Supreme Court Eyes Rich Activists, Their Anonymous Donations And Tax Breaks
At the Supreme Court Monday, a case involving rich conservatives and liberals, their anonymous charitable donations, and tax breaks.
At issue is a California law, similar to laws in others states, that requires tax-exempt charities to file with the state a list of their large donors — a copy, in fact, of the list they file annually with the IRS.
The IRS form, to be attached to the state filing, reports the names and addresses of all donors who give $5,000 to the charity, or more than 2% of the total donations. Under both federal and California Law, the names and addresses are confidential, and it is illegal to disclose them publicly.
In 2012, the Americans for Prosperity Foundation, a tax-exempt nonprofit founded by Charles Koch and his brother David Koch, who died in 2019, and the Thomas More Law Center, another conservative group, refused to comply with the confidential disclosure requirement. They claimed that to do so would violate their First Amendment right to freedom of association and that it would subject their donors to potential harassment. A federal appeals court ruled against them, and they appealed to the Supreme Court.
The foundations' argument rests on a 1958 Supreme Court decision that struck down an Alabama law requiring the NAACP to publicly disclose its membership list.
"If people couldn't give anonymously to the NAACP in 1958, it might not have been able to make the advances for civil rights it did," says Kathleen Sullivan, who represents the Koch brothers foundation. "And especially now, the stakes are very high because the internet makes it very very hard to give to an unpopular cause and endure the retaliation and reprisal and threats of violence that may follow."
Not so, says Sean Delaney, the former head of the New York state bureau charged with supervising charities. "The notion that this has any resemblance whatsoever to cases like NAACP v. Alabama is, frankly, an insult to the Civil Rights movement," he says.
The facts are very different in California, he points out. The list of donors is not made public; it is reported to the state, and only big donors' names must be reported at all. In the case of the Koch brothers foundation, for instance, the 2% rule meant that in 2018, only donors who gave more than $340,000 were reported.
Historically, it is state attorneys general who police charities, and in California, a state with 115,000 charities, that is a big job.
Jan Masaoka, the CEO of the California Association of Nonprofits, compares the California regime to the Federal Aviation Administration's system of regulation. Just as the FAA needs information from airplane manufacturers and airlines to ensure safety in air travel, California and other states need information from charities to ferret out fraud and self-dealing.
"All of us--nonprofits and donors--we want to have that confidence that the rules are being enforced, and we need the [state] attorney general to do that," Masaoka says.
Delaney, who was was responsible for that enforcement in New York state, says the only way for a state to monitor so many charities is to have scannable information, and computers programmed to search for red flags that identify potentially problematic organizations.
Donor information, for instance, was central to identifying that there were certain tax-exempt credit-counseling services in California, ostensibly set up to help consumers, that were instead "serving the interests of creditors." And, according to a study by the California Department of Corporations, those creditors turned out to be the charities' major funders.
Similarly, a brief filed by CharityWatch, an independent nonprofit that rates the performance of charities, highlights how donor information was used by the Federal Trade Commission to uncover a long-running scheme involving a charity called Cancer Fund of America that deceptively solicited more than $187 million from donors. As CharityWatch described the scam, the money was funneled into four other organizations, all managed by members of the same family, who in turn doled out the cash to family and friends in the form of high-paying jobs and fancy perks, including cars, trips, luxury cruises, college tuition, jet-ski outings, dating-service subscriptions, and more.
But Sullivan, the lawyer for Americans for Prosperity, says there are alternatives to what she calls California's "sweeping" demand for donor information.
"They can use targeted audit letters or subpoenas if they ever need that information for a legitimate investigation," she says, adding that "where the government doesn't need to know the names of your donors, it shouldn't be allowed to under the First Amendment."
That's nonsense, replies Scott Nelson, of the the nonprofit watchdog group Public Citizen.
"The idea that an investigator can start a full-blown investigation and issue a bunch of subpoenas completely blinks the reality of how bureaucracies work," he says. Regulators "have to get some kind of a red flag before they know which charities to pick out for that kind of investigation."
The AFP foundation's Sullivan notes that prior to this litigation, there were inadvertent public disclosures of some donors' names. She maintains that the disclosures were "substantial and repeated." Nelson counters that the problems with the state's data system were short-lived and have been fixed. And even Sullivan concedes that the disclosures cannot be linked to the harassment and threats donors say they experienced, since many donors, like the Koch brothers themselves, are well known, as are their views.
In the Supreme Court, an astounding 63 briefs have been filed in support of the Koch brothers foundation. And while the overwhelming majority were filed by conservative advocacy groups, a small but significant set of briefs were filed by liberal groups like the ACLU and the NAACP legal defense fund.
As for the Trump administration, it sided firmly with the Koch brothers foundation in 2020, a year after the tax-exempt Donald J. Trump Foundation was forced to dissolve--a result of an investigation by the New York Attorney General's office that uncovered a "shocking pattern of illegality" that included using $10,000 of donor money to fund a Trump portrait and more than $100,000 to settle a Mar-a-Lago legal dispute.
The Biden administration has changed the government's position in Monday's case, and will urge the justices to send the case back to the lower court for further findings and legal analysis.
Still the case is seen as a very big deal, and something of a stalking horse.
"This fight is a skirmish in a larger war," observes Delaney, the former New York regulator.
In the political context, the Supreme Court has long ruled that disclosure of campaign contributors is constitutional because it serves the important public interest of accountability by disclosing who has skin in the game of influencing government policy. Indeed, public disclosure is perhaps the only remaining check on political contributions, and some political contributors would like to see it eliminated, too.
At the same time, tax regulators would like to see oversight rules toughened up to prevent tax-exempt charities from being used for partisan purposes.
In Monday's case, though, the question is more limited. As Public Citizen's Nelson puts it, "If the challengers get what they want here, it's going to make the job of being a watchdog a lot harder."
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