Nonprofits Lose Donor Confidentiality Decision

Requiring nonprofits to file information with state charity regulators about some of their largest donors may turn off some contributors but not enough to warrant a burden on their First Amendment rights.

The ruling yesterday by a three-member panel in the U.S. Court of Appeals for the 9th Circuit in Pasadena, Calif., reversed an earlier decision by the District Court for the Central District of California. The case brought by the Americans For Prosperity Foundation and Thomas More Law Center has made its way through the California-based courts during the past few years and eventually could be appealed to the Supreme Court of the United States.

“The mere possibility that some contributors may choose to withhold their support does not establish a substantial burden on First Amendment rights,” Judge Raymond C. Fischer wrote in his opinion. The Schedule B requirement “is a far cry” from the broad, indiscriminate disclosure laws passed in the “1950s to harass and intimidate members of unpopular organizations.”

The Registry Unit of the California Attorney General’s Office ramped up enforcement of Schedule B obligations in recent years, drawing lawsuits from the two organizations.  The requirement “survives exacting scrutiny as applied to the plaintiffs because it is substantially relate to an important state interest in policing charitable fraud.”

Even if contributors might face substantial harassment if the information became public, the strength of the state’s interest in collecting the information reflects the “actual burden on First Amendment rights because the information is collected solely for nonpublic use, and the “risk of inadvertent public disclosure is slight.”

Fischer cited testimony that regulators could still complete their investigations without requiring the filing of Schedule B but they would not be as effective or as efficient.

Americans For Prosperity Foundation and the Thomas More Law Center have argued that requiring donor disclosure via Schedule B to state regulators opens their donors to the potential for harassment or retaliation and would chill contributions.

Evidence shows that some individuals who have or would support the plaintiffs might be deterred from contributing if plaintiffs are required to submit Schedule B to the attorney general, Fischer wrote, but the “evidence shows at most a modest impact on contributions.”

On average, the foundation and Americans For Prosperity combined lose roughly three donors a year due to concern that they will be disclosed and threats, according to testimony. The Law Center introduced a letter from a contributor who chose to make a $25 contribution anonymously out of fear that ISIS would break into the organization’s office, obtain a list of contributors and target them, according to the ruling.

Nonprofits also file Schedule B with the Internal Revenue Service (IRS) but the information is confidential and not available to the public.

Tuesday’s ruling was handed only a few months after the IRS and Department of Treasury announced revised reporting requirements for Schedule B for other types of 501(c) organizations. The new requirements, which will take effect next year, affect organizations that primarily don’t receive tax-deductible contributions, such as associations, labor unions and social welfare organizations.