Highlights from the ABA Exempt Organizations Committee Meeting 2/1/22 – Part Two – Nonprofit Law Blog

Consequences of Americans for Prosperity Foundation v. Bonta

We are left to conclude that the Attorney General’s disclosure requirement imposes a widespread burden on donors’ associational rights. And this burden cannot be justified on the ground that the regime is narrowly tailored to investigating charitable wrongdoing, or that the State’s interest in administrative convenience is sufficiently important. We therefore hold that the up-front collection of Schedule Bs is facially unconstitutional, because it fails exacting scrutiny in “a substantial number of its applications . . . judged in relation to [its] plainly legitimate sweep.” 

Americans for Prosperity Foundation v. Bonta

Background: Thomas More Law Center and the Americans for Prosperity Foundation challenged state donor disclosure requirements as violating the First Amendment (compelled disclosure of affiliation with groups engaged in advocacy may constitute as effective a restraint on freedom of association); 9th Circuit held that donor disclosure was related to an important state interest in policing charitable fraud, despite risks that donors might face “substantial harassment” if their contributions became public; the U.S. Supreme Court granted cert. and reversed the 9th Circuit holding by a 6-3 vote, holding that the compelled disclosure of Form 990 Schedule B (Schedule of Contributors) is facially invalid not narrowly tailored to the state’s interest in investigating charitable misconduct using an exacting scrutiny standard.

The dissent objected to (1) the requirement of narrow tailoring because it potentially renders many other reporting and disclosure requirements unconstitutional and (2) the facial challenge (that the legislation, and not just its application, is always unconstitutional) as being too broad.

First Amendment – “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

Freedom of Association – Individual identity derives from group memberships; To protect individual expression, the Constitution must also protect group associations. After APF v. Bonta, what will freedom of association protect? Shift may concern regulators.

IRS Collection of Schedule B – The Court noted that “revenue collection efforts and conferral of tax-exempt status may raise issues not presented by California’s disclosure requirement, which can prevent charities from operating in the State altogether”.

Form 990 Disclosure Limitations – (1) Some organizations (not too surprisingly, including some that exist only for a single election cycle) choose not to file the Form 990 and have their 501(c)(3) status revoked after three consecutive years of missed filings. These organizations may also face some penalties, but their work has been completed and donors have received deductions without disclosure to the IRS. (2) More than a few Forms 990 are prepared without sufficient competence and some with the goal of obscuring certain information from public disclosure. (3) The IRS, especially in its current state, does not have sufficient resources to adequately review Forms 990 for compliance.

State Responses to APF v. Bonta

  • California AG’s Registry of Charitable Trusts “will no longer require” (effective July 1, 2021).
  • Hawaii AG’s Tax & Charities Division “will no longer require.”
  • New Jersey’s Division of Consumer Affairs says requirement “can no longer be enforced.”
  • New York AG’s Charities Bureau “has suspended” collection and issued a proposed regulation requiring instead either a redacted Schedule B or the gross amount of contributions received from New York sources.

But it’s still uncertain how APF v. Bonta may affect donor disclosure requirements for state tax-exemption purposes (e.g., California Franchise Tax Board Form 199) and for campaign finance donor disclosure requirements. On the latter issue, there has been at least one case upholding a state’s donor disclosure law: Gaspee Project v. Mederos. See Federal appeals court upholds Rhode Island donor disclosure law.