Nonprofit directors, donors and more

NONPROFIT NEWS

Governor Jerry Brown recently signed into law amendments to the California Corporations Code intended to provide further clarity around the permissibility of and rules applicable to ex officio nonprofit directors. There's also been a lot of recent news related to the disclosure of donor information by exempt organizations, including the controversial requirement by the California attorney general that an organization subject to registration with the attorney general must submit a redacted copy of its Form 990 Schedule B with its annual registration renewal form. Finally, the Treasury Inspector General for Tax Administration issued a report in early October that unsurprisingly showed that the IRS is not currently very active in its efforts to enforce restrictions on impermissible political activity by exempt organizations.

New Law on Ex Officio Directors

There has long been confusion around the title and role of ex officio directors of California nonprofits. It's not uncommon for an organization to mistakenly use the phrase to refer to an individual who is intended to have the right to attend board meetings, but not to have a vote on matters placed before the board. However, under California law, that's not quite correct.

The phrase "ex officio director" refers to an individual who serves as a director of an organization automatically by virtue of holding some other office, either inside or outside of the organization. For example, an organization that wishes for the individual serving as its executive director to also automatically be a director may provide in its bylaws that its executive director shall be an ex officio director of the organization.

There has been so much confusion around this issue that the California Corporations Code was amended in 2016 to clarify the rules with respect to nonprofits. Section 5047 of the code states in relevant part "If the articles or bylaws designate that a natural person is a director or a member of the governing body of the corporation by reason of occupying a specified position within the corporation or outside the corporation, without limiting that person's right to vote as a member of the governing body, that person shall be a director for all purposes and shall have the same rights and obligations, including voting rights, as the other directors. A person who does not have authority to vote as a member of the governing body of the corporation, is not a director as that term is used in this division regardless of title." In short, if an organization's bylaws state that an individual is an ex officio director without clearly providing that such person does not have the right to vote on matters placed before the board, the individual is a full director. However, if they bylaws clearly provide that a person does not have the authority to vote on matters placed before the board, she is not a director at all, regardless of the title that the organization may use.

In September, Assembly Bill 2557, which further amends the California Corporations Code with respect to ex officio directors, was signed into law by Gov. Brown. The law, which will take effect on Jan. 1, 2019, will amend Corporations Code Section 5220 with respect to nonprofit public benefit corporations (and the correlating provisions that apply to nonprofit mutual benefit, nonprofit religious, and cooperative corporations) to specifically authorize organizations to have ex officio directors. Although the code previously contemplated the existence of ex officio directors, as mentioned above, the law apparently does not currently explicitly permit them.

The new language will state: "If authorized in the articles or bylaws of a corporation, all or any portion of the directors may hold office ex officio by virtue of occupying a specified position within the corporation or outside the corporation. The term of office of an ex officio director shall coincide with that director's respective term of office in the specified position entitling him or her to serve on the board of directors. Upon an ex officio director's resignation or removal from that position, or resignation or removal from the board for any reason, the term of office as a director of the corporation shall immediately cease. At that time, the successor in office shall become an ex officio director of the corporation, occupying the place of the former director." Hopefully this new language to help to further clarify at least some of the confusion around this issue.

Donor List Disclosure

The issue of nonprofits being required to disclose their donors has been in the news a lot recently in several contexts -- the IRS and Treasury move to excuse many exempt organizations from the obligation to file personally identifiable donor information on Schedule B, which I wrote about last month; the U.S. Supreme Court's refusal to stay a ruling requiring nonprofits to disclose all contributors who gave above a certain amount toward influencing federal elections on Federal Election Commission independent expenditure disclosure reports (Crossroads Grassroots Policy Strategies v. Citizens for Responsibility and Ethics in Washington et al., 16-00259); and the recent 9th U.S. Circuit Court of Appeals decision regarding providing the unredacted Form Schedule B to the California attorney general (Americans for Prosperity v. Becerra, 2018 DJDAR 9121 (9th Cir., Sept. 11, 2018)).

Schedule B to the Form 990 is used for exempt organization filers to disclose the names of, addresses of, and types and amounts of contributions received from major donors (generally those giving more than $5,000 in the reporting year) to the filing organization. As I wrote about last month, the IRS and Treasury recently announced that many exempt organizations will no longer be required to disclose much of this information beginning next year. However, Schedule B will continue to be required for many 501(c)(3) exempt organizations.

Becerra

Although a completed Schedule B must be submitted to the IRS if required, most exempt organizations, with the exception of private foundations and Section 527 political organizations, are not required to publicly disclose the names and addresses of donors disclosed on Schedule B and such information is not supposed to be provided by the IRS when sharing Form 990 records with the public. Nonetheless, California Attorney General Xavier Becerra has in recent years required all organizations subject to the registration requirement submit the unredacted Schedule B as part of the full Form 990 that is required to be submitted to the attorney general with the annual registration renewal. It has maintained a voluntary policy of not intentionally disclosing Schedule B forms to the public.

In an earlier lawsuit, exempt organization plaintiffs had argued that the attorney general's demand of the unredacted Schedule B chilled protected conduct and would lead to harassment of its donors. The federal district court reviewing the case granted a permanent injunction preventing the attorney general from requesting the unredacted Schedule B information filed by plaintiffs, which was later vacated by the 9th Circuit Court of Appeals. In September, a three-judge panel of the 9th Circuit upheld the prior 9th Circuit decision, meaning that the California attorney general may continue to demand unredacted Schedule B information from all exempt organizations subject to the charitable solicitation registration requirements in California, whether formed in California or not.

TIGTA Political Activity Report

The Treasury Inspector General for Tax Administration issued a report in early October summarizing its audit of the IRS's review of complaints of impermissible political activity by exempt organizations. The rules regarding political activity differ for organizations depending on the section and subsection of the Internal Revenue Code under which they are exempt. For example, 501(c)(3) public charities may engage in an insubstantial amount of lobbying activity, but are prohibited from directly or indirectly participating or intervening in any political campaign. 501(c)(4) social welfare organizations, on the other hand, may engage in unlimited amounts of lobbying activity in furtherance of their exempt purposes, as well as a limited amount of political campaign intervention.

According to the report, TIGTA reviewed the IRS's revised procedures relating to the examination of political activities of 501(c)(4)s after a Senate Committee on Finance investigation concluded that, from the end of 2010 to April 2014, the IRS had not conducted any examinations of 501(c)(4)s based on complaints alleging impermissible political activity by such organizations. The IRS created the Political Activities Referral Committee in July 2015, which is a group of three randomly selected, experienced IRS managers tasked with independently reviewing complaints alleging impermissible political activity to determine whether IRS examinations were appropriate. IRS procedures require that complaints that include evidence or allegations of impermissible political activities must be sent to the PARC for review.

According to the TIGTA report, between its formation and August 2016, the PARC received 19 referrals regarding impermissible political activities that it was tasked with reviewing. The PARC in turn recommended that ten of these, more than half of which involved 501(c)(4)s, lead to examinations by the IRS. However, as of January 2018, five of the ten recommended examinations had not yet begun and there had been no revocations or other negative findings as a result of any of the examinations.

TIGTA further reviewed a sample of the more than 6,500 complaints regarding tax-exempt organizations that were submitted to the IRS as a whole between July 2015 and August 2016. As a result of that review, TIGTA estimates that more than 1,000 complaints including allegations of impermissible political activity were never forwarded to the PARC in the first place. As a result of its audit, TIGTA made five recommendations related to the review of such complaints, all of which IRS management agreed with.

The TIGTA report is further confirmation of the IRS's current apparent hesitation to take action with respect to exempt organizations based on impermissible political activities. This is frustrating for those of us who consider the prohibition on campaign intervention by 501(c)(3)s, in particular, to be an important part of protecting the integrity of the nonprofit sector. However, such hesitation is also somewhat understandable given the significant budget cuts and reputational staining the IRS has experienced as a result of its alleged political partisanship in connection with the so-called Tea Party scandal several years ago, as well as the recent (thus far unsuccessful) attempts by the Republican Party and Trump to modify or altogether repeal the prohibition on 501(c)(3) campaign intervention activity.