California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 4 - Exempt Corporations › Article 2 - Taxation of Business Income of Most Exempt Organizations › Section 23737 - Denial of Exemption Under Section 23701d in the Case of Certain Organizations Accumulating Income

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
[FN*]
The restrictions enumerated in Section
						23737 are in addition to and not
						in limitation of the restrictions contained in Section
						23701 d. Even though an
						organization has not violated any of the terms of Section
						23737, it still may not qualify
						for tax exemption in view of the general provisions of Section
						23701 d. Thus, if an officer,
						director, trustee or fiduciary of the organization (whether or not he is also a
						creator of such organization) enters into a transaction with the organization,
						such transaction will be closely scrutinized in light of the fiduciary
						principle requiring undivided loyalty to ascertain whether the organization is
						in fact being operated for the stated exempt purposes.
For any income year beginning after December 31, 1950,
						any organization described in Section
						23701 d other than an organization
						described in Section
						23736 shall not be exempt under
						Section 23701 d if the amounts accumulated
						out of income during the income year or any prior income year, (including
						income years beginning prior to January 1, 1951), and not actually paid out for
						exempt purposes by the end of the income year are unreasonable. Amounts
						accumulated out of income become unreasonable when more income is accumulated
						than is needed, or when the duration of the accumulation is longer than is
						needed, in order to carry out the purpose constituting the basis for the
						organization's exemption. Furthermore, an organization shall not be exempt
						under Section
						23701 d if amounts accumulated out
						of income are used to a substantial degree for purposes or functions other than
						those constituting the basis for the organization's exemptions, or if such
						amounts are invested in such a manner as to jeopardize the carrying out of the
						purpose or function constituting the basis for the organization's
						exemption.
For the purpose of Section
						23737, the term "income" means
						gains, profits, and income determined under the principles applicable in
						determining the earnings or profits of a corporation. The amount accumulated
						out of income during the income year or any prior income year shall be
						determined under the principles applicable in determining the accumulated
						earnings or profits of a corporation. In determining the reasonableness of an
						accumulation out of income, there will be disregarded the following:
(1) the accumulation of gain upon the sale or
					 exchange of a donated asset to the extent that such gain represents the excess
					 of the fair market value of such asset when acquired by the organization over
					 its substituted basis in the hands of the organization;
(2) the accumulation of gain upon the sale or
					 exchange of property held for the production of investment income, such as
					 dividends, interest, and rents, where the proceeds of such sale or exchange are
					 within a reasonable time reinvested in property acquired and held in good faith
					 for the production of investment income.
Where the conditions specified in paragraphs (a), (b),
						and (c) of Section
						23737 are present in any case must
						be determined from all the facts. The conditions specified in Section
						23737 may result from the use of
						only one organization or of a chain of two or more organizations.
An organization that has lost its exempt status by reason
						of the provisions of Section
						23737 may, in order to
						re-establish its exemption, file a claim for exemption with the Franchise Tax
						Board. Form 190, the exemption application, a copy of which may be obtained
						from any branch office, shall be used for this purpose. The claim for exemption
						must contain or be accompanied by information or evidence showing that the
						circumstances that caused the loss of exemption under Section
						23737 no longer exist, and an
						affidavit, by a principal officer of such organization authorized to make such
						affidavit, that the organization will not knowingly again violate the terms of
						Section 23737. See Section
						23701 for proof of exemption
						requirements in general. The provisions of Section
						23737 contemplate that an
						organization denied exemption thereunder will be subject to taxation for at
						least one full income year. For the purpose of this regulation, the term
						"income year" means the established annual accounting period of the
						organization next succeeding the year in which the transaction occurred; or, if
						the organization has no such established annual accounting period, the "income
						year" of the organization means the calendar year next succeeding the year in
						which the transaction occurred.
In the case of an organization denied exemption under
						Section 23701 d solely by reason of the
						provisions of Section
						23737, deductions otherwise
						allowable under Sections
						24357 to
						24359, inclusive, for gifts or
						contributions to such organizations shall not be disallowed.
[FN*]
This regulation is substantially the same as Section
						29.3814-1, Fed. Reg.
						111.