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Bullock v. Internal Revenue Service

United States District Court, D. Montana, Great Falls Division

July 30, 2019

STEPHEN C. BULLOCK, in his official capacity as Governor of Montana; MONTANA DEPARTMENT OF REVENUE; STATE OF NEW JERSEY, Plaintiffs,
INTERNAL REVENUE SERVICE; CHARLES RETTIG, in his official capacity as Commissioner of the Internal Revenue Service; UNITED STATE DEPARTMENT OF THE TREASURY, Defendants,


          Brian Morris United States District Court Judge

         The Court addresses two motions. Defendants Internal Revenue Service (“IRS”), Charles Rettig in his official capacity as Commissioner of the Internal Revenue Service, and the United States Treasury (collectively “Defendants”), move the Court to dismiss this action for lack of subject matter jurisdiction and for failure to state a claim, pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6). (Doc. 31). Plaintiffs Stephen C. Bullock in his official capacity as the Governor of Montana, the Montana Department of Revenue, and the State of New Jersey (collectively “Plaintiffs”) move the Court for summary judgment as to Count One of their Amended Complaint. (Doc. 41). Count One asks the Court to hold unlawful and set aside the IRS's promulgation of Revenue Procedure 2018-38, and order the IRS to follow the procedure for rulemaking as required by the Administrative Procedure Act (“APA”). (Doc. 16 at 26-27).

         The Court held a hearing on these motions on June 5, 2019. (Doc. 56). The Court will address first the issue of whether the Plaintiffs possess standing sufficient for purposes of Article III to survive Defendants' motion to dismiss. The Court next will address Plaintiffs' motion for summary judgment as to Count One of their Amended Complaint.


         The Internal Revenue Code imposes federal taxes on all entities on income from any source. Certain organizations remain exempt from various taxes if the organization qualifies as one of twenty-eight types of nonprofit organizations. 26 U.S.C. § 501(c), (c)(3). These exempt organizations include those organized and operated exclusively for charitable, educational, and similar purposes. Id. Federal law largely exempts those entities from federal income taxes, but the entities must meet certain substantive requirements to qualify for tax-exempt status. For example, § 501(c)(4) groups generally must be “operated exclusively for the promotion of social welfare.” 26 U.S.C. § 501(c)(4).

         Section 6033 of the Internal Revenue Code requires exempt organizations to file annual information with the IRS. 26 U.S.C § 6033. Each organization exempt from taxation must file an annual return “stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.” 26 U.S.C § 6033(a)(1). The statute also contains a discretionary exception that allows the Secretary to “relieve [most exempt organizations] . . . from filing such a return where he [or she] determines that such filing is not necessary to the efficient administration of the internal revenue laws.” 26 U.S.C. § 6033(a)(3)(B).

         The IRS by regulation had required most exempt organizations to report on Schedule B of Form 990 the “names and addresses of all persons who contributed . . . $5, 000 or more” during the taxable year. 26 C.F.R. § 1.6033-2(a)(2)(ii)(f). The IRS had required by regulation that the exempt organizations described in § 501(c)(7) (social clubs), § 501(c)(8) (fraternal beneficiary societies), or § 501(c)(10) (domestic fraternal societies), report on Schedule B the names of each donor who contributed more than $1, 000 during the taxable year to be used exclusively for certain religious, charitable, or educational purposes. 26 C.F.R. § 1.6033-2(a)(2)(iii)(d). Section 1.6033-2 serves the principle purpose of collecting and centralizing annual information regarding money acquired by exempt organizations.

         Federal law permits states and their tax agencies to collect and use federal return information gathered by the IRS. 26 U.S.C. §§ 6103, 6104. Section 6103(d) provides for federal and state information sharing of “[r]eturns and return information with respect to taxes imposed by” a broad swath of the federal tax code. This information “shall be open to inspection by, or disclosure to, any State agency, body, or commission” that is “charged under the laws of such State with responsibility for the administration of State tax laws, . . . for the purpose of . . . the administration of such laws.” 26 U.S.C. § 6103(d). A state also may enter into a disclosure agreement with the IRS pursuant to § 6104(c). Neither Montana nor New Jersey has entered into a disclosure agreement with the IRS.

         Congress noted that federal and state information sharing serves two primary purposes when it updated § 6103(d) in 1976. Sharing information first helps ensure that people and organizations follow the tax laws. Congress reasoned “that it is important that the States continue to have access to Federal tax information for tax administration purposes. With Federal tax information, the States are able to determine if there are discrepancies between the State and Federal returns in, e.g., reported income.” Staff of Joint Comm. On Taxation, 94th Cong., General Explanation of the Tax Reform Act of 1976 (Comm. Print 1976), 1976 WL 352412, at *32. Sharing tax information also relieves state governments from the burden of expending resources to gather information already obtained by the IRS. Congress highlighted the fact that “many States have only a few, if any, of their own tax auditors and rely largely (or entirely) on Federal tax information in enforcing their own tax laws.” Id.

         New Jersey alleges that it has received the names and addresses of significant contributors through the Schedule B forms. (Doc. 42 at 19). New Jersey alleges that the substantial-contributor information previously contained in the Schedule B form has allowed its Division of Consumer Affairs to track contributions over time. Id. New Jersey further alleges that this tracking of contributions has allowed it to 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. Id. at 20. New Jersey also requires certain organizations claiming tax-exempt status to file registration statements that must include a “complete copy of the charitable organization's most recent [IRS] filing(s), ” including “[a]ll schedules.” Id.; N.J. Admin. Code § 13:48-4.1(b)(7). New Jersey thus obtained substantial-contributor information through the IRS's Schedule B forms given to the state pursuant to state tax laws. (Doc. 42 at 21).

         Montana similarly requires entities claiming tax-exempt status to report whether they have received a federal exemption. See Agreement on Coordination of Tax Administration between the MTDOR and the IRS (Doc. 45-1). Federal law and Montana law contain similar standards. The IRS's regulations require entities to submit the necessary information for exemption determinations. Montana alleges that it relies on the IRS's information regarding its exemption determinations when making its own exemption determinations under state law. Walborn Decl. (Doc. 45 at ¶¶ 9-10); (Doc. 42 at 21).

         The collection of donor information changed when the IRS issued Revenue Procedure 2018-38. Revenue Procedure 2018-38 eliminated the IRS's previous requirement contained at 26 C.F.R. § 1.6033-2 that exempt organizations report donor information. Rev. Proc. 2018-38 at 1. Revenue Procedure 2018-38 applies to all 501(c) groups except 501(c)(3) charitable organizations. Id. The instructions to the 2018 Schedule B to Form 990 incorporate these changes and inform exempt organizations of these changes. (Doc. 32 at 10). Revenue Procedure 2018-38 specifies that exempt organizations still must collect and maintain the donor information. The exempt organizations now must make it available to the IRS only upon a specific request. Rev. Proc. 2018-38 at 1. The IRS maintains its ability to demand this donor information should the IRS determine that this information would be relevant. (Doc. 32 at 10).

         I. Motion to Dismiss

         A motion to dismiss tests the legal sufficiency of the claims asserted in the complaint. Fed.R.Civ.P. 12(b)(6). A court should not dismiss a complaint unless it appears beyond doubt that plaintiffs can prove no facts sufficient to support a claim that entitles plaintiffs to relief. Hicks v. Small, 69 F.3d 967, 969 (9th Cir. 1995). The Court must assume at this stage that all allegations in Plaintiffs' complaint are true and draw reasonable inferences in Plaintiffs' favor. Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).

         A. Standing

         Defendants argue that Plaintiffs lack Article III standing. Defendants contend that Plaintiffs possess no legally protected interest in receiving donor information from the IRS and thus have suffered no actual harm caused by Revenue Procedure 2018-38. (Doc. 32 at 14-15). The Court must consider whether New Jersey or Montana has suffered a “concrete and demonstrable injury to [its] activities, ” mindful that “a mere setback to [Montana's and New Jersey's] abstract social interests” remains insufficient. Equal Rights Ctr. v. Post Props., Inc., 633 F.3d 1136, 1138 (D.C. Cir. 2011).

         An injury must be “concrete, particularized, and actual or imminent” in order to establish Article III standing. Clapper v. Amnesty Int'l USA, 568 U.S. 398, 409 (2013). The injury must be “fairly traceable to the challenged action” and be “redressable by a favorable ruling.” Id. At the pleadings stage, “general factual allegations of injury resulting from the defendant's conduct may suffice.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). The Court may presume that these “general allegations embrace those specific facts that are necessary to support the claim.” Oregon v. Legal Serv. Corp., 552 F.3d 965, 969 (9th Cir. 2009).

         The deprivation of information can rise to a level sufficient to establish an Article III injury for the purposes of standing. The D.C. District Court in Public Citizen v. Carlin, 2 F.Supp.2d 1, 9 (D.D.C. 1997) (reversed on other grounds), determined that a group of researchers, historians, and journalists possessed standing to challenge the decision of the Acting Archivist of the United States to authorize the disposal of information contained in government documents and records. The plaintiffs argued that the information contained in the documents proved necessary for the dissemination of that information through plaintiffs' public record libraries, research projects, and journal articles. Id. at 6.

         The district court acknowledged that this deprivation of information worked a “distinct and palpable injury.” Id. Plaintiffs demonstrated that they previously had relied, and would continue to rely, on the withheld information for purposes of their work. Id. The injury remained true despite the fact that the plaintiffs could request the records in electronic form through a Freedom of Information Act (“FOIA”) request. Id. The record cited by plaintiffs stood as “ample evidence that the individual plaintiffs and members of plaintiff organizations have been or will be directly harmed” by the Archivist's action of authorizing the destruction of previously used and available information. Id. at 6. Defendants suggest that Plaintiffs fail to meet an informational injury similar to Public Citizen. Defendants argue that an “informational injury can give rise to standing only when access to that information is statutorily guaranteed.” (Doc. 32 at 16). The principle upheld in Public Citizen sweeps more broadly than the notion that an informational injury occurs only when a statute guarantees information to a specific plaintiff. The district court determined instead that an informational injury exists when the plaintiff can show that it has relied on, and will further seek, the information that must be ...

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