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In brief

On 1 July 2021, the Supreme Court issued its decision in the consolidated case Americans for Prosperity Foundation v. Bonta, No. 19-251 (US 1 July 2021). The Supreme Court reversed the judgment of the Ninth Circuit Court of Appeals and struck down a California donor-disclosure law as facially unconstitutional by a six to three majority.


In More Detail

  1. Background on Schedule B

2. Other US Tax News and Developments

In More Detail

The California law required nonprofits operating or soliciting contributions in California to disclose information about all of its donors who contribute more than USD 5,000 in a particular tax year or more than 2% of the organizations total contributions to the state Attorney General’s Office (generally, through submission of their Schedule Bs from their Internal Revenue Service (IRS) Form 990s). Failure to comply with the requirement could result in suspension of a nonprofit’s ability to solicit donations from Californians and corporate fines. The Americans for Prosperity ruling will have wider repercussions as similar donor disclosure laws in other jurisdictions are litigated, and may have a broader impact on reporting and disclosure requirements more generally as Justice Sotomayor noted in her dissent.

Background on Schedule B

In May 2020, the IRS issued final regulations that nixed the requirement that organizations exempt under Code Section 501(c), except for section 501(c)(3) charities and section 547 political organizations, include names and addresses of donors who contributed USD 5,000 or more on Schedule B. Although section 501(c)(3) organizations still must file Schedule B with the IRS if their donors meet the disclosure thresholds, federal law prohibits the IRS from disclosing donor information to the public or to other federal agencies, except in limited circumstances.

Lower Court decisions

In 2010, the California Department of Justice increased its efforts to enforce charities’ Schedule B reporting obligations. The plaintiffs, two charities that were tax-exempt under section 501(c)(3), were amongst the organizations who received deficiency letters. When both organizations resisted disclosing their donors’ identities to the California Attorney General’s Office, the Attorney General threatened to suspend their registrations and fine their officers and directors. Both organizations responded to such threats by filing suit in the Central District of California.

In both cases, the District Court granted preliminary injunctive relief prohibiting the California Attorney General (“Attorney General”) from collecting the organizations’ Schedule B information. The Ninth Circuit vacated and remanded. On remand, the District Court permanently enjoined the Attorney General from collecting Schedule B and held that disclosure of Schedule B information was not narrowly tailored to California’s interest in investigating charitable misconduct citing testimony from California officials stating Schedule B information was rarely used to audit or investigate charities. The Ninth Circuit again vacated the District Court’s injunctions and remanded for entry of judgment in favor of the California Attorney General. Americans for Prosperity Foundation appealed the Ninth Circuit ruling to the US Supreme Court, which granted their petition on 8 January 2021.

The Americans for Prosperity ruling

The US Supreme Court reviewed the law under (at a minimum) the “exacting scrutiny” standard, which requires a “substantial relation between the disclosure requirement and a sufficiently important governmental interest.” Chief Justice Roberts indicated that while there is no doubt California has an important interest in preventing wrongdoing by nonprofit organizations, there is an inherent mismatch between the interest the Attorney General seeks to promote and the implemented disclosure regime. Further, Roberts noted the fact that California did not begin rigorously enforcing the disclosure obligation until 2010 and stated that California’s interest in up-front collection is more a matter of administrative ease than investigating fraud.

Roberts also rejected the state’s argument that the disclosure requirement did not broadly discourage donations because California’s Schedule B requirement is confidential. Roberts stated that assurances of confidentiality may reduce the burden of disclosure but they do not eliminate it, and indicates in a footnote that “[h]ere the States’ assurances of confidentiality are not worth much.” Roberts points to the evidence introduced by both plaintiffs demonstrating that they and their supporters have been subject to threats. He indicates that such risks are heightened given the technology available today.

Justice Sotomayor’s dissent cautions that the court’s “analysis marks reporting and disclosure requirements with a bull’s eye.”

Take note

On 2 August 2021, about a month after the Supreme Court ruling, the New York Attorney General announced that, effective immediately, charities are no longer required to disclose donor information in their annual filings. Further, the Attorney General indicated that any outstanding notices of deficiency related to missing or incomplete Schedule Bs are no longer operative as to such deficiency.

At this time New Jersey has not changed its requirement to include Schedule B with its nonprofit filings; however, given the similarities between the New Jersey and California laws, challenges are expected.

Under the exacting scrutiny standard, a donor disclosure requirement could be upheld if the requirement is more tailored than the California law and shows substantial relation to combating charity or donor fraud. Nonprofit organizations and donors should keep an eye on changes to donor disclosure laws in other states.

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Jacque Titus is an associate in the North America Tax Practice Group and resides in the Firm's Dallas Office. She advises US and multinational companies on domestic and international tax planning and transactions.

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