Supreme Court Holds California Attorney General’s “Blanket Demand for Schedule Bs” Unconstitutional

CATEGORY: Special Bulletins
CLIENT TYPE: Nonprofit
PUBLICATION: LCW Special Bulletin
DATE: Jul 01, 2021

Today, the U.S. Supreme Court held that California Attorney General’s requirement that nonprofits disclose certain donors is unconstitutional.  In Americans for Prosperity Foundation v. Bonta, the Court overturned the Ninth Circuit Court of Appeals holding in Americans for Prosperity v. Becerra (2018) 904 F.3d 1000, and remanded the case for further proceedings.  As a result, California nonprofit corporations are no longer required to submit Schedule B to their IRS Form 990 to the California Attorney General’s office as a matter of course.  Schedule B discloses donors who contribute in excess of $5,000 to a nonprofit (or in some cases, those who have given more than 2 percent of an organization’s total contributions).  Despite the ruling, unless otherwise exempt from doing so, nonprofits must continue to submit Schedule B to the Internal Revenue Service with their Form 990, and may still be required to submit the schedule  to the State Attorney General’s Office upon specific request, e.g. in the event of an investigation into the corporation’s charitable activities.

In a series of cases that began in 2014, a California nonprofit corporation, Americans for Prosperity Foundation, brought an action challenging the State Attorney General’s requirement that certain nonprofit corporations (excluding religious organizations, educational institutions, hospitals, and health care service plans) submit their IRS Form 990, inclusive of Schedule B, to the Attorney General’s Registry of Charitable Trusts on an annual basis; whereupon, the submitted information would be open for public inspection. The Foundation challenged this practice as violating the First Amendment rights of donors who wished to remain anonymous, and whose speech (in the form of a donation demonstrating support for the organization), it argued, would be chilled by this practice.  It further challenged the practice as violating provisions of the Internal Revenue Code that penalize the unauthorized disclosure of the Schedule B to Form 990.

In 2018, the Ninth Circuit Court of Appeals, in a consolidated action including Americans for Prosperity Foundation and Thomas More Law Center, held that the State Attorney General’s requirement that certain nonprofit organizations disclose donor information included in Schedule B to the Registry of Charitable Trusts did not violate the First Amendment, nor the Internal Revenue Code. The Ninth Circuit’s holding relied in-part on the Attorney General’s codifying a previously informal policy of treating the Schedule B as a confidential document not available for public inspection on its Registry.  As of 2016, the Attorney General adopted formal regulations expressly limiting disclosure only for court or administrative proceedings to enforce charitable trust obligations; or in response to a search warrant.

In the Ninth Circuit holding, the Court opined that the Attorney General’s Schedule B requirement – obligating certain charities to submit the same information they are required to file with IRS – survived constitutional scrutiny because the requirement was “substantially related to an important state interest in policing charitable fraud.”  The Court further opined that the plaintiffs, Americans for Prosperity Foundation and Thomas Moore Law Center, failed to demonstrate that the disclosure of Schedule B information significantly burdened their First Amendment rights by chilling contributions, or creating a reasonable probability that disclosure would subject donors to threats, harassment, or reprisal.  Even if they had demonstrated these results, the Court held that the state’s requirement reflected the seriousness of the actual burden on First Amendment because it would collect the information solely for nonpublic use, and the risk of inadvertent public disclosure was slight.

On January 8, 2021, the Supreme Court granted review of the case.  Numerous nonprofit organizations, and other states, filed briefs in support of and against the State Attorney General’s position. The Court heard oral arguments on April 26, 2021, which largely reflected the positions set forth in the Ninth Circuit case.  Reflecting issues addressed by the Ninth Circuit, the plaintiffs argued that their donors did in fact face harassment and threats associated with their support of controversial issues; and that the State had only rarely used the Schedule B to initiate an inquiry in charitable fraud.  They further argued that the State could obtain this information on an as-needed basis, if a particular charity is under investigation.  The State, on the other hand, argued that seeking this information only when needed could tip-off a wrongdoer, who might destroy additional information before the Attorney General is able to retrieve it.  The State further suggested it could exempt organizations from providing the information upon a showing of good cause, e.g. due to actual harassment suffered by donors.

Ultimately, the Supreme Court found the plaintiffs’ arguments compelling and overturned the Ninth Circuit holding.  The Court found that the State’s disclosure requirement is overly broad, as applied to the First Amendment interest at issue.  The Court did not doubt the State’s “important interest” in preventing wrongdoing by charitable organizations.  However, it found that up-front collection of Schedule B did not sufficiently further that interest because the collected information rarely had been used to initiate an investigation; and the State has other means for collecting the information as needed.  The Court noted that the Attorney General receives complaints each month that identify charitable misconduct, and the pre-collection of Schedule B is tied primarily to efficiency rather than policing chartable fraud.  In short, the Court found a “dramatic mismatch” between the interest the Attorney General seeks to promote (policing charitable wrongdoing) and the regime implemented to achieve that end (blanket collection of the Schedule B).

The Court’s majority briefly noted that the State’s demand for Schedule B was not justified by the fact that the information is already disclosed to the IRS because “each governmental demand for disclosure brings with it an additional risk of chill” on individual First Amendment rights.  It also noted that the collection effort as a condition of state tax exemption could prevent charities from operating in California altogether.

Based on today’s holding, California nonprofit organizations no longer need to submit a Schedule B to the State Registry of Charitable Trusts on an annual basis.  However, for now, they must continue to so with their IRS Form 990 filings, absent an exception.  They may additionally be required to submit the Schedule B to the State Attorney General on a case-by-case basis.

This Special Bulletin is published for the benefit of the clients of Liebert Cassidy Whitmore. The information in this Special Bulletin should not be acted upon without professional advice. 

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