(a) Section
23731
of the Revenue and Taxation Code imposes a tax upon the unrelated business
taxable income of all organizations (including some trusts) otherwise exempt
from tax under Section
23701
of the Revenue and Taxation Code. The tax is also applicable to some nonexempt
trusts. However, quasi-governmental organizations that are formed to carry out
a function of the state and which are under the control of the state are
considered state agencies to which the tax is not applicable. Under subdivision
(a) corporations, associations and business trusts are subject to the
corporation rates imposed by Section
23151 or Section
23501
of the Revenue and Taxation Code. Under subdivision (b) trusts are subject to
individual rates imposed by Section
17041
of the Revenue and Taxation Code. No deduction for personal exemption or
exemption credit is allowed a trust in computing unrelated business taxable
income.
(b) Applicability of
Unrelated Business Income Tax.
(1) Subdivision
(a) is applicable for income years beginning after December 31, 1970.
(2) For income years beginning before January
1, 1971 the tax set out in Subdivision (a) is applicable only at the
corporation rate and only applicable to organizations exempt under Section
23701
of the Revenue and Taxation Code and described in Sections
23701a,
23701d,
23701e
or
23701n
of the Revenue and Taxation Code and to organizations described in Section
23701h
of the Revenue and Taxation Code if income is payable to an organization which
itself is subject to the tax imposed under Section
23731
of the Revenue and Taxation Code or to a church or convention of
churches.
(3)
(A) For income years beginning before January
1, 1970, the tax was not applicable to churches or associations of churches
which are exempt under Section
23701d
of the Revenue and Taxation Code.
(B) The term "church" includes a religious
order or a religious organization if such order or organization (a) is an
integral part of a church, and (b) is engaged in carrying out the functions of
a church, whether as a civil law corporation or otherwise. In determining
whether a religious order or organization is an integral part of a church,
consideration will be given to the degree to which it is connected with, and
controlled by, such church. A religious order or organization shall be
considered to be engaged in carrying out the functions of a church if its
duties include the ministration of sacerdotal functions and the conduct of
religious worship.
If a religious order or organization is not an integral
part of a church, or if such an order or organization is not authorized to
carry out the functions of a church (ministration of sacerdotal functions and
conduct of religious worship) then it is subject to the tax imposed by Section
23731
of the Revenue and Taxation Code whether or not it engages in religious,
educational, or charitable activities approved by a church. What constitutes
the conduct of religious worship or the ministration of sacerdotal functions
depends on the tenets and practices of a particular religious body constituting
a church. If a religious order or organization can fully meet the requirements
stated in this subparagraph, exemption from the tax imposed by Section
23731
of the Revenue and Taxation Code will apply to all its activities (prior to
1970), including those which it conducts through a separate corporation (other
than a corporation described in Section
23701h
of the Revenue and Taxation Code) or other separate entity which it wholly owns
and which is not operated for the primary purpose of carrying on a trade or
business for profit. Such exemption from tax will also apply to activities
conducted through a separate corporation (other than a corporation described in
Section
23701h
of the Revenue and Taxation Code) or other separate entity which is wholly
owned by more than one religious order or organization, if all such orders or
organizations fully meet the requirements stated in this subparagraph and if
such corporation or other entity is not operated for the primary purpose of
carrying on a trade or business for profit.
(C) Churches and conventions or associations
of churches are not entitled to most of the transitional rules provided for
under federal law.
(4)
Trusts.
(A) The taxes imposed by Section
23731
of the Revenue and Taxation Code apply in case of a trust which is exempt under
Section
23701
of the Revenue and Taxation Code. The tax also applies to nonexempt trusts
treated as exempt organizations because of Section 4947(a)(1) of the Internal
Revenue Code. The tax is also imposed on many types of trusts under the
Personal Income Tax Law by Section
17651
of the Revenue and Taxation Code. These trusts include exempt deferred
compensation trusts (as defined in Section
17501
of the Revenue and Taxation Code, with any tax imposed by Section
17651
of the Revenue and Taxation Code).
(B) However, if any of the above trusts
conduct a business which is a separate taxable entity on the basis of all of
the facts and circumstances, for example, an association taxable as a
corporation, the business will be taxable as a feeder organization described in
Section
23702
of the Revenue and Taxation Code.
(c) Title Holding Companies.
(1) In General. If a corporation described in
Section
23701h
of the Revenue and Taxation Code pays any amount of its net income to an
organization exempt from taxation under Section
23701
of the Revenue and Taxation Code (or would pay such an amount but for the fact
that the expenses of collecting its income exceed its income), and if such
corporation and such organization file a consolidated federal information tax
return for such taxable year, then such corporation shall be treated, for
purposes of the tax imposed by Section
23731
of the Revenue and Taxation Code, as being organized and operated for the same
purposes as such organization, as well as for its title-holding purpose if it
attaches a copy of its federal consolidated return to its Form 199, 199B, or
109. Therefore, if an item of income of the Section
23701h
of the Revenue and Taxation Code corporation is derived from a source which is
related to the exempt function of the exempt organization to which such income
is payable and with which such corporation files a consolidated federal
information return, such item is, together with all deductions connected
therewith, excluded from the determination of unrelated business taxable income
under Section
23732
of the Revenue and Taxation Code and shall not be subject to the tax imposed by
Section
23731
of the Revenue and Taxation Code. If, however, such item of income is derived
from a source which is not so related, then such item, less all deductions
directly connected therewith, is, subject to the modifications provided in
Section
23732(b)
of the Revenue and Taxation Code, unrelated business taxable income subject to
the tax imposed by Section
23731
of the Revenue and Taxation Code.
(2) The provisions of subparagraph (1) may be
illustrated by the following example:
EXAMPLE.
The income of X, a Section
23701h
of the Revenue and Taxation Code corporation, is required to be distributed to
exempt organization A. During the taxable year X realizes net income of
$900,000 from source M and $100,000 from source N. Source M is related to A's
exempt function, while source N is not so related. X and A file a consolidated
Federal Form 990T for such taxable year and furnish a copy of the 990T with X's
Form 109. X has net unrelated business income of $100,000, subject to the
modifications in Section
23732(b)
of the Revenue and Taxation Code. If no unrelated business income tax is due, a
copy of the consolidated Federal Form 990 will be filed with X's Form
199.
(3) Effective Dates.
Paragraphs (1) and (2) of this subdivision apply with respect to taxable years
beginning after December 31, 1970. For taxable years beginning before January
1, 1971, a corporation described in Section
23701h
of the Revenue and Taxation Code and otherwise exempt from taxation under
Section
23701
of the Revenue and Taxation Code is taxable upon its unrelated business taxable
income only if such income is payable either--
(A) to a church or convention or association
of churches, or
(B) to any
organization subject, for taxable years beginning before January 1, 1971, to
the tax imposed by Section
23731
of the Revenue and Taxation Code.
(d) The fact that any class of organizations
exempt from taxation under Section
23701
of the Revenue and Taxation Code is subject to the unrelated business income
tax under Section 27731 of the Revenue and Taxation Code and this regulation
does not in any way enlarge the permissible scope of business activities of
such class for purposes of the continued qualification of such class under
Section
23701
of the Revenue and Taxation Code.
(e) Assessment and Collections: Since the
taxes imposed by Article 2 of Chapter 4 are taxes imposed by Section
23151, or Section
23501, or Section
17041
of the Revenue and Taxation Code, all provisions of law and of the regulations
applicable to taxes imposed under Section
23151 or Section
23501, or Section
17041
of the Revenue and Taxation Code are applicable to the assessment and
collection of taxes imposed by Section
23731
of the Revenue and Taxation Code. Organizations subject to the tax imposed by
Section
23731
of the Revenue and Taxation Code are subject to the same provisions, including
penalties, as are provided in the case of the income tax of other corporations.
In the case of a trust subject to tax under Section
23731 or Section
17651
of the Revenue and Taxation Code, the fiduciaries for such trusts are subject
to the same provisions, including penalties, as are applicable to fiduciaries
in the case of the income tax of other trusts.
(f) Returns. For requirements of filing
annual returns with respect to unrelated business income tax see Section
23771
of the Revenue and Taxation Code. Estimated tax returns must be filed but as
the tax is imposed by Chapter 3 of Part II, Division 2, the payment of at least
the minimum tax with the first installment is not required. Filing of Form 109
is in addition to Form 199 or 199B.
(g) Tax on Preference Items. The tax imposed
by Section 23400 or Section
17062
of the Revenue and Taxation Code applies to an organization subject to tax
under Section
23731 or Section
17651
of the Revenue and Taxation Code with respect to items of tax preference which
enter into the computation of unrelated business taxable income. For this
purpose, only those items of income and those deductions entering into the
determination of tax imposed by this section are considered in the
determination of the items of tax preference under Section
17063
of the Revenue and Taxation Code.
(h) Taxable Years, Method of Accounting, Etc.
The taxable year (fiscal year or calendar year, as the case may be) of an
organization shall be determined without regard to the fact that such
organization may have been exempt from tax during any prior period. In
computing unrelated business net income, the determination of the taxable year
for which an item of income or expense is taken into account shall be made
under the provisions of the Bank and Corporation Tax Law, and the regulations
thereunder, whether or not the item arose during a taxable year beginning
before, on or after December 31, 1950.
* This regulation is
substantially the same as Fed. Reg. 1.511.
