FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Z STREET, INC.,
Plaintiff, No. 2:10-cv-04307-CMR
DOUGLAS H. SHULMAN,
IN HIS OFFICIAL CAPACITY AS
COMMISSIONER OF INTERNAL
The United States’ motion to dismiss should be granted because: (1) Z Street has an adequate
remedy at law, and (2) the Williams Packing and Regan exceptions to the Anti-Injunction Act are not applicable to this case.
I. Plaintiff’s Request for Injunctive Relief Must Be Denied Because Plaintiff Has an
Adequate Remedy at Law.
In its motion to dismiss, the United States identified four alternative legal remedies available
to Z Street, including an action under 26 U.S.C. § 7428. (M. to Dismiss Memo. at 6.) In Z Street’s opposition, it continually complains that it lacks an adequate remedy because the remedies recited by the United States will not give it what it seeks–namely “a constitutional decisionmaking [sic] process.” (E.g., Opp’n at 2.) Z Street argues that the “government . . . simpl[y] refus[es] to acknowledge what is at issue in this case” and that Z Street is not seeking a declaration of exempt status or a tax refund, but instead a “constitutionally untainted process” in determining whether Z Street is an exempt organization. (Id. at 2-3.)
Despite Z Street’s rhetoric, the United States was clear that the identified remedies, including
an action under Section 7428, provide the very process that Z Street is seeking. “[P]laintiff can file suit under 26 U.S.C. § 7428 and have the United States Tax Court, the United States Court of
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Federal Claims, or the United States District Court for the District of Columbia make a
determination as to whether it qualifies for tax exempt status without regard to the application of any‘special policy’ Z Street currently complains of.” (M. to Dismiss Memo. at 6.) To the extent Z Streetis unhappy with the Service’s administrative process or the alleged delay involved in that process, Z Street has an adequate remedy – a remedy that was created specifically so that aggrieved taxpayers could obtain “relatively prompt judicial review of . . . exempt organization issues.” Centre for Intn’l Understanding, v. C.I.R.,, 84 T.C. 279, 283 (Tax Court 1985)(citation omitted). In fact, Section
7428 was enacted, in part, to address the very concerns raised in Z Street’s complaint with respect to
its difficulty in raising funds pending a determination on whether it is tax exempt.1 (See Compl. ¶ 25;
Opp’n. at 6.)
Although Section 7428 may not be Z Street’s preferred remedy, it provides an adequate
remedy (i.e., a constitutionally untainted process to determine whether Z Street is tax exempt and
eligible to receive tax-deductible contributions). This Court should not fashion a different remedy.
See Bob Jones, 416 U.S. at 746. See also Shreiber v. Mastrogiovanni, 214 F.3d 148, 152-53 (3rd
Cir. 2000)(“Congress chose to provide certain remedies, and not others, as part of the complex
statutory scheme which regulates the relationship between the IRS and taxpayers. We will not create
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a remedy where Congress has chosen not to.”); Schweiker v. Chilicky, 487 U.S. 412 (1988)(the
absence of statutory relief for a constitutional violation does not necessarily mean that courts should
create a damages remedy against the officer responsible for the violation); Judicial Watch v.
Rossotti, 317 F.3d 401, 408 (4th Cir. 2003)(“Although Judicial Watch may not like the avenues
congress has provided for challenging an audit, it simply cannot maintain that it has no avenue for
doing so.”) Berkery v. C.I.R., 105 A.F.T.R.2d 2010-496, 2009 WL 5698497 (E.D. Penn.
2009)(“Although the remedy available at law may not be Plaintiff's preferred remedy and may have
drawbacks, its existence is sufficient to prevent this Court from exercising equitable jurisdiction.”)
II. The Anti-Injunction Act and the Declaratory Judgment Act Bar the Requested Relief.
As stated in the United States’ motion to dismiss, the Anti-Injunction Act (“AIA”) bars
plaintiff’s complaint because: “First, the injunctive relief sought requires the Court to interject itself
into the Service’s process by which it determines whether Z Street is a tax exempt organization.
Second, an injunction by the Court will delay and could frustrate the eventual assessment of tax
against Z Street if the Service concludes that it is not a tax-exempt organization. Third, this suit runs
counter to the ‘collateral objective’ of the Act—preventing the Internal Revenue Service from the
costs and delays of litigation ‘pending a refund claim.’”(M. to Dismiss Memo. at 8.) Z Street does
not dispute any of these arguments, but instead seeks to avoid the mandates of the AIA by arguing
that its case falls within the narrow exceptions to the Act articulated in Williams Packing and Regan.
Neither exception, however, applies to this case and the Court must therefore dismiss the complaint.
A. The Williams Packing exception is inapplicable because Z Street has not demonstrated
that (1) the United States has “no chance of success on the merits,” and (2) it has been
In Enochs v. Williams Packing & Nav. Co., the Supreme Court held that an injunction may
issue notwithstanding the AIA only “if it is clear that under no circumstances could the Government
(1) See JOINT COMM.ON INT. REV. TAX, 94TH CONG., 1ST SESS., COMM.
MEMBER SELECTIONS OF PROPOSALS FOR CONSIDERATION IN FIRST PHASE OF
TAX REFORM 12 (H. Comm. Print 1975)(“Because of the present usual long delay in getting a
court test of any adverse determination by the IRS, and the almost certain loss of contributions
during this period of delay, the committee has agreed to provide a procedure whereby an
organization may ask the Tax Court for a declaratory judgment as to its tax-exempt status and
classification under section 501(c)(3) of the Internal Revenue Code.”); JOINT COMM. ON INT.
REV. TAX, 94TH CONG., 1ST SESS., COMM. MEMBER SELECTIONS OF PROPOSALS
FOR CONSIDERATION IN FIRST PHASE OF TAX REFORM 12 (H. Comm. Print 1975)(an
organization “suffers the often-extensive delay that occurs between the time the dispute arises
with the Service and the time that a judicial proceeding can begin. In many cases, this “limbo”
period spells the end of the organization . . .)
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ultimately prevail . . .and . . . if equity jurisdiction otherwise exists.” 370 U.S. 1, 6 (1962). A
taxpayer bears a “very substantial burden” in demonstrating that the Williams Packing exception
applies. Flynn v. U.S., 786 F.2d 586, 591 -592 (3rd Cir. 1986.) To meet this “very substantial
burden,” Z Street must demonstrate “that: 1) under the most liberal view of the law and the facts, the
United States cannot establish [the merits of] its claim, and (2) that . . . [Z Street] will suffer
irreparable injury without injunctive relief” Zarra v. U.S., 254 Fed.Appx. 931, 933, 2007 WL
3391337, 1 (3rd Cir. 2007)(internal quotations and citations omitted) Accordingly, even though the
United States has filed the motion to dismiss, the Court no longer views all facts in a light most
favorable to Z Street, but instead must determine whether “under the most liberal view of the law
and the facts” the United States could prevail in the action. If, taking this liberal view, the United
States could prevail, the Williams Packing exception does not apply and Z Street’s complaint must
be dismissed. See id. Or, stated another way, “the Service is entitled to judgment on a Williams
Packing claim if it demonstrates that it has a position which it can litigate in good faith.” Flynn, 786
F.2d at 592. See also Laino v. U.S., 633 F.2d 626, 629 (2nd. Cir. 1980)(The Williams Packing
exception requires “the Government's action be ‘plainly without a legal basis' or have ‘no chance of
success on the merits.’”)(citations omitted.)
1. Z Street has not and cannot demonstrate that the United States has no chance
of success on the merits in this case.
In the present case, there simply was no viewpoint discrimination as Z Street alleges in its
complaint. Contrary to Z Street’s allegations, there is no “Israel Special policy”and Z Street’s
application has not been subject to “heightened scrutiny” because its views differ from those
espoused by the Obama administration. (See Waddell Decl. ¶¶ 6-7.)
In recent years, the Internal Revenue Service has been particularly concerned with tax exempt
organizations with ties to countries that have a heightened risk of terrorism and who may be involved
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with fraud, terrorist financing, or tax avoidance. Within the Internal Revenue Service’s Exempt
Organization Determinations, a TAG group was formed to identify cases early in the process that
may involve an abusive tax avoidance transaction, fraud, terrorism, or the diversion of funds to
terrorism. (See Thomas Decl. ¶ 7; I.R.M. 22.214.171.124.) Agents charged with exempt organization
determinations are required to identify and report to the TAG group organizations that may be
involved in abusive tax avoidance transactions, fraud, terrorism, or the diversion of assets to
terrorism (See Thomas Decl. ¶ 6; I.R.M. 126.96.36.199.) Once referred to TAG, the TAG group evaluates
the issue and determines whether “the issue involves terrorism.” If it does, the issue is worked by the
TAG group and other anti-terrorism agents; if it does not, it is generally sent back to the referring
agent. (See Thomas Decl. ¶ 8.) The TAG Group was set up in July 2005, years before Z Street was
organized and filed its application for exemption. (See id. ¶ 5.)
Referrals to the TAG group are not uncommon. An initial screening process transfers
approximately 1,000 applications for exemption per year directly to the TAG group for
determination. (Id. ¶ 7.) Additionally, agents and their managers refer approximately 500 additional
case to TAG each year to determine if the case potentially involves tax avoidance, fraud, terrorism,
or the diversion of funds to terrorism. (Id. ¶ 8.) Z Street’s application, like so many before (and
after) it, was referred to TAG to determine if any fraud, terrorism, or tax avoidance issues were
present. (See Waddell Decl. ¶¶ 3-4.) The application was not transferred to TAG because of an
“Israel Special Policy” or because Z Street’s views on Israel contradict the Obama
administration’s views on Israel. (Id. ¶¶ 6-7. Cf. Gentry Decl. ¶¶ 7-9.)
Given the above facts, Z Street cannot possibly demonstrate that “under the most liberal
view of the law and the facts, the United States cannot establish [the merits of] its claim.” Zarra,
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254 Fed.Appx. at 933. There simply is no viewpoint discrimination in referring a case to the TAG
group to determine if any fraud, terrorism, tax avoidance, or diversion of funds issues exist.
2. Z Street has not and cannot demonstrate irreparable injury
Additionally, the Williams Packing exception is inapplicable because Z Street has not
demonstrated “irreparable injury.” Although Z Street alleges that “[t]he loss of First Amendment
freedoms, for even minimal periods of time, unquestionably constitutes irreparable injury,” (Opp’n at
10,) Z Street is incorrect because: 1) Z Street has not been restrained from exercising any First
Amendment rights; 2) the dicta Z Street quotes is not the law of this Circuit; and 3) the Elrod and
Pfizer cases Z Street relies upon are easily distinguishable.
First, Z Street enjoys the same First Amendment rights it has had since its incorporation. Z
Street has been and remains free to voice whatever opinion it chooses through either its website or in
traditional print and broadcast media. Nothing the Service has done has abrogated Z Street’s right to
express itself as guaranteed by the First Amendment. At most, there has been a “delay”2 in the
United States’ decision as to whether or not it is going to subsidize Z Street’s speech. See e.g.,
Regan v. Taxation With Representation of Washington 461 U.S. 540, 541 (Tax exempt status
subsidizes an organization’s speech.) As explained above, however, this “delay” is viewpoint
neutral and has not therefore impinged on Z Street’s rights. Moreover, the Supreme Court has long
rejected “the notion that First Amendment rights are somehow not fully realized unless they are
subsidized by the State.” Regan, 461 U.S. at 546 (quoting Cammarano v. U.S., 358 U.S. 498, 514
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2 The United States objects to characterizing the referral to TAG as a “delay.” Z Street’s
application could not be approved or denied without determining whether there were potential
terrorism or diversion of funds issues. This determination is required to be made by the TAG
group – the group that is trained and has expertise on these issues. Thus, the referral to TAG
moved the process along; it did not delay it.
(1959)(Douglas, J. Concurring)) Since the United States’ refusal to subsidize speech is not a First
Amendment violation, an alleged “delay” in determining whether or not to subsidize that speech is
also not a violation. Accordingly, Z Street has not demonstrated that it has been irreparably injured.
Second, although Z Street loosely quotes dicta from Elrod and Pfizer, it fails to state the law
of this circuit. See United States v. Berrigan, 482 F.2d 171, 174 (3rd Cir. 1973) (“On more than one
occasion this court has remarked that the citation of isolated nomenclature from miscellaneous
opinions does not rise to the level of black letter law.”) In the Third Circuit, First Amendment harm
“is not necessarily synonymous with . . . irreparable harm . . .” ACS Enterprises, Inc. v. Comcast
Cablevision of Philadelphia, L.P., 857 F.Supp. 1105, 1110 (E.D. Pa. 1994)(quoting Hohe v. Casey,
868 F.2d 69, 73 (3rd Cir. 1989) and contrasting those cases that follow the dicta in Elrod). In Hohe,
the Third Circuit held that “the possibility that the deduction of ‘fair share’ fees from non-union
members' paychecks to support union activities violated the First Amendment failed to rise to that
level of constitutional deprivation sufficient to show the irreparable harm necessary for the issuance
of a preliminary injunction.” Id. Thus, Z Street cannot merely claim a First Amendment violation
without otherwise demonstrating it has suffered irreparable injury. Id. See also Kruger v. Garden
Dist. Ass'n, 779 So.2d 986, 990-991 (4th Cir. 2001)(“we previously considered Elrod and
specifically refused to extend its language beyond its context.”); Tarvin v. Board of Educ. of East St.
Louis School Dist. No. 189, 2010 WL 1444862, 1 -2 (S.D. Ill. 2010)(The loss of First Amendment
rights does not necessarily constitute irreparable injury. “What constitutes irreparable injury in a
case, depends upon the particular facts of that case”)(quoting Oburn v. Shapp, 521 F.2d 142, 151
Because Z Street has failed to demonstrate irreparable injury, and because Z Street has an
adequate remedy if it is dissatisfied with the Service’s administrative process in examining it’s
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application, Z Street cannot meet the second prong of Williams Packing and its complaint must be
Third, the cases Z Street relies upon to demonstrate irreparable harm are easily
distinguishable. In Elrod v. Burns, employees of the Cook County Illinois’s sheriff’s office were
being threatened with immediate discharge for refusing to change their political affiliations. 427 U.S.
347 at 373. The present case has nothing to do with coercing an individual to change his political
views. In Pfizer, Inc. v. Giles, the Third Circuit issued a writ of mandamus vacating an interlocutory
order that “powerfully inhibited” Pfizer from associating with a trade organization that it had long
been associated with. See Pfizer, 46 F.3d 1284, 1287 & 1295. A writ of mandamus in prior restraint
cases is proper “because the duration of a trial is an ‘intolerably long’ period during which to permit
the continuing impairment of First Amendment rights.” Id. at 1294. Unlike Pfizer, the present case
does not deal with prior restraints. Had the Internal Revenue Service prevented Z Street from
associating with another organization, Z Street’s reliance on Pfizer would have merit. Because the
Service has not, Pfizer is inapposite.
B. Regan exception to AIA inapplicable because Z Street has an adequate remedy.
Z Street is correct that the Regan exception analysis “resolves around the same question dealt
with above in Section [I]” (Opp’n at 11.) Only if Z Street has no available remedy can it prevail
under the Regan exception to the AIA.
In South Carolina v. Regan, the Supreme Court held that notwithstanding the Anti-Injunction
Act, South Carolina could challenge the constitutionality of a provision of the Internal Revenue Code
that taxed the interest earned on state bonds and essentially required the State to issue registered
bonds. 465 U.S. 367, 372-3 (1984). The situation in Regan was unique because South Carolina was
not required to pay the tax associated with the Code provision and thus had no way of challenging
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the constitutionality of the provision in a refund action. Id. at 379-80. The Regan exception does
not apply when a taxpayer can file a refund action or has other avenues of relief. See id. at 374. In
this case, Regan is inapplicable because Z Street, unlike South Carolina, can file a refund action after
a tax is assessed, or sue for a declaratory judgment under Section 7428.
“Because of the strong policy animating the Anti-Injunction Act, and the sympathetic, almost
unique, facts in Regan, courts have construed the Regan exception very narrowly . . .” Judicial
Watch v. Rossotti, 317 F.3d 401, 408 n.3 (4th Cir. 2003)(citing cases). In Judicial Watch, the
Internal Revenue Service began an audit of Judicial Watch to determine if the organization should
remain tax exempt. The audit commenced just days after the organization submitted a report to the
House Judiciary Committee alleging that “the Clinton Administration had operated a campaign of
retribution and retaliation against its perceived enemies, using politically inspired and retaliatory tax
audits as a major weapon in that campaign.” Id. at 403. Judicial Watch claimed that the audit of its
organization was “retaliatory, politically motivated, and unconstitutional” and sued to prevent the
audit. Id. The United States moved to dismiss, and the district court granted the motion. The Fourth
Circuit affirmed, holding that the Anti-Injunction Act barred Judicial Watch’s suit.
With respect to the Williams Packing exception, the court held that the Service had
articulated non-politically motivated reasons to audit Judicial Watch and that “regardless of any
additional, improper non-tax related purpose, Judicial Watch has not and cannot demonstrate that the
IRS action does not reflect, at least in part, ‘a good faith effort to enforce the technical requirements
of the tax laws.” Id. at 407 (quoting Bob Jones, 416 U.S. at 740.) Accordingly, Judicial Watch
could not demonstrate that “under no circumstances could the Government ultimately prevail.” Id.3
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3 Similarly, as explained supra, the United States had reasons to transfer the case to TAG
that had nothing to do with any “Israel Special Policy” or concerns that Z Street espoused views on Israel that contradict the views of the Obama administration.
Addressing the Regan exception, the court stated that “the basis of the Regan exception is not
whether a plaintiff has access to a legal remedy for the precise harm that it has allegedly suffered, but
whether the plaintiff has any access to judicial review.” Id. at 408 (emphasis in original). The court
distinguished the facts in Regan and stated that “the [Internal Revenue] Code also provides that
organizations whose exempt status under 501(c)(3) has been denied or revoked can seek declaratory
relief.” Id. (citing 26 U.S.C. § 7428.) Because Judicial Watch could sue under § 7428 if the Service
revoked its tax exempt status, the Regan exception was inapplicable. “Although Judicial Watch may
not like the avenues congress has provided for challenging an audit, it simply cannot maintain that it
has no avenue for doing so.” Id. Finally, the court stated that “strong policy reasons support” its
refusal to fit Judicial Watch’s complaint into one of the narrow judicial exceptions to the Anti-
Injunction Act. “Extending the recognized exceptions to the Anti-Injunction Act . . . would threaten
a flood of lawsuits brought against the IRS . . . creating precisely the kind of judicial interference . . .
the Act was designed to prevent.” Id.
Similarly, although Z Street may not like the avenues provided by Congress (e.g., a refund
suit or a suit under Section 7428,) “it simply cannot maintain that it has no avenue” for relief.
Because Z Street has access to judicial review, the Regan exception is inapplicable and the Court
should dismiss Z Street’s complaint. See Judicial Watch, 317 F.3d at 408. (“[T]he basis of the
Regan exception is not whether a plaintiff has access to a legal remedy for the precise harm that it
has allegedly suffered, but whether the plaintiff has any access to judicial review.”)
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For the foregoing reasons, and those stated in the United States’ motion to dismiss, Z Street’s
complaint should be dismissed.
Date: December 9, 2010.
Acting Assistant Attorney General
ZANE D. MEMGER
United States Attorney
/s/ Duston K. Barton
DUSTON K. BARTON
ANDREW C. STRELKA
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 227
Washington, D.C. 20044
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