DATELINE: March 24, 2011, Chicago
Yesterday we had a little fun at the expense of the California Attorney General (see that post, reproduced below). A friend of the blog pointed out that we had overlooked an important California statute that severely limits the California Attorney General's power to investigate, institute court proceedings against, and sanction organizations formed as California religious corporations.
As was true yesterday, we have yet to see any evidence of wrongdoing on the part of Family Radio or its president, Harold Camping. Yet, we believe the issues we raised yesterday are as...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, has quickly become the go-to guide for nonprofit executives and advisors. So what are people saying about the Guide? In the October 2007 edition of the The Federal Lawyer, New York lawyer George W. Gowen and nonprofit authority, wrote:
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour.
valid today as they were yesterday. Those issues revolve around whether organizations organized under the California Religious Corporation Law should be subject to some sort of rules that approximate cy pres. In other words, should the corporation be held accountable to someone other than itself when it solicits funds for a specified purpose and those purposes subsequently turn out to be impossible or impracticable before all the funds received are spent? The larger question is whether the California legislature should repeal or significantly modify the statutory regime it uses to regulate religious corporations.
We have always been troubled by regulatory exemptions granted to religious organizations and churches, whether at the state level or under the Internal Revenue Code. While we respect the Founders' decision to protect religion from state interference, we have some trouble seeing how granting special exemptions from regulation to religious corporations doesn't constitute the establishment of religion. There seems to be a natural and irreconcilable (at least philosophically) conflict between the "free exercise" and "establishment" clauses of the First Amendment.
But deep and technical thinking doesn't seem to constrain Harold Camping. Rather than acknowledging that everybody who has predicted the end of the world has been wrong to date and that it is probably best to be ready for the end, but not predict it, Camping has modified his prediction--October 21, 2011 is now the day of Rapture. Apparently Camping forgot to carry the five in his original calculations. Once again, we and many will joke, but Camping has just created another impetus for fundraising. One article indicates, however, that he will not promote the October 21 event. The question remains: Will others promote it? Jesse McKinley, An Autumn Date for the Apocalypse, New York Times (May 23, 2011). Camping indicated that his organization would not return contributions made in anticipation of the earlier event, according to the Times. It is unknown whether any donor has requested the return of contributed funds.
Does Camping's Family Stations have to register with the California Attorney General? Apparently not, as our friend advised us early last night. On checking, we found no sign of the charity in California's registry of charities, although its name does appear in the California Secretary of State's registry of corporations. This leads us to believe that this entity has been organized as a religious corporation under California's Religious Corporation Law, but we can't say for sure. For the remainder of this post, we will assume so.
Section 9111 of California's Corporation Code defines a religious corporation as:
"a corporation...formed under this part primarily or exclusively for any religious purposes"
We are unable to locate any definition of what constitutes "religious" in the statute. Nor has our limited search turned up any case law. Based on the statutory scheme, it appears that those forming a religious corporation are not required to establish to the satisfaction of any regulatory body that the corporation satisfy a specified definition. The California legislature appears to have given incorporators unlimited discretion to opt into this regime--at least on the front-end.
Incorporators opting into the religious-corporation regime effectively opt out of much of the regulatory framework that applies to organizations formed as public benefit corporations under California law. Most people will reflectively cite constitutional protections for this sort of statutory regime, but we suspect that the constitution--at least the U.S. Constitution--did not require the California legislature to paint with such a broad brush. In particular, take the IRS analogues. There is an exemption for filing the Form 990 for churches, their integrated auxiliaries, and certain other specified organizations, but not a blanket exemption for all organizations having anything to do with religion. Section 7611 of the Internal Revenue Code imposes special procedural hurdles for the IRS's examinations of churches and certain other organizations. Once again, this Church Audit Procedure Act does not provide a blanket limitation for all organizations that touch religion.
The California Attorney General has no powers with respect to a religious corporation except as provided in Section 9230 of the California Corporations Code. Section 9320(b) provides that the California Attorney General can challenge a corporation's claim that it qualifies or should be classified as a religious corporation, but without a clear statutory definition of "religious," we suspect that the California Attorney General will have some difficulty doing so. Section 9320(c) provides the California Attorney General with power to initiate certain criminal proceedings, which appear to include proceedings against the use of a religious organization to perpetuate fraud for secular purposes. This provision may be an important one, but is not applicable in the current situation.
What strikes as the most relevant provision is Section 9230(d), which states:
Where property has been solicited and received from the general public, based on a representation that it would be used for a specific charitable purpose other than general support of the corporation's activities, and has been used in a manner contrary to that specific charitable purpose for which the property was solicited, the Attorney General may institute an action to enforce the specific charitable purpose for which the property was solicited; provided (1) that before bringing such action the Attorney General shall notify the corporation that an action will be brought unless the corporation takes immediate steps to correct the improper diversion of funds, and (2) that in the event it becomes impractical or impossible for the corporation to devote the property to the specified charitable purpose, or that the directors or members of the corporation in good faith expressly conclude and record in writing that the stated purpose for which the property was contributed is no longer in accord with the policies of the corporation, then the directors or members of the corporation may approve or ratify in good faith the use of such property for the general purposes of the corporation rather than for the specific purpose for which it was contributed.
This statute operates to eliminate the doctrine of cy pres as most charities know it. This is troubling because wooden form drives policy, with inexplicable results. Take two corporations, one formed as a California religious corporation and the other formed as a public benefit corporation. Each raises $1 million from the general public for purpose X, which is the delivery of a certain social service to low-income people. Before the $1 million is spent, it becomes impossible to accomplish purpose X. The corporation organized as public benefit corporation must adhere to the regular procedures that apply when funds solicited for one purpose cannot be used for that purpose because of impossibility or impracticability. In the case of the entity organized as a religious corporation, the directors or members are given broad authority to change how the property is used. Does this make sense given that both entities raised the funds on the premise that the funds would be used for a specific purpose? We think not.
California's legislature somehow believed that religious corporations had greater capacity for self regulation than secular charities. Experience does not bear that out, as we have seen with the Catholic Church's sexual molestation problem, countless thefts and embezzlements from religious organizations, and internecine property disputes among church factions.
Although the California Legislature emasculated the California AG's powers, the AG still has at least two courses of actions available to it. First, the AG should propose legislation that either eliminates religious corporations altogether or, at least, creates a more sensible regulatory scheme. We as a society may want to grant a great deal of leeway to religiously-based organizations, but there are limits, particularly when those organizations are soliciting funds from the general public rather than members of a congregation having some say in internal governance.
Second, the Attorney General should follow the procedure outlined in the statute to to deal with funds raised by Family Stations through public solicitation for purposes of getting the word out about the May 21, 2011 event, to the extent that those funds have not been expended. In other words, the AG should inform the charity that it will institute legal proceedings unless the charity advises the AG how it plans to handle any leftover funds, which could include converting them to general use. At least the AG's office can use the little leverage that it has to try and provide donors with some information. If there are any plans to inappropriately convert the funds to private use--we know of none--such a notice might cause somebody to rethink their plans.
As we have now noted, the California AG is severely constrained by what strikes us as an expedient but unwise choice by the California legislature. That does not necessarily mean that other AGs are equally constrained. Here we enter realm of conflicts of law, something we know very little about. We can only raise the issue, and will do so with the following example. Assume Family Stations solicited contributions in State X and received a contribution from a resident of State X. The solicitation was for funds to get the message out regarding the predicted May 21st Rapture. Can State X's AG institute a cy pres proceeding (or equivalent procedures provided by State X law) to force Family Stations to adhere to procedures for modifying how the funds can now be utilized? If so, where are the AGs from other states, assuming solicitations were made outside of California?
We find this topic to a fascinating one. Any reader who has insights into the law should feel free to contact us by e-mail. Apologies again to our friends in the California AG's office.
NOTE: We have seen Campings' organization referred to by a variety of names, including Family Radio and Family Stations. All references in these posts are to Campings' organization rather than to unrelated organizations that might have similar names.
Here is the text of our prior post:
THE END DIDN'T COME, WHICH MEANS THE CALIFORNIA ATTORNEY GENERAL SHOULD HAVE A BUSY MONDAY
"Send us all your money and we will make sure it is waiting for you when you get to Heaven"
Attributed to the Firesign Theatre
"The Sun's not yellow, it's chicken"
Bob Dylan, Tombstone Blues from Highway 61 Revisited
DATELINE: May 23, 2011, Chicago
We thought about writing this post last Friday, but with the end of the world fast approaching, we thought, "Why bother, particularly with all the packing we have to do?" But we are still here today, which means that a serious question now must be asked.
In covering the approaching rapture, the Contra Costa Times reported that Harold Camping, the president of Family Radio, said:
If we have any money left, and we will because we have to pay bills up to the very end. ... it will all be destroyed because the world will be in a day of judgment. ...The money is not important at all. It's a vehicle to spread the judgment and a vehicle of the Lord."
Matthias Gafni, Oakland-Based Family Radio Sees Donations Soar as 'Judgment Day' Approaches (May 18, 2011). That is a pithy statement, but one to be taken seriously given the fact that Family Radio has raised more than $100 million over the last seven years, according to the Times. In other words, there may well be more than a few nickels and dimes left. It was Camping's forecast that drove the entire May 21 mania.
The question for the California Attorney General: What are you going to do now that the world did not come to an end? Is Family Radio going to be faced with a cy pres proceeding? Are you going to require that the excess be returned to the donors? Will Family Radio be permitted to spend the leftover money as it wishes, or must it set aside the money for the purchase of billboards once it determines the next likely date for the Rapture? The answers to these questions depend in large part on how the fundraising campaign was worded. It has long been the position of the California Attorney General that a charity must use funds for the purposes for which they were solicited. If the funds were raised to get the word out for the May 21 event, then what happens to the funds after May 21 if the world still turns?
Of course the California Attorney General is unlikely to do anything. If the California Attorney General is like most charity regulators and the IRS, it is terrified of taking any action (including even asking legitimate questions) against any organization operating under the banner of religion. As we watch several states consider legislation to protect consumers against fraudulent solicitation--which is effectively being defined by these states as having too many non program-related expenses--we can only begin to wonder why telling people you know the world is coming to an end on Day X as part of a solicitation does not constitute some sort of fraud? Is it because the pronouncement is so absurd? We doubt any regulator would be willing to go on the record offering that as the explanation for regulatory inaction.
While many took the entire promotion as one big joke, there are reports of people who devoted substantial sums to the cause, although not necessarily by giving to this particular charity. One reason the efforts of those to get the word out might not be fraudulent is because the promoters truly believed what they said. That may eliminate the element of fraud, but it certainly doesn't eliminate a legitimate regulatory concern: What happens to the money the day after the non-event?
OK, California. What are you going to do? "Cluck, cluck, cluck"
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
If you liked this post, please visithttp://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
Copyright 2011, Charity Governance Consulting LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good" and this web blog. For additional information call 773-325-2124