Missouri River Courthouse in Great Falls. Credit: Jenn Rowell / The Electric

GREAT FALLS —  A federal judge heard arguments today in a lawsuit Gov. Steve Bullock brought against the IRS over a rule change the agency implemented last summer, which holds that tax-exempt organizations no longer have to collect names and addresses of major donors.

The state of New Jersey joined the lawsuit in March, and U.S. District Judge Brian Morris heard from both sides Wednesday at the Missouri River Federal Courthouse.

Deepak Gupta, a Washington, D.C., attorney representing Montana and New Jersey, said federal law had previously granted states access to federal tax information.

He said the states are harmed by the rule change because they will now have to enact new rules of their own and commit resources to gather information previously collected by the IRS.

“The states have been denied the right to participate in the rule change. Process matters,” Gupta said. “Those procedural requirements are important because they affect substantive outcomes.”

The IRS asked the court to dismiss the case for lack of jurisdiction and for the plaintiffs’ failure to show harm by the rule change.

Attorneys for Montana and New Jersey asked the court to find in their favor and force the IRS to open the rule change for public comment.

In July 2018, the IRS announced it would no longer require disclosure of the information for tax-exempt organizations other than 501(c)(3) groups.

Groups no longer required to disclose donor information under the rule change include labor groups, agricultural and horticultural organizations, civic leagues, social welfare organizations, local associations of employees, business leagues and chambers of commerce, and social and recreational clubs, among others.

Bullock sued the agency in his capacity as governor and on behalf of the Montana Department of Revenue, arguing the IRS made the rule change through a sub-regulatory document and did so in violation of the Administrative Procedure Act, which requires agencies to notify the public and provide an opportunity for comment before amending a legislative rule.

The IRS did not notify the public before changing the rule and did not allow the public a chance to comment.

The IRS building in Washington, D.C. / Adobe Stock

Raph Graybill, an attorney in Bullock’s office and a Democratic candidate for attorney general, said the states aren’t disputing the IRS’ authority to make a rule change, but do dispute the lack of public notice and comment that they believe is required. U.S. Justice Department Attorney Joseph Sergi argued that the rule was changed because the IRS no longer needed the information to administer tax law.

The rule change did not eliminate the requirement that tax-exempt organizations collect and maintain the information for use in case of concern about the tax code’s prohibition against inurement, i.e., a tax-exempt organization’s use of income or assets to benefit an individual or other people who have close ties to or exercise significant control over the organization.

Sergi said the IRS has collected that information for many years, but was required to redact the names and addresses of donors for public release.

In recent years that information was wrongfully released to the press, Sergi said, and one way to lessen the chance of wrongful release was to cease collecting the information.

Sergi said that previously, the IRS collected the information and states could ask for it. Sergi said that Montana and New Jersey had not previously requested the information. He said state agencies can also get the information from tax-exempt organizations within their states by other means.

“The only thing that’s lost here, I guess, is comfort,” Sergi said.

In the complaint, Graybill wrote, “because Montana law does not independently require organizations seeking tax-exempt status to file the names and addresses of their significant contributors with the state, MTDOR relies on the availability of this information from the IRS. MTDOR also relies on the exhaustiveness of the IRS’s private inurement determinations.”

Graybill argued that changes that weaken the integrity of federal inurement determinations would “frustrate Montana’s tax regime, impose substantial pressure on Montana to change its laws, and require Montana to expend substantial resources to develop new procedures for state determinations.”

New Jersey regulators announced a new rule in May requiring tax-exempt organizations to disclose donors who give more than $5,000, effectively replacing the IRS’ former rule.

Attorneys general from New Jersey and New York are also suing the IRS for failing to comply with a Freedom of Information Act request seeking information regarding the agency’s decision to change the rule.

Bullock argues the IRS rule change makes it easier for organizations to hide “dark money” by moving it anonymously through groups that can influence elections.

Sergi said the rule change is specifically related to the administration of tax law, and not election rules.

“It’s not the IRS’ job to regulate dark money,” Sergi said.

Morris did not rule from the bench on Wednesday after hearing about two hours of testimony.

Bullock is running for president in 2020, and on Wednesday he announced a new policy proposal dubbed “Check the Box” to keep foreign money out of American elections.

Bullock said as president he would add a checkbox to standard IRS and Federal Election Commission forms requiring dark money groups and SuperPACs to certify they are not using foreign money in elections.

“Ridding foreign money from American elections could be as simple as checking a box,” Bullock said in a campaign release. “There can be no free passes for those deliberately seeking to undermine our democracy. ‘Check the Box’ is a small, yet powerful tool to fight back against the corrupting influence of foreign money in American politics, and will ensure that our government represents one thing: the voice of every American.”

Lying on ‘Check the Box’ would carry the same penalties as perjury, including up to 10 years prison time and a $250,000 fine, according to Bullock’s release.

Jenn Rowell is founder and editor of local news organization The Electric in Great Falls, focusing on local government, military and economic development. She has previously worked for newspapers in Montana, Alabama and Virginia.