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In Thomas More Law Center v. Harris, CV 15-3048-R, the US District Court for the Central District of California found the State of California's demand for donor information via Form 990, Schedule B, was unconstitutional as applied against the Thomas More Law Center and issued a permanent injunction to enjoin the Attorney General of California from demanding Form 990, Schedule B.

Background

Thomas More Law Center (TMLC) is a Section 501(c)(3) organization that "represents clients who are in the midst of intense public scrutiny and often times on the receiving end of extremely negative criticism" (as described by the district court). Based in Ann Arbor, Michigan, TMLC funds its activities by raising charitable contributions nationwide, including in California.

An exempt organization must report donors who contribute $5,000 or more to the organization on IRS Form 990, Schedule B. An exempt organization generally is not required to disclose publicly the contents of Schedule B. Federal Treasury Regulation Section 301.6104(d)-1(b)(4)(ii) specifically excludes the "name and address of any contributor to the organization" from being included in the public disclosure copy of the annual information return of an exempt organization. The California Attorney General, however, requires organizations to file a copy of their Form 990, including an unredacted copy of Schedule B, with the state to maintain their registered status with the Attorney General's Registry of Charitable Trusts.

From 2001 through 2009, TMLC filed its Form 990 with the California Attorney General, but did not include Schedule B. The Attorney General wrote TMLC in March 2012, stating that the organization's 2010 filing was "insufficient" because it did not include a Schedule B. In April 2015, TMLC filed suit and requested an order preliminary enjoining the California Attorney General from demanding its Schedule B. TMLC argued that the California law requiring disclosure of its Schedule B to the Attorney General was facially unconstitutional. TMLC also brought an as-applied challenge against the disclosure requirement.

The district court granted a preliminary injunction to TMLC. On appeal, the US Court of Appeals for the Ninth Circuit (the Ninth Circuit) vacated the injunction, holding that the district court "is bound by its previous decision in Center for Competitive Politics v. Harris, 784 F.3d 1307, 1317 (9th Cir. 2015) — that the Attorney General's non-public Schedule B disclosure regime was not facially unconstitutional." (See Americans for Prosperity Found. v. Harris, 809 F.3d 536, 538 (9th Cir. 2015) and Tax Alert 2016-774.) The Ninth Circuit also instructed the district court to hold a trial on the "as-applied" constitutional challenge.

On remand

After a full bench trial on the as-applied challenge, the district court found that, as applied to TMLC, the filing of the Schedule B form is not substantially related to the California Attorney General's stated compelling interest in "protecting the public and ensuring that charitable organizations are not abusing their legal privileges."

In its holding, the Court noted that the State of California's position is "undercut by the fact that the State has only recently determined a need for the information and has access to the same information from other sources." Further, even if the information genuinely assisted in the Attorney General's investigations, the Court held that the demand for Schedule B disclosure is more burdensome than necessary. Investigators and state attorneys testified that they had completed successful investigations without Schedule B; had accessed information contained in Schedule B from numerous other sources; and had successfully conducted investigations for years before Schedule B was ever created. The Attorney General's ability to obtain information to successfully investigate charitable organizations through other means demonstrated that the use of Schedule B was not substantially related to California's important interest in regulating charitable organizations and that its interests could be more narrowly achieved. Although the Court could not find the disclosure requirement to be facially invalid, it did find the requirement unconstitutional as applied to TMLC, especially considering the burdens on TMLC's First Amendment rights.

The Court also held that TMLC could independently prevail on its as-applied challenge by proving that being required to disclose its Schedule B to the Attorney General would burden TMLC's First Amendment rights, particularly by its showing a reasonable probability that disclosing contributors' names "will subject them to threats, harassment, or reprisal from either Government officials or private parties." The Court noted that the US Supreme Court stated that the type of evidence to succeed in an as-applied challenge includes "past or present harassment of members due to their associational ties, or of harassment directed against the organization itself, or a pattern of threats or specific manifestations of public hostility." The Court found that TMLC had furnished such evidence.

The Court noted the nature of TMLC's advocacy arouses "intense passions" and its clients are frequently subjected to denigration and insults that have resulted in threats, harassing phone calls, and intimidating and obscene emails. Because TMLC donors and the organization tend to share similar views, the Court reasoned, "the evidence of threats and harassment directed toward TMLC because of [its] views indicates a high likelihood of similar treatment towards donors."

The Court concluded that TMLC had produced evidence to establish a reasonable probability that compelling disclosure of the identity of its donors would burden the donors' First Amendment rights. This harm to First Amendment rights was "sufficient to outweigh the Attorney General's interest in protecting the public from illegal charitable organizations and her overly burdensome means of achieving that interest." Forcing TMLC to choose to be able to operate as a charitable organization in California by revealing the names of donors who wanted to remain anonymous caused TMLC "an irreparable" First Amendment injury that outweighed any inconvenience the state may suffer from not having access to the donor information on Schedule B.

Implications

Charitable organizations that receive money or property in California, solicit donations in California, or are otherwise incorporated, formed, or doing business within the state must register with the Attorney General's Registry of Charitable Trusts and renew their registration annually. A complete copy of Form 990, including an unredacted copy of Schedule B, Schedule of Contributors, must be included with the annual registration renewal filing (see CA Form RRF-1). An organization's Schedule B reports the names and addresses of every individual nationwide who donated more than $5,000 to a charity during a given tax year.

This district court's holding in both the Americans for Prosperity Foundation (AFP) case and now the TMLC case illustrates its continued willingness to recognize an exception to California's reporting requirement of filing with the registry an organization's Form 990 Schedule B and to provide relief to organizations on an "as-applied" challenge when there is evidence showing a reasonable probability that the disclosure of an organization's contributors' names will subject them to threats, harassment, or reprisal from either government officials or private parties. Although, after the AFP litigation concluded, the state's registry confidentiality policy was codified in a formal regulation and procedures were adopted to ensure proper handling of confidential documents, it is unclear whether the state will move to further modify its annual reporting requirements in light of the court's decision in the TMLC case.

Both of these cases serve as a reminder to charitable organizations registered in California to review the state's reporting requirements to ensure they comply with all of the rules in order to avoid penalties and potential loss of California income tax exemption. Additionally, out-of-state charitable organizations that seek to receive or solicit contributions in California should consider the effect of the Form 990 Schedule B disclosure requirement on donor relations before soliciting donations within the state. In light of both of these decisions, California charitable organizations should perform a review of their donor confidentiality policies and disclosures to confirm that donors who make contributions to the organization are aware of the reporting requirements.

Please contact your EY Tax professional with questions about this case.

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— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg

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