A federal district court has ruled that the IRS violated federal law when it adopted Revenue Procedure 2018-38, which provides that exempt organizations other than 501(c)(3)s no longer need to provide donor information on Schedule B. Revenue Procedure 2018-38, which we blogged about last year, represented a change in longstanding practice by the IRS and caused public outcry due to the reduced transparency around contributions.

The court’s ruling focuses not on the substance of whether the IRS can legitimately decide to no longer require the donor information. Rather, it hinges on the procedure that needs to be followed in doing so. For administrative law buffs, it is a matter of whether Revenue Procedure 2018-38 is a legislative rule or an interpretative rule under the Administrative Procedure Act (“APA”). A legislative rule—which has been defined in case law as creating rights, imposing obligations or effecting change in existing law—needs to go through a public notice-and comment process. An interpretive rule, which explains but does not add to existing substantive law, does not.

The court held that Revenue Procedure 2018-38 is a legislative rule, and as such that the IRS violated the APA in issuing the procedure without going through the notice-and-comment period. The court stated that the IRS’ promulgation of the procedure appears to represent an attempt to “evade the time-consuming procedures of the APA.” It also noted that the procedure represents a change in a nearly 50-year practice required under Treas. Reg. 1.6033-2(a)(ii)(f) and effectively amends this existing rule.

The lawsuit resulting in this decision was a joint effort between the states of Montana and New Jersey, and New Jersey Attorney General Gurbir S. Grewal applauded the ruling:

“This decision is a big win for democracy and for the rule of law. Not only did the IRS try to make it easier for dark money groups to hide their funding sources, it did so behind closed doors, without seeking public input. By setting the IRS’s decision aside, the court has ensured that the IRS will be held accountable for its actions – and dark money groups can be held accountable for theirs.”