Rules requiring certain not-for-profits to report the names and addresses of major donors will remain in place for the time being. A recent ruling from the U.S. District Court of Montana set aside and declared unlawful the Revenue Procedure that would have exempted some types of not-for-profits from the requirement to report the names of their major donors in their annual information filings.
While the court case involved a subset of not-for-profit organizations, the ruling speaks to a broader issue involving the balance between not-for-profit transparency and privacy protections for an organization’s major contributors.
In 2018, the IRS published Rev. Proc. 2018-38, which would have eliminated the requirement for certain tax-exempt organizations to include the names and addresses of their major donors in their Form 990 annual information filings (or if applicable, Form 990-EZ). The prior IRS guidance in Rev. Proc. 2018-38 affected organizations other than those that are 501(c)(3) public charities, 501(c)(3) private foundations, and Section 527 political organizations. Essentially, the prior IRS guidance applied to social welfare organizations, labor organizations, and business leagues and trade associations. Although the donor information would no longer be part of the Form 990, the IRS stressed that organizations should still keep records of their donors in case the IRS requested to see that information.
Donors subject to disclosure generally include individuals who contribute more than $5,000 a year to the organization. Social groups and fraternities (generally 501(c)(7) organizations) have a lower disclosure threshold—$1,000 a year if the donation is to be used exclusively for religious, charitable, scientific, educational purposes, or for the prevention of cruelty to children or animals.
Rev. Proc. 2018-38 raised some concerns about the ability for the government to monitor financing sources for political campaigns. Not-for-profits’ Form 990s are available to the public and provide insight into how the organization operates. While donor names and addresses are not open to public inspection, the government would have such information (notwithstanding Rev. Proc. 2018-38). Some individuals worried that by removing the names of major contributors, there would be less transparency around where an organization received its contributions, and could create a “dark money” problem. Information available to the public includes only the amount of individual donations, but the additional donor information made available to the government would lessen the perceived risks associated with dark money.
Rev. Proc. 2018-38 Goes to Court
Steve Bullock, the governor of Montana, numbered among those who had concerns with the rule change. His chief concern lay in the fact that there was no opportunity to comment on the rule change before it went into effect. Joined by the state of New Jersey, Gov. Bullock filed a suit against the IRS in U.S. District Court in Montana.
In the case, Gov. Bullock and the other plaintiffs shared some of their concerns about the rule change. They argued that if organizations do not include the names of major donors, it could hinder the states’ ability to monitor how charities in their states are operating. States generally grant organizations tax-exempt status based on the organization’s federal exemption; but in order to do that, most states require organizations to submit information that demonstrates they qualify for tax-exempt status, such as their Form 990s.
The U.S. District Court of Montana sided with the states and ruled on July 30, 2019 that Rev. Proc. 2018-38 is “unlawful” and should be “set aside,” because the IRS failed to follow the Administrative Procedure Act (APA) in enacting the Revenue Procedure. The APA requires a notice about a proposed rule change followed by a comment period before the new rule can take effect.
The Aftermath of the Court Case and What It Means Going Forward
For the short term, there may be little impact from the Montana court’s decision. The IRS published Notice 2019-49 shortly after the court decision, which provides that the IRS will waive penalties for organizations that would have been eligible to exclude the names and addresses of their substantial contributors under Rev. Proc. 2018-38 for 2018 Form 990 filings. The IRS also announced proposed regulations on Sept. 6, 2019 that would provide similar disclosure exemptions to those under Rev. Proc. 2018-38, but this time it is inviting comment about the new rules in the proposed regulations.
What happens in the long-term is a different story. The Montana court decision only weighed in on the protocol issue. It did not speak to the other concerns that the states of Montana and New Jersey raised about Rev. Proc. 2018-38. The decision did not address the transparency versus privacy issue.
Form 990s are designed to provide transparency and insight into how an organization operates. The amount of information organizations provide in their Form 990 can be viewed as a trade-off for the benefits that accompany the organizations’ tax exemption. But because Form 990s are available upon request for those who desire it, donor privacy can be a significant concern where inadvertent disclosure by the IRS is possible. Further, the threshold contribution amount to be “a substantial donor” is not high, so a lot of donors could potentially find themselves included as part of an organization’s Form 990 reporting to the IRS.
The balance between transparency and protections for donor privacy will be a complicated matter to address, because individuals aren’t the only ones asking for an organization’s Form 990 information (as Montana and New Jersey demonstrated). Other types of regulators need to monitor and oversee not-for-profit organizations, and they may be looking to an organization’s Form 990 information in order to do so.
The comment period offered under the proposed regulations ends in December 2019. The ultimate IRS response to the comments remains to be seen. Our tax team will help monitor future developments as they emerge so that your organization is prepared for the potential changes to its donor disclosure rules. For more information, please reach out to a member of our team.
Published on September 25, 2019