Donor privacy and related First Amendment rights are at stake as state charities’ regulators press for disclosure of IRS Form 990 Schedule B donor information from organizations that fundraise in their states. A recent New York case shows that the fight over whether states may require donor disclosure is very much alive. In addition, Congress is considering elimination of Schedule B itself.
Background - Schedule B, the IRS, and State Charity Regulators
Charitable organizations must comply with both federal and state reporting requirements. The key federal filing is IRS Form 990. Schedule B of Form 990 requires a list of names, addresses, and amounts given for major donors. 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. While Form 990s are subject to public disclosure, the IRS is legally obligated to keep Schedule B donor information confidential, under the penalty of civil and criminal sanctions for improper disclosure. Nonprofits thus may legally redact Schedule B donor information on their publicly available Form 990s.
Most state charitable regulators require annual reporting for organizations that fundraise in their states. Federal Form 990 is often included in state reports. Increasingly state regulators require that reporting organizations include IRS Schedule B donor information, ostensibly to improve transparency, thwart fraud, and even expose “dark money” used to support political activity. The California and New York Attorneys General (AG) are at the forefront of this trend. Significantly, the New York and California AGs seek disclosure of donor information on the basis of their own modified agency internal policies, not legislative changes to the statute. They are not, therefore, constrained by a legislative scheme, or subject to any statutory penalties for violations of donor privacy through public disclosure of donor information. This lack of statutory oversight is troubling, since organizations that fail to comply with these new obligations may face hefty penalties and may be denied access to two of our nation’s largest donor pools.
In our blog earlier this year, we reported on the Americans for Prosperity Foundation’s victory for donors and First Amendment rights against California AG Kamala Harris (albeit after three rounds of litigation within the federal courts). In that case, the trial court judge rejected the California AG’s authority to require donor disclosure. The Court based its holding on constitutional free speech principles, freedom of association rights, and very real threats of harm to donors from such disclosure. But things aren’t looking quite as bright for donors in New York.
New York Litigation - Citizens United v. Schneiderman
For many years, New York law has contained a requirement that organizations soliciting donations from New York residents file a copy of their IRS Form 990, including attached schedules, when submitting their annual state charitable solicitation registration filing. Until 2012, however, organizations could complete such filings without submitting Schedule B donor information. For example, Citizens United (a 501(c)(4) social welfare organization) and Citizens United Foundation (a 501(c)(3) organization) regularly filed redacted Schedule B forms, leaving out donor information. In 2012, however, based on its own changed internal policies, New York Attorney General Eric Schneiderman’s office notified the organizations that they must provide such donor information. Citizens United and its related Foundation sued, claiming that such legal requirement is unconstitutional.
As set forth in the Citizens United v. Schneiderman complaint, these organizations claimed the mandatory donor disclosure violates their rights under the US Constitution. Among other things, Citizens United argued that the new policy violates the First Amendment, both "on its face" (meaning the policy would be unconstitutional no matter to whom it is applied) and as applied specifically to Citizens United and the Foundation. The court sided with the AG’s office on a preliminary motion to dismiss, finding no plausible claims.
In rejecting each of Citizens United’s claims, the court’s key objection was that the organizations had not pled enough in their complaint. Among other things, the court determined that they had failed to properly allege that the government’s mandatory donor disclosure requirement lacked the requisite “substantial relation” to government interests, such that the donors’ constitutional interests should prevail. In addition, the court found that the organizations had not pled sufficient actual or potential harm from the New York policy’s application. As the court observed, “[t]he complaint in this action suffers from [a] flaw: it fails to allege that any donor has suffered in the past due to donating, and it fails to allege any fact that could render future negative consequences plausible.” The court further found that the organizations had only alleged potential donor harm resulting from mandatory disclosure “on information and belief,” which it ruled was legally insufficient.
This result differs from the California litigation, where Americans for Prosperity was able to successfully show that their donors would be substantially harmed by disclosure of their donation information. The New York court left a door open to the Citizen United litigants, to allow an amended complaint to add such information. Instead, Citizens United has appealed the trial court’s dismissal, presumably based on the legal position that they did include all necessary legal arguments and supporting facts in their complaint. If Citizens United wins its appeal at this preliminary stage, then the case will return to the trial court to have the claims fully heard. Perhaps additional evidence may then be developed fully for a compelling case against mandatory donor disclosures, with donor privacy favored in the constitutional balance.
The lesson here? Organizations seeking to challenge state mandatory donor disclosure requirements should be armed with significant evidence of actual or potential harm. In the California case, for example, the trial court was provided with evidence of threats to donors, harassment, and evidence was developed about the CA AG’s systematic failure to keep donor information confidential. Absent similar evidence, courts may well side with the government and its asserted interests in collecting donor information.
Will Federal Legislation Make the Fight Moot?
Against the backdrop of state charity regulator activity, the U.S. Congress has entered the fray on the issue too. In June 2016, the U.S. House of Representatives passed H.R.5053, a bill that would prohibit donor disclosure requirements in IRS Form 990 filings (with limited exceptions directly related to nonprofit tax restrictions, such as improper donor benefits and tax shelters). This bill is currently pending with the Senate Committee on Finance.
If H.R.5053 is passed, Schedule B will be eliminated – and state charity regulators will no longer be able to seek Schedule B donor information. While state regulators could attempt to require the same information in some other format, this would likely take some time, entailing lengthy procedures to amend regulations or to develop new or amended forms for this purpose. And like the current litigation tread, such attempts will likely result in further drawn-out legal battles.
Nonprofits that solicit donations in multiple states need to stay continually mindful of their charitable solicitation registration requirements, as donor trends vary and state legal requirements can change. Evolving donor disclosure requirements adds another significant wrinkle for many organizations, particularly those that value donor privacy and related First Amendment rights.