Can a state force charitable organizations to disclose the identities of their donors?
On April 26, the Supreme Court heard oral arguments in the combined cases of Americans for Prosperity Foundation v. Bonta and Thomas More Law Center v. Bonta. The question before the court is whether the Attorney General of California can require tax-exempt charitable organizations to disclose the schedule of donors, which is attached to a charitable organization’s informational tax return filing with the Internal Revenue Service (IRS), as part of California’s charitable organization registration requirements. The Supreme Court’s ruling may have a wide impact across the country as more states have implemented or are exploring donor disclosure requirements of their own.
Most tax-exempt charitable organizations have an annual informational tax return filing obligation with the IRS. Though requirements may vary based on the organization’s structure, a tax-exempt charitable organization generally must file a Form 990 or 990-PF. The Bonta cases involve a schedule to the informational filing - Schedule B - which lists the names and addresses of donors who contributed more than $5,000 to the organization in the preceding fiscal year. Currently, the IRS redacts donor information on Schedule B in the publicly available copies of tax returns for charitable organizations that qualify as public charities. The law at issue requires public charities to disclose the donor information that is reported to the IRS to California as part of the registration and reporting requirements to solicit charitable contributions in California.
California is arguing that the donor data is necessary to detect and investigate fraud and prevent abuse of tax-exempt status. Some charitable organizations say the disclosure requirement creates a chilling effect on speech because donors may face threats of violence or other backlash when they contribute to controversial causes and the donors’ identities are deliberately or inadvertently disclosed. The charitable organizations also suggest that California could achieve its purpose by requesting donor information on a case-by-case basis.
Once provided to California, the Schedule B information remains confidential and is to be used only to protect the interests of Californians. The petitioners allege, however, that California has already accidentally published thousands of Schedule B donor disclosure forms and has failed to protect donor data. Critics of California’s donor disclosure requirement argue that if California’s requirement is upheld, then more states will create their own donor disclosure requirements and more donor identity leaks or breaches are likely.
The Supreme Court’s decision about California’s donor disclosure requirement is expected during summer 2021. This case highlights the challenge that tax-exempt organizations face when navigating shifting and sometimes conflicting state and federal requirements. State-level registration and reporting requirements can vary significantly.
Taft frequently helps tax-exempt organizations understand and fulfill their state registration requirements. Please contact us if you have questions concerning compliance for your organization.