Important Legal Developments for Nonprofit Organizations Soliciting Contributions or Conducting Activities in California and New York

California Ninth Circuit Upholds Attorney General’s Demand for Reporting of Donor Identities 

This article was derived and adapted with permission from ECFA’s article California Court Upholds Attorney General’s Demand for Donor Information in its October 2018 issue of the Nonprofit Pulse.

By Michele Wales, Kaylyn Varnum, and Mike Batts

As reported in ECFA’s October 2018 edition of Nonprofit Pulse, the California Ninth Circuit Court of Appeals recently affirmed the position of the California Attorney General stating that charities located or doing business in California must provide a copy of their un-redacted Form 990 Schedule B with their annual report filed with the Attorney General. The information required to be submitted includes the names, addresses, and amounts of contributions for all donors that are required by the IRS to be reported on Schedule B. This ruling raises concerns about donor privacy even though the Attorney General has asserted that the information will not be made public.

Another recent legal development addresses a similar requirement in the state of New York.

So what do these rulings mean for nonprofits doing business, soliciting contributions, or holding assets in California or New York?

Nonprofit Reporting Requirements – California Attorney General – Background

Tax-exempt organizations meeting certain criteria that file Form 990 (the major informational return) with the Internal Revenue Service are required to include in the return Schedule B, which discloses the identities of certain donors who have given large contributions to the organization, together with their addresses and the amounts they gave. The Form 990, once filed with the IRS, is required to be made available for public inspection by the filing organization and the IRS releases copies of the Form 990, which are generally made publicly available on the website GuideStar.org. The public inspection copies of Form 990 are not required to include the identities (or identifying information) of the donors, but the amounts reported on Schedule B are required to be disclosed. The IRS redacts donor identity information from the copies of Form 990 that are released and made available on the GuideStar website.

In California, the Attorney General’s Registry of Charitable Trusts (“Registry”) regulates charities and other nonprofit organizations by administering certain registration and reporting requirements. Generally, nonprofit organizations must register with the Registry within 30 days of first receiving a donation or assets with financial value for charitable purposes. This initial registration reporting package includes a state Form CT-1, a copy of the nonprofit’s tax exemption application, a copy of the nonprofit’s IRS determination letter, and copies of the organization’s founding documents.

Additionally, nonprofits generally must comply with annual reporting requirements in the form of registration renewals (i.e., Annual Registration Renewal Fee Report, Form RRF-1). When filing a Form RRF-1, charitable organizations are required to file a copy of their annual IRS Form 990, Form 990-EZ, or Form 990-PF informational return. The Attorney General maintains that all schedules to these forms filed with the IRS must also be filed with the Registry, including Schedule B.

According to the most recent Attorney General’s Guide for Charities (“the Guide”), the California Attorney General has oversight over “foreign” entities (a term used for any entities legally formed outside of California, including those formed in other states of the U.S.) involved in the nonprofit sector in California. The Guide further states that the Registry registration and reporting requirements summarized above apply to entities that solicit, conduct business, or hold charitable assets in California. According to the Guide, the definition of doing business in California includes:

  • Soliciting donations from Californians by mail, telephone, e-mail, through advertisements in media, or any other direct (not passive) means from outside of California;
  • Conducting charitable programs or services in California, or targeting Californians with programs or services;
  • Holding meetings of the board of directors or statutory or voting members in California;
  • Maintaining an office in California;
  • Holding property in California; or
  • Having officers or employees who perform work in California.

Religious corporations (as defined by the California Secretary of State) are automatically exempt from registration and reporting with the Registry. Additionally, the Guide indicates that the Registry typically exempts any foreign (i.e., non-California) religious corporation that holds property for religious purposes and operates primarily as a religious organization. The Guide further indicates that “if a religious organization outside California has a broad purpose statement and dissolution clause, or the purpose statement includes a non-religious purpose (e.g., to build schools internationally, feed the hungry, or shelter the homeless), the organization might not be exempt as a religious organization.” The Registry evaluates claims of religious exemption by foreign corporations on a case-by-case basis.

Other specific exemptions from registration and reporting requirements exist for other types of organizations. Additionally, California’s Charitable Solicitation Law contains additional reporting requirements for charitable organizations. A nonprofit organization should consult with legal counsel regarding applicability of the California reporting requirements to a specific organization.

California and New York Litigation Regarding Schedule B Disclosures to State Agencies

As noted above, California requires nonprofit organizations to submit a full copy of its Form 990, Form 990-EZ, or Form 990-PF informational returns to the Attorney General’s office annually, and specifically requires that the returns include copies of all Schedules, including Schedule B.

In recent years, the requirement to file Schedule B with the IRS Form 990 has created controversy. Both California and New York have previously required an un-redacted copy of Schedule B if a charity wanted to solicit contributions in the state (both states have also indicated that it is not their policy to disclose the information in Schedule B to the public). Courts have generally ruled in favor of the states. For example, in February 2018, the Court of Appeals for the Second Circuit affirmed a district court’s decision that New York State’s requirement that registered charities disclose the identity of their donors did not violate the First Amendment and that the requirement was not preempted by federal tax laws.

However, in Americans for Prosperity Foundation v. Becerra and Thomas More Law Center v. Becerra, the California Attorney General’s collection of Schedule B information was successfully challenged in Federal District Court based on the arguments that the confidential disclosure to the California Attorney General itself chills protected conduct and/or would lead to persecution and harassment of the nonprofit’s donors by the state or the public.

The Ninth Circuit Court of Appeals decision, filed in September 2018, vacated the district court’s injunctions, reversed the bench trial judgments, and entered judgment in favor of the California Attorney General in both cases. The Ninth Circuit Court of Appeals found that “the plaintiffs have not demonstrated that compliance with the state’s disclosure requirement will meaningfully deter contributions. Nor, in light of the low risk of public disclosure, have the plaintiffs shown a reasonable probability of threats, harassments, or reprisals.”

Thus, the Ninth Circuit Court of Appeals decision and the Second Circuit Court of Appeals decision earlier this year, both affirm states’ rights to request un-redacted copies of Schedule B in connection with state registration and reporting requirements.

Concluding Thoughts

As ECFA mentioned in its article, quoting Paul Streckfus, editor of the EO Tax Journal, “Out-of-state charitable organizations that solicit contributions or do business in California should consider the effect of these disclosure requirements on donor relations. All affected charities, including out-of-state charities, should review their donor confidentiality policies and disclosures to ensure that their donors are aware of California’s disclosure requirement.” [Authors’ note – We would suggest the same with respect to New York.]

Streckfus added, “Charities should continue to follow the Schedule B instructions and not include Schedule B filings with states that do not require it, as those states may inadvertently disclose the charity’s donor information to the public. Out-of-state charities not currently registered with the California AG’s Registry of Charitable Trusts that would like to solicit contributions or otherwise do business or hold property in California should consider contacting local counsel for advice regarding their activities within the State to avoid or minimize potential penalties.”

Nonprofit organizations should consult with their legal counsel and ensure that the organization is in compliance with California, New York, and other state reporting requirements, including the requirement in some states to submit a full copy of the Form 990.

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