BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 557|
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CONSENT
Bill No: AB 557
Author: Irwin (D)
Amended: 5/28/15 in Assembly
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 7/1/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/15/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Moorlach, Pavley
NO VOTE RECORDED: Lara
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 78-0, 6/2/15 - See last page for vote
SUBJECT: Nonprofit corporations: abatement: dissolution:
surrender
SOURCE: Author
DIGEST: This bill creates a streamlined administrative
dissolution and surrender process for nonprofit corporations, as
specified.
ANALYSIS:
Existing law:
1)Establishes the rules for dissolving different types of
nonprofit corporations, as follows:
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a) When a nonprofit public benefit corporation or
nonprofit mutual benefit corporation has been wound up
without court proceedings, a majority of the directors then
in office must sign and verify a certificate of dissolution
stating that the corporation has been completely wound up;
that its known debts and liabilities have actually been
paid or adequately provided for, or that it has incurred no
known debts or liabilities; that the corporation is
dissolved; and that all final returns required under the
Revenue and Taxation Code have been or will be filed with
the Franchise Tax Board (FTB). The certificate of
dissolution must be accompanied by a written waiver of
objections to the distribution of the corporation's assets
issued by the Attorney General (AG) or a written
confirmation from the AG that the corporation has no
assets. The certificate of dissolution and attachment must
be filed with the Secretary of State (SOS). The corporate
existence ceases upon acceptance by the SOS of the filing.
The SOS is then required to notify FTB of the dissolution
(Corporations Code Sections 6615 and 8615).
b) When a nonprofit religious corporation elects to
wind up and dissolve, it may do so either by approval of a
majority of its members or by approval of the board and its
members, as specified. All of the corporation's assets
must be disposed of in conformance with the corporation's
articles or bylaws, subject to compliance with the
provisions of any trust under which such assets are held.
Nonprofit religious corporations are generally subject to
the same rules for dissolution as nonprofit public benefit
corporations, summarized immediately above (Corporations
Code Section 9680).
c) When a foreign corporation that has qualified to
transact intrastate business wishes to surrender its right
to engage in business in California, it must file a
certificate of surrender signed by a corporate officer or
trustee, stating that it surrenders its authority to
transact intrastate business and that a final franchise tax
return has been or will be filed with the FTB, as
specified. The SOS is then required to notify the FTB of
the surrender (Corporations Code Section 2112).
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This bill:
1)Contains legislative findings regarding the cumbersome and
protracted process involved in dissolving a nonprofit
corporation's affairs and the importance of ensuring that
nonprofits which have been suspended or have forfeited
tax-exempt status are no longer able to do business in the
state or solicit donations from unsuspecting Californians.
2)Provides that a nonprofit mutual benefit, nonprofit public
benefit, nonprofit religious, or foreign nonprofit
organization that has qualified to transact intrastate
business is subject to administrative dissolution or
administrative surrender if, as of January 1, 2016 or later,
the nonprofit corporation's or foreign corporation's corporate
powers are and have been suspended or forfeited by the
Franchise Tax Board (FTB) for at least 48 continuous months.
The administrative dissolution/surrender process involves the
FTB, AG, and SOS, but is significantly less time- and
labor-intensive than the dissolution/surrender process
required under existing law. Notwithstanding the dissolution
of a corporation in this manner, the liability of the
corporation or its directors or other persons related to the
dissolved corporation is not discharged, and the dissolution
of a corporation pursuant to this procedure does not diminish
or adversely affect the ability of the AG to enforce
liabilities as otherwise provided by law.
3)Provides, under the Nonprofit Public Benefit Corporation Law,
Nonprofit Mutual Benefit Corporation Law, and Nonprofit
Religious Corporation Law, that, when a corporation has not
issued any memberships, a majority of the directors, or, if no
directors have been named in the articles of incorporation or
elected, the incorporator or a majority of the incorporators,
may sign and verify a certificate of dissolution, as
specified, and may file that certificate of dissolution with
the SOS within 24 months of filing its articles of
incorporation. The SOS must notify the FTB of the
dissolution. Once that certificate of dissolution is filed
with the SOS, the corporation is deemed dissolved, and its
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powers, rights, and privileges cease. Notwithstanding the
dissolution of a corporation in this manner, the liability of
the corporation or its directors or other persons related to
the dissolved corporation is not discharged, and the
dissolution of a corporation pursuant to this procedure does
not diminish or adversely affect the ability of the AG to
enforce liabilities as otherwise provided by law.
4)Requires FTB to abate, upon written request by a qualified
nonprofit corporation, as defined, unpaid qualified taxes,
interest, and penalties, as defined, for the taxable years in
which the qualified nonprofit corporation certifies, under
penalty of perjury, that it was not doing business.
Background
Under existing California law, the SOS, FTB, and AG share
jurisdiction over the administration and taxation of nonprofit
organizations. The SOS administers the incorporation process
and ensures that nonprofit corporations adhere to the missions
for which they form. The FTB evaluates, reviews, and monitors
the state tax-exempt status of nonprofit corporations. The AG
regulates nonprofit organizations that administer or solicit
charitable funds or assets and has broad legal and statutory
authority to commence enforcement actions for improper
activities.
According to this bill's author, the current process to dissolve
a nonprofit corporation is very cumbersome, time consuming, and
inefficient. In order to dissolve, a nonprofit corporation must
first prepare and file a Certificate of Election to Wind Up and
Dissolve. Nonprofit public benefit, mutual benefit, and
religious corporations holding charitable assets in trust must
then request a waiver of objections from the AG before disposing
of any remaining assets. In order to obtain this waiver, the
corporation must submit information detailing the persons to
whom the remaining assets will be distributed; a signed
Certificate of Dissolution; a copy of the corporation's federal
tax returns for the last three accounting periods; and an
endorsed filed copy of the corporation's articles of
incorporation, including any amendments. Once it receives a
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letter from the AG waiving objections to the distribution of
assets or confirming that the corporation has no assets, the
corporation must mail a final dissolution packet to the SOS,
containing the letter from the AG and the executed Certificate
of Dissolution.
Once the SOS processes the corporation's paperwork, the
corporation is completely dissolved, and its corporate existence
ceases in California. However, the organization must still
submit a final notice of dissolution to the AG. This submission
must include a copy of the Certificate of Dissolution filed by
the SOS or written confirmation that the Certificate of
Dissolution has been filed with the SOS and the final financial
report for the corporation showing that all assets were
distributed properly, resulting in a zero balance. It is only
after this final submission that the dissolved corporation
ceases to be subject to the minimum franchise tax.
Because of this cumbersome process, it is estimated that close
to 60,000 of the 150,000 nonprofit corporations currently "on
the books" in California are eligible for the administrative
dissolution process that AB 557 seeks to establish.
Comments
AB 557 is virtually identical to AB 1529 (Perez) from 2013, a
measure that was vetoed by Governor Brown. 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."
Assemblymember Irwin, author of AB 557, believes that the May
28, 2015 amendments to her bill resolve the concerns that led to
the Governor's veto.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: Yes
SUPPORT: (Verified8/14/15)
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California Secretary of State Alex Padilla
California Society of Enrolled Agents
California Taxpayers Association
OPPOSITION: (Verified8/14/15)
None received
ARGUMENTS IN SUPPORT: Secretary of State Alex Padilla
acknowledges the author's willingness to take extensive
amendments to reduce the cost of AB 557 relative to last year's
AB 1529. "AB 557 offers a cost-effective solution."
The California Taxpayers Association (Cal-Tax) not only supports
the bill, but urges lawmakers to expand the administrative
dissolution and surrender process to all legal entities, not
just nonprofit corporations, as other states like Colorado,
Georgia, and Missouri have done. In support of the bill,
Cal-Tax observes that "there is a significant problem with
for-profit and not-for-profit organizations filing incorporation
and registration papers with the SOS, and then failing to launch
their operations without formally dissolving or surrendering.
The result is a massive accounts receivable sitting on the
state's books that will never be collected. To properly
unravel, such entities must spend considerable amount of time
and expense, and go through a cumbersome reviver process with
the state, and then go through the dissolution/surrender
process. If an entity does not pay its tax liability, it
generally is difficult, if not impossible, for the FTB to hold
individual owners personally liable for the unpaid tax. Unlike
sales and payroll tax liabilities, the obligation to pay income
and franchise tax begins and ends with the entity in most
circumstances.
"The new administrative dissolution/surrender process to be
created by AB 557 would allow the FTB and SOS to formally
dissolve/surrender nonprofit entities that have been determined
to be inactive. For many of these entities, their boards of
directors disbanded years earlier, but never took the proper
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steps to dissolve/surrender the entity, thus causing years of
taxes, penalties, and interest to accrue. Further, the FTB and
SOS spend an inordinate amount of time and resources
administering the dissolution/surrender process. By
streamlining the process to dissolve/surrender defunct
nonprofits, AB 557 would help the FTB and SOS to clear away the
backlog of inactive nonprofit corporations, and save precious
state resources."
The California Society of Enrolled Agents writes, "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. The cost of revivor, which includes paying
the annual/minimum tax for each year, including penalties, is
too costly for many. Additionally, these 'phantom receivables'
should not be carried in the state's Accounts Receivable, as
most of the accounts will never prove collectible."
ASSEMBLY FLOOR: 78-0, 6/2/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd,
Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia,
Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray,
Hadley, Harper, Roger Hernández, Holden, Irwin, Jones,
Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,
Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago,
Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,
Wilk, Williams, Wood, Atkins
NO VOTE RECORDED: Chávez, Grove
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
8/18/15 12:43:15
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