Click here to read our Client Advisory regarding the recent change to the excise tax on investment income of private foundations.
On January 14, 2020, the New York Attorney General entered into an Assurance of Discontinuance (the “Settlement”) with PayPal Charitable Giving Fund (“PPGF”)—PayPal, Inc.’s charitable giving arm—to resolve issues raised during an investigation into PPGF’s 2016 giving campaign. The Settlement highlights the importance of adequate disclosure and vetting for third-party fundraising platforms that solicit charitable funds online.
PPGF is a 501(c)(3) nonprofit corporation that does business throughout the United States. It functions as a third-party fundraising platform that accepts contributions from individuals and then makes equivalent grants to charities selected by those individuals, at no cost to the donor or the charity. PPGF vets each selected charity before granting funds; if the charity does not meet PPGF’s vetting criteria, PPGF will grant the funds to a comparable charity that does meet such criteria. Prior to PPGF’s 2016 giving campaign, only charities that enrolled with PPGF, maintained a PayPal account, and satisfied PPGF’s vetting criteria (such charities, “Enrolled Charities”) were eligible to receive grants. A list of Enrolled Charities was accessible on PPGF’s website.
For its 2016 giving campaign, PPGF added charities that were not Enrolled Charities to the list of charities on its giving website (the “Cause Hub”). The added charities were on a list of 501(c)(3) charitable organizations provided by Guidestar USA, Inc. but were not enrolled with PPGF (such charities, “Unenrolled Charities”). After the addition of the Unenrolled Charities, a multistate group consisting of representatives of state Attorneys General, Secretaries of the State, and state consumer protection agencies from 23 states (such group, the “Multistate Group”) initiated an inquiry into PPGF’s disclosure and vetting practices.
In the spring of 2017, PPGF removed the listing of Unenrolled Charities from the Cause Hub to address the Multistate Group’s concerns, and PPGF fully cooperated with the Multistate Group in its inquiries. Ultimately, PPGF agreed to implement certain disclosure standards to ensure that donors have the information necessary to make informed decisions about their charitable giving.
Specifically, under the Settlement, PPGF agrees that it will:
- make “unavoidable and prominent” disclosures that donors are making donations to PPGF and not to the donor’s selected charity, and PPGF will not use language implying that donors are making a direct donation to their selected charity. (Here, “unavoidable and prominent” means (a) the information is not included in an optional pop up window or on another page accessible by a link, and (b) the information must be located on a page that every donor must access prior to making a donation and in a position on that page that is in immediate proximity to a necessary field/button used by every donor)
- make “unavoidable and prominent” disclosures to donors regarding fees charged for use of the PPGF platform, or the absence of such fees.
- make “unavoidable and prominent” disclosures regarding the expected time frame in which grant funds will be disbursed to the selected charity.
- make “unavoidable and prominent” disclosures that PPGF may redirect funds to a comparable charity under certain circumstances, and clearly describe such circumstances.
- disclose that donors’ contact information is not shared with charities that are deemed ineligible to receive a grant.
- notify donors when it redirects a donation to an organization other than the one the donor selected.
- disclose whether the charity vetting process includes review for compliance with state charitable registration requirements.
- ensure that charities listed on the Cause Hub are specifically identified as either Enrolled or Unenrolled, and explain what each designation means in practical terms.
PPGF must fulfill certain other requirements as part of the Settlement, including (a) providing biannual data to the Multistate Group regarding any redirection of grants to charities other than the ones selected by donors, and (b) making a $200,000.00 donation to the National Association of Attorneys General Charities Enforcement and Training Fund to cover costs associated with actions brought by state charities regulators and provide related training. The Settlement’s material terms are consistent with agreements entered into by PPGF and other entities comprising the Multistate Group.
In the wake of the Settlement, entities operating third-party fundraising platforms, and even charities that may receive funds via such platforms, should review disclosure language to ensure that donors receive sufficient information and contributions are made as intended.
– Ahsaki Benion
New York’s “Stop Hacks and Improve Electronic Data Security Act (SHIELD Act)” (the “Act”) officially took effect on October 23, 2019. In pertinent part, the Act amends New York General Business Law (“GBS”) § 899 to expand the scope of “private information” covered under existing data breach notification provisions, to more broadly define what constitutes a “breach” of data security, and to add new data security requirements. The Act applies to all businesses that collect private information of New York residents, including nonprofits.
Breach Notification. Under the previous law, “private information” was defined as information that could be used to identify a person (“personal information”) in combination with a social security number; a driver’s license or non-driver’s identification card number; or a financial account or credit card number with an access code or password that would permit access to an individual’s account. The Act broadens the definition of “private information” significantly to include personal information in combination with (a) credit card and financial account numbers that can be used alone to access an individual’s account; (c) biometric information (e.g., fingerprints, voice prints, etc. used to authenticate an individual’s identity); and (c) a user name or email address in combination with a password or security question that would permit access to an individual’s online account.
Importantly, whereas the previous law defined a breach of system security as “unauthorized acquisition” of certain data, the Act expands that definition to include “unauthorized access” to such data. Businesses must disclose a security breach to any resident of New York state whose private information is believed to have been wrongfully accessed or acquired. Notably, the Act provides that notice is not required if exposure of private information occurs as the result of an inadvertent disclosure by a person authorized to access the information, and the business determines that exposure will not result in misuse of the information, or in financial (or emotional) harm to the affected person.
In addition to the previous notice specifications, notice must now include the telephone numbers and websites of the state and federal agencies that provide information regarding data breach response and identity theft protection. The Act also (a) increases the penalty from $10 to $20 for each instance of failed notification, with a maximum penalty of $250,000 (up from $150,000 previously), and (b) lengthens the time period during which the Attorney General may bring an action for violation of the notice provisions—up to six years from the date of the business’ discovery of the data breach, and longer if the business made efforts to hide the breach.
Data Security. The Act adds a new GBS § 889-bb, which requires businesses that own or license data that includes private information of New York residents to “develop, implement and maintain reasonable safeguards to protect the security, confidentiality and integrity of . . . private information.” A business will be deemed compliant with the Act if it implements a data security policy that requires:
- Reasonable administrative safeguards (e.g., a designated employee to coordinate a security program; identification of internal/external risks; assessment of current safeguards; employee training in security practice and procedures; engagement of qualified service providers to implement safeguards)
- Reasonable technical safeguards (e.g., assessment of risks in network and software; assessment of risks in information handling; system failure prevention, detection, and response; testing and monitoring of key controls and procedures)
- Reasonable physical safeguards (e.g., assessment of risks of information storage and disposal; system intrusion prevention, detection, and response; protection against unauthorized use or access to data; disposal of private information after use)
Note that a “small business” (defined as one with less than 50 employees, less than $3 million in revenue during the previous 3 years, or less than $5 million in year-end assets) shall be deemed compliant with the Act’s data security requirements if the business has a security program with safeguards appropriate for its size and complexity, the nature and scope of its activities, and the sensitivity of the personal information it collects.
Businesses that already meet existing data breach notification or data security requirements mandated by other state or federal law may automatically be deemed compliant with the Act. Note also that the Act expressly does not create a private right of action; only the Attorney General is empowered to bring action for violations of its provisions.
The data breach notification provisions of the Act are effective as of October 23, 2019, and the data security provisions take effect March 21, 2020. All nonprofit organizations that collect private information of New York residents should consult legal counsel and review their existing policies and protocols to ensure compliance with the new requirements.
– Ahsaki Benion
A federal judge has invalidated a New York state Ethics Law requiring § 501(c)(3) and § 501(c)(4) tax-exempt organizations to publicly report their donors under certain circumstances.
Background. Organizations exempt from taxation under Internal Revenue Code (“IRC”) § 501(c)(3) (charitable organizations) are expressly prohibited from participating in any political campaign activity for or against a candidate for public office. Such organizations are permitted to engage in lobbying, but lobbying activity may not constitute a “substantial part” of their activities. By contrast, organizations exempt from taxation under IRC § 501(c)(4) (civic leagues or social welfare organizations) may engage in substantial lobbying, and may engage in some political activity so long as that is not their primary activity. Donations to § 501(c)(3) organizations are generally tax-deductible, while donations to § 501(c)(4) organizations generally are not. A § 501(c)(3) organization may make cash or in-kind donations to a § 501(c)(4) organization but it must ensure that its tax-deductible contributions are not used to fund lobbying.
In 2016, as part of an Ethics Law intended to address certain election and campaigning issues, New York enacted Executive Law §§ 172-e and 172-f (together, the “Provisions”). Section 172-e requires a § 501(c)(3) organization to disclose all donors who contributed over $2,500 if the 501(c)(3) itself makes an in-kind donation in excess of $2,500 to a § 501(c)(4) organization that engages in lobbying in New York. Section 172-f requires a § 501(c)(4) organization to disclose donors who contributed $1,000 or more if the 501(c)(4) expends more than $10,000 in a calendar year on communications made to at least 500 members of the public concerning the position of an elected official relating to any “potential” or pending legislation (unless the contributions are restricted to a segregated account that was not used to support such communications). According to New York’s Governor, the Provisions were intended to facilitate “[d]isclosure of political relationships and funding behaviors widely recognized to be influential, but which operate in the shadows.”
Legal Action. Citizens Union of the City of New York (“Citizens Union”) is a nonpartisan group that works to foster accountability and transparency in New York City and State government; it is a § 501(c)(4) organization with an affiliated § 501(c)(3) organization. In 2016, Citizens Union filed suit challenging the Provisions on the grounds that they unconstitutionally burden the First Amendment rights of free speech and association.
In Citizens Union of the City of New York et al. v. Attorney General of the State of New York (case no. 1:16-cv-09592, U.S. District Court for the Southern District of New York), the court evaluated the Provisions under the “exacting scrutiny” standard, which is applicable when considering content-neutral disclosure requirements challenged under the First Amendment. According to the court, “there is no question that public disclosure of donor identities burdens the First Amendment rights to free speech and free association.” Under exacting scrutiny, the Provisions are permissible only if there is a “substantial relation between the disclosure [requirements] and a sufficiently important governmental interest.”
As described by the court, the U.S. Supreme Court has recognized three governmental interests that may justify donor disclosure in the context of election campaigns despite the burden on First Amendment rights:
- First, disclosure provides voters with information about where political campaign money comes from and how it is spent by a candidate; sources of a candidate’s financial support also alert voters to the interests to which a candidate is most likely to be responsive.
- Second, disclosure requirements deter actual corruption and avoid the appearance of corruption by publicly exposing large contributions and expenditures.
- Third, recordkeeping, reporting, and disclosure requirements are an essential means of gathering the data necessary to detect violations of limits on campaign contributions.
In striking down § 172-e, the court asserted that there was no substantial relation between the requirement that the identity of donors to § 501(c)(3) organizations be publicly disclosed and any important government interest. It reasoned that other disclosure laws that have been upheld based on a showing that disclosures furthered an important government interest were drawn far more narrowly than § 172-e. Similarly, the court found that § 172-f unconstitutionally intrudes on donors’ rights to anonymously discuss and advocate on issues of public interest because it requires disclosure whenever a § 501(c)(4) organization engages in pure public issue advocacy. According to the court, § 172-f reaches a far broader swath of communications than did other lobbying- and election-related statutes that were previously upheld.
When Citizens Union initially challenged the law in 2016, the New York Attorney General agreed to a stay of enforcement, so the Provisions have never actually been enforced. We will provide an update if there are any further developments.
– Ahsaki Benion
Effective March 2019, § 174-b of the New York Executive Law was amended to add a new requirement that any solicitation by or on behalf of a charitable organization—including any solicitation by a professional fundraiser or professional solicitor—must include a statement of the New York Attorney General’s website address (www.charitiesnys.com) and telephone number ((212) 416-8686) where an individual can receive more information about the charity.
In August 2019, the Attorney General released guidance on the § 174-b disclosure requirements to assist charities in complying with the amended statute. Charitable organizations that are required to register with the Attorney General and file annual financial reports must adhere to the guidelines if they solicit contributions from persons in New York. Note that certain nonprofit organizations (including but not limited to religious organizations, certain educational institutions, and organization’s with contributions totaling less than $25,000 per year) are exempt from the requirements. Read the guidelines here.
The guidelines are not intended to serve as a substitute for legal advice; organizations should always consult legal counsel when planning or conducting any fundraising activity.
In what may be a bellwether for future challenges to existing U.S. Treasury Regulations, on August 6, 2019 the United States District Court for the District of Minnesota in Mayo Clinic v. United States invalidated Treasury Regulation § 1.170A-9(c) on the grounds that the Treasury Department exceeded the bounds of its statutory authority when it was promulgated.
Mayo Foundation is an tax-exempt § 501(c)(3) organization that is the parent of several hospitals, clinics, and the Mayo Clinic College of Medicine and Science, which is comprised of five medical schools. In 2016, the Mayo Clinic filed suit on behalf of Mayo Foundation (“Mayo”) seeking over $11 million in federal tax refunds. According to Mayo, the taxes were erroneously assessed because Mayo is a “qualified organization” that is not required to pay unrelated business income tax (“UBIT”) on passive income from debt-financed property. The Government contended that such passive unrelated business income was taxable because Mayo was not a “qualified organization” for purposes of the claimed UBIT exclusion.
Under Code § 170(b)(1)A(ii), an organization qualifies for the UBIT exclusion at issue in Mayo if it is
an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.
The Treasury Department regulation interpreting that provision—Treasury Regulation § 1.170A-9(c) (the “Treas. Reg.”)—further provides that an organization is not included in the definition of “educational organization” unless “its primary function is the presentation of formal instruction” and “noneducational activities . . . are merely incidental to the educational activities.”
The Government and Mayo agreed that Mayo would qualify as an “educational organization” under the definition set forth in the Code if the Treas. Reg. was not applicable. However, according to the Government, the Treas. Reg. expressly excluded Mayo from the definition of “educational organization” because (a) Mayo’s primary purpose is health care, not education, and (b) its noneducational “health care” activities are not merely incidental to its educational activities. Mayo challenged the Treas. Reg.’s validity, arguing that it impermissibly added a requirement—namely, the primary function test—that Congress did not intend to include in Code § 170(b)(1)A(ii).
The court considered Code § 170(b)(1)A(ii) and the Treas. Reg. under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. to determine whether the regulation was entitled to deference. Under the two-step Chevron framework, courts and agencies “must give effect to the unambiguously expressed intent of Congress. If the intent of Congress is clear, that is the end of the matter.” If Congress has not directly addressed the precise question at issue and the statute is silent or ambiguous, only then will a court consider whether an agency’s regulation promulgated to address the ambiguity is based on a permissible construction of the statute.
As stated by the court, “the precise question at issue [in Mayo] . . . [was] whether Code § 170(b)(1)(A)(ii) is silent or ambiguous with respect to the primary-function and merely-incidental requirements in the regulation.” Because the Code subsection immediately following § 170(b)(1)(A)(ii) explicitly does include a primary function requirement (it defines the principal purpose or functions of a qualifying medical facility), the court determined that Congress had “unambiguously chose not to include a primary-function requirement” in Code § 170(b)(1)(A)(ii). According to the court,
when Congress imposes a particular requirement in one subsection of a statute but not in another—settled rules of statutory construction say that the absence of the requirement is generally to be considered a deliberate omission that must be respected.
Since it found that the Treasury Department did not have statutory authority to impose a primary-function requirement under the Treas. Reg., the court never even reached the second prong of the Chevron test (i.e., whether the Treas. Reg. was a permissible interpretation of the statute).
With the Mayo decision, organizations previously ineligible for the passive income UBIT exception at issue in the case may now qualify. In addition, the Mayo precedent has the potential to invite challenges to other existing Treasury Regulations, which could significantly impact tax administration. We will continue to monitor this case closely.
(Note: The Code § 170(b)(1)(A)(ii) at issue in Mayo generally describes a type of “educational organization” eligible to receive tax-deductible charitable contributions from individuals. Now that the Treas. Reg.’s primary function test has been invalidated, charitable contributions to such an “educational organization” are tax-deductible even if the organization’s primary purpose is not the presentation of formal instruction and noneducational activities are not merely incidental to educational activities. However, by definition, a charitable contribution may only be made to a corporation that is
organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition . . . or for the prevention of cruelty to children or animals; . . . no part of the net earnings of which inures to the benefit of any . . . individual . . .
An educational organization described in § 170(b)(1)(A)(ii) must be qualified to receive a charitable contribution as defined above, regardless of the primary function test.)
On August 12, 2019, Governor Andrew Cuomo signed into law S.6577/A.8421 (the “Act”), providing new workplace harassment protections for New York workers. While certain provisions of the previous law applied only to employers with four or more employees, the Act is applicable to all employers in the state—including nonprofits.
Effective October 11, 2019, the Act amends the Executive Law to considerably lower the bar for workplace harassment claims. Under the new law, it is an unlawful discriminatory practice for an employer
to subject any individual to harassment because of an individual’s age, race, creed, color, national origin, sexual orientation, gender identity or expression, military status, sex, disability, predisposing genetic characteristics, familial status, marital status, domestic violence victim status, or because the individual has opposed [a discriminatory practice] or because the individual has filed a complaint, testified or assisted in any proceeding [relating to a discrimination complaint].
Harassment no longer needs to be “considered severe or pervasive” to constitute prohibited conduct. Instead, harassment constitutes an unlawful discriminatory practice if “it subjects an individual to inferior terms, conditions or privileges of employment because of the individual’s membership in one or more of [the] protected categories.” An employer may be liable even if an individual has not previously made a complaint about the harassment to such employer. As an affirmative defense, employers may assert that the alleged harassing conduct “does not rise above the level of what a reasonable victim of discrimination with the same protected characteristic would consider petty slights or trivial inconveniences.”
In addition to changing the standard for actionable harassment claims, the Act:
- Expands the prohibition against unlawful discriminatory practices to apply to domestic workers and non-employees (e.g., contractors, vendors, consultants, and volunteers) providing services in the workplace. (effective October 11, 2019)
- Provides that victims of employment discrimination may be awarded punitive damages (under the previous law, punitive damages were awarded only in housing discrimination cases). (effective October 11, 2019)
- Provides that victims of employment discrimination shall be awarded reasonable attorney’s fees (under the previous law, attorney’s fees could be awarded only in housing or sex discrimination cases in the court’s discretion). (effective October 11, 2019)
- Prohibits employers from requiring an employee to submit to mandatory arbitration to resolve an unlawful discriminatory claim. (effective October 11, 2019)
- Provides that an agreement to resolve a discrimination claim may not prohibit disclosure of facts related to such claim, unless confidentiality is the complainant’s preference. (effective October 11, 2019)
- Prohibits an employer from requiring a current or potential employee to sign any agreement that would prevent disclosure of factual information related to a future discrimination claim unless it is clear that such agreement does not prohibit the individual from speaking with law enforcement, the equal employment opportunity commission, the state division of human rights, a local commission on human rights, or legal counsel. (effective October 11, 2019)
- Extends the time period for filing a complaint of sexual harassment in employment from one year to three years after the alleged conduct. (effective August 12, 2020)
- Requires employers to provide all employees—at the time of hiring and at each annual sexual harassment prevention training as required by law (see our related blog post)—a notice containing the employer’s sexual harassment prevention policy and the information presented at the sexual harassment prevention training. The notice must be provided in writing in English and in the language identified by each employee as his or her primary language. According to the Act, the New York State Department of Labor Commissioner’s templates of the model sexual harassment prevention policy and the model sexual harassment prevention training program will be made available to employers in various languages. If a translation in an employee’s primary language is not made available by the Commissioner, the employer may provide the English-language notice. (effective August 12, 2019)
The effective date of each provision of the Act is indicated above, but note that it will not apply to employers with one to three employees until February 8, 2020. All New York nonprofit organizations should consult legal counsel and review their existing policies and agreement forms to ensure compliance with the new requirements.
– Ahsaki Benion
On September 10, 2019, the Internal Revenue Service issued proposed updates to the information reporting regulations applicable to tax-exempt organizations. The proposed regulations generally incorporate existing statutory amendments and IRS guidance provided since the current regulations were adopted.
Among the proposals is a regulation that would put into effect the changes previously announced in Revenue Procedure 2018-38. That Revenue Procedure, and the new proposed regulations, provide that, for tax years ending on or after December 31, 2018, tax-exempt organizations—except those exempt under Internal Revenue Code § 501(c)(3) and § 527 political organizations—are no longer required to report the names and addresses of substantial contributors (generally those donating $5,000 or more) on Schedule B to their series 990 annual information returns. Organizations exempted from the reporting requirement are still required to maintain the contributor information and make it available to the IRS upon request.
As discussed in our previous blog post, the court in Bullock v. IRS, 2019 WL 3423485 (D. Mont. Jul. 30, 2019) set aside Rev. Proc. 2018-38 on the grounds that it was issued without the public notice and comment period required by law. The IRS is now correcting that defect by implementing the rule change announced in the Rev. Proc. as a regulation and providing the requisite notice and comment period. Comments on the proposed rules or requests for a public hearing must be received by December 9, 2019. Electronic submissions may be sent here. If the proposed regulations are adopted, organizations may choose to apply them to series 990 returns filed after September 6, 2019.
In the wake of the Bullock decision, the IRS has also issued Notice 2019-17, which provides penalty relief to series 990 filers that failed to report contributor information in reliance on Rev. Proc. 2018-38 before it was invalidated by Bullock. According to the Notice, organizations granted relief from the Schedule B reporting requirement under the Rev. Proc. will not be penalized for filing an incomplete return if they failed to report substantial contributor information for a taxable year ending on or after December 31, 2018, and on or prior to July 30, 2019—the date of the Bullock decision. Note that, even if the proposed regulations take effect, exempt organizations that failed to report substantial contributor information on Schedule B between the date of the Bullock decision and September 6, 2019 may not entitled to penalty abatement.
– Ahsaki Benion
A Manhattan Surrogate’s Court judge recently ruled that our client Radio Drama Network, Inc., a private foundation, could proceed with its lawsuit to invalidate testamentary instruments that deprived it of a $100 million bequest from its founder. For more on this case, click here.
On July 30, 2019, the court in Bullock v. IRS, No. CV-18-103-GF-BMM (D. Mont. July 30, 2019) invalidated IRS Revenue Procedure 2018-38 governing tax-exempt organizations’ disclosure of donor information on the grounds that it was promulgated without the required notice-and-comment period.
As described in our previous blog post, prior to Revenue Procedure 2018-38 (“Rev. Proc. 2018-38” or the “Rev. Proc.”), all organizations exempt under Internal Revenue Code § 501(c) were required to report the names and addresses of substantial contributors (generally donors who contributed $5,000 or more during the taxable year) on Schedule B to their Form 990 series annual return. Rev. Proc. 2018-38 eliminated that requirement for all tax-exempt organizations except those exempt under § 501(c)(3) and § 527 political organizations. Organizations relieved of the reporting requirement under the Rev. Proc.—including § 501(c)(4) organizations engaged in lobbying and political activity—must continue to collect donor information and submit it to the IRS upon a specific request.
Schedule B donor information is generally not available to the public, but federal law grants states access to tax return information gathered by the IRS for the purpose of state tax law administration. According to the Bullock court, such information sharing is intended to help ensure compliance with tax laws, and “relieves state governments from the burden of expending resources to gather information already obtained by the IRS.” As the plaintiffs in Bullock, Montana and New Jersey alleged that they relied on substantial-contributor information contained in Schedule B to enforce their own state tax laws, and the loss of such previously available information would be injurious. Specifically, New Jersey alleged that Schedule B information enables it to track contributions over time and “identify suspicious patterns of activity, locate donors to aid in determining whether the entity is soliciting from individuals within New Jersey, and otherwise supplement state investigations under its Charitable Registration and Investigation Act.” Similarly, Montana alleged that
in determining whether exempt organizations are adhering to legal obligations such as the ban on ‘private inurement, limitation on political activity, or the requirements of state charities laws’ a key piece of information for Montana regulators ‘is the source of those organizations’ income—and in particular, the identity of contributors to the organization’ . . .
as set forth in Schedule B.
The plaintiffs asked the court invalidate Revenue Procedure 2018-38 on the grounds that the IRS failed to follow applicable Administrative Procedure Act (“APA”) rulemaking procedures before its enactment. The APA requires that agencies give the public notice of a proposed legislative rule and allow a period of time to comment. Legislative rules are those that “create rights, impose obligations, or effect change in existing law pursuant to authority delegated by Congress.” According to the plaintiffs, because the Rev. Proc. “effectively amends a prior legislative rule,” it is a legislative rule subject to the APA requirements. The IRS conceded that it failed to follow public notice-and-comment procedures, but argued that the Rev. Proc. is not a legislative rule; instead, it is an interpretive rule, which “merely explain[s], but do[es] not add to, the substantive law that already exists in the form of a statute or legislative rule.” Interpretive rules are not subject to APA requirements.
In setting aside the Rev. Proc, the court found that “[t]he IRS’s promulgation of Revenue Procedure 2018-38 appears to represent a[n] . . . attempt to ‘evade the time-consuming procedures of the APA.’” According to the Court, the Rev. Proc. is a legislative rule subject to APA notice-and-comment requirements because it “effectively amends the previous rule that required tax-exempt organizations to file substantial-contributor information annually,” and “explicitly upends a fifty-year practice.” In confirming the need to comply with the APA, the court affirmed that
[t]he APA’s notice-and-comment requirement grants interested persons, organizations, and entities ‘an opportunity to participate in the rulemaking process’ by submitting written data, opposing views, or arguments. . . . This procedural gate holds government agencies accountable and ensures that these agencies issue reasoned decisions.
The ruling does not speak to the merits of Revenue Procedure 2018-38, and the IRS could ultimately reinstate the Rev. Proc.’s donor disclosure exemption after the requisite notice-and-comment period. However, the ruling should afford the plaintiff states and other interested parties the opportunity to submit arguments in opposition.
Note: As of the date of this post, the Schedule B instructions have been updated to reflect the Rev. Proc. requirements, and the IRS has not issued further guidance in the wake of the Bullock ruling. We continue to monitor developments on this issue.