Proposed regulations from the California Attorney General could impact many charities in the next few months. In brief, these proposed regulations would automatically freeze the assets as soon as a charity’s Federal or California tax exemption is revoked. Directors and officers would immediately become subject to penalties for any distributions or expenditures of the frozen assets, unless they can obtain written approval from the Attorney General’s office.
The package of 10 new regulations and 3 amended regulations is available at:
These proposed regulations would also implement statutory authority to issue cease-and-desist orders and penalties of up to $1,000 per “act or occurrence.” Based on comments received, the Attorney General may revise the proposed regulations. The latest word is that these regulations will likely become final in the first half of 2015.
The proposed regulations would apply to those nonprofit organizations that are required to register with the Attorney General. Note that hospitals, schools, and religious organizations are generally excluded from such registration. Otherwise, registration applies to persons holding charitable funds in California. Of course charities that are exempt under Internal Revenue Code Section 501(c)(3) come under that definition. Other nonprofits, like service clubs (Section 501(c)(4)) and business associations (Section 501(c)(6)) might also come under that definition if they are raising funds for charitable purposes.
In the meantime, new legislation (AB 2077, Stats. 2014 Ch. 465) will facilitate increased budget appropriations for Attorney General enforcement of regulations governing charities. Up to 50,000 California charities have failed to register with the Attorney General’s Registry of Charitable Trusts. For every 10,000 additional charities that are registered, the Attorney General could collect over $1 million of registration fees, part of which would be ‘reinvested’ in staff for increased enforcement activities.
Many charities and nonprofits may run afoul of these proposed regulations simply through oversights. If a charity omits to file any tax return with the Internal Revenue Service for three consecutive years, its tax exemption is automatically revoked. Just within the City of San Diego, the IRS has posted the revocation of exemption of over 100 charities during 2014. The same three-year rule applies for state tax returns with the California Franchise Tax Board.
Charities that are incorporated are required to file a statement of information (Form SI-100) with the California Secretary of State every two years. If a charitable corporation fails to do so, its corporate privileges can be suspended, which would likewise trigger an asset freeze under these proposed regulations.
Grantmaking: In anticipation of these regulations becoming final, every grantmaking foundation and philanthropist should ensure that it reviews each grantee to make sure that it is not on the verge of having its assets frozen. This review would include searching the Attorney General’s Registry of Charities, as well as the IRS and Franchise Tax Board lists of revoked charities. For a corporate grantee, this review would also include the Secretary of State’s website to verify that the grantee has not been suspended for failure to file the Statement of Information. Such a suspension would likewise trigger the automatic freeze under the Attorney General’s proposed regulations.
Outreach: Many local San Diego charities may not yet be aware of these proposed regulations, and would accordingly appreciate an alert from the San Diego Foundation. For local charities at risk of suspension, this “early warning” would give them an opportunity to get in good standing before the automatic freeze would take effect. For its part, the Attorney General’s Office has indicated a willingness to help charities that come forward to get back into compliance.
Consolidation: The prospect of these regulations may nudge a struggling charity to merge with another charity that serves a similar purpose. Alternatively, a charity might terminate by contributing its assets to a donor-advised fund.