Nonprofit organizations must obtain an exemption under section 501 of the Internal Revenue Code in order for contributions or donations to the organization to be tax deductible. In addition, organizations also must satisfy federal and state registration and filing requirements. However, the differences in federal and state rules can cause concerns for nonprofits, as highlighted by a recent decision of the United States Court of Appeals for the Second Circuit. In Citizens United v. Schneiderman, a nonprofit organization challenged the legality of a New York State law which it maintained did not properly protect the confidentiality of its list of charitable donors.
Under federal law, a nonprofit annually must file IRS Form 990, which includes a Schedule B disclosing all of its donors. The IRS is required to keep Schedule B confidential. New York requires that a nonprofit organization register before an organization can solicit donations within the jurisdiction. In addition, the State requires its own annual filing, to which IRS Form 990 and Schedule B are required attachments. Unlike federal law, New York does not affirmatively protect the confidentiality of the list of donors.
Legality of Requiring Disclosure of Donors
Citizens United challenged New York’s annual filing requirements after the New York Attorney General issued a deficiency notice when the organization filed a redacted Schedule B. Citizens United sued on a variety of grounds, including that the requirements represented an “unconstitutional prior restraint on speech,” allowed the State Attorney General to intimidate donors, and that New York law was preempted by federal disclosure requirements.
The lawsuit was dismissed by the lower court and last month, the Second Circuit Court of Appeals affirmed that dismissal. In deciding that the law was constitutional, the Court applied an “intermediate scrutiny test” because the registration requirements were content neutral. Under the test, the Court looked at whether there was a “substantial relationship between the disclosure requirement and a sufficiently important government interest.”
In the case, the Court first looked at whether the law was constitutional in any form, known as a “facial challenge.” The Court accepted the Attorney General’s justification that it required the disclosure of donors to help protect against fraud and self-dealing. The Court then weighed the restriction on the Plaintiff against this purpose, finding that the law was not a form of censorship and that any risk of chilled speech was small in comparison to the benefits of the law. The Court next looked at whether the statute was unconstitutional specifically as applied to Citizens United. It found that it was not, as the organization was already required to provide the disclosure under federal law and there was no evidence that the Attorney General could, or in fact had previously, published donor lists.
It’s clear now that New York’s disclosure requirements are constitutional, and nonprofits must comply. If you run a nonprofit in New York and have questions about any of your filing or operational requirements, contact us for a consultation.