SB 218 - CA Law Affecting State University and College Related Nonprofits Vetoed

SB 218 was a bill that would have amended the California Education and Government Codes to treat certain nonprofit auxiliary organizations, such as alumni groups, student associations, faculty organizations, and supporting organizations associated with the University of California (UC), the California State University (CSU), and the California Community Colleges (CCC), as state and local agencies under the California Public Records Act (CPRA), Government Code section 6250 et seq. The legislative intent was to reject court interpretation of state law regarding the application of CPRA to auxiliary organizations, in particular CSU Fresno Association, at issue in California State University, Fresno Assn., Inc. v. Superior Court (2001) 90 Cal.App.4th 810, which excluded these organizations from CPRA requirements.The bill was vetoed by the Governor because he felt it would "result in a loss of private donations and volunteer activities supporting California public institutions of higher education."

CA Nonprofit Law Changes - AB 404 - Exemption Application and Determination by FTB

The Governor also recently signed AB 404, which is another a bill affecting nonprofit organizations. Click here for the text of the bill.:

The purpose of AB 404 was to clarify the process for applying for tax exemption as a charitable organization under Revenue and Taxation Code Section 23701d using the streamlined Form 3500A that was introduced by the FTB two years ago. AB 404 amends the Code so that:

• An organization, including a subordinate organization under a group ruling, can receive the exemption upon submission of a copy of the relevant IRS determination letter or ruling recognizing the organization's exemption from federal income tax as an Internal Revenue Code (IRC) Section 501(c)(3) Organization;

• The effective date of an organization's exemption from state income tax shall be no later than the effective date of the organization's recognition of exemption from federal income tax;

• If the FTB suspends or revokes an organization's exemption, the exemption shall only be reinstated upon a more detailed determination by FTB, regardless of whether the organization can establish exemption under the Form 3500A process; and

• Documents submitted to the Franchise Tax Board to verify the exemption, and the acknowledgment letter or other document issued by the Franchise Tax Board, are required to be made open to public inspection.

Changes to CA Nonprofit Law - AB 1233

Among the bills signed into law by Governor Schwarzenegger this past month was AB 1233. (Click here for the complete text of the bill.)  This bill makes many changes to the California Corporations Code as applied to nonprofit and cooperative corporations, notably:

• The term "director," as currently defined in the Code includes a natural person, designated in the articles or bylaws or elected by the incorporators, as well as natural persons designated, elected or appointed by any other name or title to act as members of the governing body of the corporation.  AB 1233 clarifies that a person who does not have authority to act as a member of that governing body is not a director, but if the articles or bylaws provide that a natural person is a director or a member of the governing body because he or she occupies a certain position, then that person is a director for all purposes.  
• The Code currently authorizes the articles of incorporation and bylaws of nonprofit corporations and consumer cooperatives to contain a provision requiring that an amendment or repeal of those articles or bylaws be approved in writing by a specified person or persons other than the board. The Code also authorizes the articles or bylaws to provide for the designation or selection of directors by a specified person or persons rather than by election by a member or members and similarly to authorize a specified person or persons to remove a designated or selected director. AB 1233 specifies that these approval requirements and designation and selection and removal entitlements are inapplicable or cease in those circumstances when the specified designator has died or ceased to exist, the office or status that created the right or entitlement has ceased to exist, or in certain cases, when the corporation has attempted and failed to obtain approval from the specified person or persons

• Under the Code, a majority of the number of directors, authorized in the articles or bylaws, constitutes a quorum for the transaction of business of a nonprofit corporation or a consumer cooperative. AB 1233 authorizes the articles or bylaws to require the presence of one or more specified directors in order to constitute a quorum of the board to transact business, subject to certain specifications.

•  The Code currently authorizes a board of a nonprofit corporation or a consumer cooperative to form one or more committees consisting of 2 or more directors to serve at the pleasure of the board and provides that these committees have the authority of the board.  AB 1233 prohibits a committee exercising the authority of the board from including, as members, persons who are not directors; however, it authorizes the board to create other committees with nondirectors that do not exercise the authority of the board.

•  The Code required a nonprofit corporation or consumer cooperative to have a chairman or a president or both, a secretary, a chief financial officer, and other officers as provided in the bylaws or determined by the board.    AB 1233 requires such a corporation to have a chair, defined as to include a “chairman,” “chairwoman,” “chairperson” or “chair” of the board, or a president or both, a secretary, a treasurer or a chief financial officer or both, and other officers as provided in the bylaws or determined by the board. The bill also specifies that if there is no chief financial officer, the treasurer is the chief financial officer.

•  The Code authorizes a nonprofit corporation or consumer cooperative to elect to voluntarily wind up and dissolve by approval of a majority of the members, as defined, or by approval of the board and approval of the members, as defined.   AB 1233 authorizes such a corporation meeting certain requirements, including the lack of a quorum, to elect to voluntarily wind up and dissolve.

• Under the current Code, certain public benefit corporations deemed to be private foundations, as defined, are subject to certain requirements. This bill would make those requirements also applicable to nonprofit religious corporations deemed to be  private foundations.

• The Corporations Code prohibited a cause of action for monetary damages from arising against any director or officer of a nonprofit corporation or a nonprofit medical association, who serves without compensation, on account of any specified negligent act or omission if the nonprofit corporation or nonprofit medical association has a general liability insurance policy in a specified amount that is in force both at the time of the injury and at the time the claim is made. AB 1233 instead prohibits those causes of action if these corporations or associations maintain a liability insurance policy that is applicable to the claim.

•   Finally, the Code regulates unincorporated associations and authorizes an unincorporated association to merge into a specified corporation, limited partnership, general partnership, or limited liability company.   AB 1233 authorizes an unincorporated association to merge with one of these entities.

2008 Consumer Product Safety Improvement Act (CPSIA) and Charitable Resale Stores

The 2008 Consumer Product Safety Improvement Act (CPSIA) was signed into law just over a year ago on August 14, 2008. This law was noteworthy in setting new limits for lead content in children’s products, including children’s toys, clothing and books. Selling any recalled products (for adults or children) is now unlawful. Additionally, certain chemicals found in plastics (phthalates) are prohibited in certain toys and child care articles. New products that comply with the new standards must now be certified and labeled accordingly in order to verify products that are CPSIA compliant.

It is important to note that the CPSIA also prohibits the sale of products that exceed the law’s new standards, including products manufactured long before the CPSIA was enacted. Although the Consumer Product Safety Commission (CPSC) has confirmed that the law’s testing requirements do not apply to resellers, a reseller cannot knowingly sell products that do not meet the CPSIA standards. The CPSIA applies to all “resellers,” which include nonprofit social service providers that support their mission by selling donated goods in thrift stores.

A current effort by the CPSC, the “Resale Round-up,” is aimed particularly at enforcing the prohibition on the sale of recalled products. As part of this effort, the Commission recently issued a Handbook for Resale Stores and Product Resellers (pdf) in order to help resale and thrift stores and charities that operate them comply with the CPSIA. There is also copious information on the Consumer Product Safety Commission’s website (www.cpsc.gov), including further details of what can't be sold by resale stores under the new law.

Walter Olsen at Overlawyered has been critical of the many impractical and burdensome aspects of the CPSIA and has extensively blogged on the issue.

Senator Grassley's EO Amendments to Health Care Reform Bill

As part of the health care reform legislation pending in the Senate Finance Committee, Senator Grassley, longtime advocate of exempt organization reform and oversight legislation, has proposed two amendments that would have an effect on all exempt organizations, not just health care entities.

Grassley Amendment #F-7 would amend IRC Section 6033(a)(1) to require that governance and management information to be reported on the Form 990.  This is an effort to head off legal challenges to the IRS’s authority to ask many of the question in Part VI of the new Form 990.  What? Doesn't the IRS have that authority now? It is unclear under current law (I think "Not." Many others, particularly within in the IRS, say "Sure.") and the question is batted around. Perhaps the amendment would clarify the law and prevent uncertainty.

Grassley Amendment #F-8 adds several changes to IRC section 4958 regarding the so-called "intermediate sanctions" rules. The senator's proposed changes would retain the due diligence requirements for determining reasonable compensation for executives and other employees and contractors, but remove the "rebuttable presumption" procedures as a safe-harbor by which an organization can establish that the compensation is reasonable unless the IRS can show otherwise. The amendment would also require organizations to disclose on its Form 990 a summary of the comparable information used to determine an executive’s compensation.  This is would be bad change in the law. Overall, I think the rebuttable presumption procedures have led to more careful consideration of executive compensation by nonprofit boards. Sen. Grassley seems to object to the procedure because organizations can use data from comparable for-profit as well as other nonprofit organizations. God forbid that, based on such data, someone in the nonprofit sector should make more than a senator or Hill staffer.

New California Raffle Law Allows for Internet Advertising

California Senate Bill 200 was approved by the Governor on August 5, 2009. This bill amends Penal Code Section 320.5 to permit  nonprofit and other eligible organizations to advertise their fundraising raffles over the Internets. The law that raffles cannot be conducted and tickets cannot be sold over the Internet remains in effect, but the new law provides that an eligible organization is not deemed to operate or conduct a raffle over the Internet, or sell raffle tickets over the Internet, if the it advertises its raffle on the Internet. The law provides that certain information that may be posted on a web site without violation of 320.5, including a) Lists, descriptions, photographs, or videos of raffle prizes, b) List of the prize winners. c)The rules of the raffle d) Frequently asked questions and their answers, e) Raffle entry forms, which may be downloaded from the website but still may not be submitted through the Internet, and f) Raffle contact information, including the eligible organization's name, address, telephone number, facsimile number, or e-mail address.  All the other provisions of Pen.C 320.5 remain in effect, including the requirement that at least 90% of gross receipts must be used by the eligible organization "to benefit or provide support for beneficial or charitable purposes" (for itself or another eligible organization). But, expenses of the raffle can be paid from other funds not derived from the raffle itself, if the organization has such unrestricted funds, which would include expenses for prizes.

USA Today Review of CEO Salaries for US Foreign Aid NGOs

USA Today reported on August 31 that, according to 2007 organizational tax returns (Form 990), four chief executives, whose government-funded non-profit corporations are paid to deliver U.S. foreign assistance, earned more than half a million dollars in 2007. Each of the organizations is exempt under IRC section 501(c)(3). Both Sen. Chuck Grassley and Sen. Patrick Leahy are quoted saying that the pay is excessive:

"It seems to me that these are salaries that are outrageous, particularly if they're government contractors," said Sen. Chuck Grassley of Iowa, the ranking Republican on the Finance Committee, which has jurisdiction over non-profit compensation.

"It conflicts with most people's notion of what a non-profit organization is about when they're paying themselves salaries that are several times higher than what a U.S. Cabinet secretary would earn," said Sen. Patrick Leahy, D-Vt., who chairs the subcommittee that funds foreign aid.

Are government salaries the benchmark for determining what nonprofit executives should earn?

Madoff Trustee May Seek Clawbacks from Charities

Bloomberg news reported this week that Irving Picard, the liquidator for Bernard Madoff’s investment business, said that he might sue charities that took out more money than they invested with Madoff’s company. “We will look at charities on a case-by-case basis before determining what action may be appropriate,” Picard said. While it will be difficult for charities to repay funds that are probably long since spent, I think it is at least reasonable for the trustee to look into recovering any of the "false profits" that may have been distributed to these organizations.

IRS Exemption Application User Fees to Change

The IRS also announced this week that user fees will increase for all exemption applications (Forms 1023, 1024, and 1028), postmarked after January 3, 2010 (The user fee increases to $850 for organizations with annual gross receipts over $10,000.) However, once the Cyber Assistant becomes available during 2010, the user fees for filing Form 1023 using Cyber Assistant will be $200, regardless of size and the user fee for all other organizations will be $850, regardless of size. Cyber Assistant is a web-based document assembly program developed by the IRS for completing the Form 1023.

New from the IRS - Form 990 Tips: Reporting Foreign Activities

The IRS issued another set of FAQs and tips this week, part of a continuing series of tips about filing the redesigned Form 990. This set addresses questions raised about the new foreign activity reporting requirements, including how passive and related organization investments should be reported on Schedule F.

Fewer Than Anticipated Nonprofit Mergers

An article on Chicago Business this week, "The Merger Wave That Never Broke," reports that, although forecasters predicted increased mergers of nonprofit organizations in difficult economic times, a March survey found that only 5% of the 986 organizations surveyed asked had actually merged or intended to merge. Many nonprofits are daunted by logistics and cost of the merger transaction itself. Even though funders may have an interest in tightening operations, apparently there isn’t foundation money available for mergers. I believe it is still very early to know what the long-term effects of the economic mess will be on nonprofits.

IRS Rejects Proposed Redesign of 990-PF (for now)

The Tax Payer Advocacy Panel (TAP) has released its 2008 Annual Report. The TAP is a national citizen advisory panel to the IRS. The panel makes recommendations to the IRS for improvements, and the IRS has the opportunity to explain why it agrees or disagrees with it. One of the 2008 TAP proposals asked the IRS to “Simplify Filing Requirements for Small Private Foundations.” Currently, all private foundations are required to file Form 990-PF, Return of Private Foundation, to report their exempt activities for the year. (A private foundation is a 501(c)(3) entity that receives all or most of its funding from one or a few sources, as opposed to a public charity which normally receives broad public support. ) Apparently the complexity of this form results in a 32% error rate, in addition to requiring professional tax support to meet the reporting requirements. The IRS, responding to the TAP proposal, indicated they were unable to implement the recommendation at this time, citing a lack of resources due to competing form re-design projects and a lack of authority regarding the filing of an electronic statement. The Service also indicated that since Form 990 was recently re-designed, they wanted to gauge the success of that project before re-designing similar, related forms. While the Service appears to have put the redesign of Form 990-PF on hold for now, given the external and internal pressure to update the form, it appears to only be a matter of time before the IRS gives it a major overhaul, like the Form 990.

Chinese NGOs with Foreign Funding

A story from the August 4, 2009 Christian Science Monitor describes recent government raids on two NGOs with foreign funding. Because of the difficulty of registering as nonprofits, many Chinese NGOs are listed as businesses. That potentially makes them liable for arbitrary tax demands, or face being shut down.

New Proposed Regulations for Church Audit Procedures

On August 5, 2009 the IRS issued proposed changes to the regulations relating to church tax inquiries and examinations. The proposed regulations replace references to positions that were abolished by the Internal Revenue Service Restructuring and Reform Act of 1998 with references that are consistent both with the statute and the IRS's current organizational structure. The proposed regulations follow upon recent litigation in which a federal judge held that the IRS did not comply with the church audit regulations requiring approval by an appropriate high-level Treasury official before commencing the church examination. The Internal Revenue Service halted its investigation of a Minnesota church whose pastor preached against presidential candidates during a sermon in May 2008, reported by the AP last week.

Drop in Spring Donations to Charities

Guidestar has published its latest report of The Effect of the Economy on the Nonprofit Sector: March – May 2009 based on a survey of over 2000 public charity and private foundation employees. Among its findings:

• More than half (52 percent) of the organizations have experienced a decrease in contributions.
• More than a third (36 percent) of grantmakers gave less money in grants over the three-month period.
• Of the organizations that have cut their budgets, the majority are making ends meet by cutting services (54 percent) and freezing staff salaries (44 percent).
• Eight percent of organizations reported that they are in imminent danger of closing their doors because of a lack of financial resources.

A copy of the report can be obtained by going to the Guidestar Publications website.

ABA Annual Meeting Program: Representing Religious Organizations

If you will be attending the ABA Annual Meeting in Chicago this week, you may be interested to know that on Saturday, August 1 there will be a CLE program: "Unique Aspects of Representing Religious Organizations" from 2:30 PM - 4:30 PM, Sheraton Towers, Ballroom I, Level Four. Expert practitioners, including Lisa Runquist, will discuss representing religious organizations regarding land use and zoning, entity structuring, tort litigation and more. Hope to see you there.

Our ABA Business Law Today Articles

Lisa Runquist and I both have articles in the latest issue of Business Law Today, a publication of the ABA Business Law Section. Appropriately for Runquist & Associates, the July/August 2009 issue of the BLT has the "mini-theme" of nonprofit organizations. Lisa's article, co-authored with attorney Mike Malamut, on the revised Form 990, is The IRS's New Regulation of Nonprofit Governance. My article, on current legal developments regarding religious organizations, is The Business of Religion.

IRS Rev. Proc. 2009-32: Reliance Criteria for Supporting Organizations and Donor Advised Funds

The Pension Protection Act of 2006 subjected payments made by private foundations to excise taxes under IRC sections 4942, 4945, and 4966 if the grants are made to certain public charities exempt as supporting organizations. So that private foundations can assure themselves that grants are not subject to these taxes, the IRS this week issued Revenue Procedure 2009-32, allowing for them to rely on documentation of an organization’s status. The Rev. Prov. states that, “In determining whether a public charity is classified under 509(a)(1), (2), or (3) of the Code, a private foundation or a sponsoring organization that maintains a donor advised fund, acting in good faith, may rely on either: (1) the grantee’s current IRS letter recognizing the grantee as exempt from federal income tax and indicating the grantee’s public charity classification under § 509(a)(1), (2), or (3); or (2) information from the BMF [IRS Business Master File].” The complete Rev. Proc. is available here(PDF).

Should Charities Repay Their Madoff Money?

Bernard Madoff was sentenced to 150 years in federal prison this week for his fraudulent Ponzi scheme investment operation. While many charitable organizations lost millions upon millions of dollars by investing with him, there are some charities that, in fact, profited from their involvement with Madoff. Writing on the New York Times website Deal Book blog, “Deal Professor” Steven M. Davidoff asks two questions regarding this situation: “First, did charities on the whole benefit from Mr. Madoff’s crime? And second, do these innocent charities have a moral or legal obligation to return the money? He also suggests that, “Under the law of fraudulent conveyance, there is a six-year lookback, and they could conceivably be sued to return the money. However, traceability of the money here will be a problem, and in many cases protect the charities.” Click here to read the whole posting.

Nonprofit Laws in Azerbaijan and Russia

In Azerbaijan, proposed amendments to the law would impose new restrictions on non-governmental organizations could force numerous local and international NGOs in Azerbaijan to cease operations. Part of the proposal is a requirement that non-governmental organizations (NGOs) limit their foreign funding to 50 percent. Experts say this would create a situation in which almost every foreign-funded NGO would be in non-compliance with the law. Click here to view the report in Eurasianet

In Russia, on the other hand, the New York Times reports that legislation was introduced on Wednesday to ease some of the strict regulatory burdens on nonprofit groups, in particular human rights organizations.

ACLU Critical of Terrorist Financing Laws

The ACLU released a report this week critical of the laws and regulations aimed at restricting the use of charitable funds to finance terrorist organizations. The report claims that the government’s actions have chilled American Muslims’ free and full exercise of their religion through charitable giving and documents the effect of U.S. government actions on American Muslims’ charitable giving practices in light of the laws. The report concludes that laws prohibiting material support for terrorism are in desperate need of re-evaluation and reform to make them fair and effective. Click here to view the full report (pdf).

Charitable Giving Down in 2008

Although charitable giving in the United States exceeded $300 billion for the second year in a row in 2008 according to Giving USA 2009, a report by the Giving USA Foundation,the report also notes that overall charitable giving fell last year by 2% from 2007. Two-thirds of public charities receiving donations saw decreases in 2008. The exceptions to this trend were in the areas of Religion, Public-Society Benefit and International Affairs. Click here for the press release from Giving USA. See also the NY Times account here.

Patrick Sternal Makes Recommendation to IRS

The following was reported in today’s Tax Notes Today in the area where they have code sections listed.

SECTION 508 -- APPLICATION FOR EXEMPT STATUS

Bar Association Reports

CALIFORNIA BAR REPORT PROPOSES REVISION OF GUIDANCE ON EXEMPT ORGS.
In a State Bar of California report, Barbara Rosen and Patrick Sternal recommended that section 508(a) and (b) be revised to provide that charities that change their form or place of incorporation not be considered new organizations subject to refiling applications for exempt status. (Release Date: MAY 18, 2009) (Doc 2009-11455)
See 2009 TNT 103-58

Legal Basics for Nonprofits - Los Angeles

Lisa Runquist and I will be speaking from 2-5pm on June 8, 2009 at the Center For Nonprofit Management on "Legal Basics for Nonprofits." Attorney Al Landegger will also be participating. As the title suggests, the program will cover the basics regarding issues of corporate governance, taxation and employment that affect nonprofit organizations. This is an excellent opportunity for officers, directors, managers and staff of nonprofit organizations to learn more about the rules of the road for nonprofits.

Click here for further information and registration.

Hot off the Presses: Guide to Representing Religious Organizations

The ABA Section of Business Law has published a great resource for religious organizations - such as churches, temples and synagogues, as well as other religious organizations - and their attorneys: the newly released Guide to Representing Religious Organizations.

The Guide to Representing Religious Organizations addresses critical issues and risk factors of concern for religious organizations ranging from formation and governance, to taxes, fundraising and employment issues, and property rights. It outlines the general requirements of applicable law and highlights areas in which religious organizations receive special consideration under the law. The Guide's topical discussions are well organized for ease of reference. This book will assist attorneys who are asked to represent religious organizations as well as provide general information for religious leaders faced with a legal challenge.

Lisa A. Runquist, principal at Runquist & Associates served as the book's executive editor, together with Jeannie Carmedelle Frey. Lisa is also the author of several chapters of this handy book, including: Constitutional Rights of Religious Organizations; Formation and Governance Structures of Religious Organizations; Tax Exemption and Taxation of Religious Organizations; and Special Tax and Other Considerations for Ministers and Other Employees of Religious Organizations. I co-authored a chapter with Lisa, Fundraising by Religious Organizations.

This book offers clear and practical guidance for attorneys and others who work with and for religious organizations.