Supreme Court Reverses Ninth Circuit; Rejects California's Donor Disclosure Law

(Parker Tax Publishing July 2021)

The Supreme Court reversed a decision by the Ninth Circuit and held that charitable organizations soliciting funds in California do not have to disclose on their Form 990, Return of Organization Exempt From Income Tax, Schedule B, the identities of major donors. The Court concluded that the disclosure requirement under California law was facially invalid because it burdened donors' First Amendment rights and was not narrowly tailored to an important government interest. Americans for Prosperity Foundation v. Bonta, 2021 PTC 192 (S. Ct. 2021).

Background

Americans for Prosperity Foundation (AFP) is a Code Sec. 501(c)(3) nonprofit corporation that describes itself as an organization of grassroots leaders who engage citizens in the name of limited government and free markets on the local, state and federal levels. It funds its activities by raising charitable contributions from donors throughout the country, including in California. The Thomas More Law Center is a Code Sec. 501(c)(3) non-profit interest law firm "whose mission is to protect religious freedom, free speech, family values, and the sanctity of human life."

California state law requires charitable organizations to file a copy of its IRS Form 990, Return of Organization Exempt From Income Tax, including Schedule B, with the California State Registry. An organization's Schedule B includes all the names and addresses of every individual nationwide who donated more than $5,000 to the charity during a given tax year. While a nonprofit's IRS Form 990 must be made available to the public, Code Sec. 6104 provides that an organization's Schedule B does not have to be made available to the public.

Beginning in 2001, AFP filed its Form 990 as part of its periodic reporting with the California Attorney General, without including its Schedule B. The Attorney General accepted AFP's filings and listed AFP as an active charity in compliance with the law. In 2010, California increased its enforcement of charities' Schedule B disclosure obligations. In 2013, the Attorney General declared AFP's 2011 filing incomplete because it did not include the organization's unredacted Schedule B. In response AFP asked a district court in Central California to enjoin the Attorney General from demanding its Schedule B. Among other claims, AFP argued that the California law requiring disclosure of its Schedule B to the Attorney General was facially unconstitutional as it violated AFP's First Amendment rights. AFP also argued that its employees, supporters and donors faced public threats, harassment, intimidation, and retaliation once their support for, and affiliation with, the organization became known. The Thomas More Law Center also challenged the law in the same district court.

The California Attorney General argued that the state law requiring that all charities file a complete copy of IRS Form 990 Schedule B placed no actual burden on First Amendment rights and was substantially related to the Attorney General's compelling interest in enforcing the law and protecting the public. The Attorney General argued that the state's use for Schedule B information is compelling since that information reveals not just how much revenue a charity receives, but also who is donating it and how it is being donated. Additionally, the Attorney General claimed that such information allows the state to determine whether an organization has violated the law, including laws against self-dealing, improper loans, interested persons, or illegal or unfair business practices. The Attorney General also argued that it was only seeking disclosure of Schedule B information for nonpublic use and, therefore, there was no potential for public targeting of private donors. The district court granted AFP's and the Law Center's requests for an injunction prohibiting the state of California from requesting Schedule B information. The court held that disclosure of Schedule B information was not narrowly tailored to the state's interest in investigating misconduct by charitable organizations and found little evidence that the Attorney General's investigators relied on Schedule Bs to detect charitable fraud. The court determined that the disclosure regime burdened the associational rights of donors and also found that California was unable to ensure the confidentiality of donors' information.

The California Attorney General appealed to the Ninth Circuit which reversed both district court decisions and remanded the cases. On remand, the district court held bench trials in both cases, after which it entered judgment for both organizations and permanently enjoined the Attorney General from collecting their Schedule B information. The California Attorney General appealed.

A panel of the Ninth Circuit vacated the district court's injunctions, reversed the judgments and remanded for entry of judgment in favor of the Attorney General. The Ninth Circuit held that the district court had erred by imposing a narrow tailoring requirement. And it reasoned that the disclosure regime satisfied exacting scrutiny because the up-front collection of charities' Schedule Bs promoted investigative efficiency and effectiveness. The panel also found that the disclosure of Schedule B information would not meaningfully burden donors' associational rights. The Ninth Circuit denied rehearing en banc. Four Ninth Circuit judges dissented, arguing that the panel had impermissibly overridden the district court's factual findings and evaluated the disclosure requirement under too lenient a degree of scrutiny.

AFP and the Law Center appealed the decision to the Supreme Court and were granted certiorari. Before the Supreme Court, the organizations argued that the obligation to disclose Schedule Bs to the Attorney General was unconstitutional on its face and as applied to them. In the alternative, they argued that they were entitled to as-applied relief.

Analysis

The Supreme Court, in a 6-3 decision, reversed the Ninth Circuit and held that California's blanket demand for Schedule Bs is facially unconstitutional. In reaching its decision, the majority cited at its decision in NAACP v. Alabama, 357 U.S. 449 (1958), in which it held that compelled disclosure of affiliation with groups engaged in advocacy may constitute as effective a restraint on freedom of association as other forms of governmental action. In that case, as part of an effort to oust the NAACP from Alabama, the Alabama Attorney General sought the group's membership lists. The Supreme Court held that the First Amendment prohibited such compelled disclosure. Because NAACP members faced a risk of reprisals if their affiliation with the organization became known, and because Alabama had demonstrated no offsetting interest sufficient to justify the deterrent effect of disclosure, the Court concluded that Alabama's demand for the group's membership lists violated the First Amendment. That decision, however, did not phrase in precise terms the standard of review that applies to First Amendment challenges to compelled disclosure.

In Buckley v. Valeo, 424 U.S. 1 (1976), the Court articulated an "exacting scrutiny" standard, which requires a substantial relation between a disclosure requirement and a sufficiently important governmental interest. Exacting scrutiny, the Court said, requires that a government-mandated disclosure regime be narrowly tailored to the government's asserted interest, even if it is not the least restrictive means of achieving that end. The Court noted that the need for "narrow tailoring" was set forth early in the Court's compelled disclosure cases. In Shelton v. Tucker, 364 U.S. 479 (1960), the Court considered an Arkansas statute that required teachers to disclose every organization to which they belonged or contributed. The Court invalidated the Arkansas statute because even a legitimate and substantial governmental interest cannot be pursued by means that broadly stifle fundamental personal liberties when the end can be more narrowly achieved. Shelton, the Court noted, stands for the proposition that a substantial relation to an important interest is not enough to save a disclosure regime that is insufficiently tailored. Where exacting scrutiny applies, the Court said, the challenged requirement must be narrowly tailored to the interest it promotes.

The Court observed that the Ninth Circuit found a substantial relation between the Attorney General's demand for Schedule Bs and a sufficiently strong governmental interest. Of particular relevance to the Supreme Court was the fact that the Ninth Circuit found that California had an interest in preventing charitable fraud and self-dealing, and that "the up-front collection of Schedule B information improves the efficiency and efficacy of the Attorney General's important regulatory efforts." However, the Court noted that the Ninth Circuit did not apply a narrow tailoring requirement and, the Court concluded, that was error. Properly applied, the Court found that the narrow tailoring requirement was not satisfied by California's disclosure regime.

The Court found a dramatic mismatch between the interest that the Attorney General sought to promote and the disclosure regime that was implemented in service of that end. The court observed that 60,000 charities in California renew their registrations each year, and nearly all are required to file a Schedule B. Given the amount and sensitivity of the information harvested by the state, the Court said, one would expect California's Schedule B collection to form an integral part of its fraud detection efforts. To the contrary, the Court noted, the record amply supported the district court's finding that there was not "a single, concrete instance in which pre-investigation collection of a Schedule B did anything to advance the Attorney General's investigative, regulatory or enforcement efforts."

Observation: In a dissenting opinion, three justices argued that the "narrow tailoring" requirement only applied for disclosure regimes that impose a severe burden on associational rights and, they said, that was not the situation in this case.

For a discussion of the reporting requirements for a Form 990, see Parker Tax ¶65,500.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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