Nonprofits, politics, and privacy.

• Author: Mayer, Lloyd Hitoshi

INTRODUCTION I. THREE DIFFERENT DISCLOSURE REGIMES A. Federal Tax Law Generally B. Federal Tax Law for Tax-Exempt Organizations C. Federal Election Law II. Two DIFFERENT APPROACHES TO PRIVACY A. A Cost-Benefit Approach to Privacy 1. In Theory 2. In Practice B. A Right to Privacy 1. In Theory 2. In Practice III. NONPROFITS, POLITICS, AND PRIVACY A. Proposals B. The Cost-Benefit Approach 1. Entity Disclosure 2. Donor Disclosure C. The Right-to-Privacy Approach 1. Entity Disclosure 2. Donor Disclosure CONCLUSION INTRODUCTION

I am both honored and saddened to have this opportunity to remember Laura Chisolm and her pioneering work on advocacy by tax-exempt, nonprofit organizations. What set Laura's work apart was her identification of the fundamental policy concerns driving the federal tax law's restrictions on advocacy and her exposure of how those restrictions were not always consistent with such concerns. (1) With this Article, I plan to take a similar approach to the much more modest topic of disclosure obligations for tax-exempt nonprofits engaged in political activity.

The political involvement of tax-exempt nonprofit organizations, which often do not disclose their financial supporters, has become a topic of national interest. (2) While such involvement is nothing new, the Supreme Court's recent Citizens United decision and the resulting focus on the flows of corporate, union, and wealthy individuals' funds into election-related activities has brought this involvement to the fore of the public's consciousness. (3) This increased attention has led to growing calls to publicly expose the financial dealings of politically involved nonprofit organizations, including the identities of their donors. (4)

The time is therefore ripe for a deeper consideration of the policy concerns that underlie such public disclosure requirements and the related issue of privacy. To clarify the discussion, one aspect for deeper consideration is recognizing that this particular area is at the intersection of three significantly different disclosure regimes. Those three regimes are (1) federal tax law generally, (2) federal tax law as it applies to tax-exempt nonprofit organizations, and (3) federal election law. (5) These regimes are a study in contrasts. Federal tax law strongly protects taxpayer information from public disclosure. And while federal tax exemption law strongly favors public disclosure of institutional information, it is more ambivalent about public disclosure of information relating to individuals. In contrast, federal election law strongly favors public disclosure of all relevant financial information, including information relating to individuals. Understanding the reasons for these differences is important to determine whether disclosures at the intersection of the three regimes are appropriate and desirable.

The other, related aspect of this deeper consideration is privacy. The concept of privacy is one that is instantly recognizable and yet theoretically, much less legally, hard to define. (6) This difficulty stems in part from the many possible applications of the privacy concept. Fortunately for the purposes of this Article, the context here is fairly clear and narrow: the public disclosure of information relating to nonprofit organizations involved in politics and their supporters. Even in this narrow context, however, there are at least two competing approaches with respect to privacy. One takes a cost-benefit approach. It judges disclosure requirements based on their quantifiable costs and benefits, including among those costs the harm to privacy, however measured. The other, less frequently used, is a fight-to-privacy approach that considers privacy a fundamental fight that can only be abridged if there is a relatively strong interest for doing so and then only to the extent required to further that interest.

The first Part of this Article briefly reviews and contrasts the history and current rules governing disclosure and privacy in the federal tax, federal tax exemption, and federal election law contexts. This review reveals that both the cost-benefit approach and the right-to-privacy approach can be found in this history, but to a greater or lesser extent depending on the context. The second Part explores these two different approaches and the extent to which the existing disclosure rules reflect those approaches. This Part shows that the rules are sometimes but not always based both on the cost-benefit approach to disclosure, in which privacy harms are but one possible cost, and on the right-to-privacy approach. The third Part considers recent proposals for disclosure rules relating to nonprofit organizations engaged in political activity using both the cost-benefit approach and the right-to-privacy approach. This consideration reveals that certain proposals, which relate to disclosure of financial information primarily about the organizations themselves, generally are justifiable under either approach. Certain other proposals that would require disclosure of financial information primarily relating to individuals, however, are more difficult to justify under a right-to-privacy approach. I conclude by discussing why this difference exists and what it means for the desirability of disclosure in this area.

1. THREE DIFFERENT DISCLOSURE REGIMES

   A tax-exempt nonprofit organization that engages in political activities is potentially at the intersection of three significantly different federal law disclosure regimes. Each of the regimes requires the organization to disclose detailed financial information to the government, including to a lesser or greater extent information about other parties with which the organization has financial dealings. While the exact financial information that must be disclosed varies, the primary difference between them is whether the financial information that is disclosed to the government is also revealed to the public. This Part explores that aspect of each disclosure regime and the apparent reasons why public disclosure is not always required.

   First, however, a brief explanation is needed regarding how this intersection came to be. As I have detailed elsewhere, federal election law requires public disclosure of financial information by entities engaged in certain types of political (i.e., candidate supporting or opposing) activity; these entities include candidate committees, political parties, and political committees (i.e., PACs), and the publicly disclosed information includes identifying information for donors of any significant size. (7) To accommodate these entities in the federal income tax system, Congress also created a separate exemption category for organizations engaged in "political activities" under Internal Revenue Code section 527 that have as their primary activity supporting or opposing candidates. (8) Because "political activity" as defined by federal tax law is broader than the "political activity" regulated by federal election law, it proved possible to create "527 organizations" that were not covered by election law's disclosure rules, which subsequently became known as "stealth PACs." (9) To correct this gap in required public disclosures, Congress amended federal tax law in 2000 to impose disclosure requirements on these stealth organizations that essentially paralleled the election law disclosure rules, including the public disclosure of information identifying donors of any significant size. (10)

   Under existing federal tax law, however, it is also possible for other types of tax-exempt organizations to engage in many types of political activity without becoming subject to either set of disclosure rules as long as that political activity does not become the primary activity of the organization. (11) These tax-exempt organizations include section 501(c)(4) social welfare organizations, section 501(c)(5) labor unions, and section 501(c)(6) trade associations and chambers of commerce. While this ability has existed for many years, the Supreme Court's decision in Citizens United appears to have triggered both a new attention to it and a new flow of funds into these politically active tax-exempt nonprofit organizations, with the sources of those funds generally not subject to public disclosure. (12) This new attention and new funds have led commentators and politicians to call for increased disclosure of information, including information relating to donors, about these organizations that sit at the intersection of the disclosure rules found in federal tax law, federal tax exemption law, and federal election law. (13)

   1. Federal Tax Law Generally

      The Treasury Department has broad authority to require taxpayers to provide detailed financial information that would help the government collect tax revenues. (14) The primary vehicle for providing this information is the myriad of forms and schedules prepared by the IRS and completed by taxpayers, a universe of paperwork that continues to grow both as Treasury identifies additional information that would aid in tax collection and as Congress enacts additional reporting laws. (15) The Treasury Department also has the ability to require taxpayers to keep extensive records that the IRS may demand on audit, as well as to ask for relevant information from third parties. (16)

      At the same time, however, the Internal Revenue Code sharply limits the extent to which the IRS can share the information it receives from taxpayers with not only the public, but even with other governments and other federal government agencies. More specifically, Internal Revenue Code section 6103 provides a general rule that "[r]eturns and return information shall be confidential." (17) A "return" is defined broadly as "any tax or information return, declaration of estimated tax, or claim for refund...." (18) Similarly, "return information" includes essentially all financial information relating to a taxpayer. (19) This...