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

ADVOCACY & LOBBYING   CALIFORNIA LAW

5 Things Nonprofits Should Know About Ballot Measure Advocacy in California

 

Open hand raised, Vote Yes sign painted, multi purpose concept -

Ballot measure advocacy can be an important and powerful way to advance an organization’s mission and purpose. Last week, the Alliance for Justice hosted a Webinar to discuss the ways in which a 501(c)(3) organization may engage in ballot measure advocacy. Here is a list of 5 things nonprofits should know about advocating for state or local ballot measures in California.

  1. Spend or Raise Less Than $1,000 Without Reporting.  In general, organizations, regardless of type, trigger reporting obligations for ballot measure advocacy if the organization spends or raises $1,000 or more on those activities per calendar year.  Therefore, organizations with limited expenses for such advocacy may avoid reporting requirements entirely if they raise and spend under the $1,000 threshold.
  2. Use Newsletters and Member Communications. In California, there are several types of activities that do not trigger disclosure requirements. For example, organizations may advocate for a ballot measure in their regularly published newsletter, as long as the newsletter is distributed in the same style and manner as done previously. Any payments associated with the publication will not count toward the $1,000 threshold. Likewise, an organization with a valid membership structure may communicate with its members regarding ballot measures without triggering the state reporting requirements.
  3. Minimize Reporting by Forming a Separate Ballot Committee. If an organization engages in ballot measure advocacy activities far above the $1,000 threshold, it may be prudent to consider forming a separate ballot measure committee. This committee may operate as a 501(c)(4) organization. Although the new committee would have significant ballot measure-related reporting obligations, the original charity would not if it continues to engage in non-reportable activities.
  4. Utilize Staff. Paid staff time used for ballot advocacy must be registered and reported in California if the staff-person spends more than 10% of her time per month working on the measure. This means that if an organization is able to properly spread the advocacy work throughout its staff, the organization may not have to report the larger cumulative effort exerted for or against the ballot measure, if no employee exceeds the 10% limit.
  5. Keep Both Federal and State Tax Law in Mind. Reporting and disclosure requirements for lobbying in California are often different than the requirements under Federal tax law. Organizations should understand and remain aware of those differences (see Introduction to Lobbying by Public Charities), and consider making the 501(h) Federal Lobbying Election.

Currently, California lawmakers are considering SB27, which would change the reporting threshold from $1,000 to $50,000, as soon as July 1, 2014. This significant increase could permit organizations to spend substantially more on ballot measures vital to their constituents, without triggering time-consuming reporting requirements.

Lastly, it is important to note that organizations should be aware of their reporting requirements under tax law and election and campaign finance laws.  When in doubt, nonprofits should seek counsel from an appropriate attorney.

Additional AFJ Resources:

Bolder Advocacy – California Advocacy Resources

Initiating Policy Change Circulating Ballot Initiatives in California

 

BOARDS / GOVERNANCE   CALIFORNIA LAW

FTB Revocation Policy for Failure to File Statement of Information or Form RRF-1

FTB

At a meeting of the California Bar Association’s Tax Exempt Organizations Committee last Friday, the issue of the California Franchise Tax Board (“FTB”) revoking an organization’s state tax-exempt status for failure to timely file a Statement of Information with the California Secretary of State was raised.  Several representatives of the FTB present at the meeting confirmed that failure to timely file a Statement of Information with the Secretary of State or a Form RRF-1, Annual Registration Renewal with the California Attorney General’s Registry of Charitable Trusts after the appropriate notices have been given by those agencies will generally result in reporting the organization as suspended to the FTB.  The FTB will then send out a notice of suspension or forfeiture to the organization indicating that it will suspend the organization if it fails to comply within 60 days (see, generally, FTB’s website). 

According to the FTB representatives present at the meeting, if an organization is suspended because it fails to take steps to comply with any requirements leading to suspension in a timely manner, the FTB may revoke its state tax-exempt status.  In order to reinstate its tax-exempt status, the organization will be required to file the full Form 3500, even if it was not required to file Form 3500 to obtain exemption initially.  Moreover, the organization may be subject to income tax or the $800 minimum franchise tax for any period in which it is operating without exempt status if it is not able to reinstate its exemption retroactively.

Although the automatic revocation of state exemption for failing to file an annual return for three consecutive years (and the corresponding IRS regulation regarding automatic revocation of federal exemption) is widely known, this was the first we had heard of the FTB’s policy regarding revocation of state exemption for failure to file a Statement of Information or Form RRF-1.  The FTB has agreed to further discuss this policy at the next meeting of the Committee and we will update this post with any further information we receive.