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In Americans for Prosperity Foundation v. Harris, No. CV 14-9448-R (C.D. Calif. 4/21/16), the US District Court for the Central District of California has granted a motion for a permanent injunction filed by Americans for Prosperity Foundation (AFP), enjoining the California Attorney General from requiring the foundation to disclose donor information contained in Form 990 Schedule B. While the Ninth Circuit has recently held (in a case involving a different organization) that the Schedule B disclosure requirement is not facially unconstitutional, the district court in the current case held (on remand from the Ninth Circuit) that the requirement is unconstitutional as applied to AFP.

Background on Schedule B disclosure requirement in California

IRS Form 990, Schedule B, Schedule of Contributors, generally requires organizations to report donors who contribute $5,000 or more to the organization. Federal law prohibits the federal government from disclosing this donor information to the public. The Attorney General of the State of California requires organizations to provide a copy of their Form 990, including an un-redacted copy of Schedule B, with the Attorney General to maintain their registered status with the Attorney General's Registry of Charitable Trusts. Under California state policy, the Schedule B information must be kept confidential and protected from public disclosure.

Organizations have previously challenged the California Schedule B disclosure requirement, arguing that it is injurious to their organization and their supporters' exercise of their First Amendment rights. Affirming the District Court in one such case (Ctr. for Competitive Politics v. Harris, 784 F.3d 1307 (9th Cir. 2015)), a panel for the US Court of Appeals for the Ninth Circuit held that the challenging organization failed to show any actual burden to itself or its supporters, and that the disclosure requirement bore a substantial relation to the state's interest in enforcing its laws and preventing fraud. The US Supreme Court denied Certiorari in Ctr. for Competitive Politics, allowing the Ninth Circuit decision to stand (see Tax Alert 2015-2143{}).

Facts in AFP's case

AFP is a Section 501(c)(3) non-profit that funds its activities by raising charitable contributions in California and others states throughout the US. While AFP has historically provided a copy of its Form 990 with its annual registration renewals required by the Attorney General of California, it has declined to include Schedule B with its filings. The California Attorney General nonetheless accepted these filing for 2001 through 2010, listing AFP as an active charity in compliance with the law. For 2011, however, the Attorney General sent a letter to AFP (in 2013) declaring the filing incomplete due to the missing Schedule B.

In 2014, AFP brought an action in federal District Court for the Central District of California seeking to enjoin the Attorney General from demanding its Schedule B, arguing that the requirement was facially unconstitutional and unconstitutional as applied to it. The District Court granted a preliminary injunction in February 2015. The preliminary injunction was appealed to the Ninth Circuit. With respect to the requirement being facially unconstitutional, the Ninth Circuit was bound by its decision in Ctr. for Competitive Politics; however, it remanded to the District Court for trial on whether the requirement was unconstitutional as applied to AFP.

District Court's analysis and granting of injunction to AFP

The District Court explained that an "exacting scrutiny" standard applies to First Amendment challenges to disclosure requirements. Under this standard, the government's interest must be both sufficiently important and substantially related to the disclosure requirement to justify any burden on First Amendment rights. In the case of AFP, the Court concluded that the government's interest was outweighed by the burden on AFP's First Amendment rights.

The California Attorney General argued, as in previous cases, that the State of California has a compelling interest in the Schedule B disclosure requirement for purposes of enforcing its laws (such as those against self-dealing, improper loans, interested persons, illegal or unfair business practices). The Court, however, was not convinced, concluding that the Attorney General failed to establish the need for such a requirement. The Court noted that the Attorney General accepted AFP's filings for 10 years (2001-2010) without a Schedule B. Moreover, testimony from state auditors and attorneys showed that Schedule B information was seldom used, and, in cases when it was, the information used was often available elsewhere. Accordingly, the Court concluded that the Attorney General failed to establish a substantial relationship between the Schedule B disclosure requirement and a compelling government interest.

The strength of the government's interest aside, the Court held AFP would independently prevail on its as-applied challenge based on its demonstration of an actual First Amendment burden imposed on it by the requirement. The Court explained that evidence necessary to succeed on an as-applied challenge may be established by examples of past or present harassment of an organization or its members, or a history of threats or manifestations of public hostility. The Court then recounted evidence of harassment and threats directed at AFP, its employees and donors. The examples ranged from general harassment from protestors to, in the case of some high-profile supporters, specific death threats. At least one supporter testified that he considered discontinuing funding to AFP in response to the threats. The Court acknowledged that the record in AFP's case is not as violent as in some other as-applied challenges, but added that it is not prepared to wait for such threats to be carried out.

The Attorney General countered that it is not seeking to make the Schedule B information publicly available — only confidentially for the use of the Attorney General. The Court, however, voiced a strong lack of confidence in the state's confidentiality practices. It stated that there have been numerous examples of the Attorney General's office publicly releasing on its website Schedule B information that was supposed to have been kept confidential. The Court determined that the Attorney General is unprepared for the task of keeping the information confidential.

Having held that AFP succeeded in its as-applied challenge, the Court concluded that AFP was entitled to injunctive relief. In applying a four-factor test for such relief, the Court noted that: (1) AFP suffered irreparable harm from the Schedule B disclosure requirement's chilling effect on association with AFP, (2) monetary damages were inadequate for a First Amendment violation, (3) an equitable remedy is warranted because the information could not be recalled if it were released publicly, and (4) public interest favors an injunction in First Amendment cases. Accordingly, the Court permanently enjoined the Attorney General from requiring AFP to file Schedule B with its charitable registrations.

Implications

California's charitable solicitation law requires charitable organizations to register with the Attorney General's Registry of Charitable Trusts and make annual filings if those organizations receive money or property in California, solicit donations in California, or are otherwise incorporated, formed or doing business within the state. A complete copy of Form 990, including an un-redacted copy of Schedule B, Schedule of Contributors, must be included with the annual registration filing (see CA Form RRF-1).

The federal District Court's decision to permanently enjoin the California Attorney General from requiring AFP to file with the state registry a copy of its Form 990 Schedule B illustrates the Court's willingness to carve out an exception to California's reporting requirements and provide relief on an "as-applied" challenge when disclosure of an organization's contributors' names will subject them to threats, harassment or reprisals. With respect to other charitable organizations, California's Attorney General can still continue to enforce the requirement that they file their entire Form 990 annually with the state, including Schedule B, which discloses the names, addresses and contribution amounts of their significant donors (generally those who contribute over $5,000 in cash or property during the year). It is uncertain whether the District Court's decision will eventually affect or change California's annual reporting requirements as applied to all charitable organizations subject to its charitable solicitation law.

California registered charitable organizations should review the reporting requirements to ensure they comply with the rules. Failure to file a complete report can result in penalties, fees and the loss of California income tax exemption. Out-of-state charitable organizations that would like to receive or solicit contributions in California should consider the effect of the reporting requirements on donor relations before soliciting donations within the state. All affected organizations should review their donor confidentiality policies to ensure that their donors understand the reporting requirements.

Please contact your EY professional with any questions.

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