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.

CALIFORNIA LAW

California Youth Equality Act Aimed at Boy Scouts of America

 

Boy scout badge 

 

Nonprofit organizations may obtain recognition of federal tax exemption under Section 501(c)(3) of the Internal Revenue Code. In California, the corresponding provision for state tax exemption is Section 23701d of the Revenue and Taxation Code. Section 23701d is very similar to Section 501(c)(3) and states the following:

"Corporations, community chests or trusts, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involved the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation, (except as otherwise provided in Section 23704.5), and which does not participate in, or intervene in (including the publishing or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

Last week, the California State Senate passed SB 323, or the Youth Equality Act, a bill that will amend Section 23701d in order to deny or revoke state tax exemption for youth organizations that discriminate. The bill, aimed at the Boy Scouts of America, was designed to bring nonprofit youth groups in line with California's existing non-discrimination laws by levying state sales, use, and corporate taxes on those organizations with discriminatory practices. Specifically, SB 323 proposes the addition of the following language to the code:

"Notwithstanding any other law, an organization organized and operated exclusively as a public charity youth organization that discriminates on the basis of gender identity, race, sexual orientation, nationality, religion, or religious affiliation shall not be exempt from taxes imposed by this part."

Critics of the measure are concerned about its constitutionality, citing free speech issues and U.S. Supreme Court cases that recognize a private organization's right to make membership decisions. Although the Boy Scouts recently approved new guidelines allowing homosexual-identifying youths to become members, its policy still prohibits openly homosexual adults from serving as leaders.

Another criticism of the bill is that the language leaves open the meaning of gender identity. An expansive definition of gender identity could have unintended (or possibly intended) consequences on nonprofit schools and institutions that have traditionally been all-boys or all-girls.

To become law, SB 323 requires a two-thirds vote from the California State Assembly and then Governor Jerry Brown's signature. If passed, the result will create a disconnect between state and federal exemption requirements, prohibiting, for example, the Boy Scouts from being recognized as exempt under state law because of its discriminatory policies, but having no change to its status as exempt under federal law. The bill is currently in the Assembly awaiting review.

CALIFORNIA LAW

Can We Have a Nonvoting Director?

 

Huh

No. All directors have a right to vote on each matter presented to the board of directors for action.*

     * applicable to California nonprofit corporations. See Cal. Corp. Code Secs. 5211(c), 7211(c), 9211(c).

 

Q:  What about directors who have a conflict of interest in a transaction being voted upon?

A:  All directors (even the ones with a conflict of interest) have a right to vote on each matter presented to the board for action. Even a conflict of interest policy requiring a director to abstain from such votes cannot prevent a director from exercising his or her statutory right. BUT (and this is a big but*) any director of a nonprofit public benefit or religious corporation with a material financial interest in a transaction being voted upon should voluntarily recuse himself or herself from the meeting and not be present during debate and voting on the transaction if it involves a compensation arrangement or property transfer.

     * cue immature laughter

The recusal is necessary in order to meet the requirements for a rebuttable presumption that the transaction is not an excess benefit transaction subject to penalties.

It should be noted that an interested director need not abstain from a vote to avoid a self-dealing transaction under state law. However, the interested director's vote will not count in meeting the safe harbor under Cal. Corp. Code Sec. 5233(d)(2) or 9243(d)(3).

Q:  So what about an ex officio director?

A:  An ex officio director, like any director, has a right to vote on each matter presented to the board for action. Ex officio in this context simply means that the person is a director by virtue of holding another office. For example, the CEO of an affiliated organization might be an ex officio director of a particular nonprofit corporation. If the CEO resigns from the CEO position, he or she would no longer be a director because it's only the person in that office that is the ex officio director. It is a common mistake to interpret ex officio to mean nonvoting.

CALIFORNIA LAW   FINANCIAL MANAGEMENT

FTB 199N: Annual Electronic Filing Requirement for Small Tax-Exempt Organizations

FTB

For accounting periods starting on or after January 1, 2010, small California tax-exempt organizations are required to file an annual return with the Franchise Tax Board (FTB) by the 15th day of the 5th month after the close of the organization's tax year. Currently, tax-exempt organizations with annual gross receipts that are normally $50,000 or less may complete this requirement by submitting a Form 199N, or what is commonly referred to as the e-Postcard, with no cost to file. (See FTB Form 199 and electronic Form 199N requirements). These organizations may also elect to instead file a Form 199 but organizations with annual gross receipts that are normally over $50,000 may only complete their annual filing requirement by submitting the longer and more detailed Form 199. Previously, the FTB required only those organizations that had an average gross receipts amount of more than $25,000 to file an annual return.

The California e-Postcard requires basic information about the organization, such as:

  • Entity ID number or California Corporation number
  • Organizational name (and any other names the organization uses)
  • Federal employer identification number
  • Tax year (or any changes to the initial tax year)
  • Mailing address
  • Name and address of a principal officer
  • Website address, if applicable
  • Total gross receipts
  • Whether the organization terminated or went out of business, if applicable
  • Contact person's name and telephone number

An organization that fails to file this form for three consecutive years will automatically lose its exempt status. Some organizations are exempt from this filing requirement such as churches and political organizations. Organizations that have an exemption application pending with the FTB can still file the e-Postcard so long as the organization's gross receipts are normally $25,000 or less.

For additional information about the filing, or to file the e-Postcard, go to: 199N California e-Postcard.

CALIFORNIA LAW   FISCAL SPONSORSHIP

New California Law Affecting Fiscal Sponsors

 New

 

Nonprofits in California serving as fiscal sponsors must be aware of the new law that may require them to maintain directors' and officers' liability insurance and disclose annually to the Attorney General how they comply with their charitable trust responsibilities. These requirements are triggered if three conditions are met:

  1. The organization is subject to the California Supervision of Trustees and Fundraisers for Charitable Purposes Act (generally applicable to charitable corporations and other entities holding property for charitable purposes);
  2. The organization holds restricted net assets (fiscal sponsors generally hold restricted assets for each project they sponsor); and
  3. The organization has negative unrestricted net assets (i.e., the organization has insufficient unrestricted assets to cover all of its liabilities).

The new requirement was codified in California Government Code Section 12599.8, which became effective on January 1, 2013:

For any year that the balance sheet of a charitable organization shows that it holds restricted net assets, while reporting negative unrestricted net assets, the organization shall provide an explanation of its compliance with its charitable trust responsibilities and proof of directors' and officers' liability insurance coverage to the Attorney General's Registry of Charitable Trusts.

CALIFORNIA LAW   STARTING A NONPROFIT

CalNonprofits: Step by Step Guide for Starting a Nonprofit

 

Calnonprofits_logo

Emily and I wrote the Step by Step Guide for Starting a Nonprofit for our good friends at CalNonprofits. Check it out here.

If you're an executive or board member of a nonprofit and not familiar with CalNonprofits, you should be. Here's a short excerpt from their website:

The California Association of Nonprofits (CalNonprofits) is a statewide membership organization that brings nonprofits together to advocate for the communities we serve. In 2013 we are entering a new period of renewed activity and impact, and we invite you to join us as we chart a new course.

CALIFORNIA LAW

Changes to California Articles of Incorporation Filings

 

California

Effective January 1, 2013, the articles of incorporation of a California nonprofit corporation must now include the entity street address and mailing address.

The changes to the requirements and a fill-in form for a nonprofit public benefit corporation are available here.

The changes to the requirements and a fill-in form for a nonprofit mutual benefit corporation are available here.

The changes to the requirements and a fill-in form for a nonprofit religious corporation are available here.