Dark Money Loses a Round

A judge blocked a new IRS rule that would have undermined donor disclosure requirements for nonprofit organizations, writes Brennan Center Fellow Ciara Torres-Spelliscy.

August 7, 2019

Last year, Gov. Steve Bullock of Montana sued the Internal Revenue Service (IRS) over a new Trump-era rule that threatened to enlarge the role of dark money in politics and upend nearly 50 years of disclosure practice.

In 2018, in Revenue Procedure 2018-38, the Treasury Department eliminated a mandate that required certain nonprofits including 501(c)(4)s from having to file a list of donors on Schedule B of Form 990. Before this rule change, the IRS had required most tax-exempt organizations to report the “names and addresses of all persons who contributed . . . $5,000 or more” during the taxable year. The new Regulation Revenue Procedure 2018-38 specified that exempt organizations must still collect and maintain donor information. However, exempt organizations must make this information available to the IRS only upon a specific request.

Dark money isn’t defined in the Internal Revenue Code. Rather, it is a pejorative phrase that many reformers (including myself) use to describe money in politics that comes from an undisclosed source. As I have described in many law review articles, despite the many different federal agencies that regulate political spending (including the FEC, the FCC, and the IRS), dark money continues to thrive because it is easy for political spenders to hide the true sources of their money. According to Open Secrets, more than $1 billion in dark money has been spent in federal elections since Citizens United.

The way to create dark money is to route political spending through an opaque nonprofit like a 501(c)(4) or 501(c)(6). Fixing how the IRS deals with dark money has long been the goal of advocates of transparency like Fred Wertheimer, president of Democracy 21, a nonprofit focused on campaign finance reform. But there is also a well-funded lobby for dark money that has spent years advocating for more secrecy in political spending.

In Bullock v. IRS, the Montana Department of Revenue and State of New Jersey joined Steve Bullock, the Montana governor and a current presidential candidate, as plaintiffs to challenge Revenue Procedure 2018-38. The state plaintiffs argued that they needed the information on the federal Schedule B to help enforce state tax laws. Furthermore, the plaintiffs made the case that the IRS’ new pro-dark-money rule did not comply with the Administrative Procedures Act (APA).

As the judge in the case, Brian Morris, noted, the pre-Trump rule (which dates back to 1970) complied with the APA. But when the Trump-era amendment was rolled out, it lacked the necessary notice and comment period required by the APA. As the judge noted, the APA’s requirements are not just meaningless bureaucracy. Rather, the “procedural gate [of notice and comment] holds government agencies accountable and ensures that these agencies issue reasoned decisions.”

And because the IRS did not follow the law when it made the new dark money rule, the judge concluded that the rule must be invalidated so that a proper notice and comment process can be completed. The judge was not ruling on the merits of the rule itself, just the process through which it was created.

As the judge concluded, “The IRS must enforce and administer the Internal Revenue Code ‘with integrity and fairness to all.’ The scope of this responsibility provides sufficient reason for the IRS to seek external information and opposing opinions before it promulgates an amendment to a legislative rule, such as Revenue Procedure 2018-38.”

The Bullock case is only in a trial court. The IRS is likely to appeal this ruling either to the Ninth Circuit or even eventually to the Supreme Court. But because this ruling was on procedural grounds and not on the merits of the rule, it seems quite likely that the IRS will continue to lose this case. At the end of the day, a win for Bullock and his co-plaintiffs merely means that the IRS could still end up with a very similar pro-dark-money rule after they go through the normal rule-making process.

Additionally, this short-term win does not solve the bigger problem of dark money.  Typically, the public does not see the Schedule B of non-profits’ Form 990s. Truly addressing the problem of dark money would (1) require political nonprofits to record all of their donors over $5,000 and (2) require the IRS to share that information with the public. Bullock is only a small step in the right direction if state tax authorities are the only ones who see Schedule Bs. But don’t get me wrong, the worst outcome would be if (as the Trump administration wishes) nonprofits are excused from having to disclose any information about their donors.

The views expressed are the author's own and not necessarily those of the Brennan Center for Justice.

(Image: Carlos Osorio/AP Photo)