BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1529 HEARING: 6/25/14
AUTHOR: John Perez FISCAL: Yes
VERSION: 5/1/14 TAX LEVY: No
CONSULTANT: Grinnell
NONPROFIT CORPORATIONS: ABATEMENT: DISSOLUTION: SURRENDER
Enacts an administrative dissolution and surrender process
for defunct nonprofits.
Background and Existing Law
California nonprofit, nonstock 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 contains
specified information, and paying a $30 fee.
California 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
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.
AB 1529 - 5/1/14 -- Page 2
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, but don't apply 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. A
nonprofit corporation becomes taxable as a regular
corporation when it loses its tax-exempt status.
Corporate dissolution can be cumbersome. The 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.
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
AB 1529 - 5/1/14 -- Page 3
penalties and interest. The author wants to create an
orderly process for nonprofits to dissolve.
Proposed Law
Assembly Bill 1529 enacts an administrative dissolution and
surrender process for nonprofit entities that FTB has
suspended for at least 48 continuous months, or that
haven't filed a statement of information for at least 48
continuous months. Before dissolving or surrendering the
entity, FTB or the Secretary of State must mail a notice to
the last known address for the corporation, or if that
fails, provide a 60 day warning of the dissolution by
posting a notice on their website listing the corporation's
name, the Secretary's file number, and the California
corporation number, as applicable.
If no notice is received, the bill dissolves or surrenders
the corporation. If FTB or the Secretary receives a notice
protesting the dissolution or surrender, the corporation
has 90 days to pay back taxes, penalties, and interest, a
period that FTB or the Secretary can only extend once. If
the corporation makes the appropriate payments, the
administrative dissolution or surrender process ceases.
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 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 of one of those three kinds of corporations to
dissolve the corporation. A majority of the 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,
AB 1529 - 5/1/14 -- Page 4
That 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,
That a final return will be filed with FTB,
That the corporation was created in error,
That 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,
That the majority of the board of directors or
incorporators, as applicable, authorized the
dissolution and elected to dissolve the corporation,
That the corporations has granted no memberships,
and if it has received payment for memberships, it has
refunded those payments,
That the corporation is dissolved.
Any certification filed according to the terms above must
be filed with the Secretary of State, who must notify FTB.
The corporation is dissolved upon filing the certification.
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 ability of the
Attorney General to enforce liabilities as otherwise
provided by law.
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.
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.
FTB and the Secretary must share the names of corporations
AB 1529 - 5/1/14 -- Page 5
with each other to implement the bill, and notify each
other when either dissolves or surrenders a corporation.
The bill also allows FTB to issue regulations, exempt from
the Administrative Procedures Act, to implement its
provisions. The measure allows the Secretary of State to
obtain address information from FTB, and makes legislative
findings and declarations supporting its purposes.
State Revenue Impact
FTB estimates that the measure has no revenue effect.
Comment
Purpose of the bill . According to the author, "There are
more than 144,000 non-profit corporations in California
that provide various forms of public service or charitable
good. These organizations, depending on their formation
status, are required to register with the office of the
SOS, FTB, and the Office of the Attorney General. Each of
these three state agencies has a specific role in the
oversight of non-profit corporations and protection of the
public's trust. The SOS administers the process for a
non-profit corporation that chooses to incorporate and
maintains the required corporate information on each
non-profit. The FTB has the task of continually
determining, reviewing, and monitoring the tax-exempt
status of a non-profit corporation. FTB also has the
authority to suspend a non-profit for failing to file taxes
or required documentation. The California Attorney General
regulates non-profit organizations and the individuals that
administer or solicit charitable funds or assets on their
behalf. It has broad legal and statutory authority to
commence enforcement actions. Each year, many non-profit
corporations seek administrative changes to expand their
mission, alter their tax status, or possibly dissolve.
This dissolution process is very cumbersome and protracted.
AB 1529 creates a streamlined administrative dissolution
process for non-profits 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
dissolve non-profits that have been sitting inactive on the
'books' for quite some time. For many of these non-profits
their Board of Directors disbanded years earlier but never
AB 1529 - 5/1/14 -- Page 6
took the proper steps to dissolve the entity, thus causing
years of fees and fines to build up and inordinate amounts
of time spent by FTB and SOS staff to proceed through the
dissolution process. By streamlining the process to
dissolve defunct non-profits, AB 1529 will help FTB and SOS
administratively clear away the backlog of inactive
non-profit corporations at both entities."
Assembly Actions
Assembly Floor 76-0
Assembly Appropriations 16-0
Assembly Banking and Finance 11-0
Support and Opposition (06/17/14)
Support : California State PTA; California Taxpayers'
Association; California Society of Enrolled Agents,
Opposition : None received.