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

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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. 

AFP vs. CA AG:  Rounds 1 and 2 – No Compelled Donor Disclosure, But Then Reversal

Since 2001, AFP had filed its Form 990 for charitable registration in California without including Schedule B.  Its registration and subsequent renewals were approved each year until March 2013, when the organization received a notice that its 2011 filing was incomplete.  AFP challenged the California AG’s new policy as unconstitutional, and it initially won.  The trial court granted preliminary injunctive relief against disclosure, noting in particular the AG’s lack of express authority to access national donor information, the fact that less intrusive alternatives were available for the AG’s oversight and law enforcement goals, and that irreparable harm to AFP would occur from disclosure (while the injunction would not cause any harm to the AG).

But on appeal, the Ninth Circuit rejected the trial court’s ruling.  The court stated that the AG could be enjoined from publicly disclosing the Schedule B information but not from compelling nonpublic disclosure of the information to the AG’s office, absent any showing of particular harm that would occur to AFP.  AFP contended that the disclosure requirement would infringe First Amendment rights by deterring donors from supporting AFP.  The court decided, however, that AFP had not yet shown anything more than “broad allegations,” “subjective fears,” and “worries” about such problems.  AFP also argued that technical failures or cybersecurity breaches are likely to lead to inadvertent public disclosure of Schedule B information, but the appellate court found this argument “too speculative” to warrant preliminary injunctive relief.  The court then ordered the case sent back to the trial court for a full trial on the merits of AFP’s claims.

Victory Again – Injunctive Relief Against Compelled Donor Disclosure

The key trial issue was essentially a constitutional “exacting scrutiny” balancing test, based on the facts.  Applying that test, Judge Real sifted through the trial evidence to determine that the government’s interest in compelled donor disclosure was not serious enough to warrant burdening the First Amendment interests at stake.  This case is remarkable in that so much compelling evidence was developed, showing both the lack of any apparent government benefit within the state charitable solicitation arena (unlike the IRS context) and significant donor and nonprofit harm resulting from the state’s new donor disclosure requirements. 

Evidence: Schedule B Is Not Needed

First, Judge Real announced that he was “left unconvinced that the Attorney General actually needs Schedule B forms to effectively conduct its investigations.”  The court further observed that the AG’s office had accepted AFP’s annual state charitable solicitation filings for ten years without requiring the Schedule B.  The court then concluded, “[t]he only logical explanation for why AFP’s ‘lack of compliance’ went unnoticed for over a decade is that the Attorney General does not use the Schedule B in its day-to-day business.”  The court additionally cited trial evidence showing that CA AG auditors and attorneys rarely use such information and had obtained it in other ways when it was needed.

Second, the court focused on the First Amendment’s associational and free speech rights, quoting a civil rights era case in which the U.S. Supreme Court ruled that “even though the governmental purpose [may] be legitimate and substantial, that purpose cannot be pursued by means that broadly stifle fundamental personal liberties when the end can be more narrowly achieved.”  (See Louisiana v. NAACP, 366 U.S. 293, 296 (1961)).  The court determined that the CA AG’s interests could be more narrowly achieved without mandatory Schedule B disclosures.  As the CA AG’s own investigators testified, they could successfully complete investigations without Schedule B forms and indeed had done so for years prior to the 2013 policy shift. 

Evidence: Untenable First Amendment Burden

Third, the court ruled that the trial evidence demonstrated an unacceptable First Amendment burden.  Specifically, “ample evidence establish[ed] that AFP, its employees, supporters and donors face public threats, harassment, intimidation, and retaliation once their support for and affiliation with the organization becomes publicly known.”  One threat was to slit a donor’s throat, and other death threats were made.  Additional evidence included event disruptions, stalking of AFP employees, hostile protestors, and threats to organizational leaders’ family members.  Such threats obviously could and in fact did cause donors to consider terminating their support of AFP.   

Judge Real then expressed his conviction, with all of his 92-year-old wisdom, that enough was enough:

The Court can keep listing all the examples of threats and harassment presented at trial; however in light of these threats, protests, boycotts, reprisals, and harassment directed at those individuals publicly associated with AFP, the Court finds that AFP supporters have been subjected to abuses that warrant relief on an as-applied challenge.  And although the Attorney General correctly points out that such abuses are not as violent or pervasive as those encountered in NAACP v. Alabama or other cases from that era, this Court is not prepared to wait until an AFP opponent carries out one of the numerous death threats made against its members.

Evidence: The CA AG's Office Cannot Be Trusted 

The court last considered the CA AG’s argument that since the Schedule B disclosures were only for nonpublic use – i.e., for the government agency’s internal use only – it should be trusted with such information.  Judge Real ruled quite to the contrary: “As made abundantly clear during trial, the Attorney General has systematically failed to maintain the confidentiality of Schedule B forms.”  More specifically, AFP proved that over 1,400 Schedule B’s had been made publicly available on the Attorney General’s website.  The court then gave the CA AG’s protestations of future confidentiality a vote of no confidence: “The pervasive, recurring pattern of uncontained Schedule B disclosures – a pattern that has persisted even during this trial – is irreconcilable with the Attorney General’s assurances and contentions as to the confidentiality of Schedule B’s collected by the Registry.”

What Next?

Judge Real’s grant of a permanent injunction against the CA AG was a welcome relief.  AFP would clearly suffer irreparable harm from its donors’ chilled First Amendment freedoms, and the balance of hardships favored nondisclosure.  Should other nonprofits now refuse to submit Schedule B forms based on Judge Real’s resounding decision against the CA AG?  While the injunction was granted only in AFP’s case, another organization may have a compelling justification for refusing disclosure. 

In the meantime, the CA AG’s office reportedly plans to appeal the trial court’s ruling.  Other states are most certainly watching this case, as some have begun pursuing similar Schedule B disclosure requirements to varying degrees.

On the federal horizon, proponents of federal bill H.R.5053 argue that the IRS also cannot be trusted to keep Schedule B disclosures confidential as legally required.  The better approach, they argue, is that Schedule B information should not be required, except with respect to donations from directors and officers (to ferret out improper financial benefits from nonprofits and illegal tax shelters).  One contrary argument is to maintain mandatory Schedule B disclosures, as a general IRS safeguard, and provide increased funding for the IRS to do its job.

H.R.5053 may likewise improve donors’ and nonprofits’ First Amendment interests if passed.  Unlike state charity regulators, however, the IRS arguably has greater justification for collecting this information, such as to protect against improper donor financial dealings with nonprofits, to distinguish between private foundations and public charities for tax classification purposes, and to protect against so-called “dark money” infusions to nonprofits involved in political activities.

These continuing developments warrant careful attention, as nonprofits seek to remain legally compliant while protecting and nurturing their valued donors.