On April 22, 2020 Judge Rudolph Contreras ordered the IRS to provide details about the adequacy of its search for documents about policy on US nonprofit charitable funding flows into Israeli settlements. The order was only the latest round in a legal battle launched by the Institute for Research: Middle Eastern Policy (IRmep), which in August of 2019 sued the IRS under the Freedom of Information Act. IRmep seeks the release of documents "related to the ongoing, long term laundering of tax-exempt donations by American donors through charitable organizations to which the IRS has issued determination letters, into illegal Israeli settlements, thereby directly and indirectly engaging in ethnic cleansing, illegal land seizures, and other expeditions against a friendly nation in violation of 18 U.S. Code § 960 and other applicable statutes and treaties."
The IRS has long tried to avoid formal comment on the massive and ongoing transfer of US tax-exempt charitable funding into overseas activities that have no apparent legality, charitable purpose, or social welfare benefit. However, the persistence of the funding flows and exceptionally large amounts involved have generated mainstream news coverage, lawsuits, and numerous requests for clarity to the IRS. Most have failed to produce any answers or redress.
In the 1982 lawsuit Khalaf v. Regan a group of individuals challenged the tax-exempt status of organizations supporting Israeli settlement efforts in the West Bank, but their legal bid fizzled. In the year 2005 USA Today reported that $50 billion had been raised, much of it likely in the United States in tax-exempt charitable contributions, only to be transferred overseas to build illegal settlements in the Israeli-occupied West Bank.
On January 11, 2010 IRS Commissioner Douglas Shulman was asked on National Public Radio what the IRS policy on settlements was in reference to the $50 billion, but Shulman clumsily dodged the question.
Eric Goldstein identified New York based charities heavily involved in funding illegal settlement activities and demanded that the practice be discontinued in his 2015 report, "Can I Take a Tax-Deduction on My donation to Israeli Settlements in Palestine?"
In 2016 the progressive tax-exemption charitable Zionist organization J Street called upon the US Treasury for a review of tax-exempt status of non-governmental organizations that "channeled millions" to support settlers. Details listed by J Street mentioned the funding was being used for "the demolition of Palestinian houses – and in some cases entire communities."
In the 2017 lawsuit Abulhawa V. United States Department of The Treasury a group of plaintiffs sued the Treasury for injuries suffered over their expulsion by Israeli settlers benefiting from tax exempt charitable support. The Court of Appeals acknowledged Plaintiffs had suffered harm, but no clarity on the question about the legality of charitable funding ever emerged from the unsuccessful case.
In the 2018 settlement of the IRS targeting lawsuit Z Street v. IRS, the Department of Justice hinted that policy positions resided within the IRS, or at very least the Treasury Department:
"In email correspondence produced in discovery, a Treasury Department employee stationed in Israel asked the IRS in spring 2009, at the request of a State Department employee, whether organizations’ tax-exempt status could be revoked for funding Israeli settlements in the West Bank. The Treasury Department employee asked whether such activity could be deemed illegal or in violation of established public policy based on executive branch policy as stated in a 2005 Congressional Research Service report that no US assistance to Israel can be used in the occupied territories because the United States does not want to foster the appearance of endorsing Israel’s annexation of the territories without negotiations. The Treasury Department employee further asked whether this would be enough to revoke the tax-exempt status of organizations that provide funds to ‘Israeli occupied territories.’
As reflected in email correspondence produced in discovery, a number of IRS employees evaluated the questions raised by the Treasury Department employee in an effort to respond to the inquiry. An IRS employee ultimately referred the Treasury Department employee to the IRS hotline for reporting violations of the Internal Revenue laws."
In July 2019, just before suing the IRS, the Plaintiff made a final bid for clarity, asking IRS National Taxpayer Advocate Nina Olson on C-SPAN’s Washington Journal to publicly explain official IRS policy toward funds laundered through tax exempt charities into settlements. Like IRS commissioner Shulman, Olson stumbled through a response, but did not substantively respond to the question.
The stonewalling in the current lawsuit against the IRS led the Plaintiff to speculate in filings whether, as is the case of questions about Israel’s nuclear weapons program, whether there is a government-wide gag order in place that forbids release of information about IRS or Treasury positions on Israeli settlement finance by charities.
The IRS may soon release policy information about its oversight of the estimated five billion in yearly tax-favored charitable subsidies to Israel, some of which directly or indirectly flow into settlements. Or IRS stonewalling on the issue may continue. Either way, it is inspiring that at least one judge on the DC Circuit – in stark contrast to yet another – is not reflexively deferential to blanket government agency claims on sensitive Freedom of Information Act lawsuits involving Israel that are usually hustled into dismissal.
Grant F. Smith is the author of the new book The Israel Lobby Enters State Government. He is director of the Institute for Research: Middle Eastern Policy in Washington, D.C. and plaintiff in the above-referenced case.