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.

Legal Grounds

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.

-Ahsaki Benion

The Internal Revenue Service (“IRS”) defines virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Virtual currency is not backed by a government-issued legal tender. Convertible virtual currency such as Bitcoin—by far the most popular—may be used to pay for goods or services, and purchased for, or exchanged into, U.S. dollars or other currency backed by a government. Several for-profit retailers (including Microsoft and Overstock.com, Inc.) now accept Bitcoin payments, and a growing number of public charities (including the American Red Cross, United Way, and Save the Children) have begun accepting Bitcoin donations, typically through companies that process Bitcoin transactions.

The most recent IRS guidance on the federal tax consequences of transactions that use convertible virtual currency (Notice 2014-21, the “Notice,” found here) provides that virtual currency is treated as “property” for federal income tax purposes, and not as money. For nonprofits and donors, this means that substantiation rules and other tax principles applicable to “in-kind” donations of personal property apply to contributions of virtual currency. The value of a contribution of virtual currency is the fair market value of the currency (measured in U.S. dollars) as of the date it was received by the charity. As virtual currencies are not legal tender in the United States and are highly volatile in value, charities that choose to accept virtual currency donations are generally advised to convert them to U.S. dollars as soon as possible to preserve the value at the time of donation. Donors may deduct the fair market value of donated virtual currency as of the time of contribution from their taxes as a charitable contribution (up to certain limits that are not unique to contributions of virtual currency). Because individuals must pay tax on any gain realized on the sale of virtual currency but contributions of virtual currency are tax-deductible, donors have an incentive to donate appreciated virtual currency directly to a charity instead of first selling the virtual currency, paying tax on any gain, and then donating the after-tax cash proceeds.

The Notice, issued in April 2014, requests comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future IRS guidance. However, two years later, in September 2016, a report of the Treasury Inspector General for Tax Administration (the “Report”) found that no action had been taken to address the comments received. The Report recommends that, among other things, the IRS (a) develop a virtual currency strategy including outcome goals, a description of how the agency intends to achieve those goals, and an action plan; and (b) provide updated guidance regarding the documentation requirements and tax treatments for the various uses of virtual currencies. To date, no further guidance has been issued, but in March 2018, the IRS did issue a reminder to taxpayers that income from virtual currency transactions must be reported just like transactions in any other property (see here). Most recently, on May 16, 2019, in response to a request from several U.S. Congressmen for additional guidance regarding the tax consequences of virtual currency transactions, IRS Commissioner Charles Rettig indicated that the IRS intends to publish guidance regarding such issues “soon” (read Commissioner Rettig’s response here). We continue to monitor developments in this area.

-Ahsaki Benion

On May 6, 2019, the New York and New Jersey Attorneys General filed a lawsuit against the U.S. Department of the Treasury (the “Treasury Department”) and its bureau the Internal Revenue Service (the “IRS”) for failing to respond records requests made pursuant to the Freedom of Information Act (“FOIA”). The requests sought records and information concerning the development and implementation of Revenue Procedure 2018-38 (the “Revenue Procedure”), which contains procedures modifying the information to be reported to the IRS on annual Form 990 Return of Organization Exempt From Income Tax and Form 990-EZ Short Form Return of Organization Exempt From Income Tax.

As discussed in our previous blog post (click here), the Revenue Procedure eliminated the requirement that tax-exempt entities organized under Internal Revenue Code § 501(c) (other than those described in § 501(c)(3)) must report the names and addresses of their substantial contributors on Schedule B to Form 990 or Form 990-EZ. Organizations relieved of the obligation to report contributors’ names and addresses must continue to keep such information in their books and records.

The Revenue Procedure, effective December 31, 2018, was promulgated without a public notice-and-comment period, which would have been required if the change had been made pursuant to a Treasury regulation. In October 2018, the Attorneys General jointly submitted FOIA requests for information regarding the Revenue Procedure’s administrative origin and development out of concern that the change to donor disclosure practices “would significantly interfere with their ability to effectively oversee affected organizations operating in New York and New Jersey.” The requested categories of records included

(i) records discussing the donor reporting requirements in effect for 501(c)-exempt entities prior to adoption of the Revenue Procedure;

(ii) records discussing historical agency review of donor information in Schedule B, including the costs and other burdens imposed by that review;

(iii) records regarding agency consideration and development of the Revenue Procedure; and

(iv) records concerning external inquires or other communications regarding consideration and development of the Revenue Procedure.

According to the lawsuit, both the Treasury Department and the IRS have exceeded the statutorily prescribed time limit for producing the requested documents; the IRS has made a single partial production of documents, and the Treasury Department has not responded to the request at all. The lawsuit asks the court to compel to disclosure of all relevant records.

Montana has already filed suit against the IRS for “unlawfully interfer[ing] with Montana’s ability to gather data that the state needs in order to administer its tax laws.” That suit seeks to set aside the Revenue Procedure on the grounds that it “was promulgated without notice and without giving the public any opportunity to comment,” in violation of the Administrative Procedure Act. It remains to be seen what additional action states may take in response to the Revenue Procedure.

Read the New York Attorney General press release here.

Read the Complaint here.

-Ahsaki Benion

On July 19, 2018, the New York Attorney General announced a settlement with Tennessee-based charity Operation Troop Aid Inc. (“OTA”) for failure to properly oversee donations received as part of a commercial co-venture.

OTA operated for the stated purpose of sending care packages to military service members, primarily during deployment. From at least 2012 to December 31, 2017, the charity engaged in a commercial co-venture relationship with Harris Originals of NY and affiliated retailers collectively known as Harris Jewelry. Harris Jewelry operates a jewelry store chain that caters to service members. As part of the commercial co-venture, Harris Jewelry conducted a promotion called “Operation Teddy Bear” in which it sold teddy bears dressed in military uniforms and advertised that, for each bear sold, a fixed dollar amount would be donated to OTA for the purpose of sending care packages to service members.

As stated by the Attorney General, “[c]harities have a fundamental responsibility when it comes to partnerships that use their charitable name and status.” A multistate investigation co-led by New York and Tennessee (and involving Attorneys General from 15 states) found that OTA failed to fulfill this responsibility and violated applicable state charitable solicitation laws because, among other things, the charity:

• did not enter into a written agreement with Harris Jewelry
• never overtook any oversight of Operation Teddy Bear
• never requested an accounting of the number of bears sold as part of the promotion
• did not seek to verify that the per bear donation amount advertised to the public matched the amount actually received
• never provided Harris Jewelry any information as to how donated funds were actually used
• failed to maintain the donated funds as restricted funds

As part of the settlement, OTA was ordered to dissolve and cease operations. In addition, its chief executive was ordered to refrain from fundraising or serving as a fiduciary for any non- profit organization, civil penalties were assessed, and OTA was required to continue to assist in the ongoing investigation of Harris Jewelry.

Read the New York Attorney General Announcement here.

Read the settlement agreement here.

-Ahsaki Benion

Internal Revenue Service Notice 2018-67 (the “Notice”) sets forth interim guidance relating to Internal Revenue Code § 512(a)(6) Special rule for organization with more than one unrelated trade or business.

Enacted on December 22, 2017 as part of Public Law 115-97 (the “Tax Cuts and Jobs Act”), Code § 512(a)(6) provides that

in the case of any organization with more than 1 unrelated trade or business— unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business.

In enacting Code § 512(a)(6), Congress intended to eliminate an organization’s ability to use a deduction from one trade or business for a taxable year to offset income from a different unrelated trade or business for the same taxable year. However, no criteria was provided for determining what constitutes a separate unrelated trade or business for purposes of calculating unrelated business taxable income (“UBTI”).

The Treasury Department and the IRS intend to propose regulations for determining whether an exempt organization has more than one unrelated trade or business and how to identify separate trades or businesses for purposes of Code § 512(a)(6). In the interim, in accordance with the Notice,

exempt organizations may rely on a reasonable, good-faith interpretation of [the relevant Code provisions], considering all the facts and circumstances, when determining whether an exempt organization has more than one unrelated trade or business for purposes of § 512(a)(6).

A reasonable, good-faith interpretation includes using the North American Industry Classification System 6-digit codes (available here), which organizations have historically used to classify revenue on their annual IRS Form 990 returns.

The Notice also includes specific principles and transition rules regarding various issues arising under Code § 512(a)(6), including treatment of income from partnerships, treatment of amounts paid or incurred for transportation fringe benefits, and calculation of net operating losses. It also provides guidance on the treatment of global intangible low-taxed income for purposes of UBTI.

Read the full text of the Notice here.

-Ahsaki Benion

Effective October 9, 2018, New York Labor Law § 201-G requires all New York state employers—including nonprofit organizations—to maintain a sexual harassment prevention policy and conduct an interactive sexual harassment prevention training program that meets certain minimum standards set forth in models provided by the Department of Labor. Employers may adopt the models promulgated by the Department, or establish a sexual harassment prevention policy and training program that equals or exceeds the minimum standards provided by such models.

Under the new law, the model sexual harassment prevention policy shall, among other things,

  • prohibit sexual harassment consistent with guidance issued by the Department of Labor;
  • provide examples of prohibited conduct that would constitute unlawful sexual harassment;
  • include information about applicable law concerning sexual harassment and remedies available to victims;
  • include a standard complaint form and procedure for investigation of complaints;
  • clearly state that sanctions will be enforced against both perpetrators and supervisory personnel who knowingly allow sexual harassment to continue; and
  • clearly state that retaliation against a complainant or individuals that assist in any proceeding under the law is unlawful.

In addition, the model sexual harassment prevention training program shall be interactive (though the term is not defined) and include, among other things,

  • an explanation of sexual harassment consistent with guidance issued by the Department of Labor;
  • examples of conduct that would constitute unlawful sexual harassment;
  • information concerning applicable law, remedies available to victims, and employees’ rights of redress; and
  • information addressing conduct by supervisors and any additional responsibilities for such supervisors.

The sexual harassment prevention policy must be provided to all employees in writing, and sexual harassment prevention training must be provided to all employees on an annual basis.

The Department of Labor has released a model policy that employers may utilize in their adoption of a sexual harassment prevention policy required under the new law (available here), as well as a model sexual harassment prevention training program (available here).

-Ahsaki Benion