CALIFORNIA LAW   CURRENT AFFAIRS & OPINION

Proposed Regulations Threaten California Nonprofits – Comments due July 13

 

Your Comment Counts words on a red suggestion box to illustrate the value and importance of feedback, opinions, suggestions and brainstorming ideas

In a previous post, we warned our readers about the initial draft of these proposed regulations from the Office of the Attorney General of the State of California:

The proposed regulations, if adopted, will mean such charities will need to suspend activities and fundraising if they are delinquent in their registration, and if suspended or revoked, their board members will be subject to personal liability and their assets subject to forced divestiture.

A revised version of the proposed regulations dated June 25, 2015 failed to adequately address the three provision we believe threaten California’s nonprofit sector and all individuals served by California nonprofits. You have until 5 p.m. on Monday, July 13, to send your comments to Joseph N. Zimring, Deputy Attorney General at Joseph.Zimring@doj.ca.gov.

According to this article by Jeffrey Davine of Mitchell Silberberg & Knupp LLP:

The California Department of Justice, however, estimates that there are 52,000 charities within California that have not complied with these requirements. Moreover, it is estimated that there are at least 130,000 additional non-California charities operating in the State that have not complied with these requirements.

Assuming such statistics are accurate, if the proposed regulations are promulgated, over 180,000 charities in California will be required to stop operation until they have fixed their registration issues (which may take several months). 180,000! What would be the impact on the people relying on the services those charities are providing? What is the likelihood that this rule will most impact those most in need, particularly in rural and poor areas? And what message is the Attorney General sending by stating that if those 180,000 charities don’t stop operating, the Attorney General can hold the board members personally liable and take away all of the charity’s assets?

§ 999.9.3. Disclosure and Restrictions on Use of Charitable Assets After Suspension or Revocation of Registration.

(b) A registrant that has been suspended or revoked may not distribute or expend any charitable assets or assets subject to a charitable trust without the written approval of the Attorney General. Members of the board of directors or any person directly involved in distributing or expending charitable assets may be held personally liable in a civil action brought by the Attorney General for any charitable assets or assets subject to a charitable trust that are distributed or expended in violation of this regulation.

Why It’s a Problem:  A charitable nonprofit that is late filing a single form with a California agency may be suspended. If a nonprofit is suspended (whether it is aware of the suspension or not) but still operates (which generally means it’s expending charitable assets), the Attorney General has the power to sue the board members. This is the true even if the nonprofit is expending funds to pay its employees, live up to its contractual operations, or deliver urgent services to its beneficiaries. This will have a chilling effect on board recruitment and on the desire for nonprofits to operate in California.

(c) The Attorney General may direct a registrant whose registration has been suspended or revoked to distribute some or all of its charitable assets or assets subject to a charitable trust to another charitable organization or into a blocked bank account.

Why It’s a Problem:  If a charitable nonprofit has been suspended (e.g., for one late filing), that fact alone gives the Attorney General power to force the nonprofit to give all of its assets to another nonprofit.

§ 999.9.1. Automatic Suspension.

(d) A registration that has been continuously suspended for one year pursuant to this regulation shall be automatically revoked.

Why It’s a Problem:  A charitable nonprofit that is unaware of its suspended status (possible due to a change in mailing address, a common scenario for all-volunteer organizations) may have its registration revoked. While the revised version of the proposed regulations included a 30-day notice period to allow a noncompliant charity to cure the violation causing an automatic suspension, this notice will not be helpful if the organization’s leaders do not receive it.

Why the AG Wants These Regulations

I get why the Attorney General wants to propose regulations with teeth that forces the tens of thousands of noncompliant charities operating in California to comply with the registration requirements. I agree this is a major problem that needs to be addressed. But the draft regulations provide an inelegant solution, leaving it up to the Office of the Attorney General to pick and choose which charities and board members will be the examples facing the stiff consequences with little guidance. Why not limit the draconian consequences to more specific situations and eliminate the possibility of imposing such consequences upon an organization that missed a single filing resulting in suspension.

You can read more about the proposed regulations on the Wexler Law Group post, Second Bite at the Apple. We encourage you to also check out his very detailed comments.

Endorse Our Letter of Concerns

Please consider adding your endorsements to the Letter to Attorney General detailing our concerns with the proposed regulations. Joining us as signatories to the letter are  Barbara Rosen of Evans Rosen LLP; the California Association of Nonprofits; the National Council of Nonprofits, and Pamela E. Davis, Founder/President/CEO, Nonprofits Insurance Alliance of California (NIAC). The letter has also been endorsed by the United Ways of California; the Alliance for Justice; and Anne Wallestad, President & CEO, BoardSource. Even thought the comment period has passed, your endorsements will add weight to our efforts to protect charities operating in California and the millions of people they serve. Please contact us or leave your endorsement in the comments section below. Thank you for your advocacy!

 

CALIFORNIA LAW

California Charity Registration: Form 990 Schedule B Disclosure

Compliance mind map, business concept

California requires a charity subject to its registration requirements to submit its IRS Form 990 including Schedule B (Schedule of Contributors) with its annual registrations to the Registry of Charitable Trusts. The list of major contributors, which remains confidential pursuant to current policy and proposed regulations*, may not be redacted from the filing.

While the right of the California Attorney General to require the unredacted Schedule of Contributors has been challenged by organizations, last month, the U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s decision to deny a preliminary injunction against the Attorney General. Notwithstanding this decision, the Ninth Circuit has yet to issue an order to compel the appellate, the Center for Competitive Politics (CCP), to file the unredacted Schedule with the Registry of Charitable Trusts. On May 15, 2015, CCP filed an emergency appeal with the U.S. Supreme Court, but it was denied by Justice Anthony Kennedy. CCP intends to file a full appeal this summer.

* Proposed Regulation 301.1

 

Donor information treated as confidential by the Internal Revenue Service pursuant to Internal Revenue Code section 6104(d)(3)(A) shall be treated as confidential by the Attorney General and shall not be disclosed except as follows:
1.  In a court or administrative proceeding brought pursuant to the Attorney General’s charitable trust enforcement responsibilities; or
2.  In response to a court order, search warrant, or administrative subpoena.

Read more …

California Attorney General Can Demand Full IRS Forms From Charity – Forbes

Court Affirms California Attorney General’s Demand for Confidential Donor List – Seyfarth Shaw LLP

No protection — yet — for group’s donor privacy – SCOTUSblog

BOARDS / GOVERNANCE   CALIFORNIA LAW   EVENTS   IRS & FEDERAL TAX ISSUES

Nonprofit Law: Hot Topics – CEB / CLE


CEB Hot TopicsOn February 26, 2015, Erin and I recorded a webinar for Continuing Education of the Bar – California on Nonprofit Law: Hot Topics. It’s an intermediate-level one-hour CLE program available here.

Providing counsel to nonprofits requires knowledge and understanding of corporate and tax laws that are often not intuitive or easy to research, and that often differ from the laws applicable to for-profits. In this program, we’ll explore considerations in the nonprofit formation process, potential alternatives to formation of a new nonprofit entity, the legal implications of nonprofits engaging in commercial activities and for-profit social enterprises pursuing charitable goals, common governance mistakes, and recent changes in the laws impacting nonprofits. We will use relevant examples to illustrate how these concepts might apply to your clients.

Program Highlights:

  • New Form 1023-EZ, the short-form federal exemption application
  • Fiscal sponsorship, an often appropriate alternative to a startup
  • Recent changes to the Nonprofit Corporations Law affecting governance and bylaws
  • Earned revenues and application of the unrelated business income tax
  • Prohibited private benefits and application to nonprofits affiliated with businesses
  • Introduction to alternative entities, including the benefit corporation and social purpose corporation
BOARDS / GOVERNANCE   CALIFORNIA LAW   CURRENT AFFAIRS & OPINION   IRS & FEDERAL TAX ISSUES

CEB: Nonprofit Law: Hot Topics – Livecast on Thu, 2/26, at noon

Hot Topics Letterpress

Erin and I will be presenting a program on Nonprofit Law: Hot Topics for Continuing Education of the Bar (CEB) – State Bar of California livecast on Thursday, February 26 from noon to 1 p.m. The following description of our program is on the CEB website.

Providing counsel to nonprofits requires knowledge and understanding of corporate and tax laws that are often not intuitive or easy to research, and that often differ from the laws applicable to for-profits. In this program, we’ll explore considerations in the nonprofit formation process, potential alternatives to formation of a new nonprofit entity, the legal implications of nonprofits engaging in commercial activities and for-profit social enterprises pursuing charitable goals, common governance mistakes, and recent changes in the laws impacting nonprofits. We will use relevant examples to illustrate how these concepts might apply to your clients.

Program Highlights:

  • New Form 1023-EZ, the short-form federal exemption application
  • Fiscal sponsorship, an often appropriate alternative to a startup
  • Recent changes to the Nonprofit Corporations Law affecting governance and bylaws
  • Earned revenues and application of the unrelated business income tax
  • Prohibited private benefits and application to nonprofits affiliated with businesses
  • Introduction to alternative entities, including the benefit corporation and social purpose corporation
CALIFORNIA LAW

Emergency Powers for California Nonprofit Corporations

Emergency pointer icon on white backgroundUnder California law, specifically after the approval of Assembly Bill 491 in 2013, corporations including nonprofit public benefit, mutual benefit, and religious corporations are permitted to conduct certain corporate activities during an emergency. Types of emergencies include a natural catastrophe, an enemy attack, an act of terrorism, or a state of emergency declared by the Governor. Previously, a nonprofit board might be unable to act, or might risk a challenge if it took action during an emergency without the approval of the minimum number of required directors.

Corporations may now conduct ordinary business operations and affairs in anticipation of or during an emergency, and may even adopt bylaws to manage and conduct such affairs, only effective in such an emergency. Furthermore, any action taken in good faith by a corporate director, officer, employee, or agent during that time may not be used to impose liability on that individual or the board.

The law also permits the directors to:

  • Relax notice requirements for directors to “any practicable manner under the circumstances”;
  • Modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent resulting from the emergency;
  • Relocate the principal office, designate alternative principal offices or regional offices, or authorize the officers to do so; and
  • Deem that one or more officers of the corporation present at a board meeting is a director, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum for that meeting.

Note, though, that the board may not take any action that requires the vote of members or is not in the corporation’s ordinary course of business, unless the required vote of the members was obtained before the emergency.

CALIFORNIA LAW

Simplified California Exemption Process for Non-Charitable Nonprofits

Simplicity concept.

Effective January 1, 2014, Assembly Bill 1173 simplified the process for applying for California tax exemption by certain organizations that have a federal exemption determination letter. Non-charitable nonprofits, specifically those recognized by the IRS as exempt under Internal Revenue Code (IRC) Section 501(c)(4), (5), (6), and (7), are now permitted to file the short Form 3500A, previously used only by 501(c)(3) organizations. Form 3500A is an abbreviated two-pages, in comparison to the rather lengthy Form 3500 previously required.

Note that while it’s possible for 501(c)(4), (5), (6), or (7) organizations – social welfare organizations, labor organizations, business leagues (including trade and professional associations), and social clubs – to self-declare themselves as tax-exempt for federal income tax purposes without filing an application with the IRS, such organizations will remain taxable for California income/franchise tax purposes unless they obtain recognition of exemption from the Franchise Tax Board.

Read more about the Form 3500A here, and on the Franchise Tax Board website, here.

ADVOCACY & LOBBYING   BOARDS / GOVERNANCE   CALIFORNIA LAW   CURRENT AFFAIRS & OPINION   FISCAL SPONSORSHIP   IRS & FEDERAL TAX ISSUES   PRIVATE FOUNDATIONS / PHILANTHROPY   SOCIAL ENTERPRISE   STARTING A NONPROFIT   UBIT / UNRELATED BUSINESS

Best of the Nonprofit Law Blog 2014

Best of 2014 - The year in reviewHere are some selected highlights from NEO Law Group over the past year that we hope you’ll find helpful. 2014 was also highlighted by an addition to Erin’s family and Michele’s graduation and passage of the bar exam! Amazing year for all of us.

Blog Posts

Governance

What Issues Should a Nonprofit Board Consider Annually?

Executive Succession: 10 Tips for Boards

Executive Committees: Why You Should Limit Their Authority

Advocacy

Nonprofit Advocacy is More Than Lobbying

Charities and Issue Advocacy: Doing it Right – Part One

5 Things Nonprofits Should Know About Ballot Measure Advocacy in California

Fiscal Sponsorship

Fiscal Sponsor Due Diligence

Fiscal Sponsorship: A Valuable Option for Grantmakers and Grantees

Arts Projects: Charitable or Not?

Proposed Laws

12 Things Nonprofits Should Know About Proposed Tax Reform

California Bill to Strengthen Enforcement of Charity Registration and Reporting

Proposed Rules Affecting California Charities – Comment Period Ends Today!

UBIT / Social Enterprises

UBIT: Advertisements vs. Qualified Sponsorship Payments

Nonprofit Limited Liability Company

Nonprofit Crowdfunding Risks

Miscellaneous

Nonprofit Laws for Human Resources Managers to Be Aware Of

Retroactive Reinstatement Procedures: Simplified

Dissolution and Transfer of Remaining Assets: An Alternative to Merger

Articles

Fair or Foul: A Review of Federal Tax Laws Governing Unfair Competition, The Nonprofit Quarterly (2014)

12 Reasons Why You Should Gracefully Resign from a Nonprofit Board, The Nonprofit Quarterly (2014)

10 Issues To Address In Your Nonprofit’s Social Media Policy, The Nonprofit Times (2014)

Videos

Tips on Starting a Nonprofit: Initial Board of Directors

Tips on Starting a Nonprofit: Fundraising Before Exemption

Tips on Starting a Nonprofit: Initial Bylaws

Nonprofit Radio

Advocacy, Net Neutrality, & The Bright Lines Project

Your Board’s Role in Executive Hiring

Fraud!

Speaking Engagements

Gene

Profit for Good: How Social Enterprise Policy Affects You, Independent Sector Public Policy Action Institute

Hot Topics in Nonprofit Law, CalNonprofits Policy Convention

Small Charities – Problems and Solutions, American Bar Association, Tax Section Mid-Year Meeting

Erin

Earned Income 101 for Nonprofits, Lawline

Understanding UBIT: What Does It Mean for Your Shared Space? Nonprofit Centers Network

Navigating Legal and Ethical Issues, New Grantmakers Institute, Northern California Grantmakers

CALIFORNIA LAW   CURRENT AFFAIRS & OPINION

Proposed Rules Affecting California Charities – Comment Period Ends Today!

Your Comment Counts Suggestion Feedback Opinion BoxUnless the Department of Justice receives persuasive feedback today by 5 p.m., California charities that are required to register with the Attorney General’s Registry of Charitable Trusts (most charities except religious organizations, hospitals, and schools) may be subject to the following regulations and penalties:

  • $100 penalty per day per violation of certain California nonprofit laws, including those regarding timely filings of annual registrations (capped at $1,000 per violation). – This is generally authorized by Gov. Code Sec. 12591.1(c) but may signal a change in policy to enforce such penalties.
  • Automatic suspension of registration for failing to pay penalties when due. – This is generally authorized by Gov. Code Sec. 12591.1(d) but may signal a change in policy to enforce such sanction.
  • Automatic suspension of registration for failing to file complete registration renewals (Forms RRF-1, attachments, and fees) for three consecutive years.
  • Automatic revocation of registration if suspended for one year.
  • Possible refusal by the Registry of Charitable Trusts to renew the registration of a charity that has failed to pay fees or file complete registration renewals for three consecutive years.
  • Need to file an accounting of all charitable assets within 30 days of any revocation of registration.
  • Prohibition applicable to all suspended or revoked charities against distributing or expending any charitable assets without the written approval of the Attorney General.
  • Board members or any person directly involved in distributing or expending charitable assets while a charity is suspended or revoked may be held personally liable.
  • The Attorney General may direct a charity whose registration has been suspended or revoked to distribute some or all of its charitable assets to another charity or into a blocked bank account.
  • Prohibition applicable to any charity whose registration is delinquent, suspended or revoked against fundraising and engaging in other charitable activities in California.

Note that it is very common for charities to be delinquent on their registration renewals, particularly for smaller charities that are volunteer-run whose address on record may be tied to a volunteer leader’s address and not a facility occupied by the charity.

The proposed regulations, if adopted, will mean such charities will need to suspend activities and fundraising if they are delinquent in their registration, and if suspended or revoked, their board members will be subject to personal liability and their assets subject to forced divestiture.

Send your comments to:

Scott Chan, Deputy Attorney General

California Department of Justice Charitable Trusts Section

455 Golden Gate Avenue, Suite 11000

San Francisco, CA 94102

Fax: (415) 703-5480

Email: scott.chan@doj.ca.gov

Notice of Proposed Rulemaking Action (September 26, 2014)

Proposed Text of Regulations

Read our Comments to Proposed Regulations 111014 submitted together with Barbara Rosen (Evans & Rosen LLP) and endorsed by Pete Manzo (President/CEO of United Ways of California).
Please consider joining our efforts with your endorsement. Just leave your name and organizational affiliation in the comments or email me at gene @ neolawgroup.com.
Additional endorsements:*

 

* Parties endorsing our Comments include individuals and organizations that do not provide legal counsel but otherwise serve the nonprofit sector.

CALIFORNIA LAW   DISSOLUTION

California Bill Regarding Nonprofit Dissolutions

Industrial robotic arms building DONE word

On May 27, 2014, California Assembly Bill No. 1529 (AB 1529), introduced by Assemblyman John Perez, was passed on the Assembly Floor. The goal of AB 1529 is to streamline the process for dissolving nonprofit corporations by creating two new dissolution processes. First, it establishes an administrative process that would allow the Franchise Tax Board (FTB) and Secretary of State (SOS) to dissolve nonprofits that have been inactive for some time. Second, it creates a mechanism for voluntary dissolution of a nonprofit corporation if certain conditions are met.

Administrative Dissolution or Administrative Surrender

In California, there are over 144,000 nonprofit corporations that provide a variety of services and programs. According to the bill’s analysis, some nonprofit corporations have been disbanded or have been inactive for a significant amount of time, but have not been dissolved. These entities continue to incur fees and fines and cause “unnecessary time spent by FTB and SOS staff to proceed through the dissolutions process.” AB 1529 attempts to relieve these burdens by giving the FTB and SOS authority to “administratively clear away the backlog of inactive nonprofit corporations.” Under the proposed law, a nonprofit would be subject to an administrative dissolution or administrative surrender if one of the following occurs:

  1. The nonprofit corporation’s corporate power are suspended or forfeited by the FTB for period of not less than 48 continuous months; or
  2. The nonprofit corporation was incorporated in California or qualified to transact intrastate business and has not filed a statement of information (SOI) with the SOS for a period of not less than 48 continuous months.

AB 1529 establishes procedures for providing notice of pending dissolution or surrender to the nonprofit corporation, and allows the nonprofit corporation to object to such action. If the nonprofit corporation timely objects to the dissolution or surrender (within 60 days of the administrative notice), it will have 90 days from its written objection to satisfy all debts and file a current SOI with the SOS. The FTB and SOS can also provide one 90-day extension to the nonprofit corporation to comply.

[Ed. Note that over 74,000 organizations have had their state tax-exempt status revoked by the FTB as of May 16, 2014. But revocation of tax-exempt status does not result in dissolution of the entity.] 

Voluntary Dissolution

The bill also attempts to ease the burden for a nonprofit corporation to voluntary dissolve. According to the bill’s author, “the current dissolution process, which involves winding down of the nonprofit corporation’s affair, is very cumbersome and protracted.” The new bill creates a mechanism for voluntary dissolution of a nonprofit corporation upon certification of certain matters by the entity – a similar mechanism already exists under California General Corporation law, known as a short form dissolution. (California Corporation Code Section 1900.5 ).

Under AB 1529, a nonprofit corporation can dissolve when it has not issued any membership and has filed a certificate of dissolution within 24 months from the date that the articles of incorporation was filed. The certification must also verify the following information:

  1. The corporation does not have any debts or liabilities.
  2. The tax liability shall be satisfied on a taxes-paid basis.
  3. A final franchise tax return.
  4. The corporation was created in error.
  5. Distribution of assets.
  6. No issuance of membership.
  7. That the corporation is dissolved.

The nonprofit corporation is dissolved once it files a signed and verified certification of dissolution with the SOS. The dissolution does not relieve the nonprofit corporation’s liability to creditors. The bill is supported by the California Society of Enrolled Agents, a professional organization of individuals who have earned the privilege of representing taxpayers before the Internal Revenue Service. The bill is currently in the Senate awaiting review.

Resources

Assembly Bill No. 1529

Assembly Bill No. 1529 Analysis

Third Reading – Assembly Bill No. 1529 Analysis

California Society of Enrolled Agents

 

Michelle Baker

Michelle Baker is a San Francisco-based attorney interested in social impact.

CALIFORNIA LAW

California Bill to Strengthen Enforcement of Charity Registration and Reporting

Sacramento

On May 27, 2014, Assembly Bill No. 2077 (AB 2077), introduced by Assemblyman Travis Allen, was unanimously passed on the Assembly Floor. AB 2077 provides that moneys in the Registry of Charitable Trusts Fund, upon appropriation by the Legislature, shall be used by the Attorney General to enforce the registration and reporting provisions of the Supervision of Trustees and Fundraisers for Charitable Purposes Act applicable to charitable corporations, unincorporated associations, trustees, and other legal entities holding property for charitable purposes, commercial fundraisers for charitable purposes, fundraising counsel for charitable purposes, and commercial coventurers. The Registry of Charitable Trusts Fund is largely funded by registration fees from charities and commercial fundraisers.

According to the Center for Investigative Reporting:

State law requires charities that fundraise in the state to register with the attorney general. The Department of Justice estimates that there are 52,000 delinquent charities in California. At least 130,000 additional charities operate in California despite having failed to register, according to an Assembly staff analysis.

From the Assembly:

FISCAL EFFECT:
On-going costs to the Attorney General in the range of $1.4 million (special fund) to support up to 13 positions to:

1) Handle administrative appeals and court actions related to delinquencies.

2) Assist unregistered charities in complying with registration and reporting requirements.

3) Review initial applications and financial reports.

4) Provide public education and protection activities.

The intent of the legislation initially focused primarily on commercial fundraisers and the summary of the bill still reads: “Requires money in the Registry of Charitable Trusts (RCT) Fund to be used by the Attorney General to enforce the registration and reporting requirements of commercial charitable fundraisers, pursuant to the Supervision of Trustees and Fundraisers for Charitable Purposes Act.” However, the proposed change to Government Code Section 12587.1 provides for more broader enforcement by simply adding the following:

(d) Moneys in the fund, upon appropriation by the Legislature, shall be used by the Attorney General to enforce the registration and reporting provisions.

Charitable organizations in California subject to the registration and reporting requirements should be aware of this push and general trend towards greater enforcement. While in the past, penalties for late filings appeared to be rarely imposed absent some other wrongdoing, AB 2077 suggests that the Attorney General may begin to get more strict with timely registrations and registration renewals.

Resources:

Attorney General – Charitable Trusts (CT) Forms