outpost, known as
Migron, by April 2012. Supreme Court President Dorit Beinish said
that "[t]here is no doubt, according to Israeli law, [that] no settlements
can be built on private lands of Palestinians."' 6 0 The Justices "said that
they recognize the difficulties surrounding the dismantling of such an
outpost, which has already expanded to 50 families, but . . . this could
have been avoided if the State had initially worked to better enforce the
law and prevented the construction of Migron in the first place."'' Unfortunately, enforcement of Israel's announced policy remains difficult
when settlers are equipped with millions of tax-exempt, tax-deductible
159 The author of this Note is not expressing any views with regard to Israeli public policy
concerning settlements or the Roadmap, nor does she posit that the established Israeli policy has
been uncontroversial or even that the Israeli government has always abided by its own obligations according to the positions it inarguably espouses in the public and the press. According to
a Peace Now report, freeze orders were breached in at least thirty-three settlements after the
moratorium on construction was imposed in late 2009, and 423 files had been opened in the
State Attorney's Office regarding illegal construction within the first five months of the moratorium. Hareuveni, supra note 145. A Newsweek article confirmed that "for all his moderate
rhetoric, Olmert's policies were deeply flawed. During the last full year of his term, construction
tenders for new structures increased dramatically-by a multiple of 38 in East Jerusalem, according to one study." Peraino, supra note 150. An Israeli commission found that more than
100 unauthorized outposts remained in the West Bank and in Gaza prior to the Israeli withdrawal, many of which were built on private Palestinian-owned land. Harel, supra note 120.
"'It is consistent with our long-standing position that building within the large settlement blocs,
which will stay a part of Israel in any final status agreement, will continue,' [Prime Minister
Olmert's spokesman Mark] Regev said. 'Construction outside the settlement blocs has been
frozen."' Barak Ravid, PM Okays 750 New Settlement Homes, Says Fits State Policy, HAARETZ
(Mar. 9, 2008), http://www.haaretz.com/news/pm-okays-750-new-settlement-homes-says-fitsstate-policy-1.240934. Prime Minister Sharon, in a letter to President Bush in April 2004, tried
to limit post-facto his commitment to the settlement freeze, saying that the Israeli government is
"fully aware of the responsibilities facing the State of Israel . . . includ[ing] limitations on the
growth of settlements." Letter from Ariel Sharon, Prime Minister, State of Israel, to George W.
Bush, President, United States of America (Apr. 2004), available at http://www.haaretz.com/
(emphasis added).
And
news/ariel-sharon-and-george-w-bush-s-letters-in-full- 1.277418
Netanyahu, like his predecessors, limited his commitment to a settlement freeze by declaring the
need to "meet the needs of natural growth in the population." Likud Allows Settlement Expansion, supra note 155. However, the Israeli failure to maintain all its commitments with regard to
a freeze on settlement construction does not negate the existence of this uncontroverted government policy.
160 Chaim Levinson, Israel's Supreme Court Orders State to Dismantle Largest West Bank Outpost, I-AARETz (Aug. 2, 2011), http://www.haaretz.com/misc/article-print-pagelisrael-s-supreme-court-orders-state-to-dismantle-largest-west-bank-outpost-1.376583?trailingPath=2.169
%2C2.216%2C2.217%2C.
161 Id
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American dollars to engage in their construction projects.16 2 Further,
the Israeli government maintains that, as a capitalist democracy, it is
unable and unwilling to interfere when a private contract is made between an alleged landowner and a contractor for construction in territories where land ownership is disputed. While the government itself does
not expend money in the settlement enterprise, privately-funded
projects undertaken by religious zealots and other ideologues for political purposes are difficult to suppress. American tax laws and American
money, then, are major means by which settlers change the reality on
the ground, incapacitating the peace process in contravention of both
United States and Israeli policies. As the settlers themselves pronounced
to Prime Minister Netanyahu in 2009, "'[wie'll continue to build the
land of Israel, with or without you!' "163
B.
The Circumvention of the IRS and Contravention of Established
Israeli Policy by "Charitable"American Organizations
A top aide to Prime Minister Olmert, speaking anonymously, is
quoted as saying that anyone demanding a total settlement freeze
"'doesn't know what they're talking about. They're making an issue out
of something the government of Israel can't control. They won't be able
to enforce it, so what's the use?' The Americans, he concluded, 'will
look like fools."1 6 4 The source probably did not know just how foolish
the Americans could look, considering their direct pecuniary complicity
in creating precisely those settlements that irreparably damage the peace
negotiations.
Reviewing both Israeli and American public records, a New York
Times investigation conducted in the spring of 2010 revealed that at
least forty American groups have collected more than $200 million in
tax-deductible gifts for settlement construction in East Jerusalem and
the West Bank in the last decade.16 1 While some of that money is used
for legitimate purposes under § 501(c)(3)-schools, synagogues, recreation centers-it is highly unlikely that these groups could legally deny
the existence of a non-exempt purpose, substantial in character, which
would threaten their tax-exempt designations, since the money has consistently been used for expenditures such as guard dogs, bulletproof
162
See infra Part IV.B.
163 Butters, supra note 153.
164 Peraino, supra note 150.
165 Rutenberg, McInetire & Bronner, supra note 135.
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vests, rifle scopes, and military vehicles to secure outposts in occupied
areas. 166
Among the groups investigated in the New York Times piece were
Elad and Ateret Cohanim, both of which are Israeli settlement organizations advocating for, organizing, and actively pursuing construction in
East Jerusalem.' 6 7 Both Elad and Ateret Cohanim "have American auxiliaries that accept tax-deductible donations," with Elad receiving $2.7
million in 2007 from its tax-exempt American affiliate, and American
Friends of Ateret Cohanim funneling $1.6 million to its Israeli counterpart in the same year.' 6' American Friends of Ateret Cohanim claims in
American tax documents to fund education, a charitable purpose legitimating tax exemption under § 501(c)(3) of the IRC. But "a Haaretz
report last August quoted an Israeli Ateret Cohanim official saying that
all money raised through the American group is used for 'land redemption."' 6 Further, in January 2010 Israeli authorities announced the
impending construction of a new Jewish settlement on the Beit Orot
campus, an American-funded yeshiva in East Jerusalem, financed in part
with the half-million tax-deductible dollars Beit Orot collected from an
American affiliate believed to be a subsidiary of Elad.7 1
There are dozens of other examples: Through various foundations
including the Hebron Fund and Christians for Israel, Reverend John
Hagee is responsible for the issuance of millions of tax-deductible dollars
in grants through the Jewish Federation and the Jewish Agency for Israel
to be used for settlement construction. 17' Tennessee-based charitable
group HaYovel is a tax-exempt organization operating under § 501(c) (3)
that advocates for Jewish winemakers in the occupied West Bank, believing that Christians must help keep Israel in the hands of the Jews to
effectuate Christ's second coming.172 HaYovel's members recruit and
invite volunteers to help Jews establish permanence in the territories
with the explicit purpose of "obstruct[ing] the creation of a Palestinian
state, widely seen as a necessary condition for Middle East peace."' 7 3
Christian Friends of Israeli Communities is a tax-exempt organization,
166
167
168
Id.
Id.
Id.
169 Nathan-Kazis,
170
171
172
173
supra note 74.
Rutenberg, Mclnetire & Bronner, supra note 135.
Id
Id.
Id
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ISN'T IT IRONIC?
123
described by its director as "humanitarian," that funds settlement construction because "the more that we support and encourage their right
to live on the land, the harder it's going to be for disengagement, for
withdrawal."M The New York-based, § 501(c)(3)-designated Friends
of Zo Artzeinu/Manhigut Yebudit has raised $5.2 million and funneled a
percentage to Israeli "community facilities" of Likud, violating the rule
that, unlike § 501(c)(4) funds, § 501(c)(3) charitable funds cannot be
used for political purposes in America or elsewhere.' 7 5 Each of these
organizations is acting with the explicit intendedpurpose of contravening
both American tax laws and Israeli policy determinations made with
complete and legitimate sovereign authority. In cases like these, the fact
that the director of the domestic organization deems these activities to
be in furtherance of the organization's own purpose, and the fact that
the director retains control over those funds, does not rationalize or justify the use of federal government dollars in such contentious affairs
within the territory of an independent foreign government.
Perhaps the most outrageous use of American tax-exempt, tax-deductible funds in this context is the cash payment by American charitable organization SOS-Israel to imprisoned Israeli soldiers who refused
orders of their military superiors by protesting a settlement evacuation at
their Israeli Defense Forces induction ceremony at the Western Wall.' 7"
The "charity" group, infamous for its radical positions, maintained that
it is a pro-Israel organization while its chairman "called on West Bank
settlers living in outposts and their supporters to use violence against
[Israeli] soldiers and officers." 17 7 SOS-Israel is led by Chabad-Lubavitch
Rabbi Shalom Dov Wolpe of Long Island, New York, who established
the organization in 1972 when it was granted nonprofit status as a religious institution.' 7 ' But Wolpe admitted that there is no office, no staff,
no church, and no congregation to back up his IRS designation.' 7 9 The
statutory requirement for the maintenance of § 501(c)(3) status is that
the organization must be "organized and operated exclusively" for such
174
Id.
175
Id.
Gal Beckerman, Group PayingIDFSoldiers to Refuse Duty May Be in Violation of U.S. Tax
Law, JEWISH DAILY FORWARD (Dec. 25, 2009), http://www.forward.com/articles/121181/.
176
'77 Kobi Nahshoni, Rabbi Wolpo: Fire rubber bullets back at soldiers, YNET NEWS (Aug. 3,
2011), http://www.ynetnews.com/articles/0,7340,L-4039076,00.html.
178 Beckerman, supra note 176.
179 Id
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purposes."'o If, therefore, a corporation or society was originally organized exclusively for exempt purposes, but later on it departed from such
purposes so that it was operated in a substantial respect for a purpose
which was not within the statute, it is not operated exclusively for exempt purposes, and is thus subject to revocation of its exempt status."'
After 38 years, it seems appropriate to question whether Rabbi Wolpe's
"church" continues to "operate exclusively" for any purpose which could
possibly fall within the purview of S 501(c)(3), yet his continued collection of tax-deductible donations and continued disregard for the explicit
policies of both the American and Israeli governments goes unchecked.
More important than his subversion of American tax policies, though, is
the fact that Wolpe's organization actually paid members of the Israeli
military, with tax-deductible American funds, to violate explicit orders
by military superiors given in accord with the laws of the State of
Israel.18 2 It is hard to imagine a more disturbing example that is able to
demonstrate the fundamental conflict existing here.
When the Israeli defense establishment conducted a two-year secret
investigation to determine the extent of illegal construction building in
disputed West Bank territories, it found "rampant illegal construction in
dozens of settlements and in many cases involving privately owned Palestinian properties." "13 But Haaretz quoted one source, apparently familiar with the data, saying that while "[e]veryone is talking about
the .
..
outposts .
..
[,] that is small change. The really big picture is the
older settlements, the 'legal' ones. The construction there has been
ongoing for years, in blatant violation of the law and the regulations."18
C.
Why this Abuse of the American System and Subversion of Israel's
EstablishedPolicy is so Dangerous to Israel's Sovereign Existence
As Prime Minister Olmert unreservedly elucidated, the internal
demographics within Israel are perhaps an equal threat to its future as
the threats coming from outside its borders. Not only is the Jewish
nature of Israel threatened by the birth rate of Arab Muslims as compared to that of its Jewish inhabitants, but any potential peace negotiation is threatened by the increasing polarity within the country's
Treas. Reg. § 1.501(c)(3)-1(d)(2) (2011).
181 69 A.L.R.2d 871 § 9 (1960).
182 Rutenberg, McInetire & Bronner, supra note 135.
183 Harel, supra note 120.
180
184
Id
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political blocs. Unless negotiations are advanced soon, there is an increasing potential that "shifts in Israeli society and the growth in the
ultra-Orthodox population changes the dynamics for good.""' As one
former Israeli cabinet minister put it, "[i]t's not only about the state of
Israel as a democratic and Jewish state but also the substance of the
nature of the Israeli Jewish state."'"' With only a small percentage of
Jerusalem's children being educated in secular, as opposed to doctrinal
schools, and the Arab and Muslim communities within the small state
populating at much higher rates, the growth in voting power is coming
from the most polarized ends of the political spectrum.' 87
Considering this internal Israeli reality, delays in the peace process
actively diminish the prospect of a final status agreement ever being concluded. When asked about the continued distribution of charitable
funds to West Bank settlement groups, former United States Ambassador to Israel, Daniel Kurtzer, said that "a couple hundred million dollars
makes a huge difference [and] creates a new reality on the ground."' 8 8
Since settlement construction is the foremost and most visible barrier to
the continuation of current negotiations, the inference is irrefutable that
settlement construction-pursued against the directive of the State of
Israel-remains the primary obstacle in resolving the Israeli-Palestinian
conflict.'" 9 "[Palestinian negotiator Saeb] Erekat insists that Israel's continued settlement building is ultimately what 'poisoned the atmosphere'
at the [most recent] talks. He told [a reporter] that sixty percent of his
conversations with his Israeli counterparts during the Annapolis process
were devoted to arguments over the settlements," clearly demonstrating
how critical the settlement issue is, considering the illusion it creates
185
Paul Danahar, Offthe Record: Is Time Running Outfor Peace?, BBC
NEWS
(Dec. 9, 2010),
http://www.bbc.co.uk/news/world-middle-east- 11959693.
186
Id
187
Id
Rutenberg, McInetire & Bronner, supra note 135.
188
189 It would be extraordinarily naYve to assert that settlement construction is the only barrier
to an agreement by both parties to sit down at the bargaining table. Prime Minister Netanyahu
has continually pushed for direct talks without preconditions, leaving the West Bank question to
a final status territorial delineation. Jonathan Peled, Letter to the Editor, An Israeli View on the
Talks, N.Y. TIMEs, Nov. 17, 2010, http://www.nytimes.com/2010/11/18/opinion/l8israel.
html?scp=2&sq=jonathan%20peled&st=cse (letter from Israel Embassy Spokesman). And Erekat's "complaint comes off as a little disingenuous, a convenient way to shift blame and avoid
discussing difficult issues like Jerusalem, security and refugees." Id. But a settlement freeze
could easily be a mere temporary concession for Israel-a "symbolic gesture [that] also removes a
[Palestinian] excuse." Peraino, supra note 150.
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that Israel is fixing the borders in anticipation of a final two-state
agreement.190
In any event, the Israeli policy determination pertaining to the settlements should be just that-an Israeli policy determination, categorically without interference by American groups, let alone United States
government-funded American groups. The greatest threat to the implementation of a settlement freeze-a determinative precursor to the possibility of direct talks-is the building on West Bank land in
contravention of Israeli policy. Since the United States government directly sponsors a substantial percentage of illegal settlement construction, the failure to implement even the most basic direct talks between
Israeli and Palestinian leaders can be attributed to that same United
States government whose policy is so explicitly to pursue negotiations.
This is the bizarre actuality of current American tax policies relating to
charitable exemption. "The result is a surprising juxtaposition: As the
American government seeks to end the four-decade Jewish settlement
enterprise and foster a Palestinian state in the West Bank, the American
Treasury helps sustain the settlements through tax breaks on donations
to support them." 1 9'
CONCLUSION
Through an imprecise and ambiguous set of rules and regulations,
the United States government has lost control of the charitable exemption, a system taking money out of the severely indebted American coffers, created with the specific intent to provide assistance to domestic
groups doing constructive domestic work. The failure of the government to curtail the grant of tax-exempt status and the almost negligent
manner in which the IRS oversees exempt groups has led to an indefensible, intolerable, and precarious situation whereby the United States
government literally undermines its own stated foreign policies, while
the Supreme Court has disallowed itself and lower courts from invoking
those policies to protect the sovereign interests of both the United States
government and governments around the world.
In Justice Powell's Bob Jones concurrence, he warned that:
Many questions remain [unanswered by the Court], such as whether
organizations that violate other policies should receive tax-exempt sta190 Peraino, supra note 150.
191 Rutenberg, McInetire & Bronner, supra note 135.
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tus under § 501(c)(3). These should be legislative policy choices. It is
not appropriate to leave the IRS 'on the cutting edge of developing
national policy.' The contours of public policy should be determined
by Congress, not by judges or the IRS.19 2
Nearly three decades later, however, Congress still has not undertaken the necessary deliberation to which Justice Powell was referring.
Without congressional guidance, judges and the IRS have no choice but
to interpret the narrow holding of Bob Jones in a way that completely
undermines the purpose behind a public policy exception.
To immobilize the spiraling grant of charitable status to every organization whose purpose is not "illegal, impossible or impracticable,"1 9 3
Congress, the IRS, and the Supreme Court must challenge and reform
the current system. First, there must be a more defined and far less
flexible category of activities that qualify as charitable or educational
under the IRC. A workable definition of "charity" must be advanced by
Congress or the IRS, bridging the gap between the current, broad interpretation and the ordinary dictionary definition.19 4 Second, the IRS,
Congress, or the Supreme Court must determine what percentage of an
organization's expenditures may permissibly be spent on those activities
which further non-exempt purposes, as distinct from those activities that
accomplish the organization's exempt purpose-the latter, and not the
former, should be accomplished through expenditure of the vast majority of an organization's tax-deductible funds. The current standard,
mandating that a charitable organization may only engage in activities
"not more than an insubstantialpart of which further non-exempt purposes,"' 95 is too indeterminate to be a practical check on these organizations' activities.
Third, the IRS must engage in substantially heightened oversight,
and, although the fear of burdening the judiciary may be legitimate, the
prohibition on third-party suits against organizations claiming charitable status eliminates an imperative source of supervision of these groups.
The IRS claims throughout the IRC that the "presence of a single [nonexempt] purpose, if substantial in nature, will destroy the exemption,
192
Bob Jones Univ. v. United States, 461 U.S. 574, 612 (1983) (Powell,
J.,
concurring).
193 Hall, supra note 14; see also supra text accompanying note 44-46.
§
194 Treas. Reg. § 1.501(c)(3)-1(c)(1) (2011).
195 Airlie Found. v. IRS, 283 F. Supp. 2d 58, 62 (D.D.C. 2003) (citing Treas. Reg.
1.501(c)(3)-1(c)(1) (2008)) (emphasis added).
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regardless of the number or importance of truly [exempt] purposes." 19
However, without meaningful oversight, that non-exempt purpose will
never be revealed. Fourth, "public policy" requires a tangible definition,
and one that is far less restrictive and inapposite than the definition
under the Bob Jones holding. The term "public policy" is itself a malteable one, but a reasonable judiciary should consider all the circumstances
and determine whether a particular path advanced by the government
constitutes an established public policy, even if only one branch (most
likely, the executive) has acted in pursuance of those goals.' 9 7 This is
especially true with regard to foreign policy endeavors, in which case the
other branches are less likely to have acted to advance the public policy.
Fifth, the portion of tax-deductible funds that may tolerably be
dispatched to international organizations must be definitively limited to
a percentage of the domestic organization's available funds, so that international organizations who incorporate under § 501(c)(3) cannot simply send the entirety of those tax-deductible contributions to
unidentified foreign projects that it deems "in furtherance of' its exempt
purpose. Finally, the IRS-not the director of the domestic organization-must be the ultimate arbiter, in every case, of whether a domestic
organization should be legally authorized to transmit tax-deductible
funds to organizations around the world. The primary inquiry in this
regard should be whether the ultimate use of the funds supports activities that contradict United States public policy.
Organizations should be granted nonprofit status only if they are
genuinely undertaking charitable activities that either supplement governmental or public programs, or relieve the government of the potential responsibility to undertake identical or similar programs. When
funds collected by charitable organizations in the United States are sent
abroad, the bona fide charitable purpose of the domestic organization
must actually be implicated in the expenditure of the funds. Under the
present system, the IRS focuses on everything except what activities are
actually undertaken with the tax-deductible funds-but that expenditure is precisely the IRS's responsibility. The tax laws are intended to
benefit the American public by providing incentives to community
groups to engage in activities that stimulate public debate, provide assis196 Better Bus. Bureau v. United States, 326 U.S. 279, 283 (1945).
197 See supra Part IV.B (demonstrating through vigorous rhetoric and determinations of various members of the United States government that the public policy of the United States is in
opposition to continued West Bank settlement construction).
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tance in times of need, encourage education and philanthropy, and promote the free exercise of religion. To protect American tax dollars,
American citizens, and citizens of nations around the world, the IRS
system of charitable deductions must undergo a radical transformation;
left unmodified, domestic groups will continue exploiting the policy of
charitable exemption, and the United States government will continue
to subsidize projects at home and abroad that contradict sovereign prerogatives of independent foreign governments and the United States
government.