Code Section Group

Revenue and Taxation Code - RTC

DIVISION 2. OTHER TAXES [6001 - 60709]

  ( Heading of Division 2 amended by Stats. 1968, Ch. 279. )

PART 11. CORPORATION TAX LAW [23001 - 25141]

  ( Heading of Part 11 amended by Stats. 2001, Ch. 543, Sec. 21. )

CHAPTER 4. Exempt Corporations [23701 - 23778]

  ( Chapter 4 added by Stats. 1949, Ch. 557. )

ARTICLE 2. Taxation of Business Income of Certain Article 1 Organizations [23731 - 23741]
  ( Article 2 added by Stats. 1951, Ch. 344. )

23731.
  

Every organization or trust exempt under this chapter, except as provided in this article, is subject to the tax imposed upon its unrelated business taxable income, as defined in Section 23732, as follows:

(a) Corporations (other than banks and financial corporations), associations, and business trusts are subject to the tax imposed under Section 23501.

(b) Trusts are subject to the tax imposed by subdivision (e) of Section 17041.

This section applies to taxable years beginning after December 31, 1970.

(Amended by Stats. 2000, Ch. 862, Sec. 96. Effective January 1, 2001.)

23732.
  

Section 512 of the Internal Revenue Code, relating to unrelated business taxable income, applies, except as otherwise provided.

(a) Section 512(a)(2) of the Internal Revenue Code, relating to special rule for foreign organizations, does not apply.

(b) Section 512(a)(3) of the Internal Revenue Code, relating to special rules applicable to organizations described in paragraph (7), (9), (17), or (20) of Section 501(c), shall be modified as follows:

(1) The reference to Section 501(c)(7) of the Internal Revenue Code shall be modified to refer to Section 23701g.

(2) The reference to Section 501(c)(9) of the Internal Revenue Code shall be modified to refer to Section 23701i.

(3) The reference to Section 501(c)(17) of the Internal Revenue Code shall be modified to refer to Section 23701n.

(4) The reference to Section 501(c)(20) of the Internal Revenue Code shall be modified to refer to Section 23701q.

(c) Section 512(d) of the Internal Revenue Code, relating to treatment of dues of agricultural or horticultural organizations, shall be modified by substituting “Section 23701a” for “Section 501(c)(5)” of the Internal Revenue Code.

(Amended by Stats. 2015, Ch. 303, Sec. 490. (AB 731) Effective January 1, 2016.)

23734.
  

(a) Section 513 of the Internal Revenue Code, relating to unrelated trade or business, shall apply, except as otherwise provided.

(b) Section 513(g) of the Internal Revenue Code, relating to certain pole rentals, shall not apply.

(Amended by Stats. 1993, Ch. 877, Sec. 39. Effective October 6, 1993.)

23735.
  

(a) Section 514 of the Internal Revenue Code, relating to unrelated debt-financed income, shall apply, except as otherwise provided.

(b) Section 10214 of Public Law 100-203, relating to the treatment of certain partnership allocations, shall apply to taxable years beginning on or after January 1, 1990, for property acquired by the partnership after October 13, 1987, and partnership interests acquired after October 13, 1987.

(c) An interest in a participation agreement, as defined in subdivision (i) of Section 69980 of the Education Code, shall not be treated as debt.

(Amended by Stats. 2000, Ch. 862, Sec. 97. Effective January 1, 2001.)

23736.
  

Sections 23736.1 to 23736.4, inclusive, shall apply to any organization described in Section 23701d or Section 23701n except—

(a) A religious organization (other than a trust);

(b) An educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on;

(c) An organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under Section 23701d) from the United States or any state or political subdivision thereof or from direct or indirect contributions from the general public;

(d) An organization which is operated, supervised, controlled, or principally supported by a religious organization (other than a trust) which is itself not subject to the provisions of this article; and

(e) An organization the principal purposes or functions of which are the providing of medical or hospital care or medical education or medical research.

(Amended by Stats. 1961, Ch. 857.)

23736.1.
  

(a) For the purposes of this article, the term “prohibited transaction” means any transaction in which an organization subject to this article—

(1) Lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to;

(2) Pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;

(3) Makes any part of its services available on a preferential basis to;

(4) Makes any substantial purchase of securities or any other property, for more than adequate consideration in money or money’s worth, from;

(5) Sells any substantial part of its securities or other property, for less than an adequate consideration in money or money’s worth, to; or

(6) Engages in any other transaction that results in a substantial diversion of its income or corpus to; the creator of the organization (if a trust); a person who has made a substantial contribution to the organization; a member of the family (as defined in Section 267(c)(4) of the Internal Revenue Code) of an individual who is the creator of that trust or who has made a substantial contribution to that organization; or a corporation controlled by that creator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.

(b) For purposes of subdivision (a), a bond, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this section referred to as “obligation”) acquired by a trust described in Section 23701n shall not be treated as a loan made without the receipt of adequate security if—

(1) The obligation is acquired—

(A) On the market, either (i) at the price of the obligation prevailing on a national securities exchange that is registered with the Securities and Exchange Commission, or (ii) if the obligation is not traded on a national securities exchange, at a price not less favorable to the trust than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer;

(B) From an underwriter, at a price (i) not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and (ii) at which a substantial portion of the same issue is acquired by persons independent of the issuer; or

(C) Directly from the issuer, at a price not less favorable to the trust than the price paid currently for a substantial portion of the same issue by persons independent of the issuer;

(2) Immediately following acquisition of that obligation—

(A) Not more than 25 percent of the aggregate amount of obligations issued in that issue and outstanding at the time of acquisition is held by the trust, and

(B) At least 50 percent of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer; and

(3) Immediately following acquisition of the obligation, not more than 25 percent of the assets of the trust is invested in obligations of persons described in subdivision (a).

(4) (A) In the case of a trust described in Section 23701n, or in the case of a corporation described in Section 23701h, all of the stock of which was acquired before January 1, 1961, by a trust described in Section 23701n, any indebtedness incurred by that trust or that corporation before January 1, 1961, in connection with real property that is leased before January 1, 1961, and any indebtedness incurred by that trust or that corporation on or after that date necessary to carry out the terms of that lease, shall not be considered as an indebtedness with respect to that trust or that corporation for purposes of this section.

(B) In the application of paragraph (1) of subdivision (a), if a trust described in Section 23701n forming part of a supplemental unemployment compensation benefit plan lends any money to another trust described in Section 23701n forming part of the same plan, that loan shall not be treated as an indebtedness of the borrowing trust, except to the extent that the loaning trust—

(i) Incurs any indebtedness in order to make that loan,

(ii) Incurred indebtedness before the making of that loan which would not have been incurred but for the making of that loan, or

(iii) Incurred indebtedness after the making of that loan which would not have been incurred but for the making of that loan and that was reasonably foreseeable at the time of making that loan.

(c) Subdivision (a) shall not apply to a loan made by a trust described in Section 23701n to the employer (or to a renewal of that loan or, if the loan is repayable upon demand, to a continuation of that loan) if the loan bears a reasonable rate of interest, and if (in the case of a making or renewal)—

(1) The employer is prohibited (at the time of that making or renewal) by any law of the United States or regulation thereunder from directly or indirectly pledging, as security for the loan, a particular class or classes of his or her assets the value of which (at that time) represents more than one-half of the value of all his or her assets;

(2) The making or renewal, as the case may be, is approved in writing as an investment that is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other independent trustee had previously refused to give that written approval; and

(3) Immediately following the making or renewal, as the case may be, the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does not exceed 25 percent of the value of all the assets of the trust.

(4) For purposes of paragraph (2) the term “trustee” means, with respect to any trust for which there is more than one trustee who is independent of the employer, a majority of those independent trustees. For purposes of paragraph (3), the determination as to whether any amount loaned by the trust to the employer is loaned without the receipt of adequate security shall be made without regard to subdivision (b).

(Amended by Stats. 2004, Ch. 183, Sec. 333. Effective January 1, 2005.)

23736.2.
  

An organization described in Section 23701d which is subject to the provisions of this article, except those specified in Sections 23736, shall not be exempt from taxation under Article 1 of this chapter if it has engaged in a prohibited transaction after January 1, 1951; and an organization described in Section 23701n which is subject to the provisions of this article shall not be exempt from taxation under Article 1 of this chapter if it has engaged in a prohibited transaction after December 31, 1960.

(Amended by Stats. 1961, Ch. 857.)

23736.3.
  

An organization described in Section 23701n or Section 23701d, except as specified in Section 23736, shall be denied exemption under Section 23736.2 only for taxable years subsequent to the taxable years during which it is notified by the Franchise Tax Board that it has engaged in a prohibited transaction, unless such organization entered into such prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purposes, and such transaction involved a substantial part of the corpus or income of such organization.

(Amended by Stats. 2000, Ch. 862, Sec. 98. Effective January 1, 2001.)

23736.4.
  

Any organization denied exemption under Section 23701d or Section 23701n by reason of the provisions of Section 23736.2 with respect to any taxable year following the taxable year in which notice of denial of exemption was received, may, under regulations prescribed by the Franchise Tax Board, file claim for exemption, and if the Franchise Tax Board pursuant to such regulations, is satisfied that such organizations will not knowingly again engage in a prohibited transaction, such organization shall be exempt with respect to taxable years subsequent to the year in which such claim is filed.

(Amended by Stats. 2000, Ch. 862, Sec. 99. Effective January 1, 2001.)

23737.
  

In the case of any organization described in Section 23701d to which this article is applicable, exemption under Article 1 (commencing with Section 23701) shall be denied for the taxable year if the amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year—

(a) Are unreasonable in amount or duration in order to carry out the charitable, educational, or other purpose or function constituting the basis for such organization’s exemption under Section 23701d; or

(b) Are used to a substantial degree for purposes or functions other than those constituting the basis for such organization’s exemption under Section 23701d, or

(c) Are invested in such a manner as to jeopardize the carrying out of the charitable, educational, or other purpose or function constituting the basis for such organization’s exemption under Section 23701d.

(Amended by Stats. 2000, Ch. 862, Sec. 100. Effective January 1, 2001.)

23740.
  

Section 4911 of the Internal Revenue Code, relating to tax on excess expenditures to influence legislation, shall apply, except as otherwise provided.

(a) Section 4911(a)(1) of the Internal Revenue Code shall not apply.

(b) Section 4911(f)(4)(A) of the Internal Revenue Code shall include efforts to influence legislation with respect to acts, bills, resolutions, or similar items by the State Legislature.

(Repealed and added by Stats. 2000, Ch. 252, Sec. 34. Effective January 1, 2001.)

23741.
  

Notwithstanding any other provision in this part, in the case of a church exempt from taxes imposed under this part pursuant to Article 1 (commencing with Section 23701) of Chapter 4, any rental income received, directly or indirectly, from another church exempt from taxes imposed under this part pursuant to Article 1 (commencing with Section 23701) of Chapter 4 for rental of exempt function church property is exempt from any tax imposed by this part.

(Added by Stats. 1981, Ch. 341, Sec. 1. Effective September 9, 1981. Applicable to income years beginning on or after January 1, 1981, by Sec. 2 of Ch. 341.)

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