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California Can't Compel Controversial Nonprofit to Disclose Donor Information.

(Parker Tax Publishing MAY 2016)

A district court held that the state of California cannot compel a controversial nonprofit to disclose the donor information it reports to the IRS on Schedule B of its Form 990. The court concluded that the California Attorney General's Schedule B disclosure requirement was unconstitutional as it applied to the nonprofit. Americans for Prosperity Foundation v. Harris, 2016 PTC 147 (C.D. Cal. 2016).

Americans for Prosperity Foundation (AFP) is a Code Sec. 501(c)(3) non-profit corporation that funds its activities by raising charitable contributions from donors throughout the country, including in California. California state law requires charitable organizations, such as AFP, to file a copy of its IRS Form 990, including Schedule B, with the California State Registry. An organization's Schedule B includes all the names and addresses of every individual nationwide who donated more than $5,000 to the charity during a given tax year. While a nonprofit's IRS Form 990 must be made available to the public, Code Sec. 6104 provides that an organization's Schedule B does not have to be made available to the public.

Beginning in 2001, AFP filed its Form 990 as part of its periodic reporting with the California Attorney General, without including its Schedule B. The Attorney General accepted AFP's filings and listed AFP as an active charity in compliance with the law. However, in 2013, the Attorney General declared AFP's 2011 filing incomplete because it did not include the organization's unredacted Schedule B. In response AFP asked a district court in Central California to enjoin the Attorney General from demanding its Schedule B. Among other claims, AFP argued that the California law requiring disclosure of its Schedule B to the Attorney General was facially unconstitutional. AFP also contended that the disclosure requirement was unconstitutional as-applied to it.

Before the district court, AFP argued that its employees, supporter and donors faced public threats, harassment, intimidation, and retaliation once their support for, and affiliation with, the organization became known. Mark Holden, the General Counsel for Koch Industries, testified that Charles and David Koch, two of AFP's most high-profile associates, have faced death threats, attacks, and harassment. Another major donor testified that after protestors attempted to enter a building where an AFP event was going on, they began to push and shove AFP guests to keep them inside the building. The donor said that when he attempted to help a woman in a wheelchair exit the building, protesters blocked their path. Once they got out of the building, the donor said, they still had to go through a hostile crowd that was shouting, yelling, and pushing. This donor also noted that his businesses had been picketed because of his affiliation with AFP.

The Attorney General argued that the state law requiring that all charities file a complete copy of IRS Form 990 Schedule B placed no actual burden on First Amendment rights and was substantially related to the Attorney General's compelling interest in enforcing the law and protecting the public. The Attorney General claimed that the state's use for Schedule B information is compelling since that information reveals not just how much revenue a charity receives, but also who is donating it and how it is being donated. Additionally, the Attorney General claimed that such information allows the state to determine whether an organization has violated the law, including laws against self-dealing, improper loans, interested persons, or illegal or unfair business practices. The Attorney General also argued that it was only seeking disclosure of AFP's Schedule B for nonpublic use and therefore there was no potential for public targeting of private donors.

The district court for Central California granted AFP's request for an injunction prohibiting the state of California from requesting AFP's Schedule B information. According to the court, setting aside the Attorney General's failure to establish a substantial relationship between the demand for AFP's Schedule B and a compelling governmental interest, AFP prevailed on its as-applied challenge because it proved that disclosing its Schedule B to the Attorney General would create a burden on its First Amendment rights. The court noted that, while the Ninth Circuit, in Center for Competitive Politics v. Harris, 784 F.3d 1307 (9th Cir. 2015), foreclosed any facial challenge to the Schedule B requirement, it specifically left open the possibility that a party could show "a reasonable probability that the compelled disclosure of [its] contributors' names will subject them to threats, harassment, or reprisal from either Government officials or private parties' that would warrant relief on an as-applied challenge."

The court noted that, over the course of trial, the Attorney General was hard pressed to find a single witness who could corroborate the necessity of Schedule B forms in conjunction with the office's investigations. Further, the court said, even assuming that this information did genuinely assist in the Attorney General's investigations, its disclosure demand of Schedule B was more burdensome than necessary.

With respect to the Attorney General's assertion that AFP's Schedule B information would not be made public, the court noted that the Attorney General's inability to keep confidential Schedule Bs private was of serious concern. As it was made abundantly clear during trial, the Attorney General had systematically failed to maintain the confidentiality of Schedule B forms. The amount of careless mistakes made by the Attorney General's division that handles Form 990s and Schedules B, the court said, was shocking.

For a discussion of the annual reporting requirement for a Form 990 and the public inspection requirement, see Parker Tax ¶65,501.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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