The Uniform Law Commission (â€œULCâ€)â€”the same group that brought us the Uniform Prudent Management of Institutional Funds Act, has drafted a new proposed uniform law known as the Protection of Charitable Assets Act. Once a new Uniform Act is approved, the ULC encourages state legislatures to adopt them to promote uniformity in the law among the states.
The ULC committee assigned the task of drafting the uniform law has released a new version of the proposed Protection of Charitable Assets Act (â€œActâ€). If the Act is ultimately approved by the ULC and adopted by the states, it will articulate and confirm the role of the state Attorney General in protecting charitable assets and impose new registration and reporting requirements on many charitable organizations across the country, particularly those that operate in multiple jurisdictions.
The proposed Act would do the following:
- impose a new registration requirement;
- clarify the authority of the state Attorney General over the protection of charitable assets in that state;
- require charities with assets above a stated minimum amount to file an annual report; and
- require a charity to notify the state in advance of certain specified â€œlife events.â€
The Act authorizes the Attorney General of each state:
- to enforce the use of charitable assets by a charity for the purposes for which the asset was given;
- to â€œact to prevent or remedyâ€ a breach of a legal duty by the charity; and
- to seek declaratory or injunctive relief to determine that an asset is a charitable asset.
In addition, the law would give the state Attorney General the power to initiate an action or to intervene in an action filed by another party to prevent harm or obtain damages for violations of the law. The state Attorneys General would also have the ability to initiate investigations and issue subpoenas to charities to investigate whether their charitable assets are being used for the purposes for which they were donated.
The Attorney General's oversight function to represent the public interest in the protection of charitable assets exists in most states, and many state Attorneys General already exercise significant regulatory oversight over nonprofit organizations operating in their states. However, in some states it has been held that no common law powers authorize the Attorney General's protection of charitable assets. Additionally, in some states, whether this power exists and what is consists of is unclear. Thus, some state Attorneys General, including the Attorney General, take a far less active role in overseeing the use of charitable assets. The proposed model law, if adopted by the states, would establish make clear the scope of the Attorney Generals regulatory authority.
The Act, as currently drafted, would require each charity that holds or administers charitable assets above $5,000 and that meets one of the following five criteria to register with the state: is organized (e.g., incorporated) under the state's law, has its principal place of business in the state, holds charitable assets in the state other than assets held for investment purposes, conducts activities in the state, or holds assets that are given for the benefit of a person in the state. The registration provision includes limited exemptions for governmental, political, religious and financial entities and certain individuals holding charitable assets.
Charities with assets above $5,000 would also be required to file an annual report with the state Attorney General. The report would require basic accounting and financial information and require the charity to attach its IRS filing (e.g., Form 990).
Charities required to register under the proposed statute also would be required to notify the state Attorney General if any of the following events occur:
- dissolution or termination of the charity;
- disposition of all or substantially all of its charitable assets;
- a merger, conversion or domestication; or
- removal of the charity or of a significant charitable asset from the state.
In requiring registration, the ULC will place an additional burden upon charities (especially large charities that operate in many states) and Attorneys General. Thus, the ULC tried to simplify the process and keep the registration simple.
Proponents of the Act argue that registration of charities is important for several reasons. The first of which is that a list of registered charities can serve as a resource for the Attorney General and the public. Additionally, a potential donor will be able to consult the list to ensure that a charity is current in its filings which will help in making an informed decision about contributing. Lastly, the registration requirement serves to remind anyone who operates or plans to operate a charity of the seriousness of the fiduciary duty one undertakes as a director or trustee of a charity.
Detractors of the Act can point to numerous cases of overreaching by State Attorneys General over the years as well as existing multistate registration burdens on charities that fundraise in multiple jurisdictions.
The Act requires notice to the Attorney General when the charity is involved in one of a variety of transactions that presents an opportunity for the misappropriation of charitable assets so that the Attorney General has time to monitor the events to prevent problems or correct problems that may have already occurred. This provision is intended to protect the public against the use of donated charitable assets for purposes other than the stated purpose when the assets were donated.
The ULC has not yet completed a final version of the statute to be submitted to the states for approval. A final draft of the statute is expected to be introduced and voted on at the annual meeting of the Uniform Law Commission commissioners in July 2011.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.