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 10. PERSONAL INCOME TAX [17001 - 18181]

  ( Part 10 added by Stats. 1943, Ch. 659. )

CHAPTER 7. Exempt Trusts and Common Trust Funds [17631 - 17677]

  ( Chapter 7 repealed and added by Stats. 1955, Ch. 939. )

ARTICLE 1. General Rule [17631 - 17640]
  ( Heading of Article 1 amended by Stats. 1963, Ch. 2025. )

17631.
  

An organization described in Section 401(a) of the Internal Revenue Code shall be exempt from taxation under this part unless such exemption is denied under Sections 17635 to 17639, inclusive.

(Amended by Stats. 1983, Ch. 488, Sec. 39. Effective July 28, 1983.)

17632.
  

An organization exempt from taxation under Section 17631 shall be subject to tax to the extent provided in Article 2 (commencing at Section 17651) of this chapter (relating to tax on unrelated income), but, notwithstanding Article 2, shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.

(Amended by Stats. 1961, Ch. 847.)

17635.
  

(a) An organization described in Section 401(a) of the Internal Revenue Code which is subject to the provisions of this section shall not be exempt from taxation under Section 17631 if it has engaged in a prohibited transaction after December 31, 1960.

(b) An organization described in Section 401(a) of the Internal Revenue Code shall be denied exemption from taxation under Section 17631 by reason of subdivision (a) only for taxable years after the taxable year during which it is notified by the Franchise Tax Board that it has engaged in a prohibited transaction, unless the organization entered into the prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purposes, and the transaction involved a substantial part of the corpus or income of the organization.

(Amended by Stats. 1985, Ch. 106, Sec. 131.)

17636.
  

Sections 17635 to 17639, inclusive, apply to any organization described in Section 401(a) of the Internal Revenue Code.

(Amended by Stats. 1983, Ch. 488, Sec. 41. Effective July 28, 1983.)

17637.
  

For purposes of Sections 17635 to 17639, inclusive, the term “prohibited transaction” means any transaction in which an organization subject to the provisions of Sections 17635 to 17639, inclusive—

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

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

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

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

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

(f) Engages in any other transaction which results in a substantial diversion of its income or corpus to;

the creator of such organization (if a trust); a person who has made a substantial contribution to such 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 such trust or who has made a substantial contribution to such organization; or a corporation controlled by such 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.

(Amended by Stats. 1983, Ch. 488, Sec. 42. Effective July 28, 1983.)

17638.
  

Any organization described in Section 401(a) of the Internal Revenue Code or a trust which is denied exemption under Section 17631 by reason of Section 17635, 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 organization will not knowingly again engage in a prohibited transaction, such organization shall be exempt with respect to taxable years after the year in which such claim is filed.

(Amended by Stats. 1983, Ch. 488, Sec. 43. Effective July 28, 1983.)

17639.
  

For purposes of subdivision (a) of Section 17637, 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 401(a) of the Internal Revenue Code shall not be treated as a loan made without the receipt of adequate security if—

(a) The obligation is acquired—

(1) On the market, either (i) at the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or (ii) if the obligation is not traded on such 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;

(2) 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

(3) 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;

(b) Immediately following acquisition of the obligation—

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

(2) At least 50 percent of the aggregate amount referred to in paragraph (1) is held by persons independent of the issuer; and

(c) 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 Section 17637.

(Amended by Stats. 1999, Ch. 987, Sec. 42. Effective October 10, 1999.)

17640.
  

Subdivision (a) of Section 17637 shall not apply to a loan made by a trust described in Section 401(a) of the Internal Revenue Code to the employer (or to a renewal of such a loan or, if the loan is repayable upon demand, to a continuation of such a loan) if the loan bears a reasonable rate of interest, and if (in the case of a making or renewal)—

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

(b) 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 similar trustee had previously refused to give that written approval; and

(c) 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.

(d) For purposes of subdivision (b), 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 subdivision (c), 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 Section 17639.

(Amended by Stats. 1999, Ch. 987, Sec. 43. Effective October 10, 1999.)

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