Yet another court ruling has been issued on a somewhat obscure regulatory requirement that highlights the tension between significant First Amendment rights and the state’s power to threaten them. The context is the power of the States’ Attorneys General, in regulating Section 501(c)(3) charitable organizations, to obtain otherwise confidential major donor information as disclosed on IRS Form 990 Schedule B.[1] The case is Americans for Prosperity Foundation v. Becerra, previously Americans for Prosperity Foundation v. Harris, in which a three-judge panel of the federal Ninth Circuit Court of Appeals recently reversed a District Court Judge’s judgment that such requirement was unconstitutional as applied to the litigants’ specific circumstances. The Court’s ruling demonstrates a fundamental difference in perspective as to the government’s role in the face of compelling First Amendment free speech and freedom of association rights.
The IRS, States Attorney General, and Form 990 Schedule B
By way of summary, relevant nonprofits must disclose to the IRS, a federal agency, a list of their major donors’ names, address, and amounts given, as part of their IRS Form 990 reporting obligations. The purpose of this information is so the IRS can check on donors’ tax compliance regarding proper deductibility of their contributions, can guard against improper donor control of organizations that, by definition, must be dedicated to public benefit, and can otherwise effectively enforce applicable federal income tax law. In turn, the IRS must keep the Schedule B information confidential, on pain of federal civil and criminal sanctions for improper disclosure.
States Attorneys General are typically charged with another type of regulation with respect to charitable nonprofit corporations. Their focus is on consumer protection: to protect donors from contributing to various entities in error, as a result of misdirection, fraud, or other malfeasance. States’ Attorneys General are thus charged with a watch-dog function for citizen-donors, through regulating nonprofits’ charitable solicitation and other fundraising efforts - not their compliance with federal income tax requirements. As part of their required charitable solicitation filings, Attorney Generals typically require an annual state filing, plus excerpts from the Form 990 filing ostensibly only for purposes of showing the extent of a charity’s financial activity – i.e., how much it is collecting from donors’ contributions.
Court Rounds One, Two and Three - Americans for Prosperity Foundation
Americans for Prosperity Foundation (“AFP”) is a Section 501(c)(3) nonprofit that has registered and made charitable solicitation filing with the California Attorney General since 2001. As part of these filings, AFP submitted relevant IRS Form 990s but without the Schedule B, which was not previously required. But in 2013, the California Attorney General notified AFP that its registration would be deemed incomplete until it filed its Schedule B, due to a policy shift within the California Attorney General’s office. The litigation followed.
Round One: AFP challenged this new Schedule B donor disclosure requirement in District Court as “facially” unconstitutional.
Round Two: On appeal, the Ninth Circuit rejected this initial challenge and ruled the disclosure requirement constitutional, at least on this facial, preliminary level of constitutional considerations generally.
Round Three: Back at the district court level, APF presented evidence for a new “as applied” challenge, arguing that the Schedule B disclosure requirement would infringe on AFP’s own First Amendment rights by deterring donor support. To make its case, APF presented evidence of documented public threats, harassment, intimidation, and retaliation based on AFP’s messages and speech. In addition, AFP presented evidence that the technical and cybersecurity failures on the part of the California Attorney General’s office made it more likely that even information intended for nonpublic use could still be inadvertently disclosed. Based on such evidence, the federal District Court granted AFP’s injunction, ruling that the California Attorney General’s requirement for Schedule B was unconstitutional as applied to AFP’s own compelling circumstances. Notably, the court held that the Schedule B disclosure requirement lacked a sufficiently important governmental interest, finding that it was more burdensome than necessary. The court further determined that the actual risk of threats and reprisals from AFP’s speech would impermissibly increase the First Amendment burden, if the donor information contained in Schedule B were to become public (whether inadvertently or otherwise). The court also concluded that the California Attorney General’s office could not be trusted with the Schedule B information, based on its systematic failure to keep it confidential, and so the First Amendment freedom of speech threat was a very real threat.
Round Four – The Ninth Circuit’s Favors Government Regulation Over First Amendment Rights
The California Attorney General appealed this as-applied ruling protecting AFP’s constitutional rights. Back on appeal before the Ninth Circuit, the appellate court reversed and held instead that the Schedule B disclosure requirement is substantially related to an important state interest in policing charitable fraud, sufficient to overcome any First Amendment rights that AFP may have. Despite the potential for substantial harassment if the information was disclosed, the court found the risk—and therefore the burden to the First Amendment—to be slight.
Noting that the California Attorney General recently adopted a regulation requiring the Attorney General’s office to keep the information in question confidential (except in the event of an administrative proceeding for enforcement purposes, or else in response to a search warrant), the court found that the disclosure requirement served an important governmental interest. Specifically, in the event that the Attorney General decides to audit or investigate a nonprofit, then the Schedule B information may possibly be needed for the investigation, and the ready availability of such information could expedite the investigation. Disturbingly, the fact that the Attorney General could obtain such information through a subpoena or audit letter was not of consequence to the court’s reasoning. Likewise disturbingly, the court concluded that the risk of retaliation to donors – at least in its judgment (and notwithstanding actual threats made) - was low, especially given the Attorney General’s Office’s shiny new nondisclosure policy and regulation, and that the software vulnerability which allowed public access to 350,000 confidential documents was since patched. The court then vacated AFP’s injunction.
What’s the Big Deal?
The primary issue here is that a state regulatory body’s attempts at obtaining an entity’s information which it had prepared for another federal agency for an entirely different regulatory purpose is an improper use of coercive state power which could result in a significant chilling effect and physical harm to individual donors based on the message of a nonprofit entity. The problem is compounded because of that state agency’s track record of failing to protect the confidential information it was supposed to safeguard. Such risk would have a chilling effect on free speech all by itself—much more so if the threats came to pass.
However, an even larger issue is at play here, which speaks to a shift in how governmental regulatory bodies see their roles, and how protections against governmental abuses are diminished alongside the priority of First Amendment freedoms, in favor of a monolithic and unchecked regulatory state. The main thrust of the Ninth Circuit’s decision centered around a utilitarian vision for a state agency that could obtain citizen information without subpoena or other due process, and without federal civil and criminal penalties for improper disclosure. The Ninth Circuit indicated that having such information on hand “just in case” it was needed was a sufficient state interest for intrusive regulatory requirements. And the Ninth Circuit seemed more convinced that the state regulatory agency would be trustworthy keepers of confidential information, despite its track record, than that First Amendment freedoms would or could be abridged by either state or individual actions (or failures to diligently secure information).
The Ninth Circuit Court of Appeals’ language certainly leads one to wonder whether the purpose of the state is to regulate its citizens or to seek the conditions of those citizens’ flourishing. The two are not the same.
[1] This issue is different than for Section 501(c)(4) social welfare (“action”) organizations, which are generally not regulated by States’ Attorney General and for which the IRS recently announced that IRS Form 990 Schedule B donor disclosures will no longer be required. See /blog/schedule-b-roll-back-newsworthy-not-so-much-501c3-e2-80-99s.
