Americans For Prosperity Foundation. v. Harris, (DC CA 4/21/2016) 117 AFTR 2d ¶ 2016-644
A U.S. district court has held that the state of California’s requirement that tax-exempt organizations submit IRS Form 990 Schedule B, which discloses names and contributions of significant donors, to the state is unconstitutional in its application to the organization that brought the case. As a result, the court permanently enjoined California from requiring the organization to file Schedule B.
Background. Regs require non-profit educational or charitable organizations registered under Code Sec. 501(c)(3) to disclose the names and contributions of their “significant donors” (donors who have contributed more than $5,000 in a single year) on Form 990 Schedule B. (Reg. § 1.6033-2(a)(2)(ii)(f)) While a nonprofit’s federal tax return, IRS Form 990, must be made available to the public, that requirement does not apply to an organization’s Schedule B. (Code Sec. 6104(b); Code Sec. 6104(d)(3)(A))
Cal. Code Regs. tit. 11, § 301 (Sec. 301) requires charitable organizations to file a copy of their IRS Form 990, including its Schedule B, with the State Registry.
Facts. Since 2001, Americans for Prosperity Foundation (AFP), a tax-exempt organization, has filed its Form 990 as part of its periodic reporting with the California Attorney General, without including its Schedule B. For each year from 2001 through 2010, the Attorney General accepted AFP’s registration renewal and listed AFP as an active charity in compliance with the law. However, the Attorney General declared AFP’s 2011 filing incomplete because it did not include the organization’s Schedule B.
In December 2014, AFP brought a case in U.S. district court seeking an order preliminarily enjoining the Attorney General from demanding its Schedule B. AFP challenged Sec. 301 on two grounds: that it was facially unconstitutional and that it was unconstitutional as applied to AFP. With respect to the second ground, AFP argued that Sec. 301 chills the exercise of AFP donors’ First Amendment freedoms to speak anonymously and to engage in expressive association.
The district court granted the preliminary injunction. The case was then remanded. (Americans for Prosperity Foundation, (CA 9 2015) 116 AFTR 2d 2015-7171) In its remand, the Ninth Circuit held that the district court is bound by the Ninth Circuit’s previous decision in Center for Competitive Politics v. Harris, (CA 9 2015) 15 AFTR 2d 2015-1711, that the Attorney General’s nonpublic Schedule B disclosure regime was not facially unconstitutional. The Ninth Circuit did, however, instruct the district court to have a trial on the as-applied challenge.
The Ninth Circuit in Center for Competitive Politics held, with respect to the issue of constitutionality, that compelled disclosure of the plaintiff’s contributors’ identities didn’t violate its and its supporters’ First Amendment right of association because there was no indication that contributors were subject to harassment as result of the disclosure requirement, disclosure wouldn’t be public, and having contributors’ information increased the Attorney General’s investigative efficiency and allowed her to identify suspicious behavior.
California’s disclosure requirement is unconstitutional as applied to AFP. The district court has held that California’s Schedule B disclosure requirement is unconstitutional in its application to AFP and has permanently enjoined California from requiring AFP to file Schedule B.
The court said that First Amendment challenges to laws requiring citizen disclosures are reviewed using an “exacting scrutiny” standard. ( John Doe No. 1 v. Reed, (S Ct 2010) 561 U.S. 186; Citizens United v. FEC, (S Ct 2010) 558 U.S. 310 ) Exacting scrutiny requires a substantial relation between the disclosure requirement and a sufficiently important governmental interest. This encompasses a balancing test. In order for a government action to survive exacting scrutiny, the strength of the governmental interest must reflect the seriousness of the actual burden on First Amendment rights. ( John Doe No. 1 )
The court examined each element of the John Doe No. 1 criteria and found that Sec. 301 failed all of them in its application to AFP. For example:
Sufficiently important government interest. The court said that the Attorney General was hard pressed to find a single witness who could corroborate the necessity of Schedule B forms in conjunction with their office’s investigations. For example, it said, the only logical explanation for why AFP’s “lack of compliance” went unnoticed for over a decade was that the Attorney General does not use the Schedule B in its day-to-day business. Such an admission was made by a California government witness.
Actual burden on First Amendment rights. The court noted several ways in which Sec. 301 created an actual burden on AFP’s First Amendment rights, including:
- While the Ninth Circuit in Center for Competitive Politics 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 here said that, during the course of its trial, it heard ample evidence establishing that AFP, its employees, supporters and donors, including Charles and David Koch, faced public threats, harassment, intimidation, and retaliation once their support for and affiliation with the organization became publicly known.
- The State 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. However, the court concluded that the Attorney General systematically failed to maintain the confidentiality of Schedule B forms.
The court then addressed whether the injunction sought by AFP was the appropriate relief. It said that AFP met the four criteria that plaintiff seeking a permanent injunction must satisfy: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. For example, as to the balance of hardships test, the court said that once AFP’s donor information is disclosed, it cannot be clawed back. Thus, if the Attorney General is allowed to compel AFP to disclose its Schedule B, the ensuing intimidation and harassment of AFP’s donors, and resulting chilling effect on First Amendment rights, could not be undone.