The IRS was almost laughed out of court yesterday when the D.C. Circuit Court of Appeals heard oral arguments in the case Z Street v. Koskinen.  Z Street, founded by AT contributor Lori Lowenthal Marcus, is a pro-Israel educational group that applied for tax-exempt status, only to encounter delay.  When it inquired as to the progress of its application, an agent told it that auditors had been instructed to give pro-Israel groups special attention, and that its application had been forwarded to a special IRS unit for additional review.

Z Street sued for viewpoint discrimination, a constitutional no-no, and the IRS went to U.S. District Court in D.C., seeking dismissal of the case.  A year ago, a federal judge rejected that dismissal, and the IRS appealed, which landed the case on the docket of the Fifth Circuit Court of Appeals, the highest court in the land other than the Supreme Court.  The appeal, critically, had the effect of halting discovery in the case, which would have allowed Z Street to examine IRS officials, under oath, and to receive internal communications from the agency regarding the special unit and special procedures for handling pro-Israel groups.

The Wall Street Journal’s Review & Outlook column reports on the incredulity with which the three-judge panel greeted the IRS’s arguments.  This was a truly extraordinary event, for it is a rare day that a high-level court reacts so negatively to the positions taken by the federal government.

[The Department of] Justice says Z Street’s case should be dismissed because the Anti-Injunction Act bars litigation about “the assessment or collection of tax.” Problem is, Z Street isn’t suing for its tax-exempt status. It’s suing on grounds that the IRS can’t discriminate based on point of view.

The three judges—Chief Judge Merrick Garland, David Tatel and David Sentelle —were incredulous. You say they want a tax exemption, but that’s not the complaint, Judge Sentelle admonished government lawyer Teresa McLaughlin : “They are not in court seeking to restrain the assessment or collection of a tax, they are in court seeking a constitutionally fair process.”

The suit should also be foreclosed, the government argued, because under Section 7428(b)(2) of the Internal Revenue Code groups may sue to obtain their tax-exempt status if no action has been taken for 270 days, and that should be an alternative to Z Street’s approach.

“You don’t really mean that, right? Because the next couple words would be the IRS is free to discriminate on the basis of viewpoint, religion, race [for 270 days]. You don’t actually think that?” Judge Garland said. “Imagine the IRS announces today a policy that says as follows: No application by a Jewish group or an African-American group will be considered until one day short of the period under the statute . . . Is it your view that that cannot be challenged?”

The judges took note that the Supreme Court has already ruled on the issue at hand in Z Street’s favor, but that the IRS buried mention of the relevant case in a footnote:

The judges also asked why the government had buried the key precedent in a footnote in its brief. In Direct Marketing Association v. Brohl, the Supreme Court decided that the language of the Anti-Injunction Act did not preclude cases like Z Street’s. In a previous case before the D.C. Circuit, Judge Garland noted, the court also “rejected” the exact arguments the government was making, “so in a way we have already decided every issue before us today, against you.”

The IRS still has the option of appealing to the Supreme Court, further delaying discovery.  Obviously, the game is to delay disclosure of embarrassing IRS policies until after the 2016 election.  But the strong language used by the Fifth Circuit makes it less likely that SCOTUS will hear the appeal.

The case is one more piece of evidence that the IRS has become totally corrupted and needs to be abolished.  The eventual GOP nominee would be wise to make the IRS an election issue, proposing a sweeping tax reform plan that would rely on consumption taxes and close down the most hated arm of government.

Hat tip: Clarice Feldman