Institute Supports Proposed Donor Disclosure Regs

November 4, 2019

Victoria Judson
Associate Chief Counsel
Office of the Associate Chief Counsel
(Employee Benefits, Exempt Organizations, and Employment Taxes)
Internal Revenue Service
111 Constitution Avenue, NW
Washington, DC 20224

RE: Comments on REG-102508-16: Guidance Under Section 6033 Regarding the Reporting Requirements of Exempt Organizations

Dear Ms. Judson:

On behalf of the Institute for Free Speech,¹ I respectfully submit the following comments in support of the proposed rule updating the information reporting regulations under Section 6033.² In this matter, the Internal Revenue Service (“IRS”) has the opportunity to protect the privacy of American citizens exercising their First Amendment rights without compromising the agency's mandate to enforce federal tax law. Amending tax regulations so that only section 501(c)(3) and section 527 organizations must continue to provide the names and addresses of contributors on their tax filings is a positive step for the freedoms of speech and association. The IRS should be commended for this action.

Compelled disclosure of donors to civil society groups offends the First Amendment. When the government compels disclosure of a private organization's financial supporters, it intrudes on the First Amendment's protection of free association.³ Since NAACP v. Alabama, the Supreme Court has held that unjustified “state scrutiny” of a private organization's membership is inconsistent with all Americans' right “to pursue their lawful private interests privately and to associate freely with others in so doing.”⁴ Indeed, the Supreme Court has “repeatedly found that compelled disclosure, in itself, can seriously infringe on privacy of association and belief guaranteed by the First Amendment.”⁵ “[I]t is immaterial whether the beliefs sought to be advanced by association pertain to political, economic, religious or cultural matters . . . state action which may have the effect of curtailing the freedom to associate is subject to the closest scrutiny.”⁶ After all, “[a]n individual's freedom to speak, to worship, and to petition the government for the redress of grievances could not be vigorously protected from interference by the State unless a correlative freedom to engage in group effort toward those ends were also not guaranteed.”⁷

Accordingly, when the government seeks to obtain private donor information from organizations, it must pass the “strict test” of exacting scrutiny.⁸ Under exacting scrutiny, the government must justify its disclosure demand, not force citizens to explain why the vast accumulation of private, constitutionally-protected information is harmless. ⁹ It is not enough for the government to simply invoke a general interest; it must show that its disclosure regime is properly tailored to that interest.¹⁰ Simply asserting a generalized law enforcement interest, for instance, is not sufficient.¹¹ As the Supreme Court has explained, “[i]n the First Amendment context, fit matters.”¹²

The proposed revisions acknowledge these principles.¹³ Plainly, the IRS does not need donor information to enforce tax law.¹⁴ Enforcement of laws concerning self-dealing, excess benefit transactions, transactions with interested persons, and the like are important government interests. But information provided in portions of IRS Form 990 other than Schedule B¹⁵ already serves these interests by providing a highly-detailed view of potential conflicts of interest, payments to officers and directors, organizational finances, the dollar amount of reported contributions,¹⁶ whether each was a non-cash contribution, and a description of any in-kind property contributed. Moreover, as the Service acknowledges, it can obtain any additional information it needs to enforce the tax code through its ordinary investigatory process instead of requiring annual reporting of sensitive donor information.¹⁷

Likewise, state tax enforcement agencies can meet their mandates without continued reporting of private contributor information to the IRS. Conducting compliance audits or subpoenaing certain donor information as part of an investigation does not offend the Constitution if an organization's annual filing demonstrates a particularized suspicion of wrongdoing. This method also invites judicial supervision when executive branch agencies seek subpoenas and warrants — a vital constitutional check on governmental power. To the extent that states relied on the current IRS rule to obtain donor information, nothing in this rulemaking prevents them from creating their own processes, provided they regulate with the precision required by the federal constitution. But federal disclosure rules do not exist for the convenience of the states, and the current regulatory regime is not demanded by statute and does not serve the First Amendment rights of nonprofits or the individual Americans who support them.¹⁸

Ending compelled donor disclosure is also wise for prudential and practical reasons. The IRS cannot legally disclose sensitive contributor information to the public,¹⁹ so amending the regulation does not decrease the amount of publicly available information. Changing the rule also removes an unnecessary burden on the IRS to protect private donor information when it can be obtained through the agency's ordinary auditing processes.²⁰ Warehousing large amounts of private donor information increases the risk of inadvertent or illegal disclosure.²¹ Lifting this burden from the IRS decreases the likelihood of donor exposure, which is significant in light of disclosures of sensitive contributor information in recent years.²² Moreover, amending the rule has the added benefit of aiding nonprofits by decreasing compliance costs.²³

At the same time, this rule change will increase nonprofit donations. Government collection of confidential donor information deters contributions to nonprofits.²⁴ When the California Attorney General adopted a dragnet policy of demanding and warehousing contributor information from certain nonprofits, the rule caused organizations (including the Institute) to stop soliciting contributions in that State — especially after it was revealed that hundreds of the collected donor lists were maintained on an unsecured website and consequently publicly disclosed.²⁵ A challenge to that regime is presently before the United States Supreme Court on a petition for a writ of certiorari. The court challenge is supported by groups as varied as Judicial Watch and the Council on American-Islamic Relations,²⁶ which indicates the importance of donor privacy to nonprofit organizations across the ideological spectrum.

Finally, this rulemaking came about as a result of the decision in Bullock v. Internal Revenue Service, which required the IRS to pursue this policy revision through the process outlined by the Administrative Procedure Act (“APA”).²⁷ The district court expressed no opinion on the merits of the proposed change in IRS policy, and the plaintiffs stated that they simply wanted an opportunity to provide comments as part of the rulemaking process under the APA.²⁸ Plaintiffs now have that opportunity, and have since expressed the view that the IRS should maintain current disclosure requirements because ending donor disclosure will harm the enforcement of state tax law and allow foreign influence in the election process.²⁹ But, as stated above, these objections are meritless.

The proposed changes appropriately value Americans' right to freedom of speech and privacy in association and demonstrates serious consideration of appropriate tailoring under the First Amendment. They should be adopted.

Respectfully submitted,

Allen Dickerson
Legal Director
Institute for Free Speech
Alexandria, VA