BILL ANALYSIS
AB 404
Page 1
Date of Hearing: April 27, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 404 (Eng) - As Amended: April 14, 2009
Majority vote. Fiscal committee.
SUBJECT : Income taxes: exemption: charitable organizations:
administration
SUMMARY : Makes several modifications to Revenue and Taxation
Code (R&TC) Section 23701d, which governs specified nonprofit
organizations generally exempt from taxes imposed under the
Corporation Tax (CT) Law. Specifically, this bill provides
that:
1) An organization operated for nonprofit purposes in
accordance with R&TC Section 23701d shall be exempt from
taxes, except as otherwise provided, upon its submission to
the Franchise Tax Board (FTB) of one of the following:
a) A copy of the Internal Revenue Service's (IRS's)
determination letter or ruling recognizing the
organization's exemption from federal income tax as an
Internal Revenue Code (IRC) Section 501(c)(3) organization;
or,
b) A copy of the IRS's group exemption letter stating that
both the central organization and all of its subordinates
are tax-exempt under IRC Section 501(c)(3) and
substantiation that the organization is included in the
federal group exemption letter as a subordinate
organization.
2) Upon receipt of this documentation, FTB shall issue an
acknowledgement that the organization is tax-exempt. The
acknowledgment may refer to:
a) The IRS's recognition of the organization's exemption as
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an IRC Section 501(c)(3) organization; and, if applicable,
b) The organization's subordinate organization status under
a federal group exemption letter.
3) The effective date of an organization's exemption from
state income tax shall be no later than the effective date
of the organization's recognition of exemption from federal
income tax as a IRC Section 501(c)(3) organization, or its
status as a subordinate organization under a federal group
exemption letter, as applicable.
4) If the FTB suspends or revokes an organization's
exemption, the exemption shall only be reinstated upon
compliance with R&TC Section 23701 (which requires an
affirmative determination), regardless of whether the
organization can establish exemption under the streamlined
documentation process set forth above.
5) If an organization is tax-exempt for any taxable year
under the streamlined documentation process, the following
shall be open to public inspection:
a) Any documents submitted to FTB to verify the
organization's federal exemption under IRC Section
501(c)(3), including any copy of the IRS's notification
approving the organization's tax-exempt status that the
organization submits to FTB; and,
b) The acknowledgement letter or other document FTB issues.
EXISTING LAW provides:
1)That specified nonprofit organizations are exempt from taxes
imposed under the Corporation Tax Law if:
a) An application for exemption is submitted in the form
FTB prescribes along with a filing fee of $25; and,
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b) FTB issues a determination exempting the organization
from tax.
2)Under R&TC Section 23701d, for the exemption of corporations,
community chests, or trusts, organized exclusively for
religious, charitable, scientific, literary, educational, or
other specified purposes.
FISCAL EFFECT : Committee staff estimate that this bill will not
impact state income tax revenues.
COMMENTS :
1) The author states:
AB 404 provides the mechanism for the FTB to issue an
acknowledgment letter when an organization applies for
state exemption from income taxation based upon the
simplified application procedure added by AB 897
(application Form 3500A) and retains the current method by
which the FTB may issue a determination letter when the
organization relies upon the traditional application for
tax-exemption (application Form 3500). It provides that
any documents submitted to the FTB to verify an
organization's exemption from taxation under 501(c)(3) of
the IRC and the acknowledgement letter or other document
issued by the FTB shall be open to public inspection. It
clarifies which organizations exempt under a federal group
exemption letter may rely upon the simplified procedure to
be recognized as an exempt organization under California
law. Finally, it makes clear that an organization whose
exempt status is revoked by the FTB must apply for exempt
status under the procedure that requires a determination by
the FTB and cannot seek to be reinstated by simply
submitting a copy of their IRS determination letter.
2) This bill is sponsored by the Nonprofit & Unincorporated
Organizations Committee of the Business Law Section of the
State Bar of California (NUOC). NUOC notes that, "AB [897]
greatly simplified the tax exemption process in California,
but it also caused uncertainty and confusion in
implementation. The purpose of AB 404 is to clarify the
new simplified process for applying for tax exemption as a
charitable organization under Revenue and Taxation Code
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Section 23701d." Specifically, NUOC states:
a) "AB 404 requires the issuance of an acknowledgement
letter by the FTB when an organization relies upon the
simplified application procedure, which was not required by
AB 897 and is not required under current law. Other
agencies rely upon a determination of tax exemption by the
FTB, but the modification of Section 23701d by AB 897 did
not allow the FTB to make a determination for those
applying under the new simplified procedure; the discretion
required to issue a determination letter was removed by AB
897 for organizations relying upon the new simplified
procedure. That the FTB has not been able to issue a
determination letter when an organization relies upon its
federal determination letter to obtain state exemption has
caused confusion. In the interim, the FTB has been issuing
an "Exempt Acknowledgement Letter" and issued FTB Notice
2008-3 that explained the purpose of the Exempt
Acknowledgement Letter, but there is no statutory provision
for such a letter. AB 404 codifies the mechanism for the
FTB to issue an acknowledgement letter when the
organization relies upon the simplified application for
state tax-exemption (new FTB Form 3500A). AB 404 leaves in
place the traditional method of applying for state
tax-exemption (current FTB Form 3500) and obtaining a
determination of the same from the Franchise Tax Board."
b) "Although the FTB attempted to solve the problem created
by the passage of AB 897 by the use of an "acknowledgement
letter," because the acknowledgment letter is not expressly
a public document under current law, the FTB is unable to
provide a copy of the letter upon request. AB 404 amends
Section 19565 to provide that any documents submitted to
the FTB to verify an organization's exemption from taxation
under 501(c)(3) of the IRC and the acknowledgement letter
or other document issued by the FTB shall be open to public
inspection. With this addition to Section 19565, the FTB
will be able to provide copies of the same upon request and
California agencies and members of the public will be able
to obtain proof of California exemption from tax directly
from the FTB."
c) "It is unclear whether organizations exempt under
federal law under a group exemption can take advantage of
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the simplified procedure for obtaining state tax-exemption
provided by AB 897. Because California law and federal law
are not in strict conformity regarding all organizations
that are recognized as exempt under federal law under a
group exemption, AB 404 clarifies that an organization that
is part of a federal group exemption can apply for state
exemption on the basis of the federal group exemption if
the central organization and all of its subordinates are
Internal Revenue Code Section 501(c)(3) organizations."
d) "Finally, it is unclear that if the FTB revokes an
organization's exempt status under California law if the
organization could then rely upon the simplified
application procedure to reinstate its exempt status by
merely submitting to the FTB a copy of its determination
letter from the IRS. AB 404 makes it clear that an
organization whose exempt status is revoked by the FTB must
apply for exempt status under the procedure that requires a
determination by the FTB and cannot seek to be reinstated
by simply submitting a copy of their IRS determination
letter."
3) Related legislation : AB 897 (Houston), Chapter 238,
Statutes of 2007, provided that specified organizations
exempt under IRC Section 501(c)(3) could bypass the FTB
determination process and obtain tax-exempt status for
state purposes by providing FTB with proof of their federal
exemption. While AB 897 greatly simplified the procedure
for recognized IRC Section 501(c)(3) organizations to be
recognized as tax-exempt under state law, certain
ambiguities have arisen in the implementation process,
which this bill seeks to address.
REGISTERED SUPPORT / OPPOSITION :
Support
Nonprofit & Unincorporated Organizations Committee of the
Business Law Section
of the State Bar of California (sponsor)
Opposition
None on file
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Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098