BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  SB 1341|
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                              UNFINISHED BUSINESS


          Bill No:  SB 1341
          Author:   Wolk (D), et al.
          Amended:  6/13/12
          Vote:     21

           
           SENATE GOVERNANCE & FINANCE COMMITTEE  :  8-0, 4/11/12
          AYES:  Wolk, Dutton, Fuller, Hancock, Hernandez, Kehoe, La 
            Malfa, Liu
          NO VOTE RECORDED:  DeSaulnier

           SENATE APPROPRIATIONS COMMITTEE  :  7-0, 4/30/12
          AYES:  Kehoe, Walters, Alquist, Dutton, Lieu, Price, 
            Steinberg

           SENATE FLOOR  :  38-0, 5/7/12
          AYES:  Alquist, Anderson, Berryhill, Blakeslee, Calderon, 
            Cannella, Corbett, Correa, De León, DeSaulnier, Dutton, 
            Emmerson, Evans, Fuller, Gaines, Hancock, Harman, 
            Hernandez, Huff, Kehoe, La Malfa, Leno, Lieu, Liu, 
            Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Rubio, 
            Simitian, Steinberg, Vargas, Walters, Wolk, Wright, 
            Wyland, Yee
          NO VOTE RECORDED:  Runner, Strickland

           ASSEMBLY FLOOR  :  79-0, 8/16/12 (Consent) - See last page 
            for vote


           SUBJECT  :    Corporation Tax Law:  charitable corporations

           SOURCE  :     Franchise Tax Board

                                                           CONTINUED





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           DIGEST :    This bill provides specified charities with a 
          120-day grace period to come into compliance with 
          registration and reporting requirements before revocation 
          of tax-exempt status.  This bill also deletes a requirement 
          that charities pay the minimum franchise tax for any period 
          in which their tax-exempt status was invalid.

           Assembly Amendments  make a technical change and add a 
          coauthor.

           ANALYSIS  :    Charitable corporations are required to 
          register with the Secretary of State's Office and the 
          Attorney General's (AG) Office upon formation and may apply 
          for tax exemption from the Internal Revenue Service (IRS) 
          and the Franchise Tax Board (FTB).  The AG's Office 
          requires charitable corporations to renew their 
          registrations annually. 

          If a charitable corporation fails to renew its paperwork, 
          the AG's Office assumes the charitable corporation received 
          the IRS's maximum tax filing extension (six months) and 
          gives the charitable corporation this same extension.  A 
          charitable corporation that does not file its paperwork 
          after this six-month extension receives a letter from the 
          AG's Office warning of possible fines and taxes if it does 
          not renew its registration within the given timeframe 
          (usually 30 days from the date the letter was sent).  The 
          AG's Office may send additional warning letters. 

          If a charitable corporation does not meet its filing 
          requirement, the AG's Office sends a request to the FTB to 
          revoke the charitable corporation's tax exempt status.  The 
          FTB assesses the minimum franchise tax ($800 per year) for 
          each year the charitable corporation did not file its 
          paperwork.  Many charitable corporations are assessed the 
          franchise tax for several years of non-filing. 

          The FTB must tax the charitable corporation once the AG's 
          Office refers it, and the charitable corporation cannot 
          clear its tax debt until it pays all amounts due.  If the 
          charitable corporation does not pay the tax, it faces the 
          same consequences that for-profit corporations do, such as 
          it cannot transact business legally, bring an action or 







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          defend itself in court, receive an automatic extension to 
          file taxes, file a claim for a refund, file or maintain an 
          appeal before the Board of Equalization, or begin or 
          continue a protest. 

          The AG's registry lists over 50,000 charitable corporations 
          as "delinquent" because they failed to renew their 
          registrations.  For 2009-10, the FTB imposed taxes on 140 
          charitable corporations for a total of 664 years of 
          non-filing and $531,200 in outstanding tax.  For 2010-11, 
          the FTB imposed taxes on 54 charitable corporations for a 
          total of 388 years and $310,400 in outstanding tax.  
          However, the state collects only about $20,000 each year 
          from delinquent charitable corporations because many of 
          them disband when they cannot afford to pay the bill. 

          This bill requires the FTB to revoke a charitable 
          corporation's tax exempt status if the charitable 
          corporation fails to file registration forms and reports 
          required by state law with the AG.  Under this bill, 
          revocation occurs only after the AG has notified the FTB 
          that a charitable corporation failed to file any 
          registration or periodic report, and the FTB mailed a 
          notice to the charitable corporation stating it intends to 
          revoke the exemption if the charitable corporation does not 
          file all past due and currently due documents with the AG.  
          After the AG has received all required documents from the 
          charitable corporation, the AG is required to notify the 
          FTB and the charitable corporation that all past due and 
          currently due documents were appropriately filed. 

          If the AG does not notify the FTB that the charitable 
          corporation has complied with the filing requirements by 
          the last day of the applicable period, the FTB must revoke 
          the charitable corporation's tax exemption on the first day 
          after the applicable period. 

          This bill defines the applicable period as:

          1. 120 days after the date on which this bill takes effect 
             for notifications of noncompliance from the AG that the 
             FTB received before this bill's effective date.

          2. 120 days after the FTB mails notification of the intent 







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             to revoke the exemption granted to the charitable 
             corporation for notifications of noncompliance from the 
             AG that the FTB received on or after this bill's 
             effective date. 

          An organization that lost its tax exempt status due to 
          non-filing may be reestablished as an exempt organization 
          upon the filing or payment of both of the following:

          1. A new application for exemption and payment of the 
             filing fee;

          2. Any returns, statements, or payment of any amounts due 
             which were not previously submitted or paid and which 
             resulted in the revocation.

          When revocation occurs because the charitable corporation 
          failed to confine its activities to those permitted by the 
          section, it may be reestablished as an exempt organization 
          if it can provide satisfactory proof that all of the 
          following have occurred:

          1. The organization corrected its nonexempt activities.

          2. The organization will operate in an "exempt manner" 
             pursuant to California law.

          3. The payment of any tax for periods the organization was 
             not qualified for exemption.

           Comments
           
          The purpose of this bill is to increase compliance with the 
          AG's filing requirements by providing charitable 
          corporations--entities that would otherwise not be 
          taxed--with a 120-day grace period to fulfill their 
          reporting requirement before the tax is imposed.  According 
          to the AG's Office, charitable corporations that complied 
          after receiving a bill from the FTB were seldom delinquent 
          with their registrations again.  Because many of these 
          charitable corporations are small and volunteer-managed, 
          some are unaware of the filing requirement.  (Some of the 
          groups listed on the AG's Web site of delinquent charitable 
          corporations include: choral societies, painting groups, 







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          volunteer firefighter associations, and park restoration 
          groups.)  When they receive a bill from the FTB, many are 
          unable to pay the tax and abandon their charitable 
          corporation altogether.  Without this bill, the FTB will 
          continue to revoke tax exemptions to charitable 
          corporations that the AG's Office refers, which could lead 
          to thousands more charitable corporations disbanding.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes   
          Local:  No

          According to the Senate Appropriations Committee:

             Annual General Fund revenue losses of approximately 
             $20,000 by providing relief from payment of the minimum 
             franchise tax for charitable corporations that reinstate 
             tax exempt status by complying with AG filing 
             requirements.

             AG staffing costs of up to $54,000 in 2013-13 and up to 
             $76,000 ongoing to update regulations and perform new 
             administrative duties (Registry of Charitable Trusts 
             Fund).

           SUPPORT  :   (Verified  8/16/12)

          Franchise Tax Board (source)
          California Association of Museums
          California Association of Nonprofits
          California State PTA
          Girl Scouts Heart of Central California
          Goodwill
          Historical Society of Morro Bay


           ASSEMBLY FLOOR  :  79-0, 8/16/12
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 
            Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, 
            Brownley, Buchanan, Butler, Charles Calderon, Campos, 
            Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, 
            Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, 
            Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Gorell, 
            Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger 
            Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, 







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            Knight, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, 
            Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, 
            Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, 
            Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao, 
            Wagner, Wieckowski, Williams, Yamada, John A. Pérez
          NO VOTE RECORDED:  Lara


          AGB:k  8/17/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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