BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 557 |Hearing | 7/15/15 |
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|Author: |Irwin |Tax Levy: |No |
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|Version: |5/28/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Nonprofit corporations: abatement: dissolution: surrender
Enacts an administrative dissolution and surrender process for
nonprofit corporations.
Background and Existing Law
California nonprofit corporations organized for religious,
charitable, social, educational, recreational or similar
purposes are formed pursuant to the Nonprofit Corporation Law.
Individuals can form nonprofit corporations in California by
filing articles of incorporation with the Secretary of State
that contain specified information, and paying a $30 fee. State
law requires corporations and limited liability companies to
update the California Secretary of State's records on an annual
or biannual basis by filing a statement. Franchise Tax Board
(FTB) or the Secretary of State can suspend a corporation for:
Failure to pay an amount due,
Failure to file a statement of information with the
Secretary of State's office, or
Failure to file any past due returns.
In California, a nonprofit corporation is not necessarily a
tax-exempt one, regardless of its federal tax status. All
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nonprofits must apply to the Franchise Tax Board (FTB) for
tax-exempt status, or provide FTB with a copy of the Internal
Revenue Service's determination that the organization is
tax-exempt under the Internal Revenue Code (AB 897, Houston,
2008). FTB then notifies the organization of its determination,
or its acknowledgement of the IRS determination, either of which
entitles the organization to an exemption from the Corporation
Tax. A nonprofit that does not obtain approval from FTB for
their tax-exempt application is subject to the Corporation Tax.
After FTB determination or acknowledgement, all non-church
charities must annually file a simple form with FTB, known as
the E-Postcard (Form 199N) with basic information about the
organization. Tax-exempt organizations with average gross
receipts over $50,000 per year must file a more comprehensive
annual return (Form 199). Churches don't have to complete either
form.
Individuals will often form nonprofits, without applying for
tax-exempt status. Without an exemption, corporations with
taxable nexus in California must pay either the minimum
franchise tax of $800, or the measured franchise tax of 8.84% of
apportioned net income if the tax exceeds $800. The minimum
franchise tax ensures that corporations that do not show a
profit in a taxable year bear some of the cost of public
services. The Legislature exempted corporations in their first
year of business from the minimum tax, but taxes are due for
every year after that, including the year in which a corporation
dissolves. Additionally, when a nonprofit generates business
income that isn't related to its exempt purpose, it must pay tax
on that income.
Corporate dissolution can be cumbersome. A corporation must
file a Certificate of Election to Wind Up and Dissolve, before
or together with a Certificate of Dissolution with the Secretary
of State. If the corporation is a charity, the Attorney General
must approve the distribution of the corporation's assets, or
confirm that it has none, and the corporation must attach that
letter in its filing to the Secretary. After that, the
corporation submits a final notice to the Secretary, then to the
Attorney General. Once all these steps are complete, the
corporation dissolves, and it no longer owes tax. Requirements
can vary whether the corporation is a mutual benefit, public
benefit, or religious corporation.
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Sometimes, individuals will form nonprofits, not obtain the tax
exemption, and then let the nonprofits' activities lapse without
completing dissolution procedures with the Secretary of State,
FTB, and sometimes the Attorney General. When FTB discovers
nonprofit corporations that are taxable under current law, they
send notices of proposed assessment equal to $800 for each year
the corporation exists without a tax exemption, plus accrued
penalties and interest. The author wants to create an orderly
process for nonprofits to dissolve.
Proposed Law
Assembly Bill 557 enacts an FTB-administered dissolution and
surrender process for nonprofit entities that FTB has suspended
for at least 48 continuous months. Before dissolving or
surrendering the entity, FTB must mail a notice to the last
known address for the corporation, and the Secretary of State
must provide a 60 day warning of the dissolution by posting a
notice on his website listing the corporation's name, the
Secretary's file number, and the California corporation number,
as applicable, with instructions of how to submit a written
objection to the dissolution.
If FTB receives a notice protesting the dissolution or
surrender, the corporation has 90 days to pay back taxes,
penalties, and interest, as well as file a current statement of
information with the Secretary, a period that FTB can only
extend once. FTB must notify the Secretary of any written
objections. If the corporation makes the appropriate payments,
the administrative dissolution or surrender process ceases. If
no notice is received, the bill dissolves or surrenders the
corporation.
If the nonprofit corporation is administratively dissolved or
surrendered, neither creditor liability nor the liability of the
directors is discharged. The measure clarifies that it doesn't
affect the Attorney General's ability to enforce liabilities as
otherwise provided by law.
The bill also amends the Nonprofit Public Benefit, and Nonprofit
Mutual Benefit Laws, and the Nonprofit Religious Corporation Law
to allow a majority of the board of directors to dissolve the
corporation under a streamlined process. A majority of the
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incorporators can dissolve the corporation under the bill's
terms if the articles of incorporation didn't name directors.
To dissolve, the majority of the board of directors or
incorporators may sign and verify a certificate of dissolution
specifying that:
The certificate is filed within 24 months from the date
the articles of incorporation are filed,
The corporation doesn't have any liabilities or debts,
except for taxes that will be paid on a "taxes paid,"
basis, or that a corporation, person, or business entity
will assume the liability,
The final return will be filed with FTB,
The corporation was created in error,
The known assets of the corporation remaining after
payment of known debts and liabilities have been
distributed according to law, or that the corporation has
no known assets,
The majority of the board of directors or incorporators,
as applicable, authorized the dissolution and elected to
dissolve the corporation,
The corporation has granted no memberships, and if it
has received payment for memberships, it has refunded those
payments, and
The corporation is dissolved.
FTB must abate unpaid taxes, interest, and penalties for taxable
years the corporation dissolved when it certifies it was not
doing business, upon written request, if the corporation:
Ceased operations at the time the request is made,
Dissolves in the next 12 months,
Had tax-exempt status under state or federal law, but
lost its status, or never had taxable nexus in the state.
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FTB can abate corporation taxes that can apply to the dissolved
nonprofit, but not taxes arising from income unrelated to the
entities' exempt purpose. If the corporation doesn't dissolve
in the next 12 months, the abatement is cancelled, and all
taxes, penalties, and interest are due and payable. The bill
also allows FTB to issue regulations, exempt from the
Administrative Procedures Act, to implement its provisions. The
measure also makes legislative findings and declarations
supporting its purposes.
State Revenue Impact
FTB states that the measure has no revenue impact.
Comments
1. Purpose of the bill . According to the author, "There is a
significant problem with non-profit corporations filing
incorporation papers with the Secretary of State (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, Franchise Tax Board (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. 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. Wait a minute . Last year, Governor Brown vetoed a very
similar bill, AB 1529 (J. Perez, 2014), stating:
To the Members of the California State Assembly:
I am returning Assembly Bill 1529 without my signature.
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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.
Sincerely,
Edmund G. Brown Jr.
However, AB 557 differs markedly from AB 1529 by excluding many
provisions that would have increased administrative
responsibilities for the Secretary of State. Unlike AB 1529,
the Secretary of State supports this bill.
Assembly Actions
Senate Banking and Financial Institutions 7-0
Assembly Floor 78-0
Assembly Appropriations 17-0
Assembly Revenue and Taxation 9-0
Assembly Banking and Finance 11.0
Support and
Opposition (7/9/15)
Support : Secretary of State Alex Padilla, California Taxpayers
Association, California Society of Enrolled Agents.
Opposition : None received.
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