BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1341 HEARING: 4/11/12
AUTHOR: Wolk FISCAL: Yes
VERSION: 3/27/2012 TAX LEVY: No
CONSULTANT: Phan
CHARITABLE CORPORATION ADMINISTRATION
Requires the FTB to provide a filing grace period to
certain charities to maintain their state tax exempt
status.
Background and Existing Law
Charitable corporations are required to register with the
Secretary of State's Office and the Attorney General's (AG)
Office upon formation and may apply for tax exemption from
the Internal Revenue Service (IRS) and the Franchise Tax
Board (FTB). The AG's Office requires charitable
corporations to renew their registrations annually.
If a charitable corporation fails to renew its paperwork,
the AG's Office assumes the charitable corporation received
the IRS's maximum tax filing extension (6 months) and gives
the charitable corporation this same extension. A
charitable corporation that does not file its paperwork
after this 6-month extension receives a letter from the
AG's Office warning of possible fines and taxes if it does
not renew its registration within the given timeframe
(usually 30 days from the date the letter was sent). The
AG's Office may send additional warning letters.
If a charitable corporation does not meet its filing
requirement, the AG's Office sends a request to the FTB to
revoke the charitable corporation's tax exempt status. The
FTB assesses the minimum franchise tax ($800 per year) for
each year the charitable corporation did not file its
paperwork. Many charitable corporations are assessed the
franchise tax for several years of non-filing.
The FTB must tax the charitable corporation once the AG's
Office refers it, and the charitable corporation cannot
clear its tax debt until it pays all amounts due. If the
SB 1341 - 3/27/2012 -- Page 2
charitable corporation does not pay the tax, it faces the
same consequences that for-profit corporations do, such as
it cannot transact business legally, bring an action or
defend itself in court, receive an automatic extension to
file taxes, file a claim for a refund, file or maintain an
appeal before the Board of Equalization, or begin or
continue a protest.
The AG's registry lists over 50,000 charitable corporations
as "delinquent" because they failed to renew their
registrations. For 2009-10, the FTB imposed taxes on 140
charitable corporations for a total of 664 years of
non-filing and $531,200 in outstanding tax. For 2010-11,
the FTB imposed taxes on 54 charitable corporations for a
total of 388 years and $310,400 in outstanding tax.
However, the state collects only about $20,000 each year
from delinquent charitable corporations because many of
them disband when they cannot afford to pay the bill.
Proposed Law
Senate Bill 1341 requires the FTB to revoke a charitable
corporation's tax exempt status if the charitable
corporation fails to file registration forms and reports
required by state law with the AG. Under the bill,
revocation occurs only after the AG has notified the FTB
that a charitable corporation failed to file any
registration or periodic report, and the FTB mailed a
notice to the charitable corporation stating it intends to
revoke the exemption if the charitable corporation does not
file all past due and currently due documents with the AG.
After the AG has received all required documents from the
charitable corporation, the AG is required to notify the
FTB and the charitable corporation that all past due and
currently due documents were appropriately filed.
If the AG does not notify the FTB that the charitable
corporation has complied with the filing requirements by
the last day of the applicable period, the FTB must revoke
the charitable corporation's tax exemption on the first day
after the applicable period.
SB 1341 defines the applicable period as:
1. 120 days after the date on which this bill
takes effect for notifications of noncompliance from
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the AG that the FTB received before SB 1341's
effective date.
2. 120 days after the FTB mails notification of
the intent to revoke the exemption granted to the
charitable corporation for notifications of
noncompliance from the AG that the FTB received on
or after SB 1341's effective date.
An organization that lost its tax exempt status due to
non-filing may be reestablished as an exempt organization
upon the filing or payment of both of the following:
1. A new application for exemption and payment of
the filing fee;
2. Any returns, statements, or payment of any
amounts due which were not previously submitted or
paid and which resulted in the revocation.
When revocation occurs because the charitable corporation
failed to confine its activities to those permitted by the
section, it may be reestablished as an exempt organization
if it can provide satisfactory proof that all of the
following have occurred:
1. The organization corrected its nonexempt
activities
2. The organization will operate in an "exempt
manner" pursuant to California law
3. The payment of any tax for periods the
organization was not qualified for exemption.
State Revenue Impact
According to the FTB, this bill will result in revenue
losses to the state of less than $20,000 annually.
Comments
1. Purpose of the bill . The purpose of SB 1341 is to
increase compliance with the AG's filing requirements by
providing charitable corporations--entities that would
otherwise not be taxed--with a 120-day grace period to
fulfill their reporting requirement before the tax is
imposed. According to the AG's Office, charitable
corporations that complied after receiving a bill from the
FTB were seldom delinquent with their registrations again.
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Because many of these charitable corporations are small and
volunteer-managed, some are unaware of the filing
requirement. (Some of the groups listed on the AG's
website of delinquent charitable corporations include:
choral societies, painting groups, volunteer firefighter
associations, and park restoration groups.) When they
receive a bill from the FTB, many are unable to pay the tax
and abandon their charitable corporation altogether.
Without this bill, the FTB will continue to revoke tax
exemptions to charitable corporations that the AG's Office
refers, which could lead to thousands more charitable
corporations disbanding.
2. Multiple warnings . These charitable corporations have
received multiple notices from the AG's Office warning them
of possible consequences if they do not renew their
registration. If they still do not comply, shouldn't they
face the consequences of their action and pay the minimum
franchise tax? SB 1341 will help large and professional
charitable corporations in addition to small and
nonprofessional ones. If these better staffed charitable
corporations do not renew their registration, shouldn't
they pay for their delinquency? The Committee may wish to
consider penalizing charitable corporations with different
amounts of wealth or staff size differently.
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Support and Opposition (4/5/12)
Support : Franchise Tax Board (Sponsor); Girl Scouts Heart
of Central California; CA Association of Nonprofits.
Opposition : Unknown.