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In a 6-3 decision, the US Supreme Court has reversed and remanded (Americans for Prosperity Foundation v. Bonta) a Ninth Circuit decision that would have continued to allow California to require charities to submit federal Form 990 Schedule B, Schedule of Contributors, to the state's Attorney General. Applying an exacting-scrutiny standard, the Supreme Court concluded that California's requirement to submit Schedule B was not narrowly tailored to the state's interest of investigating misconduct by charities.

Background

Americans for Prosperity Foundation and the Thomas Moore Law Center (together, "the petitioners") are IRC Section 501(c)(3) tax-exempt organizations that solicit charitable contributions in California. IRC Section 6033 generally requires IRC Section 501(c)(3) organizations to use Form 990, Schedule B, to report the names and addresses of substantial contributors (those who give more than $5,000 in a tax year). California also requires any charity to register annually with the Attorney General's Registry of Charitable Trusts if the charity does the following within the state: (1) receives money or property, (2) solicits donations, or (3) is incorporated, formed or does business. This registration process includes providing a copy of Form 990, including an unredacted copy of Schedule B, with the annual renewal filing.

Challenging California's collection of Schedule B information, the petitioners argued that the state's disclosure requirement impermissibly burdened their First Amendment right to free association by deterring individuals from making contributions. The California Attorney General contended that (1) it used the information solely to prevent charitable fraud, and (2) the information is not made public except in limited circumstances.

Permanently enjoining California from requiring charities to produce Form 990, Schedule B, a US district court held that the state's Schedule B requirement violated the First Amendment and that learning the identity of donors through Schedule B was not narrowly tailored to the state's interest in investigating fraud by charities (see Tax Alert 2016-0774).

The Ninth Circuit reversed this decision, rejecting the lower court's application of a "narrowly tailored" requirement and holding the state's donor disclosure requirement did not violate the First Amendment (see Tax Alert 2018-1820). Applying an exacting scrutiny standard, the appeals court concluded that California's Schedule B requirement was substantially related to an important state interest in policing fraud by charities and that complying with the requirement did not impose a significant First Amendment burden. Further, the circuit court found the petitioners had failed to show that requiring a charity to provide Schedule B either meaningfully deterred contributions or, given the low risk of public disclosure, resulted in a reasonable probability of substantial harassment.

Supreme Court decision

Reversing the Ninth Circuit, the Supreme Court held that California's Schedule B requirement was invalid on its face because it burdens the First Amendment rights of donors and is not narrowly tailored to an important government interest. Chief Justice Roberts wrote the majority opinion, in which Justices Kavanaugh and Barret joined in full. Justices Alito, Gorsuch and Thomas concurred with portions of the majority opinion and wrote concurring opinions.

Citing NAACP v. Alabama, 357 U.S. 449 (1958), the Court emphasized that "'compelled disclosure of affiliation with groups engaged in advocacy may constitute as effective a restraint on freedom of association as [other] forms of governmental action.'" Citing Buckley v. Valeo, 424 U.S. 1 (1976), to explain the exacting-scrutiny standard, the Court stated that a substantial relationship must exist between the disclosure requirement at issue and "a sufficiently important governmental interest."

For a government-mandated disclosure to satisfy exacting scrutiny, it must be "narrowly tailored to the government's asserted interest," even if there is a less restrictive means for the government to obtain the information sought, the Court stated. Applying this standard, California's requirement that all charities disclose their Schedules B to the state "is facially unconstitutional," the Court held.

Further, the Court noted, the information collected through Schedule B "does not form an integral part of California's fraud detection efforts." Characterizing California's Schedule B requirement as imposing a "widespread burden" on donors' rights of association, the Court found this burden could not be justified by the state's interest in investigating fraud and self-dealing by charities.

Dissenting, Justices Sotomayor, Breyer and Kagan described the majority opinion as "recklessly hold[ing] a state regulation facially invalid despite petitioners' failure to show that a substantial proportion of those affected would prefer anonymity, much less that they are objectively burdened by the loss of it."

Implications

Although the Court held that the exacting-scrutiny standard does not require the government to use the "least-restrictive" means of achieving its stated interest, the Court found that the up-front collection of Schedule B information, as required by California, still failed to meet that standard. In arguing that the state could have achieved the same interest by directly subpoenaing or auditing Schedule B of a given charity, the Court has opened the door for legal challenges to similar disclosure regimes in other states, with the premise that such regimes exist primarily to ease administrative burdens on the state. In addition, the Court's holding that disclosure requirements impose associational burdens, despite relatively little evidence showing a chilling effect on petitioner's donors, creates a much lower threshold for would-be challengers to similar laws.

Organizations should monitor any changes to the rules and regulations regarding donor disclosure in states where they solicit donations, as new reporting requirements and legal challenges to the same will likely continue as a result of this Supreme Court decision. Furthermore, regardless of whether donor names and addresses must be disclosed, every tax-exempt organization should continue to collect and keep such data for its books and records.

Please contact your Ernst & Young LLP professional for further information.

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