BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 1529 (J. Perez) - Nonprofit Corporations: Abatement:
Dissolution: Surrender
Amended: August 4, 2014 Policy Vote: G&F 6-0
Urgency: No Mandate: Yes
Hearing Date: August 4, 2014
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1529 would enact an administrative dissolution
and surrender process for defunct nonprofit corporations.
Fiscal Impact:
The Secretary of State's Office (SOS) indicates that
this bill would result in one-time costs of $755,000, and
$27,000 annually thereafter (General Fund).
The Franchise Tax Board (FTB) indicates that the bill
would not impact state income tax revenues. Any costs to
FTB would be minor and absorbable.
The Department of Justice (DOJ) indicates that the bill
would not significantly impact its operations.
Background: 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. 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.
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
AB 1529 (J. Perez)
Page 1
franchise tax of $800 or the measured franchise tax of 8.84
percent 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. Current law exempts corporations in their first year
of business from the minimum tax, but taxes are due for every
year thereafter, 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, DOJ 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 DOJ. 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 DOJ. 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
penalties and interest.
Proposed Law: This bill would do the following:
Create a mechanism for dissolving or surrendering
nonprofit corporations that have had their corporate powers
suspended or forfeited by the Franchise Tax Board (FTB) or
have failed to file a statement of information (SOI) with
the Secretary of State (SOS), in each case for a period of
not less than 48 continuous months.
Establish procedures for notice of pending dissolution
or surrender to nonprofit corporations and allows those
AB 1529 (J. Perez)
Page 2
nonprofit corporations an opportunity to provide written
objections to dissolution or surrender.
Allow a nonprofit corporation that has objected to
dissolution or surrender a period of 90 days to satisfy any
and all outstanding debts and file a current SOI with the
SOS, failing which the FTB or SOS may proceed with the
dissolution or surrender of the entity. The FTB and SOS
are given flexibility to extend this 90 day period for an
additional 90 days.
Create a mechanism for voluntary dissolution of a
nonprofit corporation upon certification of certain matters
by the entity.
Specify that any liability to creditors of the nonprofit
corporation is not discharged as a result of dissolution or
surrender, and clarifies that dissolution or surrender does
not diminish or adversely affect the ability of the
Attorney General to enforce liabilities.
Require the FTB to abate, upon written request by
nonprofit corporations that had their tax-exempt status
revoked or never conducted business in California at any
time following its incorporation, unpaid California taxes,
interest, and penalties for the taxable years the nonprofit
corporation certifies under penalty of perjury that it was
not doing business, provided that the nonprofit corporation
must dissolve within 12 months of requesting the abatement.
Related Legislation:
AB 2341 (Villines, Chapter 773, Statutes of 2006). This
bill allows certain suspended corporations to seek
dissolution without requiring payment of the accrued tax
liability for years in which the corporation was inactive
and not doing business.
AB 2519 (Keeley, Chapter 112, Statutes of 2002). This
bill requires that a nonprofit public benefit corporation's
Certificate of Dissolution, when filed with the SOS, be
accompanied by either the AG's written waiver of objections
to the dissolution or the AG's written confirmation that
the corporation has no assets. It also prohibits the SOS
AB 1529 (J. Perez)
Page 3
from accepting for filing a Certificate of Dissolution that
is not accompanied by one of those two documents.
Staff Comments: SOS databases housing business entity
information are the State's systems of record for non-profit
entity formation, suspension, and dissolution, and are used by
financial institutions, licensing agencies, members of the
public and law enforcement authorities. These legacy record
systems require specialized programming for even modest changes
in process.
This bill would require SOS database systems to register and
display three new types of dissolution. In order for existing
SOS mainframe computers and public access systems to record and
display accurate information about administrative dissolutions,
system modifications to the SOS website and IT systems would be
required along with testing of those modifications prior to
implementation, resulting in increased costs to SOS. SOS notes
that the implementation date of this bill would likely not give
it sufficient time to complete modifications to existing IT
systems to implement this bill. Additionally, SOS is currently
transitioning to a new IT system, which would have to be
modified to accommodate the provisions of AB 1529 should it
become law. Consequently, there could be additional unknown
costs for integration of the new dissolutions into the new IT
framework.
Any local government costs resulting from the mandate in this
measure are not state-reimbursable because the mandate only
involves the definition of a crime or the penalty for conviction
of a crime.