Corporate TaxationPublications

Clash Brewing Between States and the IRS

July 30, 2018Legal Alerts

On July 16, 2018, the IRS, Treasury and the acting commissioner of the IRS issued Revenue Procedure (2018-38), which eliminated the requirement that tax-exempt organizations other than 501 (c)(3) charities and 527 political organizations must disclose the identity of their larger donors. Charities and political organizations are already required by statute to disclose that information; the other exempts, however, are not required to do so by statute. The new Rev. Proc. frees (1) social welfare organizations, (2) fraternal benefit organizations, (3) trade associations and (4) social clubs from having to identify donors who gave more than $1000/yr. for charitable purposes. 

The change in policy was made subject to Section 1.6033-2(g)(6) of the Treasury Regulations, which gives discretion to the IRS commissioner to modify requirements for organizations other than the “charitables”. The new Rev. Proc. only affects reporting of names and addresses of donors – it does not require contribution detail.

There is, however, an underlying problem for the states. U.S. Code Section 6033 is the vehicle by which the states gather and share information about substantial contributors, commonly used when making their own tax-exempt determinations. In particular, the states routinely examine a taxpayer’s 990 and Schedule B for relevant information. This sharing practice has become widely accepted by both states and IRS. 

On July 24, 2018, the governor of Montana sued the IRS and Treasury in District Court for having “unlawfully interfered with that state’s ability to gather data the state needs in order to administer its tax laws.” Montana asserted that the IRS action amended a legislative rule without conforming to the notice and comment requirements of the Administrative Procedure Act (APA). Montana further claimed that the IRS has acted in excess of its statutory authority. Montana asks that the court issue an order setting aside the Rev. Proc. and award the state its costs and attorney’s fees. It remains to be seen whether other states will join in this action.