Schedule B Disclosures: Donor Victory Against California AG and New Congressional Bill Providing Donor Protection

Must nonprofits disclose their Form 990 “Schedule B” list of major donors?  In round three of Americans for Prosperity Foundation’s (AFP) litigation against the California Attorney General, AFP’s answer was a resounding no!  On April 21, 2016, federal trial court Judge Manuel Real ruled that such requirement “chills the exercise of [AFP’s] donors’ First Amendment freedoms to speak anonymously and to engage in expressive association.” And just a week later in our nation’s capital, the House Ways and Means Committee approved H.R.5053, a bill designed to similarly relieve nonprofits of their corresponding IRS reporting obligation.  This is great news for AFP and other nonprofits alike, as donor privacy and related First Amendment rights are increasingly being challenged.

Background -  Schedule Bs, the IRS, and State AGs

In Schedule B, a part of the IRS Form 990, nonprofits must list donors’ names, addresses, and amounts given, for all donors who contribute more than $5000 or 2 percent of all donations (whichever is higher) in a tax year.  This mandatory reporting has long been a mainstay within the IRS context, as a measure for nonprofit accountability and particularly to guard against improper donor control in violation of well established “public benefit” requirements.  While Form 990s are subject to public disclosure, the IRS is legally obligated to keep Schedule B information confidential.  Both federal civil and criminal sanctions are available for improper disclosure, and nonprofits may legally redact such information in their publicly available Form 990s. 

Enter California Attorney General Kamala Harris.  Until 2013, and consistent with most other states, the California AG’s office had never required Schedule B donor information as part of state filings related to charitable solicitation activity.  But in 2013, the California AG changed its policy and began demanding copies of Schedule B, even though no confidentiality protections exist similar to those applicable to the IRS under federal law.  Instead, under this new policy, nonprofits that fail to comply with such disclosure requirements are effectively deprived of the ability to raise money in California. 

Update on California Mandatory Donor Disclosure Litigation

Another blow to charitable organizations’ First Amendment rights took place when the federal Ninth Circuit Court of Appeals ruled on December 29, 2015, that the California Attorney General’s mandatory donor disclosure requirements are constitutional “as applied” within the context of state charitable solicitation filing requirements.

The APF litigation follows on the heels of a similar loss by the Center for Competitive Politics (CCP).  In the CCP case, the Ninth Circuit ruled that compelled disclosure of donor information by itself is insufficient to constitute a First Amendment injury compelling enough to foreclose such governmental intrusion.  The U.S. Supreme Court denied certiorari in November 2015.  APF (along with its companion plaintiff Thomas More Law Center) asserted a similar First Amendment claim based on evidence showing that such mandatory disclosures actually chill speech and result in donor harassment.   This increased level of harm is apparently constitutionally insufficient as well, at least according to the Ninth Circuit. 

Background

Both cases began when the organizations challenged the California Attorney General (AG)’s demand to submit their IRS Form 990 Schedule B as part of their annual AG reports, in connection with their charitable solicitation activity in California.  The AG’s demand resulted from a 2013 change in its policy; consistent with most other states, the California AG’s office had never before required such disclosures.  Form 990’s Schedule B requires nonprofits to list major donors’ names, addresses, and amounts given.  The IRS collects this information but is legally required to keep it confidential.  Both civil and criminal sanctions are available for improper disclosure of such information, and nonprofits may legally redact such information in their publicly available Form 990s. 

Top Ten Legal Resolutions for Nonprofit Leaders in 2016

With the new year upon us, our hope is that all of our nonprofit clients will thrive in 2016, fulfilling their organizational mission and impacting their communities.  As attorneys, we understand the importance of legal compliance for an organization’s mission, governance, and success.  The following is a list of ten critical legal areas that may impact nonprofit organizations in 2016.  Resolve to address them throughout the year, especially any deficiencies that warrant further action.

1.         Develop nonprofit website privacy and cybersecurity protections and policiesNonprofits regularly gather personal information from people who visit their organizational websites.  A major legal development in the last few years is the need for many nonprofit organizations to implement a privacy policy or user agreement for their websites.  The policies should establish protocols for collection, use, and storage of website users’ private information. They should also provide appropriate disclosures to users, such as analytics information, cookies, security measures such as encryption, and how organizations may share data.  Significantly, nonprofits that permit financial transactions on their sites, such as receiving donor contributions should ensure their payment systems are PCI DSS compliant.  These are emerging but important areas as internet traffic increases along with corresponding privacy concerns. 

2.         Use Social Media Well.  Social media is a powerful tool for many nonprofits.  Continual improvements can help promote an organization’s mission and nurture its good reputation.  Unfortunately, many nonprofits fail to take the time to understand how copyright and trademark laws govern their use of photos, videos, or other media in their posts.  In using social media, nonprofits need to teach their workers how to identify and comply with applicable copyright or trademark restrictions, for which a license or other protection may be needed.  Nonprofits should also consider individual privacy interests related to posts and obtain consents or provide other disclosures as warranted prior to posting information about beneficiaries, donors, or others.  Finally, nonprofits should take steps to protect their reputations by developing a procedure or policy that ensures employees and volunteers refrain from using the organization’s social media for disparaging comments or to express views contrary to the mission.