Court Halts Efforts by California Attorney General to Obtain Charity's IRS Schedule B, Donor Information Holding that Requiring Disclosure of Donor Information Violates First Amendment

Court Halts Efforts by California Attorney General to Obtain Charity's IRS Schedule B, Donor Information Holding that Requiring Disclosure of Donor Information Violates First Amendment

Article posted in U.S. District Court on 11 July 2016| comments
audience: National Publication, Richard L. Fox, Esq. | last updated: 1 August 2016


A recent court case holds in favor of a non-profit's rights to keep the names of donors private under the First Amendment.

By: Richard L. Fox, Esq.

In Americans for Prosperity Foundation v. Harris, 117 AFTR 2d 2016-34 (DC CA, April 21, 2016), Federal District Court Judge Manuel L. Real ruled that the Virginia-based group Americans for Prosperity Foundation, an IRC § 501(c)(3) public charity founded by billionaire brothers Charles and David Koch, does not have to turn over the IRS Schedule B filed with its Form 990 that contains information on donors to the organization   The court issued a permanent injunction barring California Attorney General Kamala Harris from seeking the organization’s list of donor names and address that are contained in IRS Schedule B, and further directs her office to accept that the foundation is in full compliance with the state's charitable registration requirements without having to submit an unredacted IRS Schedule B. 

In issuing the permanent injunction, the court held that the state law requiring AFP to disclose donor information, “as-applied” this particular organization, would be in violation of the twin guarantees of free speech and free association provided under the First Amendment of the United States Constitution.  The decision of the court let stand the general policy in California requiring submission of IRS Schedule B, as the state law requiring disclosure of donor information was not determined to be facially unconstitutionally.  The decision leaves the door open to challenges from individual organizations to show that their donors would be intimidated or chilled by the disclosure of donor information in violation of the First Amendment.  The court determined that AFP had done just that and, therefore, under the United Sates Constitution could not be compelled to furnish an unredacted Schedule B. 


In Americans for Prosperity Foundation v. Harris, 117 AFTR 2d 2016-34 (DC CA, April 21, 2016), the plaintiff, Americans for Prosperity Foundation (“AFP”), was a Virginia-based nonprofit corporation classified as a tax-exempt organization under IRC § 501(c)(3) and a public charity under IRC §§ 170(b)(1)(A)(ii) and 509(a)(1), founded by billionaire brothers Charles and David Koch.  The AFP educates the public about the principles and benefits of a free society and funds its activities by raising charitable contributions from donors throughout the country, including in California. California state law requires charitable organizations, such as AFP, to annually submit state registration reports, as well as a copy of its IRS Form 990, including IRS Schedule B, with the Attorney General of the State of California (“Attorney General”). See Cal. Code Regs. tit. 11, § 301.  

An IRS Schedule B includes all the names and addresses of every individual nationwide who donated more than $5,000 to the charity during a given tax year. While a Form 990 must be made available to the public, an IRS Schedule B is not subject to public disclosure.  IRC § 6104(b) (requirement of public availability of Form 990), (d)(3)(A) (donor nondisclosure requirement with respect to Schedule B, except for private foundations). 

Since 2001, AFP filed its Form 990 as part of its periodic reporting with the Attorney General, without including its IRS 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 applicable state law.  In a letter dated March 7, 2013, however, the Attorney General declared AFP's 2011 filing incomplete because it did not include the organization's unredacted IRS Schedule B that was included in its Form 990 filing with the IRS.  In December 2014, AFP brought an action in Federal District Court in California seeking an order preliminarily enjoining the Attorney General from obtaining its Schedule B.  Among other claims, AFP argued that the California law requiring disclosure of its Schedule B to the Attorney General was facially unconstitutional in violation of the First Amendment.  AFP also argued that even if the state law disclosure requirement was not facially unconstitutional, the disclosure requirement was in violation of the First Amendment “as- applied” to it.

On February 23, 2015, the Federal District Court granted AFP's motion for preliminary injunction, finding that the AFP had raised serious questions going to the merits of its case and demonstrated that the balance of hardships sharply favored AFP.   That decision was appealed by the Attorney General and remanded by the Ninth Circuit. Americans for Prosperity Foundation v. Harris, 809 F.3d 536, 116 AFTR 2d 2015-7171 (9th Cir. 2015). In its remand, the Ninth Circuit held that the Court is bound by its previous decision in Center for Competitive Politics v. Harris, 784 F.3d 1307, 115 AFTR 2d 2015-1711 (9th Cir. 2015), that the Attorney General's Schedule B disclosure regime was not facially unconstitutional. Americans for Prosperity Foundation, 809 F.3d at 538. The Ninth Circuit did, however, instruct the Federal District Court to hold a trial on the “as-applied” challenge.  After conducting a full bench trial, the court held that the Attorney General's Schedule B disclosure requirement as-applied to AFP was in violation of the First Amendment and, therefore, unconstitutional.  

Court Holds That Requiring IRS Schedule B to be Disclosed Violates First Amendment As-Applied to AFP

In its holding, the court first noted that courts must review First Amendment challenges to disclosure requirements under an “exacting scrutiny” standard.  John Doe No. 1 v. Reed, 561 U.S. 186, 187 (2010); Citizens United v. FEC, 558 U.S. 310, 366 (2010).  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, 561 U.S. at 196. 

The court rejected that Attorney General’s argument that the state law requiring all charities to file a complete copy of IRS Schedule B is substantially related to the Attorney General's compelling interest in enforcing the law and protecting the public.  The Attorney General claimed that her use for Schedule B information is compelling since that information reveals not just how much revenue a charity receives, but also who is donating it and how it is being donated.  Additionally, she claimed that such information allows her to determine whether an organization has violated the law, including laws against self-dealing, improper loans, interested persons, or illegal or unfair business practices.  

The Court found two issues with the stated purposes of the required disclosure as expressed by the Attorney General.  First, it found that over the course of trial 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.  As a threshold matter, the court stated that the record is undisputed that AFP had been registered with the Attorney General since 2001 and had never included a Schedule B with its annual filings.  For each year from 2001 through 2010, the court noted that the Attorney General accepted AFP's annual registration and listed the foundation as an active charity in compliance with the law. It was not until 2013 that the Attorney General first notified AFP that its 2011 filing was incomplete because of the lack of Schedule B.  In this regard, the court stated:

The only logical explanation for why AFP's 'lack of compliance' went unnoticed for over a decade is that the Attorney General does not use the Schedule B in its day-to-day business. In fact, such an admission was made by David Eller, the Registrar for [pg. 2016-1386] the Registry of Charitable Trusts in the Department of Justice. (Eller Test. 3/3/16 Vol. II, p. 75:16–20). As for the investigative unit of the Charitable Trusts Section, trial testimony confirmed that auditors and attorneys seldom use Schedule B when auditing or investigating charities.

Steven Bauman, a supervising investigative auditor for the Attorney General, testified that out of the approximately 540 investigations conducted over the past ten years in the Charitable Trusts Section, only five instances involved the use of a Schedule B. (Bauman Test. 3/4/16, p. 22:4–23:25). In fact, as to those five investigations identified, the Attorney General's investigators could not recall whether they had unredacted Schedule Bs on file before initiating the investigation. And even in instances where a Schedule B was relied on, the relevant information it contained could have been obtained from other sources. (Bauman Test. 3/4/16, p. 31:8–32:10).

On the second issue, the court stated that, even assuming arguendo that this information does genuinely assist in the Attorney General's investigations, its disclosure demand of IRS Schedule B is more burdensome than necessary.  Here, the court determined that even assuming the Attorney General presented a sufficiently important governmental interest, its interests can be more narrowly achieved as evidenced by the testimony of the Attorney General's own attorneys.  During trial, the court noted that the Attorney General's investigators testified that they have successfully completed their investigations without using Schedule Bs, even in instances where they knew Schedule Bs were missing:

For example, Mr. Bauman testified that he has reviewed Form 990s in connection with audits that did not include Schedule Bs. Specifically, he admitted that he successfully audited those charities and found wrongdoing without the use of Schedule Bs. In fact, Mr. Bauman admitted that he successfully audited charities for years before the Schedule B even existed.

It is clear that the Attorney General's purported Schedule B submission requirement demonstrably played no role in advancing the Attorney General's law enforcement goals for the past ten years. The record before the Court lacks even 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.

The court, therefore, found that the Attorney General had failed to establish a substantial relationship between her demand for AFP's Schedule B and a compelling governmental interest.

The could then found that “[s]etting aside the Attorney General's failure to establish a substantial relationship between her demand for AFP's Schedule B and a compelling governmental interest, AFP would independently prevail on its as-applied challenge because it has proven that disclosing its Schedule B to the Attorney General would create a burden on its First Amendment rights.”   The court emphasized that although the Ninth Circuit in Center for Competitive Politics, supra, foreclosed any facial challenge to the constitutionality of the  Schedule B disclosure requirement under state law, 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.” 784 F.3d at 1317 (quoting McConnell v. FEC, 540 U.S. 93, 199 (2003)).   With respect to the standard to be applied to determine whether required disclosure of donor information on Schedule B would violate the First Amendment protections, the court stated:

As the Supreme Court has held, unfounded speculation, conclusory statements, fear, and uncertainty untethered to the requirement at issue are insufficient. Buckley, 424 U.S. at 64, 69, 71–72. However, “[a] strict requirement that chill and harassment be directly attributable to the specific disclosure from which the exemption is sought would make the task even more difficult.” Id. at 74. Examples of the type of evidence sufficient to succeed on an as-applied challenge include past or present harassment of members due to their associational ties, or of harassment directed against the organization itself, or a pattern of threats or specific manifestations of public hostility. Id. This Court is more than satisfied that such a showing was made at trial.

During the course of trial, the court heard “ample evidence” establishing that AFP, its employees, supporters and donors face public threats, harassment, intimidation, and retaliation once their support for and affiliation with the organization becomes publicly known.  The court heard extensive testimony about threats of violence against the Kochs, their families and others associated with AFP, threats the judge found would be fueled by collection and release of the donor information. 

"The Court ... heard from Mark Holden, General Counsel for Koch Industries, who testified that Charles and David Koch, two of AFP’s most high-profile associates, have faced threats, attacks, and harassment, including death threats. ... Not only have these threats been made to the Koch brothers because of their ties with AFP, but death threats have also been made against their families, including their grandchildren," the court wrote. "Although the Attorney General correctly points out that such abuses are not as violent or pervasive as those encountered in NAACP v. Alabama or other cases from that era, this Court is not prepared to wait until an AFP opponent carries out one of the numerous death threats made against its members."  The court stated that it could “keep listing all the examples of threats and harassment presented at trial; however, in light of these threats, protests, boycotts, reprisals, and harassment directed at those individuals publically associated with AFP, the Court finds that AFP supporters have been subjected to abuses that warrant relief on an as-applied challenge.”

A final argument made by the Attorney General is that its office was only seeking disclosure of AFP's Schedule B for nonpublic use and therefore there is no potential for public targeting of private donors since the donor information would not be publicly disclosed.  In this regard, however, the court expressed deep concern about the Attorney General's inability to keep confidential Schedules B private.  The court stated that the “plaintiffs have raised serious questions as to whether the Attorney General's current policy actually prevents public disclosure” and “as made abundantly clear during trial, the Attorney General has systematically failed to maintain the confidentiality of Schedule B forms.”

While the Attorney General asserted that that proper procedures were currently in place to prevent negligent disclosures of Schedules B, the court was unconvinced, stating:

 “Once a confidential Schedule B has been publically disseminated via the internet, there is no way to meaningfully restore confidentiality. Given the extensive disclosures of Schedule Bs, even after explicit promises to keep them confidential, the Attorney General's current approach to confidentiality obviously and profoundly risks disclosure of any Schedule B the Registry may obtain from AFP. Accordingly, the Court finds against the Attorney General on the alternative grounds that her current confidentiality policy cannot effectively avoid inadvertent disclosure.”

Because AFP prevailed on its First Amendment as-applied challenge, the court held that it was entitled to declaratory and injunctive relief. “Equitable relief has long been recognized as appropriate to prevent government officials from acting unconstitutionally. … Injunctive relief is particularly appropriate to prevent state officials from violating the First Amendment by compelling the disclosure of the names of an organization's supporters.”

Following the court decision, AFP Foundation Chief Executive Officer Luke Hilgemann made the following statement:

Today’s ruling is an important victory for free speech and for everyone who believes in the importance of the First Amendment.  Donors to organizations, regardless of their views on public policy matters, should be free to support causes they believe in without fear of retaliation, harassment, or intimidation by powerful government figures. The Court’s ruling confirms what we have known all along – that AG Harris has no right to police the beliefs of individual Americans, or causes they choose to support.

As free speech is the right of every American, this ruling is a victory for all that transcends ideology and partisanship. We are pleased that the Court ruled against the overreach by AG Harris, and in favor of protections that were codified by the US Constitution and confirmed by the Supreme Court.

The Attorney General’s office said it plans to appeal the ruling: "We are disappointed in Judge Real's ruling and intend to appeal to the Ninth Circuit Court of Appeals," said Kristen Ford, a spokeswoman for the attorney general. "The filing of the Schedule B is a long-standing requirement that has helped Attorneys General for more than a decade protect taxpayers against fraud.”

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