Recent changes in the law have expanded the ways in which some inactive nonprofit corporations can voluntarily dissolve or be administratively dissolved. These dissolutions offer the possibility of an abatement of prior year state franchise tax, interest, and penalties. These provisions of AB 557, which have been codified in the California Corporations Code and the California Revenue and Taxation Code, are intended to streamline the process of dissolving a nonprofit.
This recent law addresses the problem of several hundreds, maybe thousands, of inactive and suspended California and foreign nonprofit corporations sitting on the state’s books. Many of these nonprofits were abandoned years ago, have lost their tax exempt status through failure to file required annual reports, and have been accruing California’s minimum franchise tax of at least $800 every year, in addition to penalties and interest. Many want to dissolve but do not have the funds to pay prior year taxes. AB 557 provides three new dissolution options to inactive nonprofit corporations.
This three-part article will cover the three approaches to nonprofit dissolution under AB 557:
- voluntary dissolution and abatement of back taxes;
- administrative dissolution; and
- short form dissolution.
We turn to the first of these now.
Voluntary Dissolution and Abatement of Back Taxes
Section 23156 of the Revenue and Taxation Code (R&TC) authorizes the Franchise Tax Board (FTB) to abate the unpaid annual $800 minimum franchise tax, interest, and penalties for each year that a nonprofit certifies, under penalty of perjury, that it was not doing business in California. In this context, “doing business” is defined by R&TC Section 23101 as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”
To qualify, the nonprofit corporation must satisfy one of the following conditions:
- It operated and previously obtained tax exempt status with the FTB but the FTB revoked its tax-exempt status due to the organization’s failure to file annual FTB information returns;
- It operated and previously obtained tax-exempt status with the IRS, but the IRS revoked its tax-exempt status due to its failure to file annual IRS information returns; OR
- It was never doing business in California within the meaning of R&TC Section 23101 at any time after the time of its incorporation in California.
To request abatement of back taxes, the nonprofit must file Form 3502, Nonprofit Corporation Request for Pre-Dissolution Tax Abatement. The FTB will notify the qualified nonprofit when the request for abatement has been approved and notify the California Attorney General’s Office of Charitable Trusts. The nonprofit must submit a copy of the FTB notice with the appropriate Secretary of State dissolution forms within twelve months of the date of filing the request for abatement. No Attorney General waiver is required. Failure to dissolve in the designated timeframe will cancel the abatement.
This article is the first of a 3-part series. Check out tomorrow’s blog for Part 2: administrative dissolution.
About the Author: Cameron Holland, a member of the ACBA Business Section’s Executive Committee, has a specialty in the representation of nonprofit organizations. Visit her website for information about her practice and more updates and tips on legal issues affecting nonprofits.