A federal District Court in California has permanently enjoined the Attorney General of California from requiring a charitable organization to file a copy of its Form 990 Schedule B disclosure of significant donors with its charitable solicitation registration application for the state.  It is the latest and sharpest decision in a series of efforts to reduce the use of Schedule B to provide information to regulators about the donors to charitable organizations.  (Americans for Prosperity Foundation v. Harris, C.D. CA, No. CV-14-9448, 4/21/16.)

The Ninth Circuit Court of Appeals had held in another case in May, 2015 that the Attorney General’s requirement to file the full Schedule B was not unconstitutional on its face.  (See Nonprofit Issues, April, 2015)  The Attorney General claimed that the information was used for investigatory purposes and not made available to the public. 

The Court of Appeals left open the possibility that the charity involved there might be able to show that disclosure would subject their donors to threats or harassment that would warrant relief from the requirement “as applied.”  Apparently only California and New York have required the unredacted Schedule B submission in order to complete charitable solicitation registration in their states.  An attempt to enjoin the imposition in New York has also been rejected by the Second Circuit.

Americans for Prosperity Foundation originally obtained a preliminary injunction from the Central District Court in 2015.  Following an appeal by the Attorney General, the case was remanded for consideration in light of the Ninth Circuit’s opinion last year. 

The Court said that First Amendment challenges of this type of disclosure requirement are reviewed under the “exacting scrutiny” standard.  It requires a “substantial relation” between the disclosure requirement and a “sufficiently important governmental interest” and encompasses a balancing test between the governmental interest and the actual burden on First Amendment rights.

Although the Ninth Circuit found that the requirement bore a substantial relation to an important governmental interest, “this Court, unlike the Ninth Circuit,” the Court wrote, “had the benefit of holding a bench trial in the matter and was left unconvinced that the Attorney General actually needs Schedule B forms to effectively conduct its investigations.”

The Court said that a supervising investigator for the state had testified that out of approximately 540 investigations over the prior 10 years, only five involved Schedule B and even where it was relied on, the information could have been obtained from other sources.  The same investigator testified that he had successfully audited charities and found wrongdoing without the use of Schedule B.  “It is clear that the Attorney General’s purported Schedule B submission requirement demonstrably played no role in advancing the Attorney General’s law enforcement goals for the past ten years,” the Court said.

The Foundation also provided testimony that its donors, including Charles and David Koch, had been threatened and at least one had considered stopping funding to the organization.

Although the Attorney General argued that it kept the donors’ names confidential and did not release the Schedule Bs to the public, the Foundation identified 1778 forms that had been publicly listed on the AG’s website, including 38 which were discovered the day before the trial. “The pervasive, recurring pattern of uncontained Schedule B disclosures — a pattern that has persisted even during this trial — is irreconcilable with the Attorney General’s assurances and contentions as to the confidentiality of Schedule Bs collected by the Registry,” the Court said.  It also said it was “unconvinced” that proper procedures had been put in place to prevent such disclosure in the future.

“The Attorney General’s requirement that AFP submit its Schedule B chills the exercise of its donor’s First Amendment freedoms to speak anonymously and to engage in expressive association,” the Court wrote.  It said that the AFP demonstrated that the disclosure requirement had placed donors “in fear of exercising their First Amendment right to support AFP’s expressive and associational activity” and that the Attorney General’s right to cancel their registration would “preclude it from exercising its First Amendment right to solicit funds in California.”

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Efforts are also underway in Congress to eliminate Schedule B entirely, although it has many other uses by the IRS than it might have for a state regulator.