Josh Wagner, Principal
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    Franchise Tax Board Shocker

    (Posted by Josh on ABANet)

    Perhaps this has been going on for some time, but I just found out about it and it blew me away.

    The Calif. Franchise Tax Board is RETROACTIVELY, and without notice, revoking state tax exemption for organizations that report no income on their annual report to the Calif. Atty. Gen. (Form RRF-1) for several years running.

    An exempt organization that had been active and reporting as required since 1996 showed zero income on the above Form RRF-1 from 2006 to 2009 (Franchise has no filing requirement under $25K).

    In June of this year, without warning, Franchise revoked their exemption beginning January 1, 2006. In California that means a retroactive minimum corporate tax of $800 per year plus penalties and interest (unless we can convince them to reverse their decision).

    Call me ignorant, but I find this EGREGIOUS! At the least the IRS has Intermediate Sanctions and has been warning nonprofits for years about the new reporting requirements (Form 990-N, etc.) before yanking their exemption.

    Any comments?

    Does anyone have similar experience?

    Gene Takagi <gene@ATTORNEYFORNONPROFITS.COM> Responds:

    Josh,

    Admin. Code Sec. 23701(d)(2)(A) provides in part that "an inactive organization is not operated for exempt purposes and therefore is not entitled to exemption from tax." Sec. 23701(d)(2)(B) provides that
    "[o]rganizations that commence exempt operations and later become inactive are subject to loss of exempt status unless they include an attachment on their annual report to explain that their inactivity is temporary and to outline their plans for becoming active in the future."

    What I believe the FTB is failing to take into account is that an organization may be actively furthering its exempt purpose(s) without having financial activity. Form RRF-1 only asks for financial activity and not exempt purpose activity. So, I agree that the FTB may be revoking exempt status without any evidence that the organization is not operating exclusively for an exempt purpose. On a case-by-case basis, an organization may be able to persuade the FTB to reverse its decision if it can provide details and some evidence of exempt purpose activities. But going back to the regulation, it may be helpful if a financially inactive organization includes an attachment with its Form RRF-1 stating that it is continuing to engage in exempt purpose activities.

    I'm looking forward to hearing from others about this issue.

    Best regards,
    Gene