The Supreme Court of the United States ruled on July 1 that California could not mandate the disclosure of major donors by charities to the State even though such disclosure is already required to be made to the Internal Revenue Service (IRS). The 6-3 decision in Americans for Prosperity Foundation v. Bonta, Attorney General of California, made along partisan lines, reverses the judgment of the Ninth Circuit and sets new precedent applicable to all states.
Practically, this means that charities required to report to the California Attorney General (AG) may now submit a copy of their IRS Form 990 with a redacted Schedule B (Schedule of Contributors) that no longer identifies major donors ($5,000 or more). So, the AG is entitled to the same information that must be disclosed to the general public and not the more detailed information that must be disclosed to the IRS (though that may be the next battle).
We won’t carefully examine the merits of the decision and the legal arguments here but share some of the high points of the majority opinion and dissent and some of the potential consequences.
The IRS requires most charities to disclose its major donors to help the IRS regulate charities’ compliance with tax laws, including those related to diverting charitable assets for prohibited private benefit to donors, board members, and others.
The California AG (and state charities regulators in New York, New Jersey, and Hawaii) had required charities to disclose its major donors to help the State regulate charities’ compliance with state nonprofit and charitable trust laws, including those related to diverting charitable assets in favor of providing benefits to donors, board members, and others.
Neither the IRS or AG require that the disclosure of major donors be made to the general public, and both agencies have taken steps to ensure such data remains secure, even if there have been (and will almost certainly continue to be) data breaches from time to time.
As a result of the Supreme Court’s decision, state regulators can no longer require this information about an organization’s major donors because it “violates the First Amendment’s right to free association.”
The decision relied in part on the Supreme Court’s prior decision in NAACP v. Alabama ex rel. Patterson (1958), in which the Alabama Attorney General sought the NAACP’s membership lists even though NAACP members had been threatened with economic reprisals and violence because of the organization’s efforts supporting racial integration in higher education and public transportation. “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 … —we concluded that the State’s demand violated the First Amendment.”
The opinion recognized that “California has an important interest in preventing wrongdoing by charitable organizations” but relied on “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.”” The opinion included the following conclusory statements:
- “California’s interest is less in investigating fraud and more in ease of administration” that “cannot justify the disclosure requirement.”
- “[T]he Attorney General’s disclosure requirement imposes a widespread burden on donors’ associational rights.”
- “[T]he State’s interest in amassing sensitive information for its own convenience is weak.”
Today, the Court holds that reporting and disclosure requirements must be narrowly tailored even if a plaintiff demonstrates no burden at all. … In so holding, the Court discards its decades-long requirement that, to establish a cognizable burden on their associational rights, plaintiffs must plead and prove that disclosure will likely expose them to objective harms, such as threats, harassment, or reprisals. … It does not matter if not a single individual risks experiencing a single reprisal from disclosure, or if the vast majority of those affected would happily comply.
In the dissent, Justice Sonia Sotomayor claims:
- “Regardless of whether there is any risk of public disclosure, and no matter if the burdens on associational rights are slight, heavy, or nonexistent, disclosure regimes must always be narrowly tailored.”
- “[T]he Court notes that the District Court concluded that California’s attorney general could not ensure the confidentiality of Schedule B information”. [Presumably, this would apply to the IRS as well.]
- “[T]he Court in no way suggests that California officials will use Schedule B information to retaliate against any organization’s donors.”
And in contrast to the majority opinion’s reliance on the District Court’s finding that no pre-investigation collection of a Schedule B did anything to advance the AG’s investigative, regulatory or enforcement efforts, the dissent noted that a former head of the Charitable Trusts Section of the AG stated “Schedule B combined with the rest of Form 990 provides “[a] roadmap to the rest of the investigation that follows” and “having Schedule Bs on hand is important to attorneys’ decisions regarding whether to advance an investigation at all.”
The dissent summarizes the decision as follows:
Today’s decision discards decades of First Amendment jurisprudence recognizing that reporting and disclosure requirements do not directly burden associational rights. There is no other explanation for the Court’s conclusion that, first, plaintiffs do not need to show they are actually burdened by a disclosure requirement; second, every disclosure requirement demands narrow tailoring; and third, a facial challenge can succeed in the absence of any evidence a state law burdens the associational rights of a substantial proportion of affected individuals.
Why This Matters?
The IRS and AG enforcement of charity laws is very limited due to the large number of charities (more than 1.5 million registered charities and perhaps hundreds of thousands of houses of worship and other unregistered charities) and limited resources of the charity regulators. The Schedule B list of major donors is a significant tool for both agencies in reviewing for misuse of charitable assets, including conferring prohibited benefits upon donors and influencing elections. Removing this tool and deterrent to unlawful actions is likely to result in more unlawful diversions of charitable assets and consequently in greater distrust of the nonprofit sector. Sen. Sheldon Whitehouse (D-R.I.) tweeted: “This case gives The Court That Dark Money Built the chance to further protect & conceal dark money destroying our democracy.”
On the other hand, the decision provides controversial nonprofits with some assurance that they are not endangering their donors by having to submit their names to a state agency that could unwittingly leak such information to potential bad actors. To be clear, Schedule B’s list of donors is not a public document and already must be filed with the IRS. But regardless of whether the Supreme Court’s decision was sound, a number of charities were relieved by the outcome – some because of their legitimate concerns for donor safety and some because of their need to appease donors and their political and power agendas.
The key question now is whether this case sets precedent relative to other required donor disclosures. Maybe; maybe not. But with the Supreme Court’s current composition, we may be on a very slippery slope.
Former Justice Antonin Scalia provided some wise words on another disclosure case before the Supreme Court in 2010:
Requiring people to stand up in public for their political acts fosters civic courage, without which democracy is doomed. For my part, I do not look forward to a society which, thanks to the Supreme Court, campaigns anonymously . . . hidden from public scrutiny and protected from the accountability of criticism. This does not resemble the Home of the Brave.