U.S. Supreme Court strikes down state nonprofit disclosure rules

On Behalf of | Oct 28, 2021 | business law | 0 comments

The Internal Revenue Service requires many nonprofit groups and charities to disclose major donors. The purpose of this requirement is to ensure these groups comply with applicable tax laws. The California attorney general also requires donor disclosure to verify compliance with state laws and regulations – until now.

In a 6-3 decision, the U.S. Supreme Court struck down California’s nonprofit disclosure scheme recently, citing the First Amendment’s guarantee of free association. The case is Americans for Prosperity Foundation v. Bonta.

The right to associate freely

The attorney general of the Golden State sought to collect information on major donors from charities and other nonprofit groups. However, this information was for in-office use and not to become public.

Because the U.S. Constitution affords the right to free association, a majority of the U.S. Supreme Court found California’s disclosure rules to be unconstitutional. That is, charities and other nonprofit groups have a right to associate with whomever they want without interference by or disclosure to state government officials.

The likely practical effect

The U.S. Supreme Court’s decision in the Americans for Prosperity Foundation case does not affect IRS disclosure requirements, although it is not hard to see how a future litigant may try to persuade the court to invalidate the IRS’s rules as well.

Practically, charities and nonprofit groups no longer must provide the names of major donors to California’s attorney general. When reporting, they may provide IRS Form 990 with a redacted schedule B that effectively blacks out donor details.

Ultimately, the attorney general may only see the information that is available to the public at large and not the more detailed information the IRS currently receives.