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Landmark Supreme Court Ruling Favors of Donor Privacy

Supreme Court

In a landmark ruling issued at the end of June 2021, the Supreme Court overturned a California law requiring donor disclosure in favor of donor privacy rights.

Background

Nearly a decade ago, the State of California, under then-Attorney General Kamala Harris, began requiring nonprofits incorporated and/or registered in the state to submit Schedule B of IRS Form 990 along with its other required annual filings.  Schedule B is a listing of donors giving more than $5,000 per year to a nonprofit.  Under federal law, Schedule B is not subject to public disclosure, but the State of California’s law made the information contained in it public anyway.

This new interpretation of existing regulations by AG Harris naturally brought major privacy concerns, and with it, the ire of many nonprofits across the political spectrum.  Ideological foes like Americans for Prosperity and the ACLU found themselves in rare agreement that California’s law violated the privacy and free-association rights of donors to charities and other nonprofits operating in California.

The Court Case

For many years, California deemed charities that filed Schedule B federally to be in compliance with state disclosure laws, though this meant that donor information was private.  Harris’s office reinterpreted existing law and issued new guidance requiring state filing of federal Schedule B, supposedly to better monitor “dark” money contributions to nonprofits.

The Americans for Prosperity Foundation, or AFP, refused to comply with the new regulations, and filed the original lawsuit that became known as Americans for Prosperity Foundation v. Bonta.  AFP won at the federal district court level.  In that case, the judge not only found the regulations to violate the First Amendment, but that California lied when it said it kept the information private.  AFP provided evidence that the state displayed about 1,800 Schedule Bs on its website.

California appealed to the 9th Circuit Court of Appeals, however, and won.  The panel of judges reversed the district court ruling, finding that the state’s requirement “promoted investigative efficiency” and that it had sufficiently dealt with the leaking of information.

AFP petitioned the Supreme Court, which agreed to take up the case this past term.

The Ruling

In a 6-3 vote, the US Supreme Court handed California a loss in what is considered a landmark case of lasting reach.  The majority found that California’s donor disclosure requirement was unconstitutional, and violated First Amendment guarantees of free speech and free association.

Chief Justice John Roberts, writing for the majority, said,

California casts a dragnet for sensitive donor information from tens of thousands of charities each year, even though that information will become relevant in only a small number of cases.

Justice Roberts likened California’s requirements to those of segregationist states requiring lists of members of the NAACP, saying,

Because N.A.A.C.P. members faced a risk of reprisals if their affiliation with the organization became known — and because Alabama had demonstrated no offsetting interest ‘sufficient to justify the deterrent effect’ of disclosure — we concluded that the state’s demand violated the First Amendment.

Another weakness in the state’s argument was that the information was needed for enforcement and oversight of charities in California.  Despite this claim, the state was unable to produce evidence that the information was ever used in prosecuting a case against a nonprofit.  Roberts wrote,

We do not doubt that California has an important interest in preventing wrongdoing by charitable organizations.  There is a dramatic mismatch, however, between the interest that the attorney general seeks to promote and the disclosure regime that he has implemented in service of that end.

Quoting the district court trial judge, Roberts continued,

There was not ‘a single, concrete instance in which pre-investigation collection of a Schedule B did anything to advance the attorney general’s investigative, regulatory or enforcement efforts.’  In reality, then, California’s interest is less in investigating fraud and more in ease of administration. This interest, however, cannot justify the disclosure requirement.

Roberts was joined by Justices Clarence Thomas, Samual Alito, Neil Gorsuch, Brett Kavanaugh, and Amy Coney Barrett.  Justices Sonya Sotomayor, Stephen Breyer, and Elena Kagan were in dissent, with Sotomayor writing,

California’s interest in exercising such oversight is especially compelling given the size of its charitable sector.  Nearly a quarter of the country’s charitable assets are held by charities registered in California.

One major problem with the logic of that dissent, however, requires an insider’s knowledge of how charity registration works.  California requires non-California-based charities to register in their state if they receive any amount of contributions from a California resident.  That means a very significant number of nonprofits registered in California aren’t native to the state, rendering the statement misleading to most people.

The Ramifications

The most important aspect of this case is the protection of First Amendment rights to free speech and association for donors.  States will no longer have the ability to go on fishing expeditions, casting a wide net over donor activity in search of a violation.  Neither will donors have to fear the leaking of their personal business in an era of Cancel Culture.

Another important point to make is that this never had to happen.  California, along with every other state, always had the ability to subpoena federal Schedule B information if it was pursuing a real case of enforcement.  That privilege still exists even after this ruling.

As I said, this is a landmark ruling.  Its impact will be felt across the country for many years to come, and it’s a victory for individual liberty and donor privacy.

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Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 2 Comments

  1. Thanks for your excellent article, Greg. I rely on your newsletter to help keep me abreast of the nonprofit sector.

    However, I question your use of the term Cancel Culture in the article. It’s fine that you have a particular political perspective. And it’s fine that you expressed strong support for the ruling.

    But everything is so polarized these days. Many people look for valuable information that is just that: valuable information — without the polarizing labels that feed the divisiveness in today’s world.

    But thanks again for all that you do!

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