Court Dismisses Suits Over Alleged IRS Mishandling of Requests for Tax-Exempt Status.
(Parker Tax Publishing November 14, 2014)

The District Court for the District of Columbia dismissed nine allegations from 41 conservative organizations regarding alleged IRS misconduct relating to their requests for tax-exemption, for lack of jurisdiction and failure to state cognizable claims. Linchpins of Liberty v. U.S., 2014 PTC 552 (D. D.C. 10/23/14).

Forty-one organizations that sought or are still seeking tax-exempt status from the IRS filed a civil action against the United States, the IRS, and several IRS officials in their official and individual capacities, alleging multiple constitutional and statutory violations. The lawsuits sought both injunctive relief and monetary damages.

The organizations alleged that as early as February 2010, the IRS began identifying tax-exempt applications for additional scrutiny, including issuing letter requests for additional information from organizations with conservative-sounding names. An IRS "Be On The Lookout" (BOLO) list allegedly contained terms that would identify organizations with conservative-sounding names that had applied for tax-exempt status under Code Secs. 501(c)(3) or 501(c)(4).

According to the organizations, IRS officials pulled applications from conservative organizations, delayed processing those applications for sometimes well over a year, and then made harassing, probing, and unconstitutional requests for additional information. The organizations claimed this had a dramatic impact on targeted groups, causing many to curtail lawful activities, expend considerable unnecessary funds, lose donor support, and devote countless hours to responding to onerous IRS information requests that were outside the scope of legitimate inquiry.

After the organizations instituted this action, the IRS publicly released a memorandum on its website stating that the challenged IRS scheme had been suspended as of June 20, 2013, and that remedial steps had been taken to address the scheme. The IRS sought dismissal of the complaints.

After examining the allegations, the district court granted the IRS's motions to dismiss, finding that the court either did not have jurisdiction to hear the complaints or the complaints failed to state a cognizable claim.

For counts one through three of the complaint, the organizations sought monetary remedy, commonly known as a Bivens remedy. However, the court noted that circuit court precedent did not permit a Bivens remedy against the individual IRS defendants. A recent D.C. circuit case, Kim v. U.S., 632 F.3d 713 (2011), dealt with a similar situation where taxpayers sought monetary relief from IRS employees for alleged unconstitutional conduct. In that case, the court noted that it was well established that Bivens remedies do not exist against officials sued in their official capacities. As the court found no compelling reason to depart from this precedent, it dismissed counts one through three for failure to state a cognizable claim (in effect, concluding that the complaints did not contain enough factual matter to make a plausible case).

In counts four through seven of the complaint, the organizations sought declaratory and injunctive relief for the IRS's violations of the Administrative Procedure Act (APA), based on the implementation of the BOLO policy. The court noted, however, that unless an actual, ongoing controversy exists, the court was without power to decide it. As the IRS had already publicly announced that it had suspended the unconstitutional conduct complained of by the organizations and implemented changes to the tax-exempt review process to assure the public that the conduct would not recur, the court dismissed counts four through seven for lack of jurisdiction.

The eighth count in the complaint was brought on behalf of the four organizations that were still awaiting a determination of their tax-exempt status under Code Sec. 501(c)(3). As two of the organizations were granted tax-exempt status after the complaint was filed, the court dismissed this count with respect to those organizations. The matter remains open with respect to the remaining two organizations.

In count nine of the complaint, the organizations sought monetary judgments under Code Sec. 7432 against the IRS due to its allegedly illegal obtainment, inspection, handling, and disclosure of the organizations' tax return information, in violation of Code Sec. 6103. The court, however, pointed out that Code Sec. 6103 addresses improper disclosure of tax return information, not improper obtainment of related information. Thus, the court noted, although the organizations challenged the IRS's inspection of their tax return information, it was actually the IRS's alleged unconstitutional conduct in acquiring that information that formed the basis for count nine.

In the court's view, there is a clear dichotomy between the means by which tax return information is acquired and the disclosure or inspection of that information thereafter; thus, the validity of the means by which the return information was disclosed was irrelevant to whether the disclosure of the information violated Code Sec. 6103. As the organizations were unable to show that the IRS either improperly obtained tax return information or improperly disclosed that information, the court dismissed count nine for failure to state a proper claim for relief. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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