Paul L. Caron

Tuesday, April 6, 2021

Eleven Tax Profs File Amicus Briefs In Supreme Court Supporting Disclosure Of Donors To Nonprofits

Americans for Prosperity Foundation v. Rodriquez (No. 19-251), decision below:  903 F.3d 1000 (9th Cir. 2018)

Question Presented
Whether the exacting scrutiny this Court has long required of laws that abridge the freedoms of speech and association outside the election context—as called for by NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958), and its progeny—can be satisfied absent any showing that a blanket governmental demand for the individual identities and addresses of major donors to private nonprofit organizations is narrowly tailored to an asserted law-enforcement interest.

Brief of the California Association of Nonprofits as Amicus Curiae in Support of Respondent (Daniel Hemel (Chicago) & Anna-Rose Mathieson (California Appellate Law Group, San Francisco)):

Introduction and Summary of Argument
Trust is the lifeblood of the nonprofit sector.  Before members of the public will contribute their time and money to charity, they must trust that nonprofit organizations will apply those resources toward their stated missions.  Before government agencies will partner with the nonprofit sector in the delivery of vital services, they must trust that nonprofit organizations will be faithful stewards of public funds.  Until quite recently, most nonprofit organizations were organized as charitable trusts—a name that underscored the importance of public confidence.  Even as organizational forms have evolved, the centrality of trust to charity has remained a constant.

In California, as in every other State, the Attorney General is the protector of the public’s trust in the nonprofit sector.  The Attorney General has a duty to ensure that assets contributed to charity are used in accordance with the purposes for which they were donated.  The Attorney General also is charged with safeguarding the public against fraudulent and deceptive charitable appeals.  The Attorney General’s charitable trust protection duties date back to sixteenth century England, when the Crown’s Attorney General wielded the sovereign’s parens patriae power to protect subjects who were unable to defend themselves.  Five centuries later and an ocean away, State Attorneys General across the United States still carry primary oversight and enforcement responsibility with respect to the nonprofit sector.

In order to execute these duties, the Attorney General needs to be able to identify donors who have made substantial contributions to charities and the amounts they have given.  Attorneys General in California and New York—the two States with the largest number of active charities—collect this information by requiring organizations to submit copies of their annual federal Form 990 series filings, including Schedule B, to a state registry.  Schedule B reports the names, addresses, and total contributions of certain large-dollar donors, along with brief descriptions of any non-cash property that these donors contributed.  For charities such as Americans for Prosperity Foundation and Thomas More Law Center that normally receive a substantial part of their support from the general public, Schedule B requires the organization to list only donors whose contributions within the taxable year equal or exceed the greater of $5,000 or 2% of the organization’s total support.

By law, the California Attorney General  must hold Schedule B information in confidence.  11 Cal. Code Reg. § 310(b).  And it does.  Schedule B is not available to the public through the Registry of Charitable Trusts website (the Registry).  See Cal. Dep’t of Justice, Registry Verification Search, (last visited Mar. 28, 2021).  Visitors who search for an organization there will find other Form 990 series filings, but not Schedule B.  Schedule B is also not available to the public for in-person inspection.  Visitors to the Attorney General’s Sacramento office can examine other nonconfidential Registry documents, but not Schedule B.  The only report of anyone gaining unauthorized access to Schedule B information through the Registry comes from this litigation, when Petitioners hired a highly regarded data-acquisition expert and his information technology company to circumvent the Registry’s privacy safeguards.  Even then, the expert and his team were able to access less than 1% of all confidential documents in the database.  When the expert reported the breach to the California Department of Justice, the Department fixed the problem within 24 hours.  There is, moreover, no evidence that anyone has been harassed, threatened, or defamed—or has suffered any other harm—as a result of any security breach involving Schedule B or any other confidential document in the Registry’s history.

While the Attorney General protects the confidential Schedule B from public view, the Attorney General uses Schedule B information to fulfill its own responsibilities as the protector of the public’s trust in the nonprofit sector.  The trial record reveals a range of oversight and enforcement purposes for which the Attorney General uses Schedule B information.  For example:

  • Schedule B information allows the Attorney General to identify and follow up with donors regarding the representations that charities made when soliciting contributions.  That, in turn, allows the Attorney General to confirm that charities are using assets in accordance with their promises to donors.  When the Attorney General determines that an organization is breaking its promises to donors, the Attorney General can intervene to ensure that gifts are applied to the charitable purposes for which they were given.
  • Schedule B information aids the Attorney General in identifying donors who are using charitable organizations for noncharitable ends (e.g., as passthroughs for gifts to family members and friends).  When the Attorney General determines that donors are abusing the nonprofit form, the Attorney General can sue to recover diverted assets and redirect those assets toward charitable causes.
  • Schedule B information allows the Attorney General to identify organizations that are inflating values of in-kind gifts in order to make their fundraising numbers look better than they are.  The Attorney General’s string of successful enforcement actions against “gift-in-kind” schemes since 2015 is attributable in no small part to the Schedule B reporting requirement at issue here.
  • While the Schedule B reporting requirement has played a key role in the Attorney General’s nonprofit-sector enforcement efforts, the corresponding burden on Petitioners’ associational interests is modest.  To appear on Thomas More Law Center’s Schedule B in 2018, a donor would need to have given more than $31,000; for Americans for Prosperity Foundation, the threshold was more than $341,000.  This is very clearly not a demand that Petitioners reveal the identities of their “ordinary rank-and-file members.”  Cf. NAACP v. Alabama ex rel. Patterson, 357 U.S. 449, 464 (1958).

The U.S. Constitution does not prohibit the Attorney General from collecting information about large-dollar donations in order to fulfill its trust-protection functions.  There is no “per se rule” that forbids donor disclosure “in a situation where the governmental interest would override the associational interest in maintaining such confidentiality.”  Cal. Bankers Ass’n v. Shultz, 416 U.S. 21, 55-56 (1974).  Here, the Attorney General has articulated an overriding interest in disclosure: access to basic information about large-dollar donations is essential to the Attorney General’s efforts to protect charitable assets and to protect the public from fraud and deception.  Petitioners have not articulated an associational interest of comparable weight.  The First Amendment protects the nonprofit sector from unreasonable governmental intrusions, but it does not give nonprofit organizations an invisibility shield.

Brief of Amici Curiae Scholars of the Law of Non-Profit Organizations in Support of Respondent (Ellen Aprill (Loyola-L.A.), Roger Colinvaux (Catholic), James Fishman (Pace), Brian Galle (Georgetown), Philip Hackney (Pittsburgh), Jill Horwitz (NYU), Ray Madoff (Boston College), Jill Manny (NYU), Nancy McLaughlin (Utah) & Richard Schmalbeck (Duke)):

Summary of Argument
California has a compelling interest in sustaining its charitable sector, the nation’s largest. Petitioners challenge the State’s requirement that tax-exempt charities provide to the California Attorney General, on a confidential basis, a copy of the IRS Form 990 Schedule B form that charities file annually with the Internal Revenue Service. Their challenge, if upheld, would undercut crucial and irreplaceable elements of California’s efforts to regulate its charitable sector and ensure public confidence in charities operating in the State. More than that, Petitioners’ same arguments could apply equally to central aspects of the federal regulation of charities and other major components of state supervision. Thus, whatever the applicable level of constitutional scrutiny, California’s collection of information about major charitable donors should survive review.

Since before the founding of this nation, Attorneys General have worked to build and preserve charity. A gift to charity is fundamentally a matter of trust: trust that money placed in the hands of another, over whom the donor has few direct means of control, will go to its promised good purposes. Attorney General supervision supplies a strong basis for that trust, by ensuring that assets donated for charitable purposes are in fact used for those purposes.

Attorney General supervision is necessary not only to prevent the fraud and deception that Petitioners emphasize. It is necessary also to protect the public’s interest against the potentially contrary private interests of an organization’s major donors, officers, and other “insiders” who may be in a position to make use of a charity’s resources for their own purposes rather than for the charitable ends the state and the charity’s other donors hope to foster.

Seen in this light, California’s compelling interest in learning, on a confidential basis, the identities of an organization’s major donors—and that is all that Schedule B reveals, not “membership lists”—is evident. No legal regime can protect effectively against opportunistic behavior by insiders without being able to identify who those insiders are.

By focusing narrowly on whether Schedule B was essential to particular investigations, Petitioners divert the Court’s attention from larger and more important systemic uses for major-donor information. For one, uniform reporting of such information, in a machine-readable format and in advance of any potential investigation for wrongdoing, streamlines and reduces the cost of supervising California’s 115,000 charities and eliminates the need to initiate some costly and potentially burdensome investigations. California has approximately one attorney available for oversight of each 5,000 to 10,000 charities. To even identify which transactions require more than minimal scrutiny, the state must first be able to see basic identifying and financial information and to match these items against each other for red flags. Schedule B makes this process efficient without imposing any additional administrative burden on charities.

Information reporting also plays a major role in deterrence, as ample evidence has shown in many tax contexts. It is more difficult for a major donor to induce a charity to, for example, hire its donor as a contractor at supra-competitive prices, if the charity knows that both the donation and the contract will be reported to the State (on Schedule B and elsewhere on the charity’s federal tax return) and readily visible to the organization’s own compliance personnel. Petitioners’ focus on the number of individual investigations ignores this important function of the reporting requirements. Indeed, to the extent that deterrence is effective, one would expect to see fewer individual investigations based on Schedule B, because there are fewer actual instances of abuse.

Petitioners’ suggestion that individual State requests for donor information should suffice is misguided. In addition to failing to serve this crucial deterrence purpose, such requests would often be more burdensome to donors than Schedule B itself. Investigations consume time and resources and may generate negative publicity that could impact other donations, often the life blood of these charities. All of these effects could in many instances be avoided if Schedule B information were available and exculpatory. In those situations where there is real wrongdoing, that wrongdoing could continue in the absence of Schedule B reporting, perhaps aided by spoliation of requested evidence, as investigative demands wend their way through courts.

Finally, if Petitioners’ view of the major-donor reporting rule—taking it in isolation while ignoring its deterrent effects—were applied to many other components of charitable supervision by states and the IRS, they too might fall. Many charities must publicly report Schedule B information. Other publicly available data reported annually to California and the IRS similarly reveal personal information about a charity’s closest supporters, such as board members, key employees, contractors, and certain grantees. Like major-donor information, this information may not, standing alone, be directly useful to supervisory authorities but instead becomes meaningful when used in combination with other reported information. If requiring the provision of Schedule B to the State Attorney General on a confidential basis were unconstitutional because, in very rare instances, its accidental disclosure might deter association with a charity, these other forms of reporting might also be deemed constitutionally suspect.

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