BILL ANALYSIS Ó
AB 557
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Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 557
(Irwin) - As Introduced February 23, 2015
Majority vote. Fiscal committee.
SUBJECT: Nonprofit corporations: abatement: dissolution:
surrender
SUMMARY: Establishes an administrative dissolution and
administrative surrender process for nonprofit corporations.
Specifically, this bill:
1)Allows the Secretary of State (SOS) to obtain address
information from the Franchise Tax Board (FTB) to use to
provide notice to a foreign nonprofit corporation, a nonprofit
public benefit corporation, and a nonprofit mutual benefit
corporation.
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2)Provides that a nonprofit mutual benefit corporation,
nonprofit public benefit corporation, nonprofit religious
corporation, or a foreign nonprofit corporation shall be
subject to administrative dissolution or administrative
surrender if, as of January 1, 2016, at least one of the
following shall apply:
a) The nonprofit corporation's corporate powers are
suspended or forfeited by the FTB for a period of not less
48 counties; or,
b) The nonprofit corporation has not filed a Statement of
Information with the SOS for a period of not less than 48
continuous months.
3)Requires, prior to the administrative dissolution or
administrative surrender of the nonprofit corporation, a
nonprofit corporation to be notified as follows:
a) The FTB shall mail written notice to the last known
address of a nonprofit corporation;
b) The SOS shall provide a notice to the last known address
of a nonprofit corporation; or,
c) If the nonprofit corporation does not have a valid
address in the records of the FTB or the SOS, the 60 day
notice on the SOS Internet Web site of the pending
dissolution or surrender shall be deemed sufficient.
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4)Requires the FTB to transmit to the SOS the names of nonprofit
corporations subject to administrative dissolution or
administrative surrender.
5)Requires the SOS to provide a 60 day notice of pending
administrative dissolutions or administrative surrender on its
Internet Web site by listing the corporation's name, the SOS's
file number, and the California corporation number.
6)Allows a nonprofit corporation to provide the FTB or SOS with
a written objection to the administrative dissolution or
administrative surrender, and requires the FTB and SOS to
notify each other if a written objection is received.
7)Requires a nonprofit corporation to be administratively
dissolved or surrendered if no written objection to the
dissolution is received during the 60-day notice period. The
SOS's certificate shall serve as prima facie evidence of the
administrative dissolution or administrative surrender.
8)Provides that if a written objection is received by the FTB or
the SOS before the expiration of the 60-day notice period, the
nonprofit corporation shall have an additional 90 days from
the date the written objection is received by either the FTB
or the SOS to pay all accrued taxes, penalties, and interest
and to file a current Statement of Information with the SOS.
9)Requires the administrative dissolution or surrender to be
canceled if the nonprofit corporation pays all accrued taxes,
penalties, and interest, and files a current Statement of
Information.
10)Requires the nonprofit corporation to be administratively
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dissolved or surrendered 90 days after receipt of the written
objection if the nonprofit corporation fails to pay all
accrued taxes, penalties, and interest, or fails to file a
current Statement of Information.
11)Allows the FTB or SOS to extend the 90 day objection period
by an additional 90 days.
12)Requires the nonprofit corporation's liabilities for
qualified taxes, interest, and penalties to be abated upon
administrative dissolution or administrative surrender.
13)Provides that the liability to creditors is not discharged if
the nonprofit corporation is administratively dissolved or
surrendered, nor is the ability of the Attorney General to
enforce liabilities adversely affected.
14)Provides that a corporation can be dissolved when the
corporation has not issued any membership if all of the
following are verified on a certificate:
a) The certificate of dissolution is being filed within 24
months from the date the articles of incorporation were
filed;
b) The corporation does not have any debts or liabilities;
c) The tax liability shall be paid on a taxes-paid basis;
d) The final franchise tax return has or will be filed with
the FTB;
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e) The corporation was created in error;
f) The known assets of the corporation remaining after
payment of known debts and liabilities have been
distributed or that the corporation acquired no known
assets;
g) A majority of the directors, or if no directors were
named, the incorporator or a majority of the incorporators
authorized the dissolution and elected to dissolve the
corporation;
h) The corporation has not issued membership, and payments
for membership, if any have been received, have been
returned; and,
i) The corporation is dissolved.
15)Requires the certificate of dissolution to be filed with the
SOS. The SOS shall notify the FTB of dissolution.
16)Provides that a corporation shall be dissolved and its
powers, rights, and privileges cease upon filing a certificate
of dissolution.
17)Provides that the dissolution of the corporation does not
discharge the liabilities to creditors.
18)Requires the FTB to abate upon written request by a qualified
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corporation, unpaid taxes, interest, and penalties for the
taxable years the nonprofit corporation certifies under
penalty of perjury that it was not doing business.
19)Defines "qualified corporation" as a nonprofit mutual benefit
corporation, a nonprofit public benefit corporation, and a
nonprofit religious corporation incorporated in California or
a nonprofit foreign corporation that satisfies any of the
following:
a) Was operating and previously obtained tax-exempt status
with the FTB but had the tax-exempt status revoked;
b) Was operating and previously obtained tax-exempt status
with the Internal Revenue Service (IRS) but had tax-exempt
status revoked; or
c) Never did business in California at any time after the
time of its incorporation.
20)Defines "qualified taxes, interest, and penalties" as a tax
imposed and associated interest and penalties but does not
include taxes imposed under Revenue and Taxation Code (R&TC)
Section 23731 or associated interest or penalties.
21)Requires the qualified corporation to show that it has ceased
all business operations at the time of the filing request for
abatement.
22)Provides that the abatement of unpaid qualified tax,
interest, and penalties is conditioned on the dissolution of
the qualified corporation within 12 months from the date of
filing the request for abatement.
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23)Specifies that if a qualified corporation is not dissolved
with 12 months from the date of filing the request for
abatement or restarts business operations, then the abatement
of qualified tax, interest, and penalties shall be cancelled
and treated as if the abatement never occurred.
24)Allows the FTB to prescribe rules and regulations as
necessary.
25)Makes findings and declarations.
EXISTING LAW:
1)Requires foreign corporations to file within 90 days and
annually thereafter during the applicable filing period a
statement containing specified information. [Corporations
Code Section 2117.]
2)Requires nonprofit public benefit corporations and nonprofit
mutual benefit corporations to file within 90 days and
biennially thereafter a statement of information.
[Corporations Code Section 6210 and 8210.]
3)Establishes the process for voluntary windup and dissolution
for nonprofit corporations which is initiated by an election
to dissolve which may be made by the vote or written consent
of a majority of all the members of the corporation or, if
there are no members, by the board of directors. Following
the election the corporation must file documents with the SOS
such as a certificate of election to wind up and dissolve
prior to or together with a certificate of dissolution. In
addition dissolution documents can be filed only if the status
of the corporation is active on the records of the SOS. Upon
filing of the certificate of dissolution by the SOS, the
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corporation will be completely dissolved and its corporate
existence will cease in California. [Corporation Code
Sections 6611, 6615, 8611, 8615, 9680, 12631 and 12625.]
4)Requires that nonprofit public benefit corporations and
nonprofit religious corporations provide a letter from the
Attorney General's office that either waives objections to the
distribution of the corporation's assets or confirms that the
corporation has no assets accompanied with the certificate of
dissolution. [Corporations Code, Sections 6615 and 9680.]
5)Requires nonprofit mutual benefit corporations if holding
assets in a charitable trust, the distribution of those assets
must be approved by the Attorney General or be made by decree
of a superior court. [Corporations Code, Section 8716.]
6)Imposes franchise tax on all corporations doing business in
California equal to 8.84% of the taxable income attributable
to California. A minimum franchise tax (MFT) of $800 is
imposed on all corporations that are incorporated under the
laws of California, qualified to transact intrastate business
in California, or are doing business in California. Taxpayers
must pay the MFT only if it is more than their regular
franchise tax liability.<1>
7)Provides exceptions with respect to imposition of the MFT.
For instance, credit unions and nonprofit organizations are
not subject to MFT and a corporation is not subject to the MFT
for its first taxable year. However, even though a
corporation is not subject to the MFT in its first taxable
year, it will be subject to the regular franchise tax in its
first taxable year based on its taxable income.
---------------------------
<1> According to the FTB, for taxable years beginning on or
after January 1, 1997, only taxpayers with net incomes of less
than approximately $9,040 pay the MFT because the amount of
measured tax owed would be less than $800 ($9,039 x 8.84% =
$799).
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8)Provides that a tax-exempt organization that regularly carries
on a trade or business not substantially related to its exempt
purpose is required to pay tax on the unrelated or business
income that results from such activity.
9)Provides that if a nonprofit corporation's tax exempt status
is revoked, the corporation becomes subject to the franchise
or corporation income tax.
FISCAL EFFECT: This bill would not change the amount of tax
owed and would have no revenue impact.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
There is a significant problem with non-profit corporations
filing incorporation papers with the [SOS], and then
failing to launch or continue operations and remain up to
date and filing and tax requirements. These inactive
non-profits never go through the formal dissolution process
and become a hindrance to the state. The [SOS], [FTB], and
Attorney General are responsible for regulating nonprofit
corporations and spend a significant amount of resources
and time attempting to register, tax, and audit nonprofits
that no longer exist. The SOS and FTB estimate that there
are close to 60,000 nonprofits currently in their systems
that would be eligible for the administrative dissolution
process established under AB 557.
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AB 557 creates a streamlined administrative dissolution
process for nonprofits that have been suspended for at
least 48 continuous months after proper notice has been
served. This new process will allow FTB and SOS to
dissolved non-profits that have been sitting inactive on
the "books".
2)Arguments in Support : The California Society of Enrolled
Agents states that this bill "addresses a long standing
problem - the inability to dissolve or cancel business
entities that are formed but not 'launched.' Often taxpayers
form business entities that never get [off] the ground,
sometimes by attending a seminar. The taxpayers barely
remember forming the entities, do not file the right paperwork
to keep the entities alive and definitely do not have the
funds to first revive the entity, which must happen in order
to properly close the entity."
3)Dissolution and Surrender of Nonprofit Corporations : This
bill requires the FTB to abate taxes, penalties and interest
under specified conditions, and establishes a process for
involuntary administrative dissolution for a nonprofit
corporation if the entity has been suspended or forfeited by
the FTB or the SOS for not less than 48 months. In addition,
this bill allows the SOS to use the corporation address
information obtained from the FTB and allows a nonprofit that
was incorporated in error to use a short dissolution process
that is currently available to for-profit corporations.
4)Abatement of Taxes, Interest, and Penalties : As noted above,
this bill requires the FTB to abate taxes, penalties and
interest under specified conditions. Despite being given the
authority to abate taxes, interest, and penalties, FTB's
analysis states that "[t]his bill would not change the amount
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of tax owed and would have no revenue impact." If this bill
does not change the amount of tax owed, it is unclear to
Committee staff as to why the authority to abate taxes,
interest, and penalties is needed.
5)Governor's Veto Message : Last year, Governor Brown vetoed AB
1529 (Perez), of the 2013-14 Legislative Session, which is
identical to this bill. In his veto message, the Governor
stated:
This bill would make it easier to dissolve a nonprofit
corporation.
Implementing this bill, however, will require expensive
reprogramming of an obsolescent computer system that will
soon be replaced. It would be better to make this change
when the new computer system is being designed.
There is no indication that the Governor's concerns regarding
the expense of reprogramming the computer system have been
addressed.
6)Double Referral : This bill was double-referred with the
Committee on Banking and Finance, and passed that Committee by
a vote of 11 to 0 on April 13, 2015. As noted above, this
bill makes amendments to the Corporations Code beyond the
purview of this Committee. For a discussion of these
amendments, please refer to the analysis prepared by the
Committee on Banking and Finance.
7)Implementation Considerations : According to the FTB, "[t]his
bill would allow the FTB to abate MFT imposed, but is silent
regarding abatement of measure income tax. The bill should be
amended to clarify whether or not measure tax would be
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abated."
REGISTERED SUPPORT / OPPOSITION:
Support
California Society of Enrolled Agents
Opposition
None on file
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098