(Updated April 29, 2021)
In a case heard on April 26th, 2021, the Supreme Court of the United States (SCOTUS) debated the merits and constitutionality of a limited disclosure rule designed to aid state charity regulators in their enforcement of laws governing nonprofits. The Court's opinion is expected to be issued by the end of June 2021.
Names of Major Donors Are Not Public Information
The case centers on whether a non-public disclosure schedule
that charities are required to file with their IRS Form 990 returns each year,
Schedule B, Schedule of Contributors, can also be required by state charity
regulators. Schedule B requires public charities that receive a substantial
concentration of support from any one contributor during the reporting year,
defined as the greater of $5,000 or 2% of total contributions, to disclose to
the IRS the names of these donors and the amount of cash or non-cash support
donated. Unlike the core IRS tax Form 990 and other supporting schedules that can
be accessed by the general public, Schedule B is not public information.
A consensus exists within the nonprofit sector that requiring
charities to publicly disclose their donors would have a chilling effect on
free speech, including speech expressed by individuals via the charitable
causes they choose to support. In particular, charities working in more
controversial causes could lose significant support if donors had to put
themselves at risk by exposing their personal information, donating habits, or
political leanings as a condition of making contributions. CharityWatch
generally agrees with the existing rules that don’t require charities to
publicly disclose their major supporters to the public.
The Need to Deter Bad Actors
The question at hand in this case for the SCOTUS, however, is
not if the public should have access to data about a charity’s major donors. It
is whether state regulatory bodies should be allowed to continue to demand
confidential disclosure of such information in the course of their oversight of
nonprofits soliciting the public within their borders. As the National Council
of Nonprofits (the Council) reports in its Amicus Brief:
“Charitable nonprofits make
considerable efforts to ensure they operate ethically and in compliance with
the law. But charitable organizations do not have the authority, capacity, or
scale to go after bad actors or suspected fraudsters. To have faith in a
system, the public must believe that participants are playing by the rules.
That requires law enforcement. If the public believes that there is inadequate
oversight allowing some to ‘game the system,’ then people will lose faith in
that system and then withhold their support of time and money, damaging the
ability of charitable nonprofits to deliver on their missions for the millions
of people who depend on them. That is why deterrence of bad actors and fraud is
such a weighty factor.”
The Council describes opponents of such limited disclosure as supporting a case of campaign finance “cloaked in charity law clothing” given that the Petitioners, Americans for Prosperity Foundation and Thomas More Law Center, are not representative of “typical” charities. “[M]ost charitable nonprofits are small in size, with 92 percent spending less than $1 million annually and 88 percent spending less than $500,000,” according to the Council. By contrast, the Council states in its Brief, “In 2018, Petitioner Americans for Prosperity Foundation (‘AFP Foundation’) spent $18.8 million, and Americans for Prosperity (‘AFP’), a related corporate entity with which it shares extensive interlocking and overlapping directors and officers, spent $89.6 million, for a total of $108.2 million in spending under largely common control, according to their most recent Form 990…” AFP is also related to a political action committee entity called Americans for Prosperity Action, Inc. (“Prosperity Super PAC”), which “reported spending more than $47.6 million in independent expenditures to influence elections during the 2019-2020 election cycle,” the Council states in its Brief.
CharityWatch, in our Amicus Brief, communicated our concern that allowing public charities to hide information about their major donors from state regulators could allow them to more easily be misused for the purpose of funneling money into lobbying efforts that align with a particular candidate’s political positions. We provided the following example in our Brief:
“Imagine, for example, that the
brother of a politician running for office made a significant tax-deductible
contribution to a public charity, and that charity then made lump-sum grants to
a 501(c)(4) entity like a trade union, which then conducted lobbying activities
aligned with the candidate’s political positions. The brother’s contribution
would raise a serious conflict-of-interest concern, even if the 501(c)(3)’s
grant to the 501(c)(4) was not earmarked for lobbying. Because of the
restrictions on political activity for 501(c)(3) organizations, if a 501(c)(3)
donates to a 501(c)(4), the donation must be restricted to activities that do
not exceed the limitations on political activity imposed on 501(c)(3)s. In
reality, of course, money is fungible. Thus, even if a 501(c)(3) provides that
a grant to a 501(c)(4) is only for a particular purpose, the end result of the
grant is that the 501(c)(4) has more funds overall, and can use freed up
general funds for other purposes, like lobbying. In these circumstances, the
501(c)(3)’s Schedule B information would materially assist state charity
regulators in identifying and assessing the conflict of interest by allowing
them to connect a major source of the charity’s funds with its operations.”
Protecting the Public Interest
It is important to point out that allowing states to require a copy of Schedule B from the charities soliciting donations within their borders imposes no undue burden on those charities given that they are already required to submit Schedule B annually to the IRS. CharityWatch expressed concerns in our Brief that allowing charities to hide information about their major donors from state regulators would undermine the ability of these regulators to protect the public by rooting out wrongdoing like conflicts of interest, self-dealing, and tax evasion. In our nearly 30 years as a charity watchdog organization, CharityWatch has uncovered countless schemes designed to defraud or mislead donors about how their contributions to charity will be used. In this sense, we have played a more traditional oversight role by performing in-depth evaluations of complex charity financial reporting, using our expertise in analyzing publicly available documents to produce charity reports that include, along with qualitative information, a quantitative financial efficiency measurement. And while our reporting on these issues has helped to raise public awareness about wrongdoing within the nonprofit sector and helped donors understand which charities to avoid, CharityWatch lacks the ability of federal and state governments to bring enforcement actions against bad actors in an effort to permanently shut them down.
It is also incredibly difficult for the average donor to understand in a very basic way whether or not a particular charity will use their donations responsibly and efficiently, let alone take on the highly specialized task of rooting through years of audited financial statements and tax filings and applying the necessary expertise to detect potential fraud. When donors attempt to do their own research prior to making a donation to a charity, they are often overwhelmed by information of questionable quality and independence that in some cases leads them to donate to the very charities they were trying to avoid. The general public relies on regulators to police the nonprofit sector in a meaningful way that cannot be replaced by online aggregator or crowdsourcing websites that publish ratings of charities that are primarily based on the face value of what charities report about themselves. As stated in our Brief:
“Many independent organizations have
formed to address the lack of accountability mechanisms in the charitable
sector. The rigor of their approaches, though, is highly variable. Certain
independent organizations have created online databases and crowdsourcing
websites that encourage charities to upload information about themselves, such
as descriptions of their programs and self-conducted impact evaluations. Some
of these organizations also generate ratings. These websites make researching
nonprofits more convenient for donors by housing large volumes of charity
information in centralized locations. However, most organizations do little to
help donors independently vet charities’ self-reported information, and some
compilations can even undermine donors’ vetting efforts by allowing
charities to game the ratings.
“For example, uploading data is
sometimes treated as an end unto itself, resulting in a nearly immediate rating
improvement without any scrutiny of [ ] what the data reveals, let alone a check
for basic completeness or accuracy. … Thus, although these information
aggregators and ratings agencies can give donors a sense of security and create
an impression among the general public that the nonprofit sector is subject to
robust private oversight, they in fact do little to combat ineffective or
abusive practices.”
Aside from rooting out wrongdoing, Schedule B information also provides a valuable tool for confirming that a nonprofit is correctly reporting itself as a public charity versus a private foundation. Public charities must meet an ongoing public support test in order to maintain that “public charity” status and avoid the somewhat stricter governance and financial regulations imposed upon private foundations, including stern restrictions on self-dealing, limits on stock holdings and investments, and tight regulations on compensation to staff and board members. As stated in our Brief, “Prohibiting California from requiring that charities confidentially provide Schedule B to regulators would undermine the State’s ability to pursue these important interests and embolden people…who want to use charities as vehicles for self-enrichment or self-interest.”
Visit the SCOTUS blog for updates on the status of the case. Complete copies of
the Amicus Briefs discussed in this article, as well as other Briefs filed with
the Court, can be found on the SCOTUS website. In our Brief, CharityWatch provides specific, detailed
examples of mismanagement and fraud to support our position that meaningful
oversight of the nonprofit sector requires both watchdog organizations and
government regulators. Articles we have previously published about some of the
charities cited in our Brief can be found on our website using the links below.
(Update, 4/27/2021) The audio of the Oral Arguments is now available, as is a summary of key questions from the Justices and responses from the lawyers. The Court's Opinion is expected to be issued by the end of June 2021.