BILL ANALYSIS Ó AB 557 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 557 (Irwin) As Amended August 17, 2015 Majority vote -------------------------------------------------------------------- |ASSEMBLY: | 78-0 |(June 2, 2015) |SENATE: | 38-0 |(August 20, | | | | | | |2015) | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: B. & F. SUMMARY: Establishes an administrative dissolution process and an administrative surrender process for nonprofit and foreign corporations. Specifically, this bill: 1)Provides that a nonprofit mutual benefit corporation, a nonprofit public benefit corporation, a nonprofit religious corporation or a foreign nonprofit corporation (all further references to nonprofits unless stated otherwise) shall be subject to administrative dissolution or administrative surrender if the nonprofit corporation's corporate powers are suspended or forfeited by the Franchise Tax Board (FTB) and have been suspended or forfeited by the FTB for a period of not less than 48 continuous months; or, 2)Prior to the administrative dissolution or administrative surrender of a nonprofit or foreign corporation the nonprofit corporation shall be notified by: AB 557 Page 2 a) The FTB by mailing a written notice to the last known address of a nonprofit corporation; b) If the nonprofit does not have a valid address in the records of the FTB or the Secretary of State (SOS), the notice required by the SOS on its Internet Web site of the pending administrative dissolution or administrative surrender shall be sufficient. 3)Requires the FTB to transmit to the SOS and the Attorney General's Registry of Charitable Trusts and the names and SOS file numbers of nonprofit and foreign corporations subject to administrative dissolution or administrative surrender. 4)Allows a nonprofit or foreign nonprofit to provide FTB with a written objection. 5)Provides that if no objection is received by FTB during the 60 day period the nonprofit foreign nonprofit corporation shall be dissolved or surrendered. The SOS will provide a certificate as prima facie evidence. 6)Provides that if a written objection is received by the FTB within the 60 day period then the nonprofit corporation shall have another 90 days from the date of the written objection to satisfy all debt and file a current statement of information (SOI) with the SOS. 7)Allows the FTB or the SOS to extend the 90 day period for an additional 90 days. 8)Requires the corporation's liabilities for qualified taxes, interest and penalties to be abated and refunded if the nonprofit corporation has been dissolved or surrendered. 9)Specifies that if a nonprofit corporation is dissolved or surrendered that the liability to creditors is not discharged AB 557 Page 3 as well as clarifies that the measure does not diminish or adversely affect the ability of the Attorney General to enforce liabilities. 10)Allows the following related to nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations: a) A corporation can dissolve when the corporation has not issued any membership if all of the following are verified on a certificate: i) Certificate must be filed within 24 months from the date that the articles of incorporation (AOI) was filed; ii) The corporation does not have any debts or liabilities; iii) The tax liability shall be satisfied on a taxes-paid basis; iv) A final franchise tax return; v) The corporation was created in error; vi) Distribution of assets; vii) No issuance of membership; and viii) That the corporation is dissolved. b) Provides that once the certificate is filed the corporation shall be dissolved. c) Specifies that the dissolution does not relieve liability to creditors. AB 557 Page 4 11)Requires the FTB to abate upon written request by a qualified corporation, unpaid taxes, interest, and penalties for the taxable years the nonprofit corporation certifies under penalty of perjury that it was not doing business. a) 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: i) Was operating and previously obtained tax-exempt status with the FTB but had the tax-exempt status revoked; ii) Was operating and previously obtained tax-exempt status with the Internal Revenue Service (IRS) but had tax-exempt status revoked; or iii) Never did business in California at any time after the time of its incorporation. b) 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 Section 23731 or associated interest or penalties. c) Requires the qualified corporation to show that it has ceased all business operations at the time of the filing request for abatement. d) 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. e) 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. AB 557 Page 5 f) Allows the FTB to prescribe rules and regulations as necessary. The Senate amendments require the notice of dissolution to be sent to the Attorney General's Registry of Charitable Trusts and made other technical changes. 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 Sections 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 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 AB 557 Page 6 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) FISCAL EFFECT: According to the Assembly Appropriations Committee, this bill will have one-time General Fund costs of approximately $150,000 to SOS to update systems and implement new processes; minor costs to FTB, likely absorbable; potential long-term savings from no longer having to track and issue notices to defunct nonprofit businesses. No impact to state income tax revenues. COMMENTS: The goal of this bill is to streamline the dissolution process for nonprofit and foreign corporations. According to the author's office: There is a significant problem with non-profit corporations filing incorporation papers with the Secretary of State, 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 Secretary of State (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 Page 7 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'. This bill allows the FTB to waive delinquent taxes, penalties and interest under specified conditions. This bill 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, the measure allows 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. As pointed out in the measure's findings, a number of nonprofits have disbanded but do not take the proper steps to dissolve thus incur taxes, penalties and interest unnecessarily. This bill will put together a process that will allow inactive nonprofits to cease to exist in a more streamlined approach. Analysis Prepared by: Mark Farouk / B. & F. / (916) 319-3081 FN: 0001473