2005 California Revenue and Taxation Code Sections 17631-17640 Article 1. General Rule

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.
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.
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.
17636.  Sections 17635 to 17639, inclusive, apply to any
organization described in Section 401(a) of the Internal Revenue
Code.
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.
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.
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.
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.