Supreme Court Requires California Tax-Exempt Organization to Provide Donor Information
California, as do a number of other states, annually requires tax-exempt organizations registered in the state to submit a complete copy of its Form 990, Return of Organization Exempt from Income Tax, including all schedules, filed with the Internal Revenue Services (“IRS”). Therefore, it was ruled that, in order for the organization to continue to be able to solicit funds in the State of California, the Center must provide the requested donor information.
Background
The Center is an organization recognized by the Internal Revenue Service (“IRS”) as tax-exempt under Internal Revenue Code (“IRC”) §501(c)(3). As outlined on its website, the mission of the Center states that “through strategic litigation, communication, activism, training, research, and education, works to promote and defend First Amendment rights to free political speech, assembly, and petition. We are the nation’s largest organization dedicated solely to protecting First Amendment political rights.” The Center solicits funds to help support its charitable tax-exempt mission of protecting the rights of Americans to engage in free speech on controversial matters such as politics, public policy, and elections.
As with all tax-exempt organizations, in order for the Center to maintain its tax-exempt status, it is required to be compliant with both Federal and state reporting and registration requirements. As such, the Center annually files a Form 990 with the IRS which includes a Schedule B, Schedule of Contributors. Although the Form 990 is a public document, pursuant to Federal law, the names and addresses of donors included in Schedule B are redacted and are not available for public inspection. The donor information disclosed in Schedule B is the prominent issue surrounding this litigation. Schedule B instructions generally require a tax-exempt organization to report the name, address and total contribution of any donor which contributed $5,000 or more in cash or non-cash items to the organization during its tax year. Additionally, on a state level, California tax-exempt organizations must apply for and receive an exempt determination or acknowledgement letter from the State of California Franchise Tax Board to be considered tax-exempt in the State of California. The application that must be completed in order to receive tax-exempt status in the State of California is a Form 3500, Exemption Application. Once an organization’s tax exemption is approved within the State of California, the organization must file annually a Form 199, Exempt Organization Annual Information Return, with the Secretary of the State. As outlined in the instructions to Form 199, taxpayers must enclose “a copy of the complete IRS Form 990, 990-EZ or 990-PF with schedules” with their Form 199 filing on an annual basis.
A tax-exempt organization must be registered with the California Registry of Charitable Trusts in order to legally solicit tax-deductible contributions in California. In order maintain registration in the California Registry of Charitable Trusts, a tax-exempt organization must attach a complete copy of its Form 990; including Schedule B, when filing annual reports with the State Attorney General.
The Case
The State of California wrote to the Center to request a complete copy of the organization’s Form 990, Schedule B, with the names and addresses of all donors disclosed since the Center had omitted the names and addresses of its contributors in its filing with the State of California. The Center argued that the California Attorney General’s requirement of submitting a completed Schedule B to its state filings was not required under IRC §6104.
The Center argued that enforcing the Schedule B policy placed an undue burden on the organization and the fear that California has been unable to consistently keep donor information confidential. The Center also argued that IRC §6104 specifically prevents the California State Attorney General from requesting the Center to provide its Schedule B as filed with the IRS.
Notwithstanding the facts presented, the U.S. Supreme Court agreed with the decision by the Ninth Circuit in that IRC §6104 is intended to regulate the IRS and not ban all means of accessing donor information. The Ninth Circuit stated that the Center failed to show that there was any actual burden on its associational rights by providing the organization’s Schedule B to the California Attorney General. The California Attorney General also stated that it requests a full copy of the Schedule B to help protect the public from fraud and the misuse of charitable donations.
Conclusion
This is not the first time the disclosure of donor information to a state jurisdiction has been challenged. As noted in our Withum Weekly Pulse dated September 9, 2015, on July 27, 2015, a U.S. District Court issued an opinion in Citizens United v. Schneiderman, 14-CV-3703 (S.D.N.Y). As noted in the opinion, Citizens United and Citizens United Foundation, collectively the “Plaintiffs”, had been denied a motion “seeking to preliminary enjoin the New York Attorney General from enforcing his policy of requiring registered charities to disclose the names, addresses, and total contributions of their major donors in order to solicit funds in the state.” New York, as do a number of other states, annually requires tax-exempt organizations registered in the state to submit a complete copy of their Form 990, Return of Organization Exempt from Income Tax, including all schedules, filed with the Internal Revenue Service (“IRS”). Therefore, it was ruled that, in order for the organization to continue to be able to solicit funds in the State of New York, the Plaintiffs must provide the requested donor information.
While charitable organizations are always looking to increase donations there is much concern that states’ requirements for full transparency could negatively impact an organization’s ability to solicit such funds. The states generally counter this argument by noting that their respective policies would require that this information be kept confidential and as such would cause no adverse conditions for the charitable organizations.
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