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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, July 25, 2018

NY Times: Montana Governor Sues IRS, Warning Of ‘Foreign Money’ In Elections:

New York Times, Montana Governor Sues I.R.S., Warning of ‘Foreign Money’ in Elections:

Gov. Steve Bullock of Montana, a Democrat who has crusaded against the loosening of campaign finance rules, is suing the Trump administration to block it from eliminating a mandate that politically active nonprofit groups disclose the identities of their major donors to the government.

The Treasury Department announced last week that the Internal Revenue Service would no longer require a range of nonprofit organizations to identify any contributors giving more than $5,000, in a move it described as bolstering privacy and easing administrative burdens for those groups. Previously, certain nonprofits had to name their large donors to the government even though they were not supposed to be disclosed to the public.

The change in rules stirred immediate political controversy because of its effect on so-called “dark money” groups, which spend money in elections but are not required to reveal the sources of their funding except to the I.R.S. Under the new reporting regime, groups associated with organizations like the National Rifle Association, Planned Parenthood and Americans for Prosperity, the conservative advocacy network backed by the billionaire Koch brothers, would no longer have to list their donors, even to the government.

But in a lawsuit filed on Tuesday in Federal District Court in Montana, Mr. Bullock and his administration alleged that the Trump administration had flouted proper government process in eliminating the disclosure requirements. The suit asked the court to issue a judgment voiding the new I.R.S. policy. ...

The Montana litigation claims that the federal government failed to follow the Administrative Procedure Act, a law that has been the basis for other suits charging the Trump administration with improper or capricious rule making. The suit accuses the I.R.S. of evading important regulatory requirements, like the mandate to seek public comment before rewriting government rules, and of rewriting policy under the guise of adjusting what the I.R.S. termed a “revenue procedure.”

Mr. Bullock said that because Montana currently uses I.R.S. information to administer nonprofits at the state level, the abrupt policy shift could hobble its ability to conduct oversight and collect revenue.

Slate:  Montana vs. the Koch Brothers, by Daniel Hemel (Chicago):

The revenue procedure of the IRS ... is legally flawed in at least two ways. First, a 1946 federal law, the Administrative Procedure Act, requires agencies to give the public an opportunity to comment before promulgating, modifying, or repealing a “substantive” rule—such as a rule that imposes binding legal obligations on private parties. The new IRS policy should qualify as a substantive rule under that provision of the APA. ...

Second, the Supreme Court has held that an agency “must supply a reasoned analysis” before it promulgates, modifies, or repeals a substantive rule. This requirement—known as the State Farm doctrine—stems from the Administrative Procedure Act’s prohibition on “arbitrary” and “capricious” agency action. The agency’s “reasoned analysis” must demonstrate that its decision “was based on a consideration of the relevant factors” and that the agency has not “entirely failed to consider an important aspect of the problem.” The IRS revenue procedure flunks that standard too. ...

So why did the IRS act so hastily to eviscerate a rule that had applied to 501(c)(4) groups for nearly a half-century? For one thing, it faced heavy pressure from conservative activists: The Koch brothers’ Americans for Prosperity group, among others, had urged President Trump and Treasury Secretary Steven Mnuchin to make the change. And because the IRS moved quickly through a revenue procedure instead of waiting for public comments, its new policy can take effect for tax year 2018—which means that millions of dollars can pour into midterm races without the names and addresses of donors being reported.

The federal district court in Great Falls, Montana, which now has the state’s lawsuit, should set aside the IRS revenue procedure and send the agency back to the drawing board. To be sure, a comprehensive solution to the dark-money phenomenon requires legislation, and the Senate so far has declined to take up a bipartisan proposal that would mandate that 501(c)(4) organizations disclose their significant donors if they intervene in electoral campaigns. In the meantime, Montana’s lawsuit is one of the few efforts that can stop the world of dark money from going pitch-black. 

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