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HELENA — A U.S. District Court judge in Great Falls has slapped down a Trump administration effort to excuse tax-exempt nonprofit organizations from routinely reporting major donors to federal tax authorities, saying the Internal Revenue Service failed to follow proper public input processes.
But the ruling, by Judge Brian Morris, doesn’t necessarily stop the IRS from eventually implementing the new rules, which critics including Montana Gov. Steve Bullock say make it easier for so-called dark money groups to hide the identities of donors from state regulators and the public.
“It may be true that the IRS lawfully can determine what information that it requires from exempt organizations…” Morris wrote. “The IRS cannot escape, however, the procedural demands of the [Administrative Procedure Act].”
Nonprofit entities are generally exempt from federal income taxes on the basis that they’re organized for purposes other than creating profit for their owners, though the IRS still requires them to deliver annual financial filings detailing revenues and spending. Historically, the IRS has also asked for the names and addresses of all major donors — those providing more than $1,000 or $5,000 annually, depending on the type of nonprofit — and redacted that information in tax records released to the public.
Last summer, the IRS announced revised regulations that would excuse some nonprofits, with the exception of 501(c)(3) charities, from reporting major donors to the IRS unless the information is specifically requested by the agency. In a release, Treasury Secretary Steven Mnuchin, appointed by President Donald Trump, said the new policy would streamline paperwork and protect donor privacy.
Groups that would be exempted from routine donor disclosure under the change include social welfare organizations, labor groups, agricultural organizations, civic leagues, employee associations, and business organizations.
(Montana Free Press is organized as a 501(c)(3) nonprofit. In addition to its legally required annual tax filings, MTFP reports donors who have given $5,000 or more on its website, montanafreepress.org.)
Montana and New Jersey, both under Democratic governors, responded by suing to challenge the rule change. In Montana’s filings, Bullock and his chief legal counsel, Raph Graybill, argue that because the IRS shares information with state tax agencies, the new rule would deprive the Montana Department of Revenue of information necessary to administer the state’s own tax laws. Specifically, they said, having access to donor names lets tax auditors catch entities that try to claim nonprofit status but actually function for private benefit like a for-profit business.
Bullock and Graybill also argued that certain tax-exempt entities like 501(c)(4) social welfare organizations are allowed to engage in political activity, making donor disclosure an important transparency measure for tracking money in politics. If the IRS doesn’t know who is giving to a politically active social welfare organization, they said, the agency can’t enforce federal campaign laws that, for example, prohibit foreign entities from political spending intended to influence American elections.
Oral arguments in the case were held in Great Falls in June.
Morris writes in his order that, contrary to claims made by the IRS, the new reporting requirement is a significant enough change that it should be subject to the federal government’s explicit, if time-consuming, public comment procedures. As such, Morris declared the agency’s initial attempt to change the reporting rules invalid.
In a release, Bullock’s office called the ruling “a big victory for Montanans, for Americans and for our representative democracy.” It also said that Bullock, an attorney, helped argue the IRS lawsuit and was “personally involved” in writing its legal filings.
Bullock, termed out as governor in 2020, is seeking the Democratic nomination for U.S. president with a campaign based partly on his accomplishments strengthening Montana’s laws regarding transparency in political spending. Graybill, also a Democrat, is running to be Montana’s next attorney general.