Louis E. Michelson, A Professional Corporation

The following is another 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.

3. Regarding Commercial Coventurers: Would a business be required to register and report under the commercial coventurer statute (Government Code Section 12599.2) if it represents to buyers that proceeds from sales will benefit the buyer’s charity of choice? In other words, how broadly does a business have to “represent to the public” that it is benefiting a charity in order to fall under this requirement?

Mr. Gong noted that the statute is broad (“any person who for profit, is regularly and primarily engaged in trade or commerce other than in connection with the raising of funds, assets, or property for charitable organizations or charitable purposes, and who represents to the public that the purchase or use of any goods, services, entertainment, or any other thing of value will benefit a charitable organization or will be used for a charitable purpose” (emphasis added)), and the only exception to the definition, for persons described to it, is the contract alternative set forth in the statute. Nothing in the statute suggests that it is necessary to name a specific charity in order to be within the definition of Section 12599.2. However, if there is no contract between the for-profit entity and a specific charity, the for-profit entity would have to register and provide an annual report for funds raised.

4. Requiring tax returns for RRF-1 filings: Is there any limit on the number of years back that the Registry will require Form 990 for delinquent organizations? For example, if an organization cannot find a tax return from 5 years ago, but has submitted the past 4 years and has made efforts to locate a copy of it the 990 to no success, will the Registry still require the return before it can be in good standing? Is this a legislated requirement? Would you be open to considering legislation limiting it to 3 year look-back?

Mr. Gong indicated that the Registry of Charitable Trusts reported that it has the authority to go back ten years, but usually goes back five. The Registry suggested that an organization that has difficulty finding its older returns should request them from the IRS.  Mr. Gong did not anticipate that the AG’s office would support limiting the look-back to three years, since it has the authority to go back ten years in order to reinstate good standing.   Mr. Michelson noted, and other participants agreed, that the typical case was one in which the organization seeking reinstatement had not filed returns for each of the years requested.

5. This question involves CCC Section 5227 and the exception for reasonable payments to directors as directors. If you pay a director to manage a California public benefit corporation, where all of the directors are closely related, could this situation come under the exception in Section 5227 for payments to a director as a director, as long as amounts are reasonable?

Mr. Gong clarified that a director who is compensated by the corporation as a director would not be an interested person under Section 5227 (b), because of the exception in Section 5227(b)(1) that excludes any reasonable compensation paid to a director as a director. Compensation must be reasonable and services must be rendered as a director. This would include services provided to run the organization, but only if performed as a director. Ms. Bishop commented that usually directors who get paid to manage organizations are also officers and are being paid in that capacity, rather than “as a director.”

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.”