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CA 9 reverses district court, upholds state law donor disclosure requirement

September 13, 2018

The Court of Appeals for the Ninth Circuit, reversing the district court, has held that a California charitable registration requirement is constitutional as applied to two tax-exempt organizations. The Court found that the requirement was substantially related to the important state interest of policing charitable fraud, and that the organizations failed to show that it impermissibly burdened the organizations’ First Amendment free association rights.

Background. Regs require non-profit educational or charitable organizations registered under Code Sec. 501(c)(3) to disclose the names and contributions of their “significant donors” (donors who have contributed more than $5,000 in a single year) on Form 990, Schedule B. (Reg. § 1.6033-2(a)(2)(ii)(f)) While a nonprofit’s federal tax return, IRS Form 990, must be made available to the public, that requirement does not apply to an organization’s Schedule B. (Code Sec. 6104(b)Code Sec. 6104(d)(3)(A))

Cal. Code Regs. tit. 11, § 301 requires charitable organizations to file a copy of their IRS Form 990, including its Schedule B, with the State Registry (Schedule B requirement). Cal. Code Reg. tit. 11, § 310 provides that the Schedule B information will be kept confidential and is exempt from public inspection except in a judicial or administrative proceeding or in response to a search warrant (safeguard requirement). Before the safeguard requirement was codified in 2016, Schedule B was treated as a confidential document under an informal policy.

Facts. Since 2001, Americans for Prosperity Foundation (AFP), a tax-exempt organization, and Thomas More Law Center (Center; collectively, the organizations), have either not filed, or filed redacted versions of, their Schedule B with the California Attorney General, despite filing a complete Schedule B with IRS each year. The Attorney General informed the Center in 2012, and AFP in 2013, that their filings were deficient.

In December 2014, AFP brought a case in U.S. district court seeking an order preliminarily enjoining the Attorney General from demanding its Schedule B. AFP challenged the Schedule B requirement on two grounds: that it was facially unconstitutional and that it was unconstitutional as applied to AFP. With respect to the second “as applied” ground, AFP argued that the Schedule B requirement chills the exercise of AFP donors’ First Amendment freedoms to speak anonymously and to engage in expressive association.

AFP and the Center separately filed suit alleging that the Schedule B requirement unconstitutionally burdens their First Amendment rights by deterring individuals from financially supporting them.

The district court granted the preliminary injunction, and the Attorney General Appealed.

While those appeals were pending, the Ninth Circuit upheld the Schedule B requirement against a facial constitutional challenge in  Center for Competitive Politics v. Harris, (CA 9 2015) 115 AFTR 2d 2015-1711. In that decision, the Ninth Circuit concluded that compelled disclosure of the plaintiff’s contributors’ identities didn’t violate its and its supporters’ First Amendment right of association because there was no indication that contributors were subject to harassment as result of the disclosure requirement, disclosure wouldn’t be public, and having contributors’ information increased the Attorney General’s investigative efficiency and allowed her to identify suspicious behavior.

The appeal was then remanded by the Ninth Circuit, which (i) stated that the district court is bound by the Center for Competitive Politics decision, and (ii) instructed the district court to have a trial on the “as applied” challenge. (Americans for Prosperity Foundation, (CA 9 2015) 116 AFTR 2d 2015-7171)

On remand, the district court held, in two separate decisions, that the Schedule B requirement is unconstitutional in its application to AFP and to Law Center and permanently enjoined California from requiring either organization to file Schedule B. The court said that First Amendment challenges to laws requiring citizen disclosures are reviewed using an “exacting scrutiny” standard (John Doe No. 1 v. Reed, (S Ct 2010) 561 U.S. 186; Citizens United v. FEC, (S Ct 2010) 558 U.S. 310), which requires a substantial relation between the disclosure requirement and a sufficiently important governmental interest, and that California’s Schedule B requirement failed to satisfy this standard. (Americans For Prosperity Foundation. v. Harris, (DC CA 4/21/2016) 117 AFTR 2d 2016-1384; see ” California’s rule that it receive nonprofit’s Form 990 information held unconstitutional ” (04/28/2016))

Circuit Court reverses.  The Court of Appeals for the Ninth Circuit reversed the district court, holding that the Schedule B requirement survives the exacting scrutiny standard as applied to the organizations because it was substantially related to an important state interest in policing charitable fraud.

The Ninth Circuit found that the district court’s conclusion was reached by applying an erroneous legal standard, which essentially was to require the Attorney General to show that it wasn’t possible to accomplish her goals without the Schedule B. In so holding, the Court expressly rejected the organizations’ argument that the “substantial relation” element of the exacting scrutiny standard requires that the means used by the State must be “narrowly drawn” to avoid stifling association, finding that the exacting scrutiny test is different from a “least-restrictive-means” test. (Center for Competitive Politics)

Rather, the “substantial relation” element of the exacting scrutiny test merely requires that the strength of the governmental interest reflect the seriousness of the actual burden on First Amendment rights, and the Court concluded that this element was met in this case. The Court found that the government interest served in this case—ensuring that charities operating in accordance with the law—is indeed a significant one, and that other Circuit Courts have reached the same conclusion.

The Court also found that the actual burden on the organizations’ first amendment rights was insufficient to overcome the government’s substantial interest. Evidence that disclosure would limit contributors showed, at most, a modest impact; neither organization actually identified a single individual whose willingness to contribute hinged on disclosure to the Attorney General. In the end, the Court found that the mere possibility that some contributors may withhold their support was insufficient to show a substantial burden on First Amendment rights.

And, while the organizations did show that public disclosure of donor information could potentially subject their contributors to threats, harassment or reprisals, the Court found that that, since public disclosure of the Schedule B information is prohibited under the safeguard requirement, the risk is low.

Finally, the Court rejected the organizations’ facial challenges as foreclosed by  Center for Competitive Politics.

References: For annual information returns of tax-exempt organizations that must be made available for public inspection, see FTC 2d/FIN ¶ S-6603United States Tax Reporter ¶ 61,044.