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Analysis

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.

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)