N.Y. ex rel. Tzac v. New Israel Fund
Decision Date | 15 February 2021 |
Docket Number | 1:20-cv-02955-GHW |
Parties | STATE OF NEW YORK ex rel. TZAC, INC. Plaintiff, v. NEW ISRAEL FUND, Defendant. |
Court | U.S. District Court — Southern District of New York |
Defendant New Israel Fund ("NIF") is a nonprofit charity organization dedicated to the advancement of democracy in Israel. NIF receives millions of dollars in charitable donations each year, which it distributes through grants to Israeli nonprofit organizations. NIF is registered as a 501(c)(3) organization, meaning that it is exempt from federal taxes and qualifies for exemptions from state and local taxes. As a condition of its 501(c)(3) status, NIF is prohibited from engaging in certain political activities. Specifically, 501(c)(3) entities are forbidden from engaging in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office, and are required to attest to that fact on their yearly federal tax returns.
Plaintiff-Relator, the Zionist Advocacy Center ("TZAC"), brings this action on behalf of the State of New York (the "State"), alleging that NIF fraudulently obtained and maintains its status as a 501(c)(3) organization because it has engaged in prohibited activities and financially supports organizations that "electioneer" by engaging in advocacy efforts for or against candidates for public office. TZAC claims that NIF's fraudulent certifications on its federal tax returns violated the New York False Claims Act, N.Y. State Fin. Law §§ 187-194 (the "NYFCA"), because NIF submitted those forms to state authorities and obtained its state and local tax exemptions based on its 501(c)(3) status.
NIF has moved to dismiss TZAC's amended complaint, advancing three arguments. First, NIF argues that TZAC's amended complaint is barred because it is based on information that is available in the public domain through the Internal Revenue Service (the "IRS")'s database and the "news media," and TZAC does not fall under the "original source" exception to the NYFCA's public disclosure bar. See Mem. Law Supp. NIF's Mot. to Dismiss TZAC's Am. Compl. ("Mem.") 6-11, Dkt. No. 37. Second, NIF argues that its state tax-exempt status does not turn on its federal tax-exempt status, but rather on whether it "operate[s] on a not-for-profit basis and [whether] no part of its net earnings inure to the benefit of any officer, director[,] or member of the corporation." Id. at 13 (citation omitted). NIF asserts that because it satisfies those conditions, its allegedly false certifications or non-compliance with § 501(c)(3)'s requirements are immaterial to its New York tax obligations and do not give rise to a claim under the NYFCA. Id. at 14. Lastly, NIF argues that even if its allegedly false certifications were material, TZAC has failed to plead scienter with particularity because it did not provide a factual basis for attributing the conduct of NIF's grantees to NIF or for TZAC's assertion that NIF knew it engaged in partisan political activity when it certified its tax returns. Id. For the reasons set forth below, NIF's motion is denied.
Because NIF's status as a 501(c)(3) entity is relevant to this case, a brief overview of that provision of the U.S. Internal Revenue Code and its relationship to the New York tax code is warranted. Entities organized under § 501(c)(3) are exempt from federal taxes and may be eligible for exemption from state and local taxes. See 26 U.S.C. § 501(c)(3); N.Y. Comp. Codes R. & Reg. tit. 20, § 1-3.4(b)(6)(i)-(ii). To qualify as a 501(c)(3) organization, the entity must exist for an"exempt purpose," which means that the organization must be "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes" and that "no part of the net earnings of [the organization] inures to the benefit of any private shareholder or individual." 26 U.S.C. § 501(c)(3).
As a condition of their status as tax-exempt entities, 501(c)(3) organizations are prohibited from participating in certain activities. See id. As relevant here, entities may not "participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office" and violation of this prohibition may result in denial or revocation of their tax-exempt status. Id.; see also The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations, IRS (Sept. 23, 2020), https://www.irs.gov/charities-non-profits/charitable-organizations/the-restriction-of-political-campaign-intervention-by-section-501c3-tax-exempt-organizations (last visited January 25, 2021). "Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity." The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations, IRS (Sept. 23, 2020), https://www.irs.gov/charities-non-profits/charitable-organizations/the-restriction-of-political-campaign-intervention-by-section-501c3-tax-exempt-organizations (last visited January 25, 2021). This applies to information posted on a 501(c)(3) organization's website. Frequently Asked Questions About the Ban on Political Campaign Intervention by 501(c)(3) Organizations: Website Postings and Links, IRS (Dec. 8, 2020), https://www.irs.gov/charities-non-profits/charitable-organizations/frequently-asked-questions-about-the-ban-on-political-campaign-intervention-by-501c3-organizations-website-postings-and-links (last visited January 25, 2021) () .
The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organisations, IRS (Sept. 23, 2020), https://www.irs.gov/charities-non-profits/charitable-organizations/the-restriction-of-political-campaign-intervention-by-section-501c3-tax-exempt-organizations (last visited January 25, 2021). To be clear, "[a]n organization may take positions on public policy issues, including issues that divide candidates in an election for public office as long as the message does not in any way favor or oppose a candidate." Frequently Asked Questions About the Ban on Political Campaign Intervention by 501(c)(3) Organisations: Organisation Position on Issues, IRS (May 21, 2020), https://www.irs.gov/charities-non-profits/charitable-organizations/frequently-asked-questions-about-the-ban-on-political-campaign-intervention-by-501c3-organizations-organization-position-on-issues (last visited January 25, 2021).
Id. Section 1-3.4(b)(i)-(ii) describes the relationship between § 501(c)(3) and the state tax provision.
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