Court Strikes Down Rule Excepting Certain Nonprofits from Donor Disclosures

On July 30, 2019, in Bullock vs. Internal Revenue Service, a federal court held unlawful and set aside Rev. Proc. 2018-38 as adopted by the IRS without complying with applicable notice-and-comment procedures. Rev. Proc. 2018-38 provided that tax-exempt organizations described by section 501(c), other than section 501(c)(3) organizations, will no longer required to report the names and addresses of their contributors on Schedule B for tax years ending on or after December 31, 2018. The change in the disclosure requirement had led to heavy criticism about the likely influx of more dark money influencing elections at every level of government. But it was ultimately a failure to allow the public to exercise its rights to comment on the change in rule that caused it to be stricken.

A proper notice-and-comment procedure will provide the IRS with the opportunity to review and consider information submitted by the public and interested parties. Then, and only then, may the IRS act on a fully-informed basis when making potentially significant changes to federal tax law.

Donor Disclosure Requirement

The change in law means that 501(c)(4), 501(c)(5), and 501(c)(6) organizations, among other tax-exempt organizations, must again disclose their contributors on Schedule B of Form 990. 501(c)(3) organizations were always required to make such disclosure. Note that, as of the date of this post, the Instructions to Schedule B have yet to be amended to reflect the court’s decision.

Contributions reportable on Schedule B (Form 990, 990-EZ, or 990-PF) are contributions, grants, bequests, devises, and gifts of money or property, whether or not for charitable purposes. For example, political contributions to section 527 political organizations are included. Contributions don’t include fees for the performance of services.

Generally, a filing organization must report in Part I of Schedule B contributions from all persons who contribute $5,000 or more (in money or other property) during the tax year. All separate and independent gifts that are $1,000 or more must be used to determine a contributor’s total contribution. Gifts that are less than $1,000 are disregarded in this calculation.

For a 501(c)(3) organization that meets the 33-1/3% public support test under IRC sections 509(a)(1) and 170(b)(1)(A)(vi) (whether or not the organization is otherwise described in section 170(b)(1)(A)), only those contributors whose contribution of $5,000 or more during the tax year is greater than 2% of total contributions must be included in Part I of Schedule B.

Bullock vs. IRS

“The APA [Administrative Procedure Act] requires courts to “hold unlawful and set aside agency action” promulgated “without the observance of procedure required by law.” The APA requires that agencies advise the public through a notice in the Federal Register of the terms or substance of a proposed legislative rule and allow the public a period of time to comment.”

“The APA’s rule-making procedures, including the notice-and-comment period, do not apply to interpretive rules, which simply “advise the public of the agency’s construction of the statutes and rules which it administers.” Interpretive rules “merely explain, but do not add to, the substantive law that already exists in the form of a statute or legislative rule.””

“The IRS’s promulgation of Revenue Procedure 2018-38 appears to represent a similar attempt to “evade the time-consuming procedures of the APA.” The IRS has required tax-exempt organizations for nearly five decades to “file an annual information return” that furnishes “[t]he total of the contributions, gifts, grants and similar amounts received . . . and the names and addresses of all persons who contributed, bequeathed, or devised $5,000 or more . . .” 26 C.F.R. § 1.6033-2(a)(ii)(f). Revenue Procedure 2018-38 explicitly upends this fifty-year practice and “effectively amends” this existing rule. The IRS’s admitted failure to follow the APA’s public notice-and-comment procedure warrants summary judgment in favor of Plaintiffs ….”