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Court Strikes Down IRS Rule That Eliminated Exempt Organization Donor Reporting

(Parker Tax Publishing August 2019)

A district court granted summary judgment in favor of two states that challenged the issuance of Rev. Proc. 2018-38, which eliminated the requirement in Reg. Sec. 1.6033-2 that tax exempt organizations identify to the government contributors donating $5,000 or more, on the grounds that the IRS failed to follow the required notice and comment procedures under the Administrative Procedure Act. The court found that the notice and comment procedures were required because Rev. Proc. 2018-38 is a legislative rule that upended the longstanding practice of requiring organizations to annually report such donor information. Bullock v. IRS, 2019 PTC 290 (D. Mont. 2019).


Tax exempt organizations are required under Code Sec. 6033(a)(1) to file annual returns reporting the items of gross income, receipts, and disbursements, and such other information as the IRS prescribes by forms or regulations. Code Sec. 6033(a)(3)(B) allows the IRS to relieve most exempt organizations from filing an annual return if the IRS determines that the filing is not necessary to the efficient administration of the internal revenue laws.

Reg. Sec. 1.6033-2(a)(2)(ii)(f) requires most 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. Exempt social clubs, fraternal beneficiary societies, and domestic fraternal societies are required under Reg. Sec. 1.6033-2(a)(2)(iii)(d) to report on Schedule B the names of each donor who contributed more than $1,000 during the tax year to be used exclusively for exempt purposes. The IRS issued Reg, Sec. 1.6033-2(a)(2)(ii)(f) in 1970, following a public notice and comment period.

Under Code Sec. 6103 and Code Sec. 6104, states tax agencies are allowed to collect and use federal return information gathered by the IRS. Code Sec. 6103(d) provides for federal and state information sharing of tax returns and return information. This information is required to be open to inspection by, or disclosure to, any state agency that administers tax laws. When it updated Code Sec. 6103 in 1976, Congress noted that the purposes of federal and state information sharing are to ensure that people and organizations follow the tax laws and to relieve state governments from the burden of expending resources to gather information already obtained by the IRS.

The collection of donor information changed when the IRS issued Rev. Proc. 2018-38 in July of 2018. Rev. Proc. 2018-38 eliminated the requirement in Reg. Sec. 1.6033-2 that most exempt organizations report donor information on Schedule B. Exempt organizations still must collect and maintain the donor information and make it available to the IRS only upon specific request, and the IRS can demand donor information if it determines that the information would be relevant.

New Jersey and Montana challenged the issuance of Rev. Proc. 2018-38 in a district court. They filed for summary judgment asking the court to set aside Rev. Proc. 2018-38 and order the IRS to follow the rulemaking procedures required by the Administrative Procedure Act (APA). New Jersey explained that it had received the names and addresses of significant contributors through the Schedule B forms and used that information to identify suspicious patterns of activity, determine whether the entity was soliciting from individuals within New Jersey, and otherwise supplement investigations of tax exempt organizations. New Jersey also requires organizations claiming tax exempt status to submit their Forms 990 and all Schedules, and, as a result, obtains substantial donor information pursuant to that requirement. Montana requires entities claiming tax exempt status to report whether they have received a federal exemption. It claimed that it relies on the IRS's information regarding the IRS's exemption determinations when making its own exemption determinations under state law.

Observation: In challenging the change implemented by Rev. Proc. 2018-38, Governor Steve Bullock of Montana pointed out that the revised rules would make it harder to detect illegal spending in political campaigns, including the detection of foreign money in campaigns.


The district court granted the states' motion for summary judgment and held that Rev. Proc. 2018-38 was unlawful. The court said that the IRS must follow the proper notice and comment procedures under the APA if it seeks to adopt a similar rule.

The district court found that the states had standing in the case because Rev. Proc. 2018-38 deprived them of previously available information that they were now incurring expenses to obtain on their own. The court also determined that the states interests were protected by Code Sec. 6103 and Code Sec. 6104 because their interests related to the purposes of the statutory policy of information sharing and the requirement in Reg. Sec. 1.6033-2 that exempt organizations submit substantial contributor information.

The district court next determined that the IRS had to follow the APA notice and comment procedures, which it was required to do because Rev. Proc. 2018-38 is a legislative rule. The court explained that for legislative rules, which create rights, impose obligations, or effect a change in existing law, agencies must give the public notice of the substance of the proposed rule and allow the public a period of time to comment. The court explained that this requirement holds government agencies accountable and ensures that they issue reasoned decisions.

The court said that the IRS's issuance of Rev. Proc. 2018-38 appeared to represent an attempt to evade the time-consuming procedures of the APA. In the court's view, Rev. Proc. 2018-38 explicitly upended the 50-year practice of requiring exempt organizations to annually report donor information and effectively amended the existing rule in Reg. Sec. 1.6033-2. The court rejected the IRS's contention that Rev. Proc. 2018-38 simply specifies the type of information that certain organizations are required to provide, reasoning that while the IRS can lawfully determine what information it requires from exempt organizations under Code Sec. 6033, it cannot escape the procedural demands of the APA. The court also concluded that the states' purposes in gathering substantial donor information, including determining whether an organization has violated the prohibition on private inurement and enforcing limits on political activity, supported the need for the IRS to comply with the notice and comment rules before amending a longstanding regulation implicating the collection and sharing of this information.

For a discussion of the annual reporting requirements of tax exempt organizations, see Parker Tax ¶ 65,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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