City of Culver City, California
City Council Agenda Item Report
RECOMMENDATION:
That the City Council approve a policy regarding the treatment of bonafide Non-
Profit Organizations, and direct the City Treasurer to draft for the City Council’s
adoption a policy on the manner in which such organizations are to be treated with
respect to business tax.
BACKGROUND:
According to the Culver City Municipal Code of the various possible non-profit
organizations, only charitable organizations and homeowners associations are
mentioned under the list of exempted businesses and organizations. Charitable
organizations are required to obtain a business tax certificate but not required to pay
any business tax. Homeowners associations are neither required to obtain a
business tax certificate nor pay any business tax.
Under Section 11.01.230 of the City of Culver City’s Municipal Code, Charitable
Organizations are defined as:
“Any organization conducting a business or activity for charitable
purposes; which presents proof of its designation as a tax-exempt organization for
charitable purposes, in a form which is satisfactory to the City Treasurer. For
purposes of this Section, the Committee may also make a determination that an
organization or business is conducting an activity which has a charitable purpose”.
The Committee referred to in the previous paragraph is the Committee on Licenses
and Permits.
Meeting Date: 09/12/05 Item Number: A-3
AGENDA ITEM: Discussion of City Policies and Practices – Definition of a
“Bonafide Non-Profit Organization”.
Contact Person/Dept.:
Nagam Rao/City Treasurer's Office
Phone Number: (310) 253-5889
Fiscal Impact: Yes [x] No [] General Fund: Yes [x] No []
Public Hearing: [] Action Item: [x] Attachments: []
Public Notification: Master Notification List on 9/7/05
Department Approval:
Crystal C. Alexander 9/1/05
CAO Approval:
Jerry Fulwood 9/7/05
City Controller Approval:
Marlee Chang 9/6/05City of Culver City, California
City Council Agenda Item Report
A Non-Profit Organization, (also referred to as a not-for-profit organization), is an
organization whose primary objective is to support an issue or matter of private
interest or public concern for non-commercial purposes.
In order for the organization to be a Non-Profit Organization, the organization’s
charter, trust instrument, or articles of association must specify that no part of it’s
assets shall benefit any persons who are members, directors, officers or agents for it
to qualify for tax exempt status. The organization must also have a legal charitable
purpose, created to support educational, religious or charitable activities. As long as
the organization operates within its exempt purposes and it maintains an endowment
or uses any excess revenue to further develop its activities, it will not be taxed by the
Internal Revenue Service. However any income from a trade or business that does
not conform with the organization’s exempt purpose, even though the profits are
used for an exempt purpose are subject to taxation.
An activity is an unrelated business (and therefore subject to tax) if it meets the
following three criteria:
(1) It is a trade or business,
(2) it is regularly carried on, and
(3) it is not substantially related to the furtherance of the exempt purpose of the
organization.
Both the Internal Revenue Service and the Franchise Tax Board require all cases of
unrelated business income to be reported and taxes paid at the applicable rates.
If the purpose of the organization is one of those described in Section 501(c)(3) of
the Internal Revenue Code, then donations to it are tax deductible to the persons or
businesses who make them.
Due to differing requirements by the states, and the federal government, it is
possible to be recognized as a non-profit organization by the state but not by the
federal government. Similarly, the fact that an organization is exempt from federal
income tax does not automatically exempt it from California tax.
To qualify for tax exemption in California, an organization must be organized and
operated for purposes described in one of the following California Revenue and Tax
Codes (R & TC) sections corresponding to the Internal Revenue Code (IRC)
sections shown below.
R & TC IRC Purpose
23701 h 501(c)(2) Title holding corporations.
23701 d 501(c)(3) Religious, charitable, scientific, literary, or educational
organizations. City of Culver City, California
City Council Agenda Item Report
23701 f 501(c)(4) Civic leagues or social welfare and local associations
of employees.
23701 a 501(c)(5) Labor, agricultural, or horticultural organizations.
23701 e 501(c)(6) Business leagues, chambers of commerce, etc.
23701 g 501(c)(7) Social and recreational organizations.
23701 b 501(c)(8) Fraternal beneficiary societies.
23701 i 501(c)(9) Voluntary employees’ beneficiary organizations.
23701 l 501(c)(10) Fraternal Societies.
23701 j 501(c)(11) Teachers’ Retirement Funds
23701 c 501(c)(13) Cemeteries, crematoriums.
23701 y 501(c)(14) Credit unions.
23701 n 501(c)(17) Supplemental unemployment compensation trusts.
23701 w 501(c)(6) War veterans’ organizations.
23701 x 501(c)(25) Title holding organizations.
23701 k 501(d) Religious and Apostolic organizations.
23701 r 527 Political organizations.
23701 t 528 Homeowners’ association.
23701 u none Public facility financial corporations
23701 v none Mobile home park association.
Charitable Trusts / Organizations: Effective January 1, 2005, charities in California
are required to register with the Attorney General’s Registry of Charitable Trusts
within 30 days of receiving assets. An initial registration fee of $25 has also been
introduced this year for charities operating within California. The annual registration
renewal fee is on a sliding scale.
Renewal Fee Charity Revenue
$0 less than $25,000
$25 between $25,000 - $100,000
$50 between $100,000 - $250,000
$75 between $250,000 - $1 million
$150 between $1 million - $10 million
$225 between $10 million - $50 million
$300 greater than $50 million
In order to meet the definition of a Charitable Organization, under Section 501(C)(3),
they are required to meet the (1) operational test, and (2) the publicly supported test.
For the operational test, the organization’s purpose as established by its articles, or
organization and carried out by its operations, must be exclusively charitable. For
the publicly supported test, the organization must either receive:
(i) any part of its fund as contributions ( unrestricted gifts) from the United States
Government, a State Government, or a political subdivision,City of Culver City, California
City Council Agenda Item Report
(ii) be primarily supported by voluntary contributions (unrestricted gifts) of the
general public. An organization is “primarily supported by contributions of the
general public” if more than 50% of its receipts or income received in the
accounting period is derived from voluntary contributions of the general
public, as distinguished from a few contributions or donors or from related or
associated persons or ticketed sales.
In addition to the annual renewal fee, charitable organizations whose revenues are
more than $25,000 a year are also required to file Form 199, along with a filing fee of
$10 or $25 depending upon whether they file on time or not.
On the basis of the manner in which they are treated by the IRS and the Franchise
Tax Board, we can categorize the gamut of Non-Profit Organizations as those
determined to operating as
(1) Section 501(c)3 organizations, whose do not have to file IRS Form 199
i.e. whose revenues are less than $25,000 during that year.
(2) Section 501(c)3 organizations, required to file Form 199.
(3) Non-Profit Organizations recognized by either the Internal Service or the
Franchise Tax Board,
(4) any of the above with unrelated business income, as declared to, or
determined by the taxing authorities.
Non-profit Organizations operating in our City are required to pay only the first time
application fee. They are, however, exempt from payment of the annual renewal fee
and the business tax.
DISCUSSION:
In the light of the above discussion the following are being suggested for your
consideration.
Section 501(c)3 organizations: With a view to supporting their purpose, the
Section 501(c)3 organizations who do not file Form 199, should be required to pay
only the first time application fee. However if they are required to file Form 199, they
should be required to file the business tax renewal fee for each year. However the
business tax could be waived as long as they provide evidence that they are
operating under this Section.
Other Non-Profit Organizations: These organizations though exempt from
payment of taxes, are still subject to applicable application fees and determination
charges by both the Internal Revenue Service and the Franchise Tax Board.
Consequently, while payment of the annual business tax could be waived, they
should be required to pay the initial application fee and the annual renewal fee.City of Culver City, California
City Council Agenda Item Report
Unrelated Business Income: In those years where the organization has unrelated
business income, income that they are required to declare and pay income tax on,
they should also be required to pay the business tax renewal and the business tax.
With a view to reducing penalties due to any timing differences between the City’s
business tax deadlines and the income tax authorities, we could waive any
applicable penalties if their amended Business Tax payment is received within 15
days of their payment to the Internal Revenue Service or the Franchise Tax Board.
FISCAL ANALYSIS:
We currently have 252 accounts (an organization may have more than one account),
under the Non-Profit category. Of these 70 are listed as Section 501(C)3 accounts
and another 10 are either Federal or State government agencies. If we were able to
collect the $45 renewal fee from the remaining 172 accounts, the additional revenue
to the General Fund would be $7,740 per year.
MOTION:
That the City Council:
Direct the City Treasurer to Draft a Policy for Adoption by the City Council on the
treatment of bonafide non-profit organizations operating in the City for the purpose of
business tax.