The California Attorney General has released a revised version of its September 2014 proposed regulations aiming at shutting down nonprofits that have gaps in their compliance filings.
i submitted comments on Monday July 13: MFW comment 7-13-15 on OAG modified regs
Gene Takagi likewise submitted comments, endorsed by Barbara Rosen, California Association of Nonprofits, United Ways of California, and Alliance for Justice. (link) (Takagi final Letter-to-Attorney-General-re-Modifications-to-Proposed-Regulations-NEO-Law-Group-Final) I heartily endorse those comments, and share the concern about a “chilling effect on volunteer board service, particularly for small nonprofits without paid staff.”
These regulations have already drawn criticism because the Attorney General would be enforcing tax rules more strictly than the taxing agencies themselves. Automatic suspensions would freeze charitable assets and expose nonprofit officers and directors to penalties.
Added language is shown in double-underlined blue text.
Some revisions affirm the Attorney General’s discretion to mitigate the harsh effects of the regulations. Automatic suspensions are not actually triggered until after 30-day written notice from the Attorney General. § 999.9.1(b). After a suspension takes effect, the Attorney General can stay or lift the suspension, subject to written conditions that it may specify. § 999.9.1(g) and (h). Hypothetically, if a charity was suspended because its IRS exemption had been revoked, the suspension might be stayed while its IRS application for reinstatement was pending. Revisions to § 999.9.5 similarly confirm the Attorney General’s discretion to reinstate a charity even if not yet completely in compliance with these regulations.
Other changes, however, toughen the regulations. Prohibitions on charitable solicitation extend to charities that should have registered with the OAG but never did. § 999.9.4. The $1,000 penalty for charitable solicitation applies to each call, mailing, or request, regardless of whether it yields a donation. § 315. That clarification responded to my comment. File that under “Be careful what you ask for, because you might get it.
Violations of cease-and-desist orders will be punished by contempt orders under Government Code 11455.10 and 11455.20.
Concerning the “pointy end” of the regulation, which freezes all charitable assets immediately upon suspension, there were no revisions, even though prior comments had pointed out that a suspended charity would swiftly collapse if it could not make routine payments for rent, utility bills, or rank-and-file payroll.
That provision makes these regulations pertinent to foundations, grantmakers, and major donors. If a grantee charity gets suspended due to a glitch in its compliance, then the recent grant or donation proceeds will be frozen. The very programs that the grantmaker or donor intended to support will likely be shut down.
To guard against that unhappy outcome, grantmakers and donors should cast their net wide in confirming that the intended recipient charity is complying with all its Federal and state tax and legal filings.
I would appreciate any feedback on my comments.