In this case the Zionist Advocacy Center’s False Claims Act suit differed from its previous cases in two ways. First, it was filed in New York State court and based on the state’s statute rather than the federal one. Second, the alleged fraud relates to New Israel’s tax-exempt status, unlike previous cases, which were based on USAID grant certifications. The case was removed to federal court where New Israel Fund’s motion to dismiss in pending.

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Case Summary

The Zionist Advocacy Center (TZAC)’s original False Claims Act case against the New Israel Fund (NIF), unsealed in New York state court in December 2019, was removed to federal court, where TZAC filed an amended complaint and NIF’s motion to dismiss, filed Aug. 25, 2020, is now pending. NIF is a U.S.-based grantmaking organization that has sponsored over $300 million to more than 900 Israeli civil society organizations since 1979. TZAC alleges that NIF falsely claimed state tax-exempt status by unlawfully interfering in Israeli elections. NIF argues that the activities it supported are permissible issue advocacy under tax-exempt law and that TZAC’s complaint fails to meet basic requirements for a “relator” (whistleblower) under the False Claims Act. The ACLU, co-counsel for NIF, told the Jewish Telegraphic Agency that TZAC’s faulty legal arguments could “undermine a lot of the work nonprofits do both in the United States and around the globe to promote the value of constitutional democracy.”

The case began in August 2019 when TZAC filed a claim under New York’s State Finance Law §190, the state’s False Claims Act. Under FCA rules the case was sealed while the state determined whether to take it up or not. The State of New York subsequently declined to intervene in the case, which was unsealed on Dec. 16, 2019. The case was removed to federal court in April 2020 pursuant to rules that allow removal when a federal question is involved.

In June the court stayed discovery proceedings pending its decision on NIF’s original Motion to Dismiss. On July 17 TZAC filed an amended complaint and NIF responded with its second Motion to Dismiss on Aug. 25. TZAC must file any opposition to dismissal in mid-September.

 

 

False Claims Act Basics

The False Claims Act is a U.S. law that imposes liability on those that knowingly defraud government programs. Private parties, called “relators,” can bring these suits on the government’s behalf. Complaints filed under the FCA are automatically sealed for 60 days while the government investigates the claims and decides whether or not they merit further action. During this time the defendant (and the public) has no notice that a case has been filed. The court can extend the sealing period for months or even years.

Once the government has investigated the claims, it may choose to:

  1. join the lawsuit,
  2. ask that the case be dismissed or
  3. allow the complaining party to proceed on their own.

For more information see our Issue Brief: False Claims Act Lawsuits; What Nonprofits Need to Know

 

 

The amended complaint is substantially similar to the original but attempts to strengthen TZAC’s legal position. It argues that NIF’s annual Form 990 filings with the Internal Revenue Service (IRS) falsely claim it had not engaged in partisan electioneering (which is prohibited for groups exempt under Sec. 501(c)(3) of the tax code) and that this in turn caused New York to grant it state exempt status. The amended complaint cites examples of activities and statements by groups that have received NIF funding but does not allege NIF’s grants were used to support these activities or explain how they constitute “electioneering” as defined by the IRS. In one case it alleges that calling a campaign message “racist” violates IRS rules.

NIF’s motion to dismiss argues that:

• TZAC’s complaint is based entirely on information in the public domain, so that it does not meet the requirement that a whistleblower filing a False Claims Act case provide previously undisclosed information or be an original source of publicly available information;

• New York State does not grant tax-exempt status based on IRS determination of 501(c)(3) charitable status, and

• TZAC fails to allege that NIF knowingly violated the IRS ban on partisan electioneering and:

o Does not claim that NIF funded the activities described in the complaint. NIF cites IRS Revenue Rulings that state 501(c)(3) organizations must retain control and discretion over use of funds they provide but are not otherwise responsible for all activities of their grantees.

o The motion notes the IRS rules defining prohibited partisan electioneering are not precise, and that “TZAC’s theory depends on several novel interpretations of Sec. 501(c)(3)’s broadly drawn and imprecise terms.” It provides examples of U.S.-based 501(c)(3) organizations that have conducted issue advocacy around the integrity of the electoral process that are similar to those NIF supported.

TZAC filed its Opposition to motion to dismiss, arguing that the New York State standard limiting suits based on publicly disclosed information is more lenient than the federal standard and repeated its arguments that NIF knowingly violated the ban on partisan electioneering by charities but did not allege any facts connecting partisan activities by NIF grantees to NIF grants. NIF replied, arguing that the IRS does not hold a grantmaker responsible for activities that it does not fund, and cited case law supporting its interpretation of the public disclosure rule.

NIF’s projects in Israel include strengthening civil society, combating racism, and protecting democratic channels for minorities. Its programs range from protecting Holocaust survivors to improving the socio-economic inclusion of Israeli Arabs and rural communities. NIF advocates for their key issues in Israel, and helps unite likeminded, progressive organizations to build an inclusive Israeli society.