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National Philanthropy Day State Laws that Charitable Organizations Should Know November 1, 2012 Hugh R. Jones Tax & Charities Division.

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Presentation on theme: "National Philanthropy Day State Laws that Charitable Organizations Should Know November 1, 2012 Hugh R. Jones Tax & Charities Division."— Presentation transcript:

1 National Philanthropy Day State Laws that Charitable Organizations Should Know November 1, 2012 Hugh R. Jones Tax & Charities Division

2 There are Various Sources of the AG’s Authority in this Area  Common Law  State Statutes: Ch. 414D: Hawaii Nonprofit Corp. Act Ch. 414D: Hawaii Nonprofit Corp. Act Ch. 467B: Charitable Solicitation Act Ch. 467B: Charitable Solicitation Act Ch. 517E: UPMIFA Ch. 517E: UPMIFA Ch. 323D: Hospital Acquisitions Ch. 323D: Hospital Acquisitions Ch. 431: Charitable Gift Annuities Ch. 431: Charitable Gift Annuities Ch. 554 Trust Proceedings Ch. 554 Trust Proceedings

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5 Common Law Authority: Hawaii Statement of the Law  The function of the attorney general, as parens patriae of charitable trusts, is to oversee the activities of the trustees to the end that the trust is performed and maintained in accordance with the provisions of the trust document, and to bring any abuse or deviation on the part of the trustees to the attention of the court for correction Hite v. Queen's Hospital, 36 Haw. 250, 262 (1942). The authority of the attorney general over charitable trusts does not extend beyond the performance of that function. M. R. Fremont-Smith, Foundations and Government, 198 (1965). Hite v. Queen's Hospital, 36 Haw. 250, 262 (1942)Hite v. Queen's Hospital, 36 Haw. 250, 262 (1942)  Midkiff v. Kobayashi, 54 Haw. 299 (1973)

6 Standing to Enforce Charitable Trusts  Generally, only the Attorney General has standing to enforce the terms of a charitable trust.  The Hawaii Supreme Court adopted a narrow exception in the case: Where a breach of trust Kapiolani Park Trust is brought to the attention of the AG and the AG does not bring the breach to the court’s attention for correction, the Court will recognize the standing of a third party as a “relator.” Where a breach of trust Kapiolani Park Trust is brought to the attention of the AG and the AG does not bring the breach to the court’s attention for correction, the Court will recognize the standing of a third party as a “relator.”

7 Common Law Authority  Its generally accepted that the Attorney General is the only person with legal standing to enforce a charitable gift or a donor restricted gift  Generally donors and third parties do not have standing

8 Corporate Charities (Not Trusts)  The State’s nonprofit corporation act gives the Attorney General significant oversight tools over charities that exist in corporate form (“Public Benefit Corporations”). Power to seek judicial removal of directors who have breached their duties or where the corporation is no longer able to perform its functions. HRS 414D-140 Power to seek judicial removal of directors who have breached their duties or where the corporation is no longer able to perform its functions. HRS 414D-140 The AG has power to review “Conflicts’ transactions. HRS sec. 414D-150 The AG has power to review “Conflicts’ transactions. HRS sec. 414D-150

9 Corporate Charities (Not Trusts)  Public Benefit Corporations must give notice of their intent to dissolve to the Attorney General. HRS sec. 414D-233  Public Benefit Corporations must give notice of their intent to sell or transfer substantially all their assets. HRS sec. 414D-222  Public Benefit Corporations must give notice of their intent to Merge to the Attorney general if the survivor of the merger will into be another Public Benefit Corporation. HRS sec. 414D-211

10 Private Foundations   Hawaii’s nonprofit corporation’s act provides that a private foundations must not: Subject the foundation to the tax under IRC section 4942 Non engage in any act of self-dealing as defined in IRC section 4941(d) Not retain any excess business holdings as defined in IRC section 4943(c) Not make any investments in such manner to subject the corporation to tax under section 4944 (Jeopardy Investments) Not make any taxable expenditures as defined in IRC section 4945(d)(Lobbying, political intervention, grants to individuals)

11 Loans to Officers and Directors   Hawaii’s nonprofit corporation’s act prohibits loans to officers and directors:   §414D-151 Loans to or guaranties for directors and officers. (a) A corporation may not lend money to or guaranty the obligation of a director or officer of the corporation. (b) The fact that a loan or guaranty is made in violation of this section shall not affect the borrower's liability on the loan.

12 Conflict Transactions  Transactions between a director and the nonprofit corporation must be approved by a quorum of the board that is free from any conflict and after full disclosure of the material terms of the transaction  A “conflict” includes a transaction with another organization in which that director is also a director, officer or trustee  Examples: Building Contractor, Attorney, CPA’s etc.  Haw. Rev. Stat. section 414D-150

13 Uniform Prudent Management of Institutional Funds Act (UPMIFA)  Chapter 517E, HRS  Applies to “Endowments” Ex. I give $100,000 to the UH Foundation, the Income of which is to be used to endow a chair at the School of Veterinary Medicine. Ex. I give $100,000 to the UH Foundation, the Income of which is to be used to endow a chair at the School of Veterinary Medicine.  UMPIFA allow the appropriation of “corpus” if the Trustees act prudently.  UPMIFA allows for “non judicial cy pres” with AG Consent where the size of the fund is less than $250,000. HRS sec. 517E-6  Otherwise must seek judicial approval of release of restriction

14 Hospital Acquisitions  Ch. 323D, HRS  In the 1980’s there was a wave of acquisitions of nonprofit hospitals by large hospital chains  Acquisition of Blue Cross Blue Shield Plans and Managed Care Systems  Purpose of Oversight is to Insure that Charitable Assets Remain Protected by the Sale and Continue to be Devoted to Charity  Some of these transactions involved Golden Parachutes and other Excessive Benefits to Insiders.  Usually results in the formation of a Foundation to hold the Sale Proceeds

15 Hospital Acquisitions  §323D-72 Acquisition of hospital. (a) No person shall engage in the acquisition of a hospital without first:  (1) Applying for and receiving the approval of the agency; and  (2) Notifying the attorney general and, if applicable, receiving approval from the attorney general pursuant to this part.

16 Hospital Acquisitions (323D-72) Standards to be Apply by AG  (1) Whether the acquisition is permitted under chapter 414D governing nonprofit entities, trusts, or charities;  (2) Whether the hospital acted in a duly diligent manner in deciding to sell, selecting the purchaser, and negotiating the terms and conditions of the sale;  (3) The procedures used by the seller in making its decision, including whether appropriate expert assistance was used;  (4) Whether all conflicts of interest were disclosed, including, but not limited to, conflicts of interest related to board members of, executives of, and experts retained by the seller, purchaser, or parties to the acquisition;  (5) Whether the seller will receive reasonably fair value for its assets. The attorney general may employ, at the seller's expense, reasonably necessary expert assistance in making this determination;  (6) Whether charitable funds are placed at unreasonable risk, if the acquisition is financed in part by the seller;  (7) Whether any management contract under the acquisition is for reasonably fair value;  (8) Whether the sale proceeds will be used for appropriate charitable health care purposes consistent with the seller's original purpose or for the support and promotion of health care in the affected community, and will be controlled as charitable funds independent of the purchaser or parties to the acquisition; and  (9) Whether a right of first refusal to repurchase the assets by a successor nonprofit corporation or foundation has been retained, if the hospital is subsequently sold to, acquired by, or merged with another entity. [L 1998, c 257, pt of §1; am L 2002, c 40, §10]

17 Charitable Gift Annuities  HRS sec. 431-1-201  Imposes certain minimum asset and operating and reserve requirements on charities that issue CGI’s or they are treated as life insurance products  Requires Annual Certification of compliance with the AG.  The Form is on the AG’s Charities website.

18 Charitable Solicitation/Registration Chapter 467B, HRS requires registration by: Chapter 467B, HRS requires registration by: Charities that solicit contributionsCharities that solicit contributions Professional Solicitors (Telemarketers/Direct Mailers)Professional Solicitors (Telemarketers/Direct Mailers) Professional Fundraising CounselsProfessional Fundraising Counsels Commercial Co-VenturersCommercial Co-Venturers

19 Charitable Solicitation/Registration  Financial Reporting by Charities and Paid Solicitors is required.  Charity Registration is done electronically via the Internet.  The AG receives registration statements through via a system developed by the Urban Institute (home of the Nat.’l Center for Charitable Statistic)

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27 State Charity Regulators Have Access to Reporting Features This report shows Users with the name “Wish” in their organizational names

28 Hawaii Charity Registry  XML and PDF files received through the Fed/State Backend are transferred using a FTP protocol to the administrator of the State’s Internet Portal  Ehawaii.gov constructed a publicly searchable registry for these registrations and 990 Forms  AG pays Ehawaii.gov a portion of annual fees to develop and maintain the registry.

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34 The AG’s Charity Resources Website Provides a Wealth of Information  Financial reporting by professional solicitors  Donor Education Tools  Guides for Nonprofit Directors and Boards  All our Forms  Model Policies for Nonprofit Organizations  Other Guides for Directors and Officers and the Public www.hawaii.gov/ag/charities

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36 In Addition to Registration We Do Investigation/Enforcement/Sanction  We investigate and enforce prohibited practices in soliciting charitable contributions  We may suspend or revoke the registration of charities and professional fundraisers  We may impose civil penalties for violations .

37 In Addition to Registration AG Does Investigation/Enforcement/Sanctions  We may issue cease and desist orders  Administrative actions are subject to the right to a contest case hearing.  We may seek and obtain injunctive and other relief.

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40 Case Studies in Governance Failures.

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42 “ WMSA has failed to comply with its governing documents and polices in numerous respects and WMSA appears terribly confused about its corporate structure. It appears that the directors have violated their statutory duties of care in numerous respects including but not limited to delegating (or largely abandoning) governance of the organization to the Executive Director … The Board has failed to comply with its own Bylaws in many instances and engaged in non-permitted proxy voting at Board meetings.” WMSA: AG Findings

43 “[T]he Board has failed to formally adopt fundamental polices to protect the organization from risk and threats despite informing the Internal Revenue Service (“IRS”) it has done so, putting the organization’s valuable tax exempt status at risk. WMSA’s 2009 and 2010 IRS Form 990 [tax return] appears inaccurate in several material respects and WMSA has engaged in prohibited political intervention by making an illegal campaign contribution.”

44 WMSA: AG Findings “WMSA itself has no records to substantiate how it allocated its functional expenses among program services, management and general, and fundraising on its IRS Form 990 for 2010 but reports $154,000 in program related services.” “The other senior employee of WMSA is the Executive Director’s daughter who has been employed by WMSA for fifteen years an an Accountant/Office Manager and was hired ‘at the recommendation of the CPA’ in violation of WMSA’s anti-nepotism policy (the Board retroactively modified its anti-nepotism policy after her date of hire).”

45 WMSA: AG Findings  No Evaluation of Executive Director since 2009  No Strategic Plan  Part IV, line 3 of WMSA’s IRS Form 990 for 2010 states that it does not engage in lobbying. However, WMSA frequently testifies before the County Council in support of or against specific legislation and WMSA staff expends time preparing the written testimony and meeting with Council members, their staffs and subcommittees. Such activities constitute ‘direct lobbying’ under applicable Treasury regulations

46 Private Foundations  The AG receives IRS Form 990PFs  The AG regularly reviews 990PF’s submitted by Hawaii private foundations  These 990PF reviews often generate AG inquiries about matters reported on the 990PF

47 Private Foundation Inquiry  Foundation “A” has two directors “C” and “D” who are attorneys  Foundation has $134 million in assets.  C’s law firm rents space in Foundation A’s offices  Director C negotiated the lease for the law firm.  Directors C&D billed the foundation at their attorney rates for doing “director related” services and what appears to be non legal services

48 Private Foundation Inquiry  Directors C and D are engaged in a conflict transactions with Foundation A on whose board they sit.  Section 414D-150 defines “indirect conflict of interest” as follows: 1. (c) For purposes of this section, a director of the corporation has an indirect interest in a transaction if: (1) Another entity in which the director has a material interest or in which the director is a general partner is a party to the transaction; (1) Another entity in which the director has a material interest or in which the director is a general partner is a party to the transaction;  The lease to C’s law firm and payment of attorneys fees qualify as indirect conflicts under (c)(1) above

49 Private Foundation Inquiry  Directors C and D are disqualified persons and receive approximately $140,000 in compensation as directors  If compensation is not necessary and reasonable, it may expose the directors to the excise tax on self dealing transactions by foundation managers.  As a matter of State law, nonprofit corporation may not engage in a self-dealing excise tax transaction  C&D’s Law firms is also potentially a disqualified person depending on the extent of C&D’s ownership in the partnership  Payments made to C&D’s law firms totaled nearly $533,000 in 2008 and it included time spent performing work as directors.

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51 Questions?????


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