Bloomberg Tax
July 31, 2019, 8:57 PM

IRS Could Face More Court Battles After Nonprofit Donor Ruling

Allyson Versprille
Allyson Versprille

The IRS may be vulnerable to more court challenges after a federal judge struck down agency guidance that rolled back nonprofit donor disclosure requirements, according to tax professionals.

The ruling upends a position that the Internal Revenue Service and Treasury Department have taken for a long time that guidance falling short of a regulation doesn’t have to go through a full notice-and-comment period, said Kristin Hickman, who for about a year worked as a special adviser in the Office of Management and Budget’s Office of Information and Regulatory Affairs reviewing Treasury’s tax guidance.

The administration in July 2018 revoked a decades-old rule requiring certain politically active nonprofits to report the names and addresses of their donors on tax forms. The change (Revenue Procedure 2018-38) drew the ire of Democratic lawmakers, including Sen. Ron Wyden (D-Ore.), who said it would make it easier for “dark money” groups to influence U.S. elections through anonymous donations.

Opponents of the change gained a victory in court July 30 when Judge Brian Morris of the U.S. District Court for the District of Montana overturned the donor disclosure policy on the grounds that the IRS’s revenue procedure was a “legislative rule” and as such needed to go through the notice-and-comment process required by the Administrative Procedure Act.

“The fact that the judge declared a revenue procedure to be a legislative rule is a big deal,” said Hickman, a professor at the University of Minnesota Law School who specializes in tax administration and administrative law.

The decision could subject other revenue procedures—or revenue rulings—to challenges from taxpayers if Morris’s ruling stands, said Lloyd Hitoshi Mayer, a professor at University of Notre Dame Law School. This, however, may not work in every case. The fact that the donor disclosure change amended a nearly 50-year-old rule seemed to play a large role in the judge’s decision, Mayer said.

The agency declined to comment, saying it doesn’t discuss litigation.

The donor-disclosure change applies to organizations exempt under tax code Section 501(c), except for 501(c)(3) charities and Section 527 political organizations.

Subregulatory Versus Regulatory

The IRS and Treasury have long taken the stance that subregulatory guidance—such as notices, revenue procedures, and revenue rulings—doesn’t have the force and effect of law. This means they don’t consider those forms of guidance to be legislative rules, which are subject to the APA’s notice-and-comment requirements.

The IRS and Treasury reiterated this position in a policy statement released in March.

They do, however, generally apply full APA notice-and-comment procedures to their regulations, even if they consider them to be “interpretive,” as noted in the statement. Interpretive rules are exempt from that requirement. Regulations are the type of guidance most often at the center of cases involving taxpayer challenges to the IRS and Treasury’s adherence to the APA.

There has been at least one other APA case dealing with subregulatory guidance, Cohen v. U.S., which held that an IRS notice establishing excise tax refund procedures was reviewable under the APA as a final agency action. But those cases are rare, according to Hickman.

The IRS has the option to appeal the July 30 decision but it’s unclear if it will do so. If it does appeal, the agency may ask a court to temporarily suspend Morris’s ruling.

If the IRS accepts the decision, it may want to considering writing procedural guidance that explains when pronouncements, other than regulations, are going to be subject to the notice-and-comment process, said Marcus Owens, a partner at Loeb & Loeb LLP and former head of the IRS Exempt Organizations division.

Appealing the ruling may be more attractive to the agency so it doesn’t have to grapple with that issue, Owens said. It would also prevent the IRS from having to address the concerns raised by states like New Jersey and Montana over the donor disclosure change, he said.

The agency would have to defend its new donor rule if it has to resubmit the guidance as a proposal and respond to outside comments.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Colleen Murphy at