Recent judicial and administrative decisions in New York State should put not-for-profit organizations, advocacy groups and similar entities on notice about their disclosure and transparency obligations in New York.

On July 27, the United States District Court for the Southern District of New York denied a preliminary injunction sought by Citizens United and Citizens United Foundation to stop the Attorney General of New York from enforcing a state policy that requires registered charities, in order to solicit funds in New York State, to disclose the names, addresses and total contributions of their major donors.  A copy of the ruling can be found here.  Although denial of injunctive relief serves merely an initial step at the district court level, the ruling has significant, and potentially lasting, transparency implications for “social welfare” advocacy groups seeking to raise funds in New York.

Citizens United, as a 501(c)(4) entity, and Citizens United Foundation as a 501(c)(3) organization, are required to comply with a number of registration and reporting requirements in order to maintain their tax-exempt and charitable organization statuses.  Federal law, however, does NOT require organizations such as Citizens United Foundation and Citizens United to publicly disclose the identity of their donors.  New York law provides that all charitable organizations that are not otherwise exempt must first file a registration form with the Attorney General’s Charities Bureau in order to solicit donations in the state. In subsequent years, New York law obligated charitable organizations to file an annual report form known as CHAR500.  In 2006, the Attorney General’s office promulgated a regulation that required an organization’s CHAR500 filed with the Charities Bureau to include a copy of the organization’s complete IRS Form 990, 990-EZ or 990-PF.  Attorney General Schneiderman’s interpretation of the 2006 regulation requires the Form 990 submitted with the CHAR500 also include the Form’s Schedule B, which includes the organization donor list.  This policy would allow parties to obtain information about donors to a charitable organization, thus circumventing federal law that makes Form B unavailable to the public.  Citizens United and Citizens United Foundation, although registered as charities in the state since 1995, have never filed copies of their Schedules B with the Attorney General, citing First Amendment protections against such disclosure.

In rejecting Citizens United's preliminary claims, District Court Judge Sidney Stein agreed with General Schneiderman that New York's insistence upon receipt of donor information from all entities soliciting funds in the state did not violate the two organizations’ freedom of speech and association rights.  The court found that the 2006 regulation bears a substantial relation to the important governmental interests of enforcement of charitable solicitation laws and the oversight of charitable organizations, and determined that New York’s interests in enforcing the Schedule B policy clearly outweigh any burden that it may impose on charities. In addition, the court held that although the requirements that charities register with the Attorney General and submit annual reports in order to solicit contributions in New York function as a prior restraint on speech, such requirements nonetheless set forth “narrow, objective, and definite standards” that restrain the Attorney General’s exercise of discretion.

The court also rejected other, more technical, objections to the law—that the Attorney General’s enforcement of the policy violated due process by reversing earlier interpretations of the law, and that the Attorney General failed to comply with the formal rule-making procedures under the New York State Administrative Procedure Act before adopting the policy change. Finally, and importantly, the court held that the policy is not preempted by federal law, which sets out a mechanism for states to request Schedules B from the IRS and also ensures the confidentiality of donor information.

While this preliminary ruling is almost certain to receive appellate scrutiny either before or after development of a factual record, the national implications of this ruling must be noted by tax exempt entities looking to raise funds in New York.  First, as noted by Citizens United following the ruling, it is a significant development that General Schneiderman has recognized the need for donor information to remain confidential, notwithstanding the requirement that such information now be disclosed to New York State.  It is also noteworthy that the court accepted the Attorney General's argument that requiring registered charities to file donor disclosures furthers the state's interests in overseeing charitable organizations and enforcing solicitation laws, since information on charities’ sources of funding enables law enforcement to identify organizations that may be operating fraudulently or without a proper charitable purpose.  This is an important precedent that other states are likely to follow when enacting similar policies in the future.

New York charitable organizations may also face further scrutiny with respect to their transparency obligations going forward.  On August 3, New York’s Joint Commission on Public Ethics (JCOPE) ruled that two 501(c)(4) organizations, Family Planning Advocates of New York (FPA) and the state Civil Liberties Union (NYCLU) were not exempt from New York law that required advocacy organizations to publically disclose the source of their funding for lobbying activities.  A 2012 amendment to New York lobbying law obligated entities who lobby on behalf of themselves and who spend more than $50,000 on lobbying activity in New York State to make publically available each source of funding that exceeds $5,000 for such lobbying.  An organization, however, could seek an exemption from disclosing such funding sources to JCOPE (and thus becoming publically available) if the entity could demonstrate, by clear and convincing evidence, that disclosure of the funding source would cause “substantial likelihood of harm, threats, harassment or reprisals” to the donor of such funds.

Last year, JCOPE rejected the requests by FPA and NYCLU for a donor-disclosure exemption.  The groups appealed this administrative decision and a judicial hearing officer reversed JCOPE’s decision.  As a result, the two groups resubmitted their exemption applications to JCOPE.

Upon review of the application and evidence presented by the two organizations, JCOPE ruled that the two organizations failed to demonstrate by clear and convincing evidence that “harm, threats, harassment or reprisals” existed to warrant an exemption.  In fact, the JCOPE chairman noted that lobbying law “should tilt heavily in favor of disclosure” and warned that granting such an exemption in these two cases would establish an excessively lax standard.  This sends a strong signal that groups seeking a disclosure exemption will have a very high bar to clear to prevent public scrutiny of its donors.   Accordingly, advocacy organizations and other 501(c)(4) groups need to be aware that significant lobbying in New York State could open themselves up to disclosure about the individuals and entities that support such group’s lobbying activity.

These are significant developments which will require careful analysis and consideration by all tax exempt groups.