AB 2084: Corporation Tax Law: tax-exempt organizations: revocation of tax-exempt status.

23701.

(a) Organizations which are organized and operated for nonprofit purposes within the provisions of a specific section of this article, or are defined in Section 23701h (relating to certain title-holding companies) or Section 23701x (relating to certain title-holding companies), are exempt from taxes imposed under this part, except as provided in this article or in Article 2 (commencing with Section 23731) of this chapter if both of the following occur:

(1) An application for exemption is submitted in the form prescribed by the Franchise Tax Board.

(2) The Franchise Tax Board issues a determination exempting the organization from tax.

(b) (1) Notwithstanding subdivision (a), an organization organized and operated for nonprofit purposes in accordance with Section 23701a, 23701d, 23701e, 23701f, 23701g, or 23701w shall be exempt from taxes imposed by this part, except as provided in this article or in Article 2 (commencing with Section 23731), upon its submission to the Franchise Tax Board of one of the following:

(A) A copy of the determination letter or ruling issued by the Internal Revenue Service recognizing the organization’s exemption from federal income tax under Section 501(a) of the Internal Revenue Code, as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19) of the Internal Revenue Code.

(B) A copy of the group exemption letter issued by the Internal Revenue Service that states that both the central organization and all of its subordinates are tax-exempt under Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19) of the Internal Revenue Code and substantiation that the organization is included in the federal group exemption letter as a subordinate organization.

(2) (A) Upon receipt of the documents required in subparagraph (A) or (B) of paragraph (1), the Franchise Tax Board shall issue an acknowledgment that the organization is exempt from taxes imposed by this part, except as provided in this article or in Article 2 (commencing with Section 23731). The acknowledgment may refer to the organization’s recognition by the Internal Revenue Service of exemption from federal income tax as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19) of the Internal Revenue Code and, if applicable, the organization’s subordinate organization status under a federal group exemption letter. The effective date of an organization’s exemption from state income tax pursuant to this subdivision shall be no later than the effective date of the organization’s recognition of exemption from federal income tax as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19) of the Internal Revenue Code, or its status as a subordinate organization under a federal group exemption letter, as applicable.

(B) Notwithstanding any other provision of this subdivision, an organization formed as a California corporation or qualified to do business in California that, as of the date of receipt by the Franchise Tax Board of the documents required under paragraph (1), is listed by the Secretary of State or Franchise Tax Board as “suspended” or “forfeited” may not establish its exemption under paragraph (1) and shall not receive an acknowledgment referred to under subparagraph (A) from the Franchise Tax Board until that corporation is listed by the Secretary of State and the Franchise Tax Board as an “active” corporation.

(3) (A) If, for federal income tax purposes, an organization’s exemption from tax as an organization described in Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19) of the Internal Revenue Code is suspended or revoked, the organization shall notify the Franchise Tax Board of the suspension or revocation, in the form and manner prescribed by the Franchise Tax Board. Except as provided in subparagraph (B), upon notification the Franchise Tax Board shall suspend or revoke, whichever is applicable, for state income tax purposes, the organization’s exemption under paragraph (1).

(B) Upon notification that an organization exempt from tax pursuant to Section 501(c)(3) of the Internal Revenue Code had that status suspended or revoked, the Franchise Tax Board may, in its discretion, maintain the exemption provided under paragraph (1) for state income tax purposes, provided that the suspension or revocation is not related to any of the following:

(i) Fraud or intentional misrepresentation.

(ii) Misuse or diversion of organizational funds.

(iii) Failure to file required returns or reports.

(iv) Other breaches of organizational reporting or governance requirements.

(C) The Franchise Tax Board may prescribe any regulations or procedures necessary to implement the evaluation process described in subparagraph (B), including, but not limited to, the process for the 501(c)(3) organization to comply.

(4) This subdivision shall not be construed to prevent the Franchise Tax Board from revoking the exemption of an organization that is not organized or operated in accordance with California law, this chapter, or Section 501(c)(3), (c)(4), (c)(5), (c)(6), (c)(7), or (c)(19) of the Internal Revenue Code.

(5) If the Franchise Tax Board suspends or revokes the exemption of an organization pursuant to paragraph (3) or (4), the exemption shall be reinstated only upon compliance with this section, regardless of whether the organization can establish exemption under paragraph (1).

(c) This section shall not prevent a determination from having retroactive effect and does not prevent the issuance of a determination with respect to a domestic organization which was in existence prior to January 1, 1970, and exempt under prior law without the submission of a formal application or payment of a filing fee. For the purpose of this section, the term “domestic” means created or organized under the laws of this state.

(d) The Franchise Tax Board may prescribe rules and regulations to implement the provisions of this article.

(e) The amendments made to this section by Section 2 of Chapter 59 of the Statutes of 2020 shall become operative on January 1, 2021.