Federal judge rules IRS donor guidance is unlawful

Federal judge rules IRS donor guidance is unlawful
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A federal judge in Montana ruled on Tuesday that IRS guidance reducing donor disclosure requirements for certain nonprofits is unlawful and will be set aside.

The ruling is a win for two states with Democratic governors that challenged the guidance — Montana and New Jersey — and is likely to be cheered by Democrats in Congress who have criticized the guidance.

Montana Gov. Steve BullockSteve BullockThe Hill's 12:30 Report: Stocks sink as Trump fights with Fed, China The Hill's Morning Report: How will Trump be received at G-7? Democratic governors fizzle in presidential race MORE is seeking the Democratic nomination for president, and the ruling was issued on the same day he appeared in the party's presidential debate.

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The IRS and Treasury Department released guidance last year that ended a requirement for certain tax-exempt groups to report the names and addresses of major donors on annual forms.

Groups affected by the guidance included social welfare organizations such as the National Rifle Association and the American Civil Liberties Union, labor unions, and business leagues.

Republicans argue that the guidance was important to protect taxpayers' privacy and First Amendment rights. But Democrats have strongly opposed the guidance, arguing that it could make it easier for foreign governments to influence U.S. elections through donations to "dark money" groups.

Bullock, the Montana Department of Revenue and the state of New Jersey filed a lawsuit challenging the IRS guidance, asking the court to set it aside because the IRS didn't provide a notice and comment period before issuing the guidance. Both states said that they had utilized the donor information.

Treasury and the IRS said the lawsuit should be dismissed, arguing that the states lack standing to sue. They also argued that the guidance was an interpretive rule that didn't need a notice and comment period.

In his ruling, Judge Brian Morris, who was appointed by former President Obama, ruled that the states have standing to pursue their claim and that the guidance was a legislative rule that did need a notice and comment period.

Morris noted that the states argued they may need the donor information to determine whether an organization violates requirements for tax-exempt groups and to enforce limits on tax-exempt groups' political activity.

"The Court agrees that these purposes support the need for the IRS to comply with the [Administrative Procedure Act]’s notice-and-comment provision when it amends a long-standing regulation that implicates the collection and sharing of this information," Morris wrote.

Morris said that if the IRS wants to adopt a similar rule in the future, it needs to follow notice and comment procedures under the Administrative Procedure Act.