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Donor Disclosure: More Upheaval Coming

Dark Money

The simmering donor-disclosure, “dark-money,” battle is set to heat up considerably in the next few months.

There were three specific developments in January 2021 directly or indirectly related to this contentious issue: (a) January 6, 2021: Capitol Insurrection (allegations of dark-money funding); (b) January 11, 2021: Supreme Court grants certiorari in California donor-disclosure challenge; and (c) January 20, 2021: Biden Administration imposes freezes or temporary holds on recent federal rulemaking.

As each unfolds over the next weeks or months, we may see confirmations of the status quo or significant shakeups in the donor-disclosure rules at the federal and state levels.  [Note: That was quick; see 2/3/21 and 2/5/21 updates below]  

       Donor Disclosure Rules

Just a few months ago, in connection with the issuance of proposed regulations for the 501(c)(4) disclosure rules, we wrote: “If you aren’t clear about whether a tax-exempt organization must disclose its donors or not, the rest of us say: ‘Welcome to the club.’” See  Disclosure Of Donors: Latest Update (October 3, 2019)  There, we summarized the federal disclosure rules for all organizations. They have been clear-cut for many decades, but recently have come under fire from certain quarters. 

Also helpful is the IRS’s web page, Exempt Organization Public Disclosure and Availability Requirements. There, you’ll find a link to the excellent “Stay Exempt Educational Series” including the Required Disclosures Course, cartoon-hosted by Legal, the StayExempt Eagle.  

In many states, particularly those with attorneys general who are active in charity regulation, the goal is more rather than less disclosure and transparency of dark money.

       Developing Disclosure Stories

For the time being, we’re presenting brief summaries only; two of the three matters are rapidly developing – and changing – stories. 

            January 6th Events

Almost as soon as the storming of the Capitol was quelled, there were deeply troubling reports about alleged financing by “dark money” as well as direct and indirect promotion and endorsement of these activities by certain 501(c)(4) organizations. Later, evidence emerged that some of the groups involved were 501(c)(3)s. 

On January 15, 2020, Senator Ron Wyden (D-OR), the incoming Chair of the Senate Finance Committee, sent a no-holds-barred letter to IRS Commissioner Charles Rettig, demanding an investigation and action. “Not only are acts of terrorism or violence committed by an organization grounds for revocation of exempt status, but any 501(c)(3) or 501(c)(4) organization that encourages, plans, or support, an illegal act may be subject to revocation.”

Senator Sheldon Whitehouse (D-R.I.) is also pressing hard for action and investigations. See A top Senate Democrat calls for IRS probe of dark-money groups that helped organize rally before riot (January 15, 2021) Brian Schwartz, CNBC; Democrats to target IRS in probe of tax-exempt pro-Trump groups that organized rally before Capitol riot (January 22, 2021) Brian Schwartz, CNBC.

The IRS reportedly has agreed to respond to these calls for investigation and action. 

            Supreme Court Case

In a saga lasting several years, two conservative-leaning charitable organizations have been suing to have the California donor-disclosure requirement struck down on constitutional grounds. They were successful at the district court level, but the Ninth Circuit overturned that decision, ruling for California. 

On January 11, 2021, the U.S. Supreme Court granted the two groups’ petitions for certiorari. The cases now consolidated for hearing are: Americans for Prosperity Foundation v. Becerra and Thomas More Law Center v. Becerra [up-to-date docket histories from SCOTUSblog including links to all court decisions as well as party and amici curiae briefs]. See Political Privacy Update: Supreme Court to Hear Two Donor Privacy Cases From California (January 21, 2021) Lee Goodman, Esq., Wiley Rein LLP and US Supreme Court takes up dispute over California nonprofit donor disclosure requirement (January 8, 2021) Lawrence Hurley, Reuters.

“California’s donor reporting rules simply require charities to provide the state, on a confidential basis, the same information about major donors that they already provide to the federal government,” said Attorney General Becerra in a press release upon learning of the Supreme Court’s acceptance of these cases for hearing in the current term. “This information helps the state protect consumers from fraud and the misuse of their charitable contributions. We look forward to defending our rules before the Supreme Court.”

The most intriguing brief – filed last fall in support of the two organizations’ petition for certiorari and against the Ninth Circuit’s decision in favor of California – is by the United States Department of Justice. See Political Privacy Update: Solicitor General Supports Certiorari in California Donor Privacy Cases (December 23, 2020) Lee Goodwin, Esq., Wiley Rein LLP.

While – undoubtedly – the Biden Administration will withdraw its support, the challengers could win this case, given the current roster of the U.S. Supreme Court. That result could affect other states’ laws as well as the continuing viability of the long-standing federal rule favoring disclosure. 

            Rulemaking Freeze

In the afternoon of Inauguration Day, the new Administration ordered a freeze on all federal rulemaking in progress. In the tax field, this would include not only formal regulations but also “subregulatory” documents including revenue rulings and revenue procedures.  This government-wide action issued by Chief of Staff Ron Klain on the President’s behalf also includes a 30-day temporary freeze on all final rulemaking officially published in the Federal Register within the past sixty days. See Regulatory Freeze Pending Review (January 20, 2021) whitehouse.gov. 

This review and hold by the new Administration will affect the future viability of a set of proposed regulations on the issue of donor disclosure in 501(c)(4) organizations. They were published in the Federal Register on September 10, 2019, with a 60-day public-comment period. These proposed regulations were drafted as a replacement after a federal court nixed the Treasury/IRS’s earlier attempt to change these long-standing donor-disclosure rules via a “subregulatory” method; that is, through Revenue Procedure 2018-38. See our update post from last October.

The last Administration had not yet circulated or officially published any final regulations in this matter. The chances that the new Administration will maintain or in any way continue or endorse this attempted relaxation of the 501(c)(4) disclosure rules: About … zero. 

       Conclusion

We’ll follow-up and report on any developments as they come into more precise view in the coming weeks and months.

[Update: 2/3/21]: Senate Finance Committee members Sheldon Whitehouse (D-R.I.) and Elizabeth Warren (D-MA) sent a detailed letter to newly confirmed Treasury Secretary Janet Yellin, touching on each of the points raised in this post. Following up on matters discussed at the recent confirmation hearing, the lawmakers ask for immediate, strong, and comprehensive action. Specifically, they seek better regulation of dark money to, and overly political activity of, 501(c)(4)s. They also request withdrawal of the last Administration’s proposed regulations lessening 501(c)(4) donor-disclosure duties as well as a formal change of position in connection with the pending Supreme Court case on the California donor-disclosure law.  See Senator Whitehouse’s press release including the full text of letter to Secretary Yellin.

[Update: 2/5/21] Rep. David Price (D-NC) introduced the Spotlight Act in House on 2/3/21; companion bill introduced in Senate by Jon Tester (D-MT) and Ron Wyden (D-OR). Proposes rescinding the last Administration’s donor-disclosure shield for 501(c)(4)s, (5)s, and (6)s and goes one step further requiring public disclosure of identities of major donors who contribute $5,000 or more annually. Similar language is included under the “Secret Money Transparency” provision in H.R. 1, “The For the People Act” which proposes sweeping democracy reform and better voting-rights protections.

            — Linda J. Rosenthal, J.D., FPLG Information & Research Director 

 

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