A federal district court (for Montana) determined that guidance relieving certain tax-exempt organizations of donor disclosure requirements is “unlawful” and is to be “set aside” because the IRS failed to follow notice-and-comment procedures before promulgating the guidance.
The case is: Bullock v. IRS, No. 4:18-CV-00103-BMM (D. Mont. July 30, 2019). Read the court’s order [PDF 289 KB]
Until recently, IRS regulations had required most tax-exempt organizations to report on Schedule B of Form 990 the “names and addresses of all persons who contributed . . . $5,000 or more” during the tax year. See Reg. section 1.6033-2(a)(2)(ii)(f).
However, on July 17, 2018, the IRS and Treasury released Rev. Proc. 2018-38, announcing that the IRS would no longer require tax-exempt organizations (other than organizations described in section 501(c)(3) or section 527) to report the names and addresses of their contributors on their Schedules B. The revised reporting requirements applied to information returns for tax years ending on or after December 31, 2018. Read TaxNewsFlash
In response to this change, Montana Governor Stephen Bullock (in his capacity of representing the State of Montana) filed suit in the U.S. District Court for the District of Montana, asserting that Rev. Proc. 2018-38 was promulgated in violation of the Administrative Procedure Act (the “APA”).
On March 13, 2019, the State of New Jersey joined the lawsuit. The federal district court held a hearing on cross-motions seeking dismissal and summary judgment on June 5, 2019, and addressed: (1) whether the plaintiffs lacked standing to bring suit; and (2) whether the government was required to comply with the APA in promulgating Rev. Proc. 2018-38.
The federal district court—recognizing that federal law permits states and their tax agencies to collect and use federal return information gathered by the IRS—determined that Montana and New Jersey had standing to bring suit because the states would have to expend significant additional resources to obtain the donor information that was available prior to the change.
Regarding compliance with the APA’s notice-and-comment requirement, the court observed that Rev. Proc. 2018-38 “explicitly upends” and “effectively amends” a long-standing rule, and concluded that the revenue procedure was a “legislative rule” for which notice and comment is required under the APA (as opposed to an “interpretative rule” that is excepted from the requirement).
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