September 25, 2019 - Douglas Myser

Federal court rejects reporting change. In our ongoing series of articles designed to cover any Tax Court issues, we need to mention that the IRS no longer wishes to require tax exempt organization to report information about their substantial financial donors. It must follow a proper notice and comment process, a federal court in Montana held in a ruling (Bullock v. irs.) NO. CV-18-103 (D. Mont. 7/30/19).  U.S. District Judge Brian Morris concluded that the IRS should have allowed greater public input before altering the long standing filing requirements because the action represented a legislative rule rather than an interpretive one. Federal court rejects reporting change.

The service announced in Rev. Proc. 2018-38 rp-18-38.pdf, that it would no longer require most tax exempt organizations to report the names and addresses of substantial donors. The change did not apply to purely charities exempt under Sec. 501(c)(3). Donor information is currently reported on Schedule B, Schedule of Contributors, of Form 990, Return of Organization Exempt from Income Tax, Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, form 990-PF, Return of Private Foundation, and part four, "Statement with respect to contributors, etc. of Form 990-Bl, information and Initial Excise Tax Returns for Black Lung Trusts and Certain Related Persons. Montana and New Jersey filed suit to challenge the rule change. The states highlighted that they use the substantial contributor information in enforcing their own laws regulating the activities of tax exempt organizations, because the federal data is shared with the states.

The district court agreed with the states that Rev. Proc. 2018-38 was invalidly adopted. The court explained that it was not assessing the revenue procedure's underlying merits, just the process that the IRS allowed. As the court saw it the agency's action appeared to be an attempt to "Evade the time consuming procedures" of the Administrative Procedures Act. In the IRS view, Rev. Proc 2018-38 was simply a rule of procedure or practice for which there was no need for a public notice and comment process. Disagreeing, the court examined case law regarding the difference between a legislative rule and an interpretive one.

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