MEMORANDUM OPINION & ORDER D efendant 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. I. BACKGROUND A. Overview of 26 U.S.C. §501(c)(3) and Its Connection to New York Tax Law 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-politicalcampaign-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-politicalcampaign-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/frequentlyasked-questions-about-the-ban-on-political-campaign-intervention-by-501c3-organizations-websitepostings-and-links (last visited January 25, 2021) (“A website is a form of communication. If an organization posts something on its website that favors or opposes a candidate for public office, it is prohibited political campaign activity. Posting information on its website is the same as if the organization distributed printed material or made oral statements or broadcasts that favored or opposed a candidate.”). Determining whether a 501(c)(3) organization has engaged in impermissible political activity is a fact-specific inquiry. 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/charitableorganizations/ the-restriction-of-political-campaign-intervention-by-section-501c3-tax-exemptorganizations (last visited January 25, 2021). “[T]he prohibition against partisan activity in section 501(c)(3) bars more than the partisan promotion of certain candidates over other candidates, and…an organization’s selective promotion of certain parties over others would be inconsistent with its section 501(c)(3) tax-exempt status.” Fulani v. League of Women Voters Educ. Fund, 882 F.2d 621, 629 (2d Cir. 1989) (citing Ass’n of the Bar of the City of New York v. Comm’r., 858 F.2d 876, 879-80 (2d Cir. 1988)). Activities conducted in a non-partisan manner, or which do not favor a particular political candidate, are permitted. For example, 501(c)(3) entities are permitted to engage in certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner…. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner. 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-politicalcampaign-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) Organizations: Organization Position on Issues, IRS (May 21, 2020), https://www.irs.gov/charities-nonprofits/ charitable-organizations/frequently-asked-questions-about-the-ban-on-political-campaignintervention-by-501c3-organizations-organization-position-on-issues (last visited January 25, 2021). Under the New York Tax Code, nonprofit organizations, including those exempt from federal taxation under §501(c)(3), may be exempt from New York taxation. See tit. 20, §1-3.4(b)(6)(i)-(ii). Section 1-3.4(b)(6), the New York provision upon which TZAC relies in bringing this action, provides that corporations organized other than for profit which do not have stock or shares or certificates for stock or for shares and which are operated on a nonprofit basis no part of the net earnings of which inures to the benefit of any officer, director, or member, including Not-for-Profit Corporations and Religious Corporations[, are exempt from taxation.] Id. Section 1-3.4(b)(i)-(ii) describes the relationship between §501(c)(3) and the state tax provision. (i) A corporation organized other than for profit, as described in this paragraph, which is exempt from Federal income taxation pursuant to subsection (a) of section 501 of the Internal Revenue Code, will be presumed to be exempt from tax under article 9-A. If a corporation organized other than for profit is denied exemption from taxation under the Internal Revenue Code, such corporation will be presumed subject to tax under article 9-A. (ii) The determination of the Internal Revenue Service, denying or revoking exemption from Federal taxation under the Internal Revenue Code, will ordinarily be followed[.] Id. (emphasis added).1 B. Factual and Procedural Background NIF is a 501(c)(3) nonprofit organization that works to advance democracy in Israel. Am. Compl.
2-3. NIF receives millions of dollars in charitable donations each year, which it grants to Israeli nonprofit organizations to advance NIF’s mission. Id. 3. Because NIF is registered as a 501(c)(3) entity, its annual revenue of approximately $25 to $30 million, including its donations and investments, is exempt from federal, state, and local taxation. Id. 4. TZAC is a “New York corporation which advocates on behalf of the Jewish State.” Id. 5. TZAC, acting on behalf of the State of New York, filed this qui tam action in New York Supreme Court on August 15, 2019, alleging that NIF violated the NYFCA by preparing false tax returns to obtain and maintain its status as a tax-exempt entity, and by submitting those false returns to the State. See Notice of Removal Ex. B 3-4, 8, Dkt. No. 1-2. On November 22, 2019, the State declined to intervene in the state court action. See Notice of Removal Ex. D 1, Dkt. No. 1-4. On April 10, 2020, NIF removed this case to federal court claiming that the action raised issues under the United States Internal Revenue Code, specifically §501(c)(3). Notice of Removal 1-2, Dkt. No. 1. TZAC alleges that NIF impermissibly engaged in both direct and indirect electioneering activities, contrary to the certifications on its tax forms that it did not do so. Am Compl. 21. TZAC alleges that NIF directly engaged in electioneering activities in 2019, when NIF gathered names for a petition to disqualify a candidate running for the Knesset, Otzma Yehudit, and sent it out to individuals soliciting their signatures. Id. 24. After candidate Michael Ben-Ari was banned by the Israeli Supreme Court from running in his election, NIF called it a “victory for democracy.” Id. TZAC alleges that NIF engaged in indirect electioneering by knowingly distributing grants to organizations that opposed and supported candidates for public office in Israel. Id.
