Introduction. After more than a decade of litigation, the California Attorney General's ("AG’s") IRS Form 990, Schedule B disclosure requirement was struck down by the United States Supreme Court in Americans for Prosperity Foundation v. Bonta, Case No. 19-251 (July 1, 2021) (“Bonta”). The Bonta decision affects U.S. jurisdictions that require charities to disclose Schedule B to the state AG pursuant to the charitable solicitation laws of that U.S. state. Beginning in 2018, through guidance, the IRS had limited the applicability of federal Schedule B reporting requirements under the Internal Revenue Code of 1986, as amended, to certain tax-exempt organizations. Final IRS regulations on Schedule B disclosure were issued in May 2020.
Schedule B Overview. In Bonta, petitioners were tax-exempt charities that solicited contributions in California, and therefore, were subject to California charitable solicitation laws, including the AG registration and annual renewal requirements. California AG regulations required registrants to file copies of their IRS Forms 990 or equivalents, along with any attachments and schedules. IRS Form 990 includes Schedule B, on which charities report annually the names, addresses, total contributions and types of contributions of contributors who donate the greater of $5,000 or 2 percent of total contributions in a tax year.
Majority Opinion in Bonta. In Bonta, petitioner Americans for Prosperity Foundation was a charity devoted to education and training about free society and free market principles, civil liberties, immigration reform and limits on government. Thomas More Law Center, the other petitioner, was a public interest law firm with a mission of protecting religious freedom, free speech, family values and the sanctity of human life. Petitioners filed suit in the Central District of California against California AG office when the office began enforcing the Schedule B disclosure requirement in 2010 by threatening to revoke registration of charities to solicit funds in California. After appeals to the Ninth Circuit and remands back to District Court, the Supreme Court granted certiorari.
The Supreme Court in the majority opinion applied exacting scrutiny as the legal standard for balancing compelled disclosure of affiliation with charities against donors’ First Amendment right of freedom of association via donations to groups engaged in advocacy. The Supreme Court stated that exacting scrutiny “requires that there be ‘a substantial relation between the disclosure requirement and a sufficiently important governmental interest,.. and that the disclosure requirement be narrowly tailored to the interest it promotes”.
The Supreme Court found that the Ninth Circuit, in reversing the District Court, erroneously failed to apply a narrow tailoring requirement in Supreme Court jurisprudence. The Court held that “the up-front collection of Schedule Bs is facially unconstitutional, because it fails exacting scrutiny in a ‘substantial number of its applications… judged in relation to [its] plainly legitimate sweep." Accordingly, the California AG was enjoined from enforcing the Schedule B disclosure requirement as applied to the two petitioners in Bonta.
Concurrences and Dissent in Bonta. In Bonta, Justices Alito, joined by Justice Gorsuch, and Justice Thomas delivered separate, concurring opinions. Of note, Justice Thomas, concurring in the majority's judgment, departed from the majority in opining that the holding was limited to the litigants in the case, and did not facially invalidate the Schedule B requirement as to any future application. Justice Sotomayor, joined by Justices Breyer and Kagan, delivered a 25-page dissent, focusing in part on the potential threats to contributors as a result of their information made public, rather than actual harm. The limiting concurrence by Justice Thomas may impact the way in which lower courts interpret the breadth of the Court's holding in Bonta, and how the Supreme Court might address any subsequent compelling disclosure litigation in the First Amendment context.
Conclusion and Action Items for Charities. The holding in Bonta has potential impact on ability of state AGs to enforce Schedule B disclosure laws against charities that are subject to state registration requirements. The majority in Bonta struck down the California Schedule B disclosure rule, finding that it was overbroad and necessary confidentiality protections were absent. Some state registration laws, such as pending legislation in New York, senate bill S4817-A generally attempts to impose confidentiality treatment on required submissions by charities to the New York AG, including Schedule B information. However, at issue in the majority opinion in Bonta primarily was failure actually to preserve confidentiality of reported contributor information, rather than statutory language. Thus, other state AGs may take the position that the confidentiality safeguards under their respective state laws operate sufficiently to meet the exacting scrutiny test under Bonta.
Presently, tax-exempt organizations registered to solicit contributions in U.S. states, including California and New York, should continue to comply with any existing Schedule B disclosure laws or regulations. However, charities and other tax-exempt registrants would find advisable to monitor developments at respective AG offices and state legislatures. Affected ax-exempt organizations should consult with counsel on required filings in the event of any amendments to applicable state registration laws or regulations or AG pronouncements on enforcement of Schedule B requirements.