Revised anti-terrorism screening procedures and director standing

NONPROFIT NEWS

We've seen a fair amount of news coverage of events involving the nonprofit sector recently: continued coverage of the college admissions scandal; intense scrutiny of former Baltimore Mayor Catherine Pugh's transactions with various nonprofits, including one which she sat on the board of, related to her Healthy Holly book series; former Vice President Joe Biden's announcement that, given his presidential campaign, he plans to wind down the Biden Foundation, a nonprofit that he and Jill Biden formed after he left office in 2017; and the launching of an investigation of the National Rifle Association by NY Attorney General Letitia James. However, this column addresses two more mundane and likely more practical recent developments affecting nonprofits: the issuance of updated IRS procedures for screening requests for exemption determinations for anti-terrorism concerns and a California Court of Appeal decision regarding standing of California nonprofit directors.

IRS Anti-Terrorism Screening Procedures

In a sad reflection of the current reality of our world, in late February, the IRS issued updated procedures for screening exemption applications for terrorism-related concerns. The IRS Internal Revenue Manual (IRM), which is an official instruction manual for IRS personnel, already requires IRS employees to "review every case for potential indicators of involvement in terrorism and heightened risk of diversion of funds to terrorism. This includes all exemption applications (including Form 1023-EZ), foundation reclassification requests, and other miscellaneous determination requests."

The memorandum issued by the IRS in February provides updated guidance requiring that employees processing exempt organization applications must use the Office of Foreign Assets Control (OFAC) online Sanctions List Search terrorist programs database to identify any potential name and address matches for those listed on the exemption application being reviewed. If an employee finds a match of two or more names in a person's full name (for example, first and last names), then it must complete a separate form and coordinate with the IRS Exempt Organizations Rulings and Agreement Anti-Terrorism Coordinator for further review. A match of a single name does not require further review unless the circumstances indicate higher risk.

The memorandum further states that, where an exemption application indicates that an applicant organization is making or intends to make foreign grants or is conducting or intends to conduct activities in foreign countries, the reviewing IRS employee must gather sufficient information to review such activities for anti-terrorism concerns. If sufficient information is not included in the initial application, the reviewing IRS employee is instructed to request further information to determine whether the organization will check the OFAC Specially Designated National and Blocked Persons List (SDN List) for the names of individuals and entities with whom it is dealing; whether it has any practices in place to ensure that foreign grants or expenditures are not diverted to support terrorism activities; and how the organization oversees its foreign grant processes to ensure proper use of grant funds, among other information. If it is determined that the facts and circumstances reflected in a particular application indicate a potential for the diversion of funds to support terrorism, then additional review by the IRS is required.

For further information on the current IRS anti-terrorism screening procedures for exemption applications and some potential practices for exempt organizations operating in foreign countries or making grants to foreign entities, please see the IRM, Part 7, Chapter 20, Section 6 and the U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities.

Nonprofit Directors and Standing to Sue

In an opinion issued last month, the California Court of Appeal in the 2nd District ruled that a former director of a California nonprofit public benefit corporation who had filed suit against the nonprofit and another director alleging self-dealing and other misconduct did not lose standing to maintain the action when she was later removed as a director of the organization. The case, Summers v. Colette, et al., 2019 DJDAR 3192 (April 15, 2019), was brought by Summers in her capacity as a director of Wildlife Waystation on behalf of the organization. Summers alleged that, while serving as a director of the organization, she had learned that another director, Colette, had engaged in numerous acts of self-dealing with the organization and breached of her fiduciary duties. She further alleged that, after she raised such issues, Colette organized an unlawful vote to remove her from the organization's board of directors. In the suite, Summers sought damages on behalf of the organization for Colette's misconduct, removal of Colette as a director, a declaration of Summers' continued role as a director, and a temporary restraining order preventing the organization from removing Summers as a director.

After the action was filed, the organization's board of directors properly held another board meeting at which Summers was removed as a director of the organization, causing Summers to file an amended complaint excluding the improper removal cause of action. Following Summers' proper removal from the board, the organization argued that she no longer had standing to sue on behalf of the organization. Summers responded by pointing to California Corporations Code Section 5233, which provides that a director of a nonprofit public benefit corporation may "bring an action" to address alleged self-dealing by another director; Section 5142(a), which permits a director to "bring an action to ... remedy a breach of charitable trust"; and Section 5223(a), which authorizes the superior court to remove a director of a nonprofit "at the suit of a director." Summer argued that, because she was a director at the time that she brought the action, she continued to have standing under these Sections of the Code.

Agreeing with Summers, the Court of Appeal reversed the trial court and held that Summers continued to have standing to sustain the action and should have been granted leave to add the California attorney general as an indispensable party. The court held that, when considered in the context of the applicable statutory framework, the language of the statutes pointed to by Summers suggests that there is no continuous directorship requirement for standing for such a suit. The court further noted that public policy considerations also favored Summers' argument