AuthorHackney, Philip

I.Introduction 142 II.Tax-Exempt Law Requirements 150 A.Social Welfare Organization Requirements 150 B.Business League Requirements 157 C.Other Tax Law Considerations 161 III.Information Return & Reporting Matters 164 A.Information Return Requirements 165 B.Information Reporting. 170 C.Enforcement Environment 175 D.Democratic Function of Disclosure 179 IV.Importance to Ancillary Legal Matters 188 A.What Role Can Income Tax Administration Play in Enforcing Ancillary Legal Regimes? 189 B.Campaign Finance Law 191 C.State Nonprofit Law and Consumer Protection 199 V.Analysis 205 VI.Conclusion 213 I. INTRODUCTION

On July 16, 2020, an FBI Agent in the Southern District of Ohio filed a criminal complaint against Larry Householder, the Speaker of the House of Representatives of the state of Ohio, along with several other defendants, including a social welfare organization claiming to be exempt under section 501(c)(4), for a $60 million bribery scheme related to state energy policy. (1) One defendant is quoted telling a p rticip nt that their bribery scheme was not likely to be discovered because of the use of a social welfare organization:

Clark discussed with Householder, the use of a 501(c)(4), controlled by Householder, to receive payments: "what's interesting is that there's a newer solution that didn't occur in, 13 years ago, is that they can give as much or more to the (c)(4) and nobody would ever know. So you don't have to be afraid of anyone because there's a mechanism to change it." (2) Clark was likely referring to the fact that in 2020, the IRS ended a longstanding rule (3) requiring tax-exempt organizations to disclose substantial donor names and addresses on Schedule B to the Form 990, the annual tax information return of nonprofits. (4) The Treasury regulation, still applicable to charitable organizations described in section 501(c)(3) and political organizations described in section 527, (5) generally req ired tax-exempt organizations to disclose the names and addresses of donors who contributed $5,000 or more during the tax year. (6) This disclosure requirement is a hotly contested partisan issue. Republicans tend to support the end of the collection of this donor information, while Democrats tend to support its maintenance. It is largely seen as a battle over campaign finance rather than tax enforcement. (7) In this Article, I focus on whether the information is needed for the enforcement of the tax law and/or to support ancillary legal regimes. Ancillary legal goals might include the transparent operation of nonprofits in a national sense, and as back-up support for legal regimes such as campaign finance and state law enforcement associated with nonprofit organizations. (8)

The IRS ought to collect this substantial donor information as it did for more than 78 years. (9) Though the collection of donor information may not be essential for groups such as social clubs, (10) fraternities and sororities, (11) and mutual ditch companies, (12) the collection from "dark money" organizations, such as social welfare organizations (13) and business leagues, (14) likely has a real impact on the enforcement of the tax law with respect both to tax-exempt organizations and to the individuals who contribute to them. (15) Additionally, the collection of that information is an inexpensive way to try to stymie illegal activity. (16) Finally, considering the deficient budget of the IRS, (17) the failure to collect that information gives up an inexpensive, unintrusive method of enforcing the law.

Most nonprofits meet their primary tax compliance requirement with the IRS by filing an annual information return called the Form 990. (18) The Treasury Department gave the Commissioner the authority in the regulations to relieve any organization in whole or in p rt from the requirements to file a return. (19) Over the years, the IRS exercised this relief authority provided to the Commissioner through revenue procedures. (20) In 18, the IRS moved to relieve all eemt organizations except charitable ones and political organizations under section 527 from the donor disclosure requirements in a revenue procedure. (21) After a federal district court in Bullock found the IRS had violated the Administrative Procedure Act by changing its rule without going through the notice and comment rocess, (22) Treasury instead adopted the elimination of this donor information through regulations. (23)

In the final regulations, the IRS states that it does not believe it needs the donor information to police the private benefit rules applicable to tax- exempt organizations. (24) It says that it needs the information rimarily on eamination and that it could easily obtain the information at that stage. The IRS accepts that disclosure of this donor information is sensitive and should remain private in part because such disclosure could lead to harassment of donors. It believes that not requiring the information will cut down on inadvertent disclosure. (25) Finally, the IRS concludes that the comliance burden could be reduced by not having to report information that is not needed. Though it admits that it at times has a duty to coordinate with other agencies on matters of campaign finance, the IRS roundly rejects the idea that its job includes enforcing campaign finance laws. (26) It stakes out a similar osition with respect to state enforcement i.e., state enforcement is not in the job description of the IRS. (27) Still, the IRS requires organizations to maintain this information for purposes of a later examination. (28)

Fortunately, and rightly, the IRS did not eliminate the requirement for charitable organizations. Donor information is key to charitable organization oversight under the tax law. It allows the IRS to see to whom an organization might be distributing earnings potentially violating the absolute prohibition on inurement placed on charitable organizations. (29) Though the Form 990 already requires organizations to provide the IRS information on some problematic transactions, like related-party transactions reported on Schedule L, (30) there are many benefits and relationships of a nonprofit that an auditor might overlook in the absence of the knowledge that the person who received those benefits or entered those relationships was a substantial contributor. The recent college admissions scandal perhaps highlights the usefulness of requiring an organization to provide that information to the IRS. (31) Of course, this information is statutorily required for charitable organizations. (32)

The most intensely fought political battle over disclosure of donor information involves section 501(c)(4) and (6) organizations. Many refer to section 501(c)(4) social welfare organizations and section 501(c)(6) business leagues as "dark money organizations" because they need not publicly disclose their donors; yet many of these organizations actively attempt to influence our political campaigns and legislators. In the political battle, Democrats typically argue that this system provides an end run around campaign finance disclosure law by allowing individuals and corporations to engage in politics anonymously. Key to this notion is that anonymous donations lead to corruption and that access to information is a liberal right that must accompany a well working democracy or polyarchy. (33) That said, the previous system was only quasi-disclosure; with the exception of private foundations and political organizations, donor names and addresses on the Schedule B are not disclosed to the public but only disclosed to the IRS. Opponents of disclosure, often Republicans, worry disclosure harms the important right of freedom of association and speech. Additionally, there is a potential harm to the IRS as a governing agency in overseeing politics-related activity. (34) Each of these is a real concern. This Article will consider each and provide a recommendation regarding what p th the IRS should take.

There are numerous factors to consider in the donor disclosure question in addition to those related directly to the law of tax-exempt organizations. One factor is the role of information reporting on the Form 990. The return serves two primary functions: (1) to inform the IRS about facts related to matters of tax, and (2) to provide the public information about nonprofit entities that helps the public to hold these organizations accountable. Though most of the Form is publicly disclosed, this donor information was and generally is not. (35)

There is a need for the return to provide the necessary information for a nonprofit to prove qualification for its tax-exempt status under the Code, an information reporting role, and a prophylactic function. In addition to using the form to determine whether organizations qualify for tax-exempt status, the IRS should be using the information it generates from the Form 990 to crosscheck other information like the tax treatment individuals choose regarding contributions they make to a nonprofit. But, the form is not just useful in providing a roadmap to an investigation; there is good work showing that the reporting of information can serve to hinder people from breaking the law in the first place, much like a red light camera. Considering the anemic enforcement resources we dedicate to the IRS, (36) and to overseeing the nonprofit sector, we should maximize the ability of relatively cheap mechanisms like information reporting to ensure tax compliance.

As to the public information role, the public nature of the form provides the public with information to promote public accountability for these organizations engaging in collective activity on our behalf. Notably, there are no shareholders of nonprofits to ensure the managers operate the organization to further its mission--the public disclosure of the Form allows individuals and states attorneys general to hold misused nonprofits to account. That said, Congress does not...

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