Robert Pigott (Handout)
Today, July 1, 2014, most provisions of the Non-Profit Revitalization Action of 2013 (NPRA) and a follow-up technical corrections act (S6249/A9117 or the Technical Corrections Act) go into effect. This first major revision of New York’s nonprofit laws in more than 40 years has generated much discussion in the nonprofit community—ranging from appreciation for certain measures eliminating statutory burdens that have been driving nonprofits to incorporate in other states to grumbling (or worse) about the imposition of certain mandatory governance practices. However, perhaps the most significant substantive provision of NPRA and the Technical Corrections Act has received absolutely no public debate—a provision that will enable charitable not-for-profit corporations to state in their certificates of incorporation merely that they have general charitable purposes, rather than, as required pre-NPRA, identifying with some specificity what those charitable purposes are.
When Governor Andrew Cuomo signed NPRA, he stated in a signing memorandum “[t]his bill as passed contains certain technical defects and barriers to implementation. The Legislature has agreed to remedy these deficiencies by passing additional legislation. On that basis, I am signing this bill.” Accordingly, in the 2014 legislative session, the Technical Corrections Act was passed by the Senate and the Assembly and, on May 20, 2014, signed by the governor.
Not prompted by the need to address anything technical in NPRA that needed correcting, Section 9 of the Technical Corrections Act gratuitously amends Section 402(a) of the New York Not-for-Profit Corporation Law (N-PCL) by adding a new subparagraph 2-a, which provides that in stating corporate purposes in a certificate of incorporation it is “sufficient to state that the purpose of the corporation is any purpose for which corporations may be organized under this chapter as a charitable or non-charitable corporation.”
Why is this significant? If you were to wake up any one of a number of New York assistant attorneys general in the middle of the night and ask him or her “what is the essential mission of the Attorney General’s Charities Bureau,” the groggy answer you would get is “to ensure that charitable assets are used for their intended purposes.” Putting aside donor-restricted gifts where a more limited charitable purpose is imposed by a donor, the primary source for identifying permissible charitable purposes to which charitable assets may be applied is the statement of corporate purposes in a not-for-profit corporation’s certificate of incorporation.
Before the permissibility of general charitable purposes clauses, the New York State Department of State offered the following guidance on the drafting of not-for-profit corporation’s purposes:
The Certificate of Incorporation must include the purpose or purposes for which the corporation is being formed. A sufficient purpose paragraph will allow anyone to determine why the corporation has been formed and what it will do to accomplish its goal.…A well-drafted purpose paragraph will answer the following three questions: [i] Why is the corporation being formed or what does the corporation intend to accomplish?, [ii] Who will benefit from the corporation’s accomplishments? And [iii] How will the corporation achieve its purpose?…Do not use a vague and general description of the purposes.”1
The Technical Corrections Act would sweep away 40 years of careful drafting of corporate purposes in not-for-profit certificates of incorporation and usher in the un-illuminating statement of general charitable purposes.
At the outset, it must be acknowledged that the Technical Corrections Act does not lessen the protection of donor-restricted gifts. Assets that are held for specific purposes—temporarily restricted assets in accounting parlance—because they are subject to a restriction in a gift instrument (which under N-PCL §551(c) includes a solicitation in response to which a contribution was made) still may be used only for the donor-restricted purposes. Thus, not-for-profit corporations can still be held accountable for the funds they receive as charitable contributions—either pursuant to a gift instrument that identifies the more restrictive purposes or in response to a solicitation by the organization identifying the purposes to which a contribution will be applied. However, the Technical Corrections Act affects the permissible use of the corporation’s unrestricted assets, limited only by the corporation’s purposes as stated in its certificate of incorporation.
Under prior law, the certificate of incorporation’s particularized statement of corporate purposes provided the ultimate point of reference for determining if a charitable not-for-profit corporation is using its charitable assets consistently with the corporation’s purposes. A corporation may amend the charitable purposes stated in its certificate of incorporation, but the Attorney General will oppose any such amendment unless the corporation undertakes to apply its existing assets to its old purposes and apply to the new purposes only newly acquired assets. As of July 1, 2014, an amendment to corporate purposes requires the approval of either New York Supreme Court or Attorney General (before NPRA, court approval and Attorney General review were required, without the option of approval by the Attorney General only).
The Attorney General’s practice, which presumably will not change as a result of NPRA and the Technical Corrections Act, is to require an affidavit from the corporation in which it undertakes to apply only future assets to the new purposes and the old assets to the old purposes.2
A corporation that incorporates after July 1, 2014, with a general charitable purposes clause in its certificate of incorporation will not need to amend its certificate of incorporation (or to make an old purposes-old assets/new purposes-new assets undertaking) as it shifts its charitable activities from, say, running a soup kitchen to funding cancer research. Both are charitable activities covered by the general charitable purposes clause in the corporation’s certificate of incorporation.
This liberalization appears to be only prospective. Existing not-for-profit corporations with specific charitable purposes in their certificates of incorporation could seek to amend their certificates to replace specific purposes with the new, permissible general charitable purposes clause.3 But the Attorney General could either deny such an application or oppose a petition to the court for approval of such an amendment if the corporation did not make the traditional “old purposes-old assets/new purposes-new assets” undertaking, which would preserve the restriction of all existing assets to the organization’s historic, specific charitable purposes. Even if this is so, a corporation might find it in its interest to amend its purposes to general charitable purposes, to get the clock running on the ability to apply new assets to general charitable purposes.
The introduction of general charitable purposes will dramatically affect well-settled law applicable to other nonprofit corporate transactions.
Asset Sales. Under N-PCL §511(d), in determining a petition for approval of the sale of all or substantially all of a charitable corporation’s assets, the court (after July 1, 2014, the court or the Attorney General) may authorize the sale “[i]f it shall appear, to the satisfaction of the court, that the consideration and the terms of the transaction are fair and reasonable to the corporation and that the purposes of the corporation or the interests of the members will be promoted…” (Emphasis added.) In such cases as Manhattan Eye, Ear & Throat Hospital v. Spitzer,4 the courts have scrutinized a corporation’s corporate purposes as stated in its certificate of incorporation to determine whether the proposed assets sale satisfied the statutory requirements for approval of the sale. What will be left of the promotion-of-corporate-purposes inquiry if the corporation has merely general charitable purposes?
Dissolution. When a charitable not-for-profit corporation with assets seeks to dissolve, the court (or, after July 1, 2014, the Attorney General) must apply the quasi cy pres doctrine codified at N-PCL §1002-a(c)(1) (“assets received and held by the corporation either for a charitable purpose or which are legally required to be used for a particular purpose, shall be distributed to one or more domestic or foreign corporations or other organizations engaged in activities substantially similar to those of the dissolved corporation pursuant to the plan of dissolution and distribution”). The objective of the quasi cy pres doctrine is, generally, to ensure that charitable assets continue to be used for their intended purposes after they are distributed by a dissolving not-for-profit corporation.
In In re Multiple Sclerosis Service Organization of New York, the Court of Appeals held that, in evaluating whether the quasi cy pres doctrine has been met, the court must consider several enumerated factors, including “the purposes and powers of the corporation as enumerated in its certificate of incorporation” and “the relationship of the activities and purposes of the proposed distributee(s) to those of the dissolving corporation.”5 Again, what will be left of the inquiry if the dissolving corporation has merely general charitable purposes?
Other Sources of Law
Lest this article’s author be considered an alarmist, this article now considers other sources of law, state or federal, that might potentially mitigate the very substantive and certainly nontechnical import of the general charitable purposes provision in the Technical Corrections Act. Two such sources are (i) the sections of the Internal Revenue Code and the regulations and IRS procedures thereunder governing organizations that seek to be tax-exempt under Code Section 501(c)(3) and (ii) the provisions of Article 7-A of the New York Executive Law applicable to the solicitation of charitable contributions in New York.
The IRS Form 1023. The Internal Revenue Service monitors changes in charitable purposes and activities, but to what end? An organization seeking tax exemption under Section 501(c)(3) of the Internal Revenue Code must file an IRS Form 1023. Part IV of the Form 1023 elicits a description of the organization’s activities that is to be “thorough and complete.”
The IRS monitors changes in an exempt organization’s activities through certain questions in the Form 990 information return filed annually by most exempt organizations.6 Thus, a New York not-for-profit corporation with a general charitable purposes clause in its certificate of incorporation that changed its activities from those identified in its Form 1023 would need to advise the IRS of its new charitable activities, even if no state law certificate amendment would be required because the new activities still fell within the certificate of incorporation’s general charitable purposes clause. However, presumably, once the IRS satisfied itself that the new activities were as worthy of 501(c)(3) charitable status as the original ones, the IRS inquiry would end. Whether assets built up advancing one charitable purpose were radically re-directed to another equally valid but dramatically different charitable purpose would be of no concern to the IRS.
The New York Executive Law Article 7-A. Under Executive Law Article 7-A, §172.1, before an organization can solicit contributions in New York, it must register with the New York Attorney General by filing a registration statement containing various categories of information, including “[a] clear description of the specific programs…for which the contributions to be solicited will be used, ” indicating whether such programs are already in existence or contemplated. (Executive Law §172.1.e) The registration statement, the Form CHAR410, requires that the registering organization describe its “ purposes,” which, in the form’s instructions, are referred to as the “purpose or mission of your organization.”
Under Executive Law Article 7-A, §172-d.4, it is prohibited for a New York not-for-profit corporation registered with the Attorney General under Executive Law Article 7-A to “[f]ail to apply contributions in a manner substantially consistent with the solicitation or the registration statement of the charitable organization or the purposes expressed therein.”
Thus, going forward, since the general charitable purposes clause in a certificate of incorporation will not circumscribe the charitable uses to which charitable assets may be applied, the Executive Law Article 7-A registration statement with its description of the specific programs may take on greater significance. Of course, not all charitable corporations are subject to Article 7-A of the New York Executive Law—only those that solicit contributions. Thus, for example, a private foundation endowed by a single individual that does not depend on charitable contributions will not be bound by a description of the specific programs contained in a registration statement filed with the Attorney General. Still, the Executive Law should, for the many soliciting charitable corporations, provide a limitation on an organization’s playing fast-and-loose with its charitable assets.
While the extent of changes wrought by the introduction of general charitable purposes in the Technical Corrections Act remains to be seen, there is one thing that can be stated now with certainty: It was not a mere technical correction and deserved scrutiny and robust debate before its enactment.
Robert Pigott is the general counsel of Phipps Houses, a not-for-profit corporation that develops low-income housing. He was a Section Chief and Bureau Chief in the New York Attorney General’s Charities Bureau from 1997 to 2008.
1 . http://www.dos.ny.gov/forms/corporations/1511-f-l_instructions.pdf (Downloaded 6/9/14.)
2. The instructional booklet on the Attorney General’s website, Procedures for Forming and Changing Not-for-Profit Corporations in New York State, states, at page 7, “[i]f adding a purpose or power, include an affidavit from an officer of the corporation stating that current assets will be used for current purposes and powers and future assets will be used for purposes and powers as stated in the Certificate of Amendment.” http://www.charitiesnys.com/pdfs/how_to_incorporate.pdf. (Downloaded 6/9/14.)
3. N-PCL §801(a) provides “[a] corporation may amend its certificate of incorporation, from time to time, in any and as many respects as may be desired, if such amendment contains only such provisions as might be lawfully contained in an original certificate of incorporation filed at the time of making such amendment.” (Emphasis added.)
4. Manhattan Eye, Ear & Throat Hospital v. Spitzer, 186 Misc.2d 126, 149-58 (N.Y. County Sup. Ct. 1999)
5. In re Multiple Sclerosis Service Organization of New York, 68 N.Y.2d 32, 35 (1986).
6. See IRS Form 990, Part III, Questions 2-3.