BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 401|
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CONSENT
Bill No: AB 401
Author: Ruskin (D)
Amended: As introduced
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 11-0, 6/17/09
AYES: Calderon, Cogdill, Correa, Cox, Harman, Kehoe, Liu,
Lowenthal, Padilla, Runner, Wolk
NO VOTE RECORDED: Florez
ASSEMBLY FLOOR : 75-0, 4/20/09 (Consent) - See last page
for vote
SUBJECT : Financial lenders: exemptions
SOURCE : Resources Legacy Fund
DIGEST : This bill eliminates the sunset date on a
provision of the California Finance Lenders Law, which
allows tax-exempt foundations and charities to make loans
for charitable program-related purposes, as specified.
ANALYSIS :
Existing federal law :
1. Allows tax-exempt organizations to make program-related
investments that do not jeopardize their tax-exempt
status, provided that the primary purpose of the
investments is to accomplish one or more specified
CONTINUED
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charitable purposes, and that no significant purpose of
the investments is to produce income or realize the
appreciation of property.
2. Defines a charitable contribution as a contribution or
gift to, or for the use of:
A. A state, possession of the United States, or any
political subdivision of any of the foregoing, but
only if the contribution or gift is made for
exclusively public purposes.
B. A domestic corporation, trust, community chest,
fund, or foundation:
(1) Organized and operated exclusively for
religious, charitable, scientific, literary,
or educational purposes, or to foster national
or international amateur sports competition or
for the prevention of cruelty to children or
animals, no part of the net earnings of which
inures to the benefit of any private
shareholder or individual.
(2) Which is not disqualified for tax-exempt
status by reason of attempting to influence
legislation, and which does not participate in
or intervene in any political campaign on
behalf of or in opposition to any candidate
for public office.
Existing law:
1. Provides for the California Finance Lending Law (CFLL),
administered by the Department of Corporations (DOC), to
license, oversee, and regulate businesses making
consumer loans and/or commercial loans.
2. Provides for various exemptions from the CFLL for
certain entities that make specified types of loans,
including colleges and universities; broker-dealers, as
specified; persons who make no more than one loan in a
12-month period, as specified; public corporations;
public entities other than the state; nonprofit
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agricultural cooperatives; loans made or arranged by any
person licensed as a real estate broker and secured by a
lien on real property; licensed residential mortgage
lenders as specified; cemetery brokers; commercial
bridge loans made by a venture capital company to an
operating company; nonprofit church extension funds; and
franchise loans made by a franchisor to a franchisee.
3. Pursuant to AB 865 (Ruskin), Chapter 316, Statutes of
2005, exempts both of the following from the CFLL, until
January 1, 2010, as specified:
A. A program-related investment defined in Internal
Revenue Code (IRC) Section 4944(c) and United
States Treasury Regulations Section 53.4944-3,
which is made by a private foundation tax exempt
organization within the meaning of IRC Section
509(a), as long as that tax-exempt organization
does not also make consumer loans, as those loans
are defined under the CFLL.
B. A loan, guaranty, or investment made by a public
charity tax-exempt organization within the meaning
of IRC Section 509(a)(1) that meets all of the
following requirements, as long as the tax-exempt
organization does not also make consumer loans, as
those loans are defined under the CFLL.
(1) The primary purpose of the loan,
guaranty, or investment is to accomplish one
or more of the exempt purposes of the public
charity making the loan, as described in IRC
Section 170(c)(2)(B).
(2) Neither the production of income nor the
appreciation of property is a significant
purpose of the loan, guaranty, or investment.
(3) No purpose of the loan, guaranty, or
investment is to accomplish one or more of the
purposes described in IRC Section
170(c)(2)(D).
This bill deletes the sunset date on the provision of law
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described immediately above in Existing Law Number 3.
Background
Tax-exempt foundations often make loans for charitable
purposes, to advance their program goals. These loans,
which are known as program-related investments, are covered
by IRC Section 4944(c), summarized above. Program-related
investments are particularly attractive to foundations,
because they allow a foundation to leverage its assets
beyond its annual grant-making budget, and, in doing so,
assist grantees and advance program objectives.
Prior to enactment of AB 865, DOC received many requests
from non-profit organizations, asking whether the CFLL
applied to their activities. DOC consistently asserted
that when a fee is charged on a loan made by one party to
another, the entity charging the fee is engaging in
business as a lender and must be licensed under the CFLL.
The organizations who supported AB 865 asserted that the
CFLL was not appropriate for, nor was it intended to
regulate lending by tax-exempt foundations and charities
for charitable program-related purposes. Tax-exempt
organizations make loans at no or low interest to other
non-profit organizations, to help those organizations
accomplish their charitable objectives. The loans are
commonly used to provide financing for things like
conservation land acquisitions, the construction of
non-profit facilities, and to provide bridge financing for
non-profits. The Internal Revenue Service regulates and
establishes standards for all of the financial activities
of tax-exempt organizations, including loans. According to
the supporters of AB 865, the application of the CFLL to
these entities was inappropriate. It subjected the
foundations to expensive and cumbersome administrative
regulations that were meant to apply to consumer loans.
The supporters of AB 865 contended that, if the CFLL was
applied to these entities, there would be decreased amounts
of low-interest funds available for land conservation,
environmental protection, the arts, health care, affordable
housing, and child care facilities in low-income areas, at
a time when public funds for those activities were scarce.
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AB 865 represented a negotiated compromise between DOC and
several non-profit organizations to address this issue. As
enacted, the bill was intended to relieve certain
non-profit organizations of the need to comply with CFLL
administrative requirements they viewed as burdensome,
while giving DOC the comfort it needed to ensure that the
non-profit organization exemption was narrowly targeted and
would not be abused. The January 1, 2010 sunset date was
intended to allow DOC, as well as the Legislature, to
determine whether the exemption provided for by AB 865 was
working as intended, before deciding to extend or modify
it. To date, DOC has received no complaints about abuse of
the exemption.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/18/09)
Resources Legacy Fund (source)
Audubon California
Big Sur Land Trust
California Association of Nonprofits Policy Council
California Council of Land Trusts
California League of Conservation Voters
California ReLeaf
California State Parks Foundation
Coalition for Clean Air
David and Lucile Packard Foundation
Forests Forever
Nature Conservancy
Planning and Conservation League
ReLeaf Green California
Trust for Public Land
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Bill
Berryhill, Tom Berryhill, Block, Blumenfield, Brownley,
Caballero, Carter, Conway, Cook, Coto, Davis, De La
Torre, De Leon, DeVore, Duvall, Emmerson, Eng, Evans,
Feuer, Fletcher, Fong, Fuentes, Fuller, Furutani, Gaines,
Galgiani, Garrick, Gilmore, Hagman, Harkey, Hayashi,
Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Knight,
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Krekorian, Lieu, Logue, Bonnie Lowenthal, Ma, Mendoza,
Miller, Monning, Nava, Nestande, Niello, Nielsen, John A.
Perez, V. Manuel Perez, Portantino, Price, Ruskin, Salas,
Saldana, Silva, Skinner, Smyth, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Torrico, Tran,
Villines, Yamada, Bass
NO VOTE RECORDED: Blakeslee, Buchanan, Charles Calderon,
Chesbro, Hall
JJA:do 6/18/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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