An attempt by two states to force the Trump administration to resume collecting information about donors to certain nonprofit groups faces a key test Wednesday when a federal judge in Montana hears arguments about whether the states can challenge the IRS policy.
Montana Gov. Steve Bullock and New Jersey Attorney General Gurbir Grewal sued the Internal Revenue Service after it ended a 40-year-old requirement last year that social-welfare groups, labor unions and business associations turn over the names and addresses of their donors who contribute more than $5,000.
The state officials argue the change makes it easier for deep-pocketed donors to hide their political spending by funneling money anonymously to tax-exempt groups that aim to influence elections under the guise of educational and issue ads.
IRS officials contend the states have no right to sue over the rule change and that neither had ever requested the donor information when the federal agency was collecting it. U.S. Justice Department attorney Joseph Sergi said in a court filing the lawsuit is "an attempt to dictate to the IRS the information it must collect from federal taxpayers and turn over to the state for its own state purposes."
Sergi will be one of the attorneys asking U.S. District Judge Brian Morris to throw out the lawsuit at Wednesday's court session. Justice Department officials declined to comment before the hearing.
Bullock is running for the Democratic nomination for president and the little-known governor of the sparsely populated state has made campaign-finance disclosure a key issue as he looks to stand out among the nearly two dozen candidates.
He filed the lawsuit last July in his official capacity as governor and without the support of Attorney General Tim Fox, a Republican whose office normally represents the state in such litigation.
Grewal, a Democratic appointee, joined the lawsuit in March on behalf of New Jersey.
The donor disclosure forms filed by groups that are registered under section 501c(4) of the U.S. tax code have never been available to the public. But the policy change cuts off one of the only avenues government regulators have to investigate whether foreign money is being funneled to those groups, said Brendan Fischer, the director of the federal reform program of the Washington, D.C.-based Campaign Legal Center.
"If Russia or another country wants to influence the 2020 elections, they might give their money to a 501c(4)," he said.
The IRS' failure to collect the donor information makes it difficult for state officials to track suspicious campaign activity, determine who's following the law and alert fraud victims, attorneys for the states plan to argue.
New Jersey requires tax-exempt organizations to submit copies of their federal donor disclosures to state officials, while Montana relies on the IRS' standards - including donor disclosures - in making its own decisions about tax-exempt organizations, attorneys for the states argue.
Grewal and Bullock say the IRS rule change was illegal because it happened without public notice.
They contend the IRS' argument that the states haven't directly sought donor information from the agency is meaningless, because federal tax law protects the states' interests in what information is gathered.
They are asking the judge to rule in their favor without a trial.
Bullock spokeswoman Marissa Perry declined to comment.
IRS officials say the procedural change is not subject to public notice or comment, so they complied with the law. They point out that the nonprofit organizations are still required to collect donor information, but only have to turn it over to the IRS upon request.
Sergi, the Justice Department attorney, argued in court documents the states could request the information directly from the tax-exempt organizations, and that New Jersey is updating its rules to do so.