The Curious History of Schedule B

The Curious History of Schedule B

On January 8, 2021, the Supreme Court of the United States decided to review two cases challenging the California Attorney General’s requirement that any charity seeking to operate in California file an unredacted copy of Schedule B, a simple tax form listing major donors to the organization. The cases, Americans for Prosperity Foundation v. Becerra, No. 19-251, and Thomas More Law Center v. Becerra, No. 19-255, were consolidated and oral arguments may be held this spring or fall. Recently, some articles have appeared that suggest that these cases will dramatically affect campaign finance laws, but that’s a stretch.

The Attorney General requires charities that want to operate in California to file an unredacted copy of Schedule B as part of their annual State applications. Donor information is highly protected under federal law, but the Attorney General demands the form as filed with the IRS. The same information is already filed with California’s Franchise Tax Board, which supervises tax-exempt organizations in California as an attachment to the CA 199 form, California’s annual tax form for tax-exempt organizations, and some organizations voluntarily file their Schedule B instead of a less formal list. The Attorney General does not, however, comply with federal data security requirements and usage restrictions, and so cannot get the information from the Franchise Tax Board.

The charities are challenging the Attorney General’s demands as violating the First Amendment’s freedom of speech and association. They have shown that the Attorney General’s office has a long and sordid history of leaking tax information on the Internet, endangering their donors’ safety and livelihoods. Under unbroken precedent dating back to NAACP v. Alabama, that showing should be enough to protect the donor information. But the Attorney General claims to need the Schedule B to enforce California’s laws against fraud and abuse of charitable status because it would be more “efficient,” and prevailed when the U.S. Court of Appeals for the Ninth Circuit refused to believe the charities’ evidence and the findings of the trial court.

The campaign finance angle is an interesting assertion, since a big part of these cases involves the charities distinguishing themselves from the statutes and judicial interpretations that have evolved from campaign finance litigation. For example, one of the biggest debates in these cases is over the “standard of review,” which tests what the opposing parties have to prove to win. Should that standard be “strict” or merely “exacting?” Traditionally, First Amendment cases have usually involved strict scrutiny, but even First Amendment-related campaign finance cases are now judged by the lower “exacting” standard. The reason is “corruption” or the “appearance of corruption” which PPLI has weighed in on before. The charities now before the Court are not looking to change campaign finance law, but to avoid using the same, lower standard for reviewing their case.

More likely, the articles are referring to the same debate that erupted over changing the IRS regulations that govern Schedule B, which PPLI has also weighed in on. The argument there was that State Attorneys General want to use IRS information to enforce campaign finance laws. In fact, on December 9, 2019, many State Attorneys General sent a letter to the IRS saying exactly that: “The revised donor reporting requirements that the IRS now proposes are certain to make federal and state review of this spending far more difficult if not impossible.” In its final Schedule B regulations on May 20, 2020, the IRS soundly rejected the Attorneys’ General plea (as PPLI had requested), noting that: “Use of returns or return information received from the IRS under these sections for purposes other than those listed above (for example, for the enforcement of campaign finance laws or consumer protection laws) is not consistent with states’ authorized use under sections 6103(d) and 6104(c).”

That didn’t stop the California Attorney General before, and likely won’t now. The Attorney General sought the filed Schedule B directly from the charities, not from the IRS. The IRS’s position is that the federal tax privacy provisions only protect against disclosures by the IRS, not by States demanding them directly from the charities. Some courts have upheld the IRS’s interpretation. But the Supreme Court isn’t bound by those interpretations, and may decide to follow the actual statutory language, which is broader than the IRS view.

Because the parties in these cases haven’t directly raised that interpretation, the Supreme Court likely won’t consider it. But the history of Schedule will likely provide context for the Supreme Court’s consideration. But tying these cases to some dramatic change in campaign finance law is a stretch.

PPLI has prepared a very long (and complicated) summary of the history of Schedule B. UPDATE: This is a new revision of this legal analysis, as of February 3, 2021, based, in part, on comments from and discussions with public policy law practitioners in the First Tuesday Lunch Group. The changes are significant and the document is both longer and more detailed, including analyses of the need for and effectiveness of Schedule B. You can find it here: