Personal Services Exception Applied to Consulting and Investment Services to Charities

Published date01 November 2019
Date01 November 2019
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
In the aftermath of the rejection by the US Court of
Appeals for the Ninth Circuit of First Amendment chal-
lenges to California’s charitable organization donor
disclosure regime (summarized in the November 2018
issue) and a vigorous dissent in the appellate court’s
decision to not allow the full panel to review the case
(summarized in the June 2019 issue), the public char-
ity principally involved in the dispute, on August 26,
petitioned the US Supreme Court for a writ of certiorari
(Americans for Prosperity Foundation v. Becerra).
As stated in the petition, the California attorney gen-
eral is demanding that “thousands of registered charities
annually disclose to the State the individual names and
addresses of their major donors.” Essentially, the appel-
late court is being faulted for not adhering to decades of
precedent by which laws like this are tested against an
“exacting scrutiny” standard. The decision, according to
the petition “cannot be squared with well-settled con-
stitutional protection for private association.” “[A]mple
means exist,” the petition states, “for California to
achieve its claimed law-enforcement interests” without
exercising its “blanket demand for donor-identity lists.”
The petition states that the Supreme Court “should
now determine whether government may compel
across-the-board identification of donors, where that
practice so clearly stands to chill speech, association,
and donor contributions around the country.” Unless
the Court intercedes, the petition continues, the Ninth
Circuit “has opened the door for the major donors of
thousands of charities to be exposed and chilled through
California’s dragnet.” If the Court declines review, the
“resulting chill will be profound and lasting.”
Acceptance of this case would enable the Court to
revisit its pronouncement of First Amendment guarantees
of the right to associate in its 1958 decision in NAACP v.
Alabama ex rel. Patterson, where the Court struck down
the Alabama attorney general’s demand that the NAACP
divulge the names of its members. In that case, the Court
recognized that “privacy in group association” is “indis-
pensable to preservation of freedom of association,”
holding that this type of compelled disclosure must satisfy
exacting scrutiny to pass constitutional law muster.
The petition makes the case that the Ninth Circuit’s
holding creates a circuit split, in that the First, Second,
Third, Fourth, Fifth, Sixth, Tenth, and DC Circuits “have
all agreed, in applying exacting scrutiny outside the elec-
tion context, that any compelled disclosure of a group’s
supporters must be narrowly tailored to or [be] the least-
restrictive means of achieving the asserted governmental
In addition, the petition asserts that the Ninth Cir-
cuit’s decision “warrants review because it threatens
grave harm to vital First Amendment interests on a
national basis.” The appellate court’s holding “condones
compelled disclosures from tens of thousands of charities
across the country, merely because they operate and reg-
ister in California.” The petition states that the “resulting
chill will be felt nation-wide as numerous organizations
and their donors grapple with disclosure requirements
and the attendant threats to confidentiality.”
The petition concludes that this case “affords an
excellent opportunity [for the Court] to clarify the frame-
work governing compelled disclosure of group affiliations
outside of the election context.” The petition ends with
this: “Unless reversed, the Ninth Circuit’s decision may
make it difficult for would-be challengers going forward
to demonstrate that a charity and its donors face dangers
comparable to those demonstrated on the record here
— or that disclosure demands confronted elsewhere in
the country appreciably surpass those already incurred
and condoned in California. If the decision below stands,
subsequent challengers will be hard pressed to secure the
relief necessary to ward off a governmental demand for
donor identities while a case winds its way to this Court.
These potential problems afford additional reasons why
this Court should use this case to take up and decide the
Question Presented.” [28.11(i)] (The Question Presented is
the first Quote of the Month.)
The IRS ruled that payments for services provided by
a disqualified person, by means of disregarded entities,
to a private foundation to enable it to offer “charitable
consulting” services and investment services to the foun-
dation and other charities will not be acts of self-dealing
because the payments are sheltered by the personal
services exception (Priv. Ltr. Rul. 201937003).
A private foundation has been receiving services to
enable it to carry out its activities, contributed to it by its
founder, by means of two wholly owned disregarded enti-
ties, A and B. These services have been provided, without
charge to the foundation, by the personnel of A and B.
A provides philanthropic program and grantmaking
services to the foundation. These services include devel-
opment initiatives, conducting due diligence with respect
to potential grantees, developing partnerships with other

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