In California, public benefit nonprofit corporations are required to register with the Attorney General’s Registry of Charitable Trusts and the Secretary of State. They should also apply for tax exempt status with both the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB). This corporate and exempt status can be suspended, revoked, and/or forfeited for failure to comply with the rules and regulations for each governing body.

 

If your corporate status is suspended, you will be unable to conduct business in the state of California. A revocation of tax exempt status means that your nonprofit will be required to pay income taxes on revenue, including donations, and donors will no longer be able to deduct contributions to the organization. Fortunately, it is often possible to have your corporate and/or tax exempt status restored with the help of an experienced California nonprofit lawyer.

 

Daryl Reese Law offers comprehensive legal services to nonprofits throughout California. As a former nonprofit executive, our founding partner Daryl Reese brings a unique perspective to advising nonprofits. To learn more about how we can shepard your nonprofit in matters involving governance, management, fundraising, finance and accounting, operations, programs, and employment, reach out to schedule a consultation.

What Is Nonprofit Suspension?

Suspension of a nonprofit typically refers to the organization’s corporate status. While the IRS may suspend an organization’s tax exempt status, this action is limited to nonprofits that have been designated as terrorist organizations. The majority of nonprofit organizations will not have their tax exempt status suspended by the IRS under this section of the tax code.

 

There are three ways that a nonprofit corporation can have its powers, rights, and privileges in California suspended. First, the Secretary of State may suspend a nonprofit’s corporate status for failure to file the required Statement of Information. Second, the Franchise Tax Board can suspend a nonprofit’s corporate status for failure to file a tax return and/or to pay taxes, fees, or penalities. Third, the Registry of Charitable Trusts may suspend or revoke an entity’s registration for failure to file required annual reports.

 

The California Secretary of State (SOS) requires every domestic nonprofit to file a Statement of Information (SI-100) within 90 days of filing its Articles of Incorporation. A Statement of Information must then be filed biennially after formation of the nonprofit. This Statement must be filed even if the nonprofit is not engaged in activities in the state at the time that it is due.

 

If your nonprofit fails to file a Statement, then the SOS will send a Notice of Pending Suspension/Forfeiture. To avoid suspension at this point, a nonprofit corporation must file a SI-100 within 60 days of the date on the Notice.

 

The California Franchise Tax Board (FTB) has the power to suspend a nonprofit’s corporate status if it fails to file a tax return or fails to pay applicable taxes, interest, penalties and fees. This may occur even if a California nonprofit corporation failed to apply for tax exempt status at the state level. If the nonprofit then fails to pay the California minimum franchise tax of $800 per year, their corporate status will be suspended.

 

Like the SOS, the FTB will send a notice of potential suspension before actually suspending a nonprofit organization’s corporate status. The nonprofit will then have 60 days to comply with the FTB’s notice. If they fail to do so, then the FTB will suspend its corporate status.

 

Finally, the Registry of Charitable Trusts may list a nonprofit as delinquent if they fail to file the required annual reports. Nonprofit organizations that are delinquent with the Attorney General’s Registry of Charitable Trusts cannot operate or solicit donations in California. If an organization fails to respond to notices regarding its delinquency, the Registry may suspend the entity, revoke its registration, and direct the FTB to revoke the entity’s state-level tax-exempt status.  

 

The Effect of a Suspension on a Nonprofit

A nonprofit corporation whose status is suspended loses its powers, rights and privileges as a California corporation. This means that the nonprofit cannot legally transact business, bring an action or defend itself in court, enforce contracts, file a claim for a refund or amended return with the FTB, be granted an extension of time to file, file or maintain an appeal before the Board of Equalization, begin or continue to protest an assessment, sell, transfer, or exchange real property or keep their exclusive rights to the entity’s name. While the nonprofit can receive money, it cannot borrow money while its status is suspended. Finally, any contracts made by a nonprofit whose corporate status is suspended may be voidable.

 

A nonprofit with a suspended status can apply for revivor, which is the process by which the organization can restore its status. It can also take other actions that may lead to a restoration of status, including paying any tax balance due, filing delinquent tax returns, amending its Articles of Incorporation to change its name or perfect its exempt status.

Restoring Corporate Status After Suspension

The steps necessary to restore corporate status depend on which entity suspended the nonprofit and the reason for the suspension. For SOS suspensions based on failure to file a Statement of Information, simply filing a current SI-100 will revive the nonprofit’s corporate status. If a nonprofit has been suspended by both the SOS and the FTB, they should file a SI-100 before attempting to restore their status with the FTB.

 

Restoring corporate status with the FTB is more complicated. Nonprofits should contact the FTB to identify the reasons for being suspended. The FTB will respond with information on how the nonprofit can come into compliance. This often requires paying delinquent taxes, fees and penalties and filing tax returns. Once you come into compliance, the FTB will send an Entity Status Letter to show that your nonprofit is once again in good standing.

 

If the reason for the suspension is a failure to pay the minimum franchise tax because the nonprofit does not have California tax exempt status, then the nonprofit may be able to apply for tax exemption while simultaneously filing the application for revivor. This process can be tricky, so it is important to consult with a California nonprofit attorney before filing.

 

An organization that has had its registration suspended or revoked with the Registry of Charitable Trusts can file a petition for reinstatement with the agency. This filing must include all deficient filings, renewal fees, proof of good standing with the SOS, FTB, and IRS, and an explanation of how the organization became delinquent and why it will not occur again.

 

What Is Nonprofit Revocation?

In addition to having their corporate status suspended, nonprofits may also have their tax exempt status revoked. This may be done by the IRS or by the FTB.

 

Most tax exempt organizations (excluding churches) are required to file an annual information return or notice with the IRS. If they fail to file Form 990, 990-EZ, 990-PF or Form 990-N for 3 consecutive years, then their tax exempt status will automatically be revoked. 

 

The IRS may also revoke a nonprofit’s tax exempt status for engaging in certain activities. Specifically, if a nonprofit violates regulations on private benefit, lobbying, electioneering, unrelated business income, or operation in accord with stated exempt purpose, it could be subject to sanctions or have its tax exempt status revoked.

 

If a California nonprofit has its tax exempt status revoked by the IRS, then it must notify the FTB. Because tax exempt status in California is often based on federal status, the FTB will revoke the nonprofit’s status unless they can otherwise prove that they meet state tax exemption guidelines. An entity may also have their tax exempt status revoked for failure to file a return, failure to pay a balance due, or for being suspended.

The Effect of a Revocation on a Nonprofit

 

If a nonprofit loses its tax exempt status with the IRS, then it is no longer exempt from federal income tax. The organization can no longer receive tax-deductible contributions.

 

Nonprofit organizations whose tax exempt status has been revoked should ensure that both the Board of Directors and staff are informed of the change in status. They should also communicate with donors about the loss of status and what it means for their own contributions. All references to donations being tax-deductible on the website and other communications should be removed.

 

Because revocation of tax exempt status impacts a nonprofit’s state and federal income taxes, it is critical to consult with a financial professional as soon as possible. Because loss of status can also impact other aspects of your operations, you should also reach out to a skilled nonprofit attorney to discuss the possibility of reinstatement.

Restoring Tax Exempt Status After Revocation

 

If a nonprofit’s tax exempt status is automatically revoked by the IRS, then it must apply to have its status reinstated. There are four potential ways to have a nonprofit organization’s tax exempt status reinstated by the IRS.

 

First, a nonprofit can submit Form 1023, Form 1023-EZ, Form 1024, or Form 1024-A for a streamlined retroactive reinstatement. This option is only available for organizations that are eligible to file Form 990-EZ or 990-N and that have not previously had their tax-exempt status automatically revoked. An application must be submitted within 15 months of the automatic revocation.

 

Second, organizations that cannot use the streamlined retroactive reinstatement process can file the same forms with the IRS within 15 months of the revocation. Nonprofits using the retroactive reinstatement process must also complete any returns that were not previously filed. They must also submit a reasonable cause affirmation for at least one of these tax returns.

 

Third, if an organization failed to file for retroactive reinstatement within 15 months, they can follow the same procedure as if they had. However, the statement regarding reasonable cause must be made for each year that the organization failed to file its tax returns.

 

Fourth, a nonprofit can seek postmark date reinstatement. Their tax exempt status will be reinstated effective to the date of their application’s postmark. This process also requires filing a Form 1023, Form 1023-EZ, Form 1024, or Form 1024-A .

 

Having your tax exempt status restored if it was revoked for engaging in conduct that violates the tax code is more complicated. If your nonprofit had its tax exempt status revoked for lobbying, electioneering, or another reason, you should reach out to a seasoned California nonprofit attorney for guidance on your next steps.

 

California nonprofit organizations whose status was revoked by the FTB because they lost their federal status must file form FTB 3500 to have their tax exempt status reinstated. If the nonprofit had their tax exempt status revoked for any other reason, there is a streamlined process provided that they gained their tax exempt status using form FTB 3500 after 1968. Otherwise, organizations whose tax exempt status was achieved using form FTB 3500A must file Form 3500 and meet the standards for a non-profit tax exemption in California.

What is Forfeiture of Status?

Forfeit is a term used to describe the forfeiture of a foreign nonprofit’s corporate status in California. It is akin to suspension for domestic nonprofit corporations, and may be imposed by the SOS and/or FTB.  

 

For the SOS, forfeiture may occur if a foreign nonprofit fails to file its initial Statement of Information or an annual Statement of Information, its corporate status may be forfeited.  Similarly, the FTB will revoke a foreign nonprofit’s tax-exempt status and report it to the SOS as forfeited if the organization fails to file tax returns, pay tax balances, resolve its delinquent status with the Registry of Charitable Trusts, or respond to notice from the FTB. Reinstatement requires taking the same steps that an organization would use to restore their corporate or tax exempt status after a suspension or revocation.

How Our Law Firm Can Help

The consequences for failing to keep up with required state and federal filings can be devastating for a nonprofit organization. While corporate and tax exempt status can often be restored, it can be a costly and time-consuming endeavor. The best way to avoid these issues is to work with an experienced California nonprofit attorney.

 

At Daryl Reese Law, we have the real world experience and legal acumen necessary to guide nonprofits through the thorny issues that often surround corporate and tax exempt status. For each client, we craft a multi-pronged strategy to ensure compliance with state and federal law while maximizing the organization’s potential. To learn more or to schedule a consultation, give us a call at (707) 858-5000 or fill out our online contact form.

 

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Certain activities: https://www.irs.gov/pub/irs-tege/How%20to%20Lose%20Your%20Tax%20Exempt%20Status.pdf