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Attorney General Investigative Letters; “Control” for Purposes of Government Code Section 12586(e)

March 25th, 2011 · No Comments · Uncategorized

The following is an excerpt from minutes of the January 18, 2011 joint meeting of the Nonprofit and Unincorporated Organizations Committee of the Business Law Section and the Exempt Organizations Committee of the Tax Section of the State Bar of California:

Ms. Cherie Evans introduced Kelvin Gong, Supervising Deputy Attorney General, Registry of Charitable Trusts, and thanked him for agreeing to join the meeting as a last-minute substitute for Belinda Johns, Senior Assistant Attorney General, Charitable Trusts Section, who was detained by jury duty. Ms. Evans explained to the meeting participants that Ms. Johns and Mr. Gong previously had been given questions collected from Nonprofit Organizations Committee and Tax-Exempt Organizations Committee members and other meeting participants. Mr. Gong reported that he had discussed with Ms. Johns her responses to the questions and could relay those responses to the group.

As an introductory matter, Mr. Gong noted that with the new Attorney General in office, many things are in flux. AG Harris has not yet appointed a new Chief Deputy. Matt Rodriguez, currently Chief Assistant for Public Rights, is Acting Chief Deputy. Mr. Gong then addressed the questions directed at the Attorney General’s office:

1. AG investigative notices and letters (e.g., cease and desist notices) are being posted to the Registry and accessible when searching a nonprofit on the RCT webs ite (in addition to 990s, CT1s, charter documents, etc.). Is it intended that such items are publicly available? If so, what documents will NOT be posted in the future?

Mr. Gong indicated that cease and desist notices are considered public documents; they are issued as a compliance mechanism, and are not the result of an investigation; therefore they are not protected by any privacy or confidentiality restrictions.

2. Please address what constitutes “control” for purposes of Government Code Section 12586(e), which provides that: “If a charitable corporation… that is required to prepare an annual financial statement pursuant to this subdivision is under the control of another organization, the controlling organization may prepare a consolidated financial statement.” Presumably, control over a majority of the Board constitutes “control” for this purpose. Can you comment on what other definition(s) of “control” the AG’s office may have had in mind when this statute was written and whether there are any other scenarios where you would consider “control” to be present? For example, what about control being exercised by a combination of legal support relationship, management, and investment agreements instead of by control over a majority of the Board? Finally, financial and government audit standards promulgated by FASB and GASB have their own provisions to determine when an organization should include another organization’s assets and operations in its financial audit. Might meeting enough of these audit standards indicate control for purposes of 12586(e)?

Mr. Gong responded that he does not currently have an answer to the question of what constitutes control for purposes of Gov’t. Code Section 12586(e). Neither Ms. Johns nor Mr. Gong had yet received a response from the Section’s Supervising Auditor, who would be the correct person to answer the question.

Update: Ms. Johns subsequently forwarded to Ms. Evans a response from Steve Bauman, the Supervising Auditor, regarding the meaning of “controlled entity.” Mr. Bauman states: “Yes, for our purposes I believe since we are talking about the ability of a ‘controlled’ entity to file consolidated financial statements, the definition of control should be defined by FASB and GASB.”


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