Existing law, the Corporation Tax Law, exempts organizations that are organized and operated for nonprofit purposes, as specified, from taxes imposed by that law if the Franchise Tax Board issues a determination exempting the organization from tax, except as provided. To receive a determination of exemption from the board, existing law requires the organization to either submit an application for exemption or to submit documentation of exemption from federal income tax law, as provided. For organizations that submit documentation of their federal exemption, existing law requires the board to suspend or revoke, as applicable, an organizations state exemption upon notification that the organizations federal exemption is suspended or revoked.

This bill would instead authorize the board, in its discretion, to retain the organizations tax-exempt status for state income tax purposes if it determines this suspension or revocation occurred for reasons other than fraud, intentional misrepresentation, misuse or diversion of organizational funds, failure to file necessary returns or reports, or other breaches of organizational reporting or governance requirements.

This bill would take effect immediately as a tax levy.

Existing law, the Corporation Tax Law, exempts organizations that are organized and operated for nonprofit purposes, as specified, from taxes imposed by that law if the Franchise Tax Board issues a determination exempting the organization from tax, except as provided. To receive a determination of exemption from the board, existing law requires the organization to either submit an application for exemption or to submit documentation of exemption from federal income tax law, as provided. For organizations that submit documentation of their federal exemption, existing law requires the board to suspend or revoke, as applicable, an organizations state exemption upon notification that the organizations federal exemption is suspended or revoked.

This bill would instead authorize the board, in its discretion, to retain the organizations tax-exempt status for state income tax purposes if it determines this suspension or revocation occurred for reasons other than fraud, intentional misrepresentation, misuse or diversion of organizational funds, failure to file necessary returns or reports, or other breaches of organizational reporting or governance requirements.

This bill would take effect immediately as a tax levy.

Existing law, the Corporation Tax Law, exempts organizations that are organized and operated for nonprofit purposes, as specified, from taxes imposed by that law if the Franchise Tax Board issues a determination exempting the organization from tax, except as provided. To receive a determination of exemption from the board, existing law requires the organization to either submit an application for exemption or to submit documentation of exemption from federal income tax law, as provided. For organizations that submit documentation of their federal exemption, existing law requires the board to suspend or revoke, as applicable, an organizations state exemption upon notification that the organizations federal exemption is suspended or revoked.

This bill would instead authorize the board, in its discretion, to retain the organizations tax-exempt status for state income tax purposes if it determines this suspension or revocation occurred for reasons other than fraud, intentional misrepresentation, misuse or diversion of organizational funds, failure to file necessary returns or reports, or other significant breaches of organizational reporting or governance requirements.

This bill would take effect immediately as a tax levy.

Existing law, the Corporation Tax Law, exempts organizations that are organized and operated for nonprofit purposes, as specified, from taxes imposed by that law if the Franchise Tax Board issues a determination exempting the organization from tax, except as provided. To receive a determination of exemption from the board, existing law requires the organization to either submit an application for exemption or to submit documentation of exemption from federal income tax law, as provided. For organizations that submit documentation of their federal exemption, existing law requires the board to suspend or revoke, as applicable, an organizations state exemption upon notification that the organizations federal exemption is suspended or revoked.

This bill, in the case of a revocation of an organizations federal tax-exempt status, would instead require the board to provide written notice of its intent to revoke upon notification that the organizations federal exemption is revoked. The bill would provide an organization that has received this notice a 90-day period to cure by submitting either evidence that the federal revocation was in error or reinstated or by submitting an application for exemption independent of federal exemption. The bill would provide that an organization that makes a submission within the 90-day period to cure maintains their state exemption until a final determination by the board. If the organization does not make a submission or the board denies the submission, the bill would require the board to revoke the organizations state exemption. bill would instead authorize the board, in its discretion, to retain the organizations tax-exempt status for state income tax purposes if it determines this suspension or revocation occurred for reasons other than fraud, intentional misrepresentation, misuse or diversion of organizational funds, failure to file necessary returns or reports, or other significant breaches of organizational reporting or governance requirements.

Existing law, the Corporation Tax Law, exempts organizations that are organized and operated for nonprofit purposes, as specified, from taxes imposed by that law if the Franchise Tax Board issues a determination exempting the organization from tax, except as provided. To receive a determination of exemption from the board, existing law requires the organization to either submit an application for exemption or to submit documentation of exemption from federal income tax law, as provided. For organizations that submit documentation of their federal exemption, existing law requires the board to suspend or revoke, as applicable, an organizations state exemption upon notification that the organizations federal exemption is suspended or revoked.

This bill, in the case of a revocation of an organizations federal tax-exempt status, would instead require the board to provide written notice of its intent to revoke upon notification that the organizations federal exemption is revoked. The bill would provide an organization that has received this notice a 90-day period to cure by submitting either evidence that the federal revocation was in error or reinstated or by submitting an application for exemption independent of federal exemption. The bill would provide that an organization that makes a submission within the 90-day period to cure maintains their state exemption until a final determination by the board. If the organization does not make a submission or the board denies the submission, the bill would require the board to revoke the organizations state exemption.

 THIRD READING  

Bill No: AB 2084

Author: Bauer-Kahan (D)

Amended: 4/20/26 in Assembly

Vote: 21

SENATE REVENUE AND TAXATION COMMITTEE: 4-0, 6/24/26

AYES: McNerney, Ashby, Becker, Grayson

NO VOTE RECORDED: Alvarado-Gil

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/13/26

AYES: Cervantes, Cabaldon, Grayson, Richardson, Wahab

NOES: Seyarto, Dahle

ASSEMBLY FLOOR: 56-16, 5/21/26 - See last page for vote

SUBJECT: Corporation Tax Law: tax-exempt organizations: revocation of tax-exempt status

SOURCE: California Association of Nonprofits

DIGEST:

This bill provides the Franchise Tax Board (FTB) with the discretion to maintain the tax-exempt status of a 501(c)(3) nonprofit whose federal tax-exempt status was revoked.

ANALYSIS:

Existing federal law:

1. Allows nonprofit organizations to obtain tax-exempt status for federal income tax purposes, pursuant to IRC Section 501(c).

Existing state law:

1. Allows California nonprofit corporations organized for religious, charitable, social, educational, recreational, or similar purposes to be formed pursuant to the Nonprofit Corporation Law.
2. Allows nonprofit organizations to apply for and obtain California tax-exempt status if they submit a complete application, in the form and manner prescribed by the FTB, and receive a letter from the FTB establishing the organization as tax-exempt for state income tax purposes.
3. Requires that the exemption application include the organization’s Articles of Incorporation, bylaws, and financial statements.
4. Authorizes the following types of nonprofit organizations that received a federal determination of tax-exempt status under Internal Revenue Code (IRC) section 501(c) to establish their state tax-exempt status by submitting to the FTB a copy of their federal tax-exempt status determination:
   1. IRC section 501(c)(3) – Organizations that operate exclusively for religious, charitable, scientific, or other specified purposes.
   2. IRC section 501(c)(4) – Civic leagues, social welfare organizations (including certain war veterans’ organizations), or local associations of employees.
   3. IRC section 501(c)(5) – Labor, agricultural, or horticultural organizations.
   4. IRC section 501(c)(6) – Business leagues, chambers of commerce, etc.
   5. IRC section 501(c)(7) – Social Clubs.
   6. IRC section 501(c)(19) – Veteran Organizations.
5. Requires a state tax-exempt organization to notify FTB of a revocation or suspension of its federal tax-exempt status, and upon receipt thereof, directs the FTB to rescind the organization’s tax-exempt status for state tax purposes.

This bill:

1. Provides that FTB may, in its discretion, maintain a 501(c)(3)’s state income tax exemption if the organization’s federal tax exemption suspension or revocation was not related to:
   
   1. Fraud or intentional misrepresentation;
      
   2. Misuse or diversion of organizational funds;
      
   3. Failure to file required returns or reports; or
      
   4. Other breaches of organizational reporting or governance requirements.
      
2. Grants FTB the authority to prescribe regulations or procedures necessary to implement this discretionary authority, and for the nonprofit organization to comply.

Background

Federal targeting of 501(c)(3) organizations. On January 21, 2025, President Trump’s Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” directed the federal government to terminate Diversity, Equity, and Inclusion (DEI)-related policies and framed certain DEI practices as unlawful discrimination. The order also revoked Executive Order 11246, the long-standing federal contractor affirmative-action framework signed by President Lyndon B. Johnson on September 24, 1965, which remained continuously in effect under every subsequent presidential administration. The White House’s January 22, 2025, fact sheet described Executive Order 14173 as ending “illegal DEI” and protecting “civil rights and merit-based opportunity.”

In their April 16, 2025 article titled “Can Trump revoke Harvard’s tax-exempt status? What to know about the law,” the Washington Post reported that Treasury officials delivered a request to the Internal Revenue Service (IRS) to revoke Harvard University’s tax-exempt status after Harvard resisted federal demands tied to governance, admissions, hiring, DEI, and campus antisemitism. Harvard described the tax-exemption threat as part of a broader federal campaign against the university, as the government had already frozen $2.2 billion in funding from the school and was considering freezing another $1 billion.

On July 29, 2025, the US Department of Justice (DOJ) issued a memorandum titled “Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination,” stating that federally funded entities must ensure their programs comply with federal antidiscrimination law, regardless of whether the programs are labeled DEI. That guidance is directly relevant to nonprofits because many 501(c)(3)s receive federal grants, contracts, or pass-through funds.

Additionally, the DOJ also created a Civil Rights Fraud Initiative in May 2025. The Department said institutions that take federal money while allowing antisemitism or promoting “divisive DEI policies” risk access to federal funds.^[1] Reuters reported that the challenged policy could affect up to 640,000 contracts and subcontracts with over 34,000 unique contractors nationwide.^[2] 19 states and Washington, D.C. have sued the Trump Administration over anti-DEI terms in federal contracts.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, “FTB indicates that this bill would result in an unknown General Fund revenue loss by allowing certain entities to retain their exemption from state taxation that they would otherwise lose and become subject to tax. For every $1 million of income that remains exempt under the bill, FTB estimates that the State would forgo $90,000 in General Fund revenue. FTB’s implementation costs would be minor and absorbable.”

SUPPORT: (Verified 8/14/26)

California Association of Nonprofits (source)
California Primary Care Association Advocates
California Society of Enrolled Agents
Planned Parenthood Affiliates of California
Valley Industry and Commerce Association

OPPOSITION: (Verified 8/14/26)

None received

ARGUMENTS IN SUPPORT:

According to the author, “Nonprofit organizations play a vital role in serving communities and advancing charitable, educational, and public-interest missions. Recent federal rhetoric and actions have raised serious concerns about the potential for abrupt challenges to nonprofit tax-exempt status when organizations are perceived by the federal administration to be acting outside their exempt purposes rather than genuine compliance issues. AB 2084 authorizes the California Franchise Tax Board to preserve a nonprofit’s state income-tax exempt status when a federal revocation occurs for reasons unrelated to legal eligibility for revocation. AB 2084 ensures that legitimate organizations are not immediately stripped of their status due to administrative issues or evolving federal interpretations. AB 2084 promotes fairness and stability for nonprofits while preserving the state’s ability to enforce compliance with tax-exempt requirements.”

ASSEMBLY FLOOR: 56-16, 5/21/26

AYES: Addis, Aguiar-Curry, Ahrens, Alvarez, Ávila Farías, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Caloza, Carrillo, Connolly, Elhawary, Fong, Gabriel, Gipson, Mark González, Haney, Harabedian, Hart, Irwin, Jackson, Kalra, Krell, Lee, Lowenthal, McKinnor, Muratsuchi, Nguyen, Ortega, Pacheco, Papan, Patel, Pellerin, Petrie-Norris, Quirk-Silva, Ransom, Michelle Rodriguez, Rogers, Blanca Rubio, Schiavo, Schultz, Sharp-Collins, Solache, Soria, Stefani, Valencia, Ward, Wicks, Wilson, Zbur, Rivas

NOES: Castillo, Davies, DeMaio, Dixon, Ellis, Flora, Gallagher, Jeff Gonzalez, Hadwick, Johnson, Macedo, Patterson, Sanchez, Ta, Tangipa, Wallis

NO VOTE RECORDED: Alanis, Arambula, Chen, Garcia, Hoover, Lackey, Ramos, Celeste Rodriguez

Prepared by: Haley Summers / REV. & TAX. / (916) 651-4117

8/15/26 9:52:52

**** END ****

1. https://www.justice.gov/opa/pr/justice-department-establishes-civil-rights-fraud-initiative ↑

2. https://www.reuters.com/legal/government/states-sue-trump-administration-over-anti-dei-terms-federal-contracts-2026-06-10/ ↑

SENATE COMMITTEE ON

Senator Sabrina Cervantes, Chair

2025 - 2026 Regular Session

AB 2084 (Bauer-Kahan) - Corporation Tax Law: tax-exempt organizations: revocation of tax-exempt status

Bill Summary:

AB 2084 would provide the Franchise Tax Board (FTB) with the discretion to maintain the tax-exempt status of a 501(c)(3) nonprofit whose federal tax-exempt status was revoked.

Fiscal Impact:

FTB indicates that this bill would result in an unknown General Fund revenue loss by allowing certain entities to retain their exemption from state taxation that they would otherwise lose and become subject to tax. For every $1 million of income that remains exempt under the bill, FTB estimates that the State would forgo $90,000 in General Fund revenue. FTB’s implementation costs would be minor and absorbable.

Background:

California nonprofit corporations organized for religious, charitable, educational, and other specified purposes are formed under the Nonprofit Corporation Law but are not automatically exempt from state income tax. Generally, organizations must apply to FTB and demonstrate they qualify for tax-exempt status. Since 2008, organizations recognized by the Internal Revenue Service (IRS) as tax-exempt under Internal Revenue Code (IRC) Section 501(c)(3), and later certain other IRC Section 501(c) organizations, have been permitted to obtain California tax-exempt status through a streamlined process by submitting their federal determination letter. Existing law also requires the FTB to revoke or suspend an organization's state tax-exempt status if its corresponding federal tax-exempt status is revoked or suspended.

Since 2025, the federal government has taken a number of actions affecting diversity, equity, and inclusion (DEI) policies and has increased scrutiny of certain nonprofit organizations, including threats to revoke the federal tax-exempt status of some organizations and expanded enforcement efforts involving recipients of federal funding. These actions have raised the possibility that organizations could lose state tax benefits and eligibility for certain state programs as a consequence of federal actions unrelated to financial misconduct or governance failures.

Last year, the Legislature enacted AB 1318 (Bonta, 2025) to allow nonprofit organizations to qualify for specified state funding based on either federal or state tax-exempt status, reducing reliance on federal determinations for funding eligibility. However, because existing law requires FTB to automatically revoke state tax-exempt status following an IRS revocation, organizations remain vulnerable to losing their California tax exemption based solely on federal action.

Proposed Law:

This bill would do the following:

• Provide that FTB may, in its discretion, maintain a 501(c)(3)’s state income tax exemption if the organization’s federal tax exemption suspension or revocation was not related to (1) fraud or intentional misrepresentation, (2) misuse or diversion of organizational funds, (3) failure to file required returns or reports, or (4) other breaches of organizational reporting or governance requirements.
• Grant FTB the authority to prescribe regulations or procedures necessary to implement this discretionary authority, and to establish the process for the 501(c)(3) organization to comply.

Staff Comments:

The magnitude of the bill's revenue impact would depend on the number of nonprofit organizations that would lose their federal tax-exempt status and the amount of income that would otherwise become subject to state taxation. Because both factors are unknown, the revenue impact cannot be estimated. However, as noted above, FTB estimates that every $1 million of income that remains exempt from state taxation would reduce General Fund revenue by approximately $90,000.

-- END --

SENATE COMMITTEE ON REVENUE AND TAXATION

Senator Jerry McNerney, Chair

2025 - 2026 Regular

Corporation Tax Law: tax-exempt organizations: revocation of tax-exempt status

Provides the Franchise Tax Board with the discretion to maintain the tax-exempt status of a 501(c)(3) nonprofit whose federal tax-exempt status was revoked.

Background

California nonprofit corporations organized for religious, charitable, social, educational, recreational, or similar purposes are formed pursuant to the Nonprofit Corporation Law. In California, a nonprofit corporation is not necessarily tax-exempt, regardless of its federal tax status. To obtain California tax-exempt status, a nonprofit organization generally must submit a completed application form to the Franchise Tax Board (FTB) and receive a letter from the FTB establishing that the organization is exempt from state income tax. The exemption application must include the organization’s Articles of Incorporation, bylaws, and financial statements.

Beginning in 2008, organizations that received a federal determination of tax-exempt status under Internal Revenue Code (IRC) section 501(c)(3) were authorized to establish their state tax-exempt status simply by submitting to the FTB a copy of their federal tax-exempt status determination (AB 897, Houston, 2007). Organizations with a tax-exempt status pursuant to IRC Section 501(c)(3) are organizations that operate exclusively for religious, charitable, scientific, or other specified purposes. The Legislature extended this streamlined state process in AB 1173 (Bocanegra, 2013) and AB 934 (Bates, 2020) to similar tax-exempt IRC 501(c) groups, specifically those exempt pursuant to:

• 501(c)(4) – Civic leagues, social welfare organizations (including certain war veterans’ organizations), or local associations of employees;
• 501(c)(5) – Labor, agricultural, or horticultural organizations;
• 501(c)(6) – Business leagues, chambers of commerce, etc.;
• 501(c)(7) – Social Clubs; and
• 501(c)(19) – Veteran Organizations.

Additionally, AB 1173 requires an exempt organization to notify FTB of a revocation or suspension of tax-exempt status for federal income tax purposes, and upon receipt thereof, directs the FTB to rescind the organization’s tax-exempt status for state tax purposes.

Federal targeting of 501(c)(3) organizations. On January 21, 2025, President Trump’s Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” directed the federal government to terminate Diversity, Equity, and Inclusion (DEI)-related policies and framed certain DEI practices as unlawful discrimination.^[1] The order also revoked Executive Order 11246, the long-standing federal contractor affirmative-action framework signed by President Lyndon B. Johnson on September 24, 1965, which remained continuously in effect under every subsequent presidential administration. The White House’s January 22, 2025, fact sheet described Executive Order 14173 as ending “illegal DEI” and protecting “civil rights and merit-based opportunity.”^[2]

In April 2025, the Washington Post reported that Treasury officials delivered a request to the Internal Revenue Service (IRS) to revoke Harvard University’s tax-exempt status after Harvard resisted federal demands tied to governance, admissions, hiring, DEI, and campus antisemitism.^[3] Harvard described the tax-exemption threat as part of a broader federal campaign against the university, as the government had already frozen $2.2 billion in funding from the school and was considering freezing another $1 billion.^[4]

In July of 2025, the US Department of Justice (DOJ) issued guidance for recipients of federal funding, stating that federally funded entities must ensure their programs comply with federal antidiscrimination law regardless of whether programs are labeled DEI. That guidance is directly relevant to nonprofits because many 501(c)(3)s receive federal grants, contracts, or pass-through funds.^[5]

Additionally, the DOJ also created a Civil Rights Fraud Initiative in May 2025. The Department said institutions that take federal money while allowing antisemitism or promoting “divisive DEI policies” risk access to federal funds.^[6] Reuters reported that the challenged policy could affect up to 640,000 contracts and subcontracts with over 34,000 unique contractors nationwide.^[7] 19 states and Washington, D.C. have sued the Trump Administration over anti-DEI terms in federal contracts.

In April 2026, House Democrats announced an inquiry to the IRS in a letter, stating in relevant part:

We write today because we are gravely concerned that the Administration has weaponized the Internal Revenue Service (IRS) by targeting tax-exempt organizations and their donors based on their political beliefs and constitutionally protected advocacy. We have said time and time again that the IRS must do its work impartially and without political bias. Taxpayers should not be targeted based on their political beliefs. The President’s use of the IRS to target any particular taxpayer is both unlawful and unacceptable. Therefore, we are deeply troubled that not only has the IRS compiled a list of Democratic donors and “left-leaning” nonprofit organizations, but that the Administration is moving to label these groups as domestic terrorists.

For California nonprofits, the immediate risk from federal 501(c)(3) targeting is not just federal income tax treatment. California nonprofits are at risk in several distinct ways because federal 501(c)(3) status is often used when determining state tax treatment, grant eligibility, and contracting opportunities. It also carries larger practical consequences, such as donor deductibility concerns, reputational harm, Attorney General Registry compliance, and possibly property tax exemption review.

AB 1318. In 2025, the Legislature enacted AB 1318 (Bonta) to address the risks of federal targeting of 501(c)(3)s by allowing nonprofit organizations to qualify for public funding if they hold either federal 501(c)(3) tax-exempt status or state tax-exempt status. By recognizing state-level tax-exempt status, the bill endeavored to ensure that nonprofits operating lawfully in California are not disqualified from funding due to federal political actions. However, the modernized streamlined process enacted by AB 1173 requires the FTB to revoke that organization’s state exemption if the IRS revokes an organization's 501(c)(3) tax-exempt status.

The California Association of Nonprofits wants to prevent disruptions to California nonprofit organizations by granting the FTB discretion to review and preserve the state tax-exempt status of nonprofits whose federal tax-exempt status have been revoked.

Proposed Law

Assembly Bill 2084 provides that FTB may, in its discretion, maintain a 501(c)(3)’s state income tax exemption if the organization’s federal tax exemption suspension or revocation was not related:

• Fraud or intentional misrepresentation;
• Misuse or diversion of organizational funds;
• Failure to file required returns or reports; or
• Other breaches of organizational reporting or governance requirements.

The bill also grants FTB the authority to prescribe regulations or procedures necessary to implement this discretionary authority, and to establish the process for the 501(c)(3) organization to comply.

State Revenue Impact

According to the FTB, AB 2084, since it is difficult to predict the frequency of and value of the state tax exemptions that would be revoked as a result of the federal determination, the revenue impact is unknown. However, it is estimated that for every $1 million of income that will no longer be exempted from state taxation, the additional revenue is estimated to be $90,000.

Comments

1. Purpose of the bill. According to the author, “Nonprofit organizations play a vital role in serving communities and advancing charitable, educational, and public-interest missions. Recent federal rhetoric and actions have raised serious concerns about the potential for abrupt challenges to nonprofit tax-exempt status when organizations are perceived by the federal administration to be acting outside their exempt purposes rather than genuine compliance issues. AB 2084 authorizes the California Franchise Tax Board to preserve a nonprofit’s state income-tax exempt status when a federal revocation occurs for reasons unrelated to legal eligibility for revocation. AB 2084 ensures that legitimate organizations are not immediately stripped of their status due to administrative issues or evolving federal interpretations. AB 2084 promotes fairness and stability for nonprofits while preserving the state’s ability to enforce compliance with tax-exempt requirements.”

2. Equity. Since AB 897 became effective in 2008, California has allowed nonprofits to establish their state tax-exempt status based on their existing federal 501(c)(3) determination. This streamlined process promoted administrative efficiency for both taxpayers and the FTB. However, the modernized streamlined process enacted by AB 1173 requires the FTB to revoke that organization’s state exemption if the IRS revokes an organization’s 501(c)(3) tax-exempt status. At the federal level, tax-exempt status for nonprofit organizations has been a focus of recent attention, including targeting organizations’ 501(c)(3) tax-exempt status due to disagreements over policies, political activity, or DEI initiatives. This can result in immediate tax liabilities, loss of grant eligibility, and interference with essential community services provided by California nonprofits. AB 2084 helps prevent disruptions to California nonprofit organizations targeted for political reasons related to their mission-driven activities advancing important state policies that improve the lives of persons in marginalized communities.

3. IRC 7217. In addition to protections for nonprofits enacted by AB 2158, there is also federal statutory protection against direct political interference of IRS enforcement. IRC Section 7217 makes it unlawful for the President, Vice President, Executive Office staff, and certain senior executive officials to request that the IRS conduct or terminate an audit or investigation of a particular taxpayer. IRS employees who receive such a prohibited request must report it to the Treasury Inspector General for Tax Administration, and willful violations carry criminal penalties. Further, as a matter of procedure, revocation of a taxpayer’s tax-exempt status is not supposed to occur by public statement or executive preference alone. IRS guidance says an organization may appeal a proposed adverse determination, including a proposed determination that it no longer qualifies for tax-exempt status after audit.^[8] The IRS also states that nonprofit audit decisions may be appealed to the Independent Office of Appeals, which is separate from the IRS examination function.^[9]

Assembly Actions

Assembly Revenue & Taxation Committee: 5-2

Assembly Appropriations Committee: 11-3
Assembly Floor: 56-16

Support and Opposition

(6/18/2026)

Support: California Association of Nonprofits (Sponsor)
California Primary Care Association Advocates
California Society of Enrolled Agents
Planned Parenthood Affiliates of California

Opposition: None received.

-- END --

1. https://www.whitehouse.gov/presidential-actions/2025/01/ending-illegal-discrimination-and-restoring-merit-based-opportunity/ ↑

2. https://www.whitehouse.gov/fact-sheets/2025/01/fact-sheet-president-donald-j-trump-protects-civil-rights-and-merit-based-opportunity-by-ending-illegal-dei/ ↑

3. https://www.washingtonpost.com/education/2025/04/16/harvard-tax-trump-irs-law/ ↑

4. https://www.harvard.edu/president/news/2025/upholding-our-values-defending-our-university/ ↑

5. https://www.justice.gov/opa/pr/justice-department-releases-guidance-recipients-federal-funding-regarding-unlawful ↑

6. https://www.justice.gov/opa/pr/justice-department-establishes-civil-rights-fraud-initiative ↑

7. https://www.reuters.com/legal/government/states-sue-trump-administration-over-anti-dei-terms-federal-contracts-2026-06-10/ ↑

8. https://www.irs.gov/pub/irs-pdf/p892.pdf ↑

9. https://www.irs.gov/charities-non-profits/charity-and-nonprofit-audits-appeal-rights-and-procedures ↑

ASSEMBLY THIRD READING

ATR Bill Id:AB 2084

Author:(Bauer-Kahan)

As Amended Ver:April 20, 2026

Majority vote. Taxy Levy

SUMMARY

Provides the Franchise Tax Board (FTB) with discretion to maintain the tax-exempt status for state tax purposes of an organization that was tax-exempt pursuant to Internal Revenue Code (IRC) Section 501(c)(3) but had that status revoked or suspended for reasons other than those provided in existing law and regulations.

Major Provisions

1. Authorizes the FTB, in its discretion, to retain tax-exempt status for state income tax purposes if it determines that the suspension or revocation of its tax-exempt status for federal tax purposes is not related to any of the following:
   1. Fraud or intentional misrepresentation;
   2. Misuse or diversion of organizational funds;
   3. Failure to file necessary returns or reports; or,
   4. Other significant breaches of organizational reporting or governance requirements.
2. Authorizes the FTB to prescribe any regulations or procedures necessary to implement the evaluation process described above.
3. Takes immediate effect as a tax levy.

COMMENTS

1. What problem does this bill seek to solve? The author and sponsor of this bill argue that this bill is necessary to protect California tax-exempt nonprofit organizations that may have their federal tax-exempt status suspended or revoked for politically motivated or other reasons that lack basis in existing federal law and regulation. This bill is focused on the subset of nonprofit organizations that qualified for tax-exempt status for state tax purposes in an expedited fashion based on their federal determination by the IRS. Under existing law, if the IRS suspends or revokes the tax-exempt status of a nonprofit organization and the organization received California tax-exempt status based on that federal determination, its state-level, tax-exempt status will also be revoked or suspended automatically by the FTB. While this bill does not change this requirement, it would allow the FTB to, in its discretion, maintain the 501(c)(3) organization's tax-exempt status only if the suspension or revocation is not related to any of the following:
   1. Fraud or intentional misrepresentation;
   2. Misuse or diversion of organizational funds;
   3. Failure to file required returns or reports; or,
   4. Other significant breaches of organizational reporting or governance requirements.
   5. Tax-exempt nonprofits: Nonprofit organizations are generally organized and operated as both nonprofit and tax-exempt entities. "Nonprofit" status refers to incorporation status under state corporation law; "tax-exempt" status refers to federal income tax exemption under the IRC and, if applicable, state tax law. The vast majority of tax-exempt entities qualify under IRC Section 501(c)(3) and, accordingly, must be organized and operated exclusively for religious, charitable, scientific, literary, educational, testing for public safety, preventing cruelty to children or animals, or fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).^[1] In addition to serving one of these public purposes, no part of the organization's net earnings can inure to the benefit of private shareholders or individuals, such as the creator's family members, board members, or persons controlled directly or indirectly by private interests. Further, organizations exempt under 501(c)(3) cannot, as a substantial part of their activities, attempt to influence legislation (subject to limited exceptions) or participate in political campaigns for or against any candidate for public office.

Organizations must apply to the IRS for tax-exempt status by completing the requisite form and provide copies of its organizing documents (e.g., articles of incorporation, constitution, trust document, etc.), bylaws (if adopted), and supplemental responses, if applicable, to demonstrate compliance with the above requirements.1

• 1. Under threat: Following a series of executive orders (EOs) by President Donald Trump in early 2025, nonprofit organizations engaging in diversity, equity, inclusion and environmental justice (EJ) work may now face significant legal and financial risks. Two major EOs—"Ending Illegal Discrimination and Restoring Merit-Based Opportunity" and "Ending Radical Wasteful Government DEI Programs and Preferencing"—aim to eliminate federal support for DEI and EJ programs. These directives not only target public-sector efforts, but also extend to private nonprofits, foundations, and associations, requiring them to certify compliance with federal anti-discrimination laws and potentially subjecting them to federal scrutiny. Additionally, another EO issued on March 7, 2025, ordered the U.S. Secretary of Education to propose regulations that exclude from the Public Service Loan Forgiveness (PSLF) program nonprofit organizations that the administration believes do not qualify for 501(c)(3) tax-exempt status due to having a "substantial illegal purpose." The EO defined activities with a "substantial illegal purpose" to include those that aid or abet violations of federal immigration laws, support terrorism, aid or abet illegal discrimination, or violate state tort laws (including those against trespassing, disorderly conduct, or public nuisance), among others.

On July 10, 2020, President Trump posted on Twitter: "Too many Universities and School Systems are about Radical Left Indoctrination, not Education. Therefore, I am telling the Treasury Department to re-examine their Tax-Exempt Status...." Since re-taking office in January of 2025, President Trump has repeated similar remarks and explicitly called for the revocation of Harvard University's tax-exempt status on multiple occasions, culminating in officials at the Treasury Department sending the request targeting Harvard to the IRS's top lawyer at the time, Andrew De Mello.^[2] Last year, President Trump suggested that Citizens for Responsibility and Ethics in Washington (CREW), a nonprofit watchdog group that has litigated against his executive actions and conducted investigations into what it alleges are conflicts of interest, should have its tax-exempt status scrutinized because, "The only charity they had is going after Donald Trump." In April 2025, Ed Martin, the former interim U.S. Attorney in Washington D.C., sent a letter to Wikimedia Foundation in April, alleging that it was "engaging in a series of activities that could violate its obligations" as a tax-exempt nonprofit.^[3] After the killing of Charlie Kirk, President Trump and other top officials threatened to use tools such as stripping groups of tax-exempt status and opening criminal racketeering probes to target these groups.^[4]

According to the Author

Nonprofit organizations play a vital role in serving communities and advancing charitable, educational, and public-interest missions. Recent federal rhetoric and actions have raised serious concerns about the potential for abrupt challenges to nonprofit tax-exempt status when organizations are perceived by the federal administration to be acting outside their exempt purposes rather than genuine compliance issues.

AB 2084 authorizes the California Franchise Tax Board to preserve a nonprofit's state income-tax exempt status when a federal revocation occurs for reasons unrelated to legal eligibility for revocation. AB 2084 ensures that legitimate organizations are not immediately stripped of their status due to administrative issues or evolving federal interpretations. AB 2084 promotes fairness and stability for nonprofits while preserving the state's ability to enforce compliance with tax-exempt requirements.

Arguments in Support

This bill is sponsored by the California Association of Nonprofits, which notes, in part:

Since it became available in 2008, the FTB Form 3500A has enabled many California nonprofits to pursue their state tax-exempt status based on their existing federal 501(c)(3) determination. This welcome efficiency creates what has become a precarious dependency: if the federal government revokes an organization's 501(c)(3) status, potentially as a targeting tactic against programmatic work deemed politically unfavorable, California is statutorily required to revoke that organization's state exemption as well. The FTB currently lacks the authority to delay this action, which can trigger immediate tax liabilities, loss of grant eligibility, and halt essential community services. FTB has indicated that 22% of California charities' tax-exempt status was granted through the Form 3500A process.

While CalNonprofits has and continues to urge these nonprofits to initiate the Form 3500 process with FTB to shore up their state tax-exempt status, this process can take up to eleven months. AB 2084 provides a pragmatic solution by amending Revenue and Taxation Code Section 23701b to allow the FTB to review and exercise discretion in these cases. It also gives nonprofits the time to seek independent state review.

Arguments in Opposition

None on file.

FISCAL COMMENTS

According to the Assembly Appropriations Committee:

1. General Fund (GF) revenue loss of an unknown amount by allowing certain entities to remain exempt from state taxation that would otherwise become subject to tax. FTB estimates that for every $1 million of income that would be subject to state taxation absent this bill, the revenue increase would be approximately $90,000. Thus, this bill would result in foregone revenue loss of $90,000 for every $1 million that would remain exempt from state taxation pursuant to this bill.

By reducing GF revenue, this bill also likely decreases Proposition 98 GF spending by approximately 40% of the revenue loss (the exact amount depends on the operative test of the annual Proposition 98 guarantee).

1. Costs of an unknown amount to the FTB to adopt regulations to modify the FTB's existing processes regarding the suspension or revocation of a tax-exempt organization's status and implement a new evaluation process.

The Legislative Analyst's Office recently warned of GF structural deficits of around $35 billion per year in the 2027-28 fiscal year and ongoing.

VOTES

ASM REVENUE AND TAXATION: 5-2-0

YES: Gipson, Carrillo, McKinnor, Quirk-Silva, Michelle Rodriguez

NO: Sanchez, DeMaio

ASM APPROPRIATIONS: 11-3-1

YES: Wicks, Aguiar-Curry, Calderon, Caloza, Fong, Mark González, Krell, Pacheco, Pellerin, Sharp-Collins, Solache

NO: Hoover, Dixon, Tangipa

ABS, ABST OR NV: Ta

UPDATED

VERSION: April 20, 2026

CONSULTANT: Wesley Whitaker / REV. & TAX. / (916) 319-2098 FN: 0002741

1. Publication 557 Tax-Exempt Status for Your Organization, Internal Revenue Service (Rev. January 2025, https://www.irs.gov/pub/irs-pdf/p557.pdf. ↑

2. Brian Schwartz and Douglas Belkin, Trump Administration Asks IRS to Start Process to Revoke Harvard's Tax-Exempt Status, The Wall Street Journal (April 16, 2025), https://www.wsj.com/us-news/education/trump-administration-asks-irs-to-start-process-to-revoke-harvards-tax-exempt-status-2a1c93cf. ↑

3. Oremus and Mark, U.S. attorney for D.C. accuses Wikipedia of 'propaganda,' threatens nonprofit status, Washington Post (April 25, 2025), https://www.washingtonpost.com/technology/2025/04/25/wikipedia-nonprofit-ed-martin-letter/. ↑

4. Foxman, Reilly, and Korte, Trump Readies Tax Audits, Criminal Probes of Liberal Groups, Bloomberg Tax (September 18, 2025), https://news.bloombergtax.com/daily-tax-report/trump-readies-tax-audits-criminal-probes-of-liberal-groups. ↑

Date of Hearing: May 13, 2026

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 2084

Author:(Bauer-Kahan) – As Amended Ver:April 20, 2026

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill authorizes the Franchise Tax Board (FTB) to retain an organization’s tax-exempt status for state income tax purposes if the FTB determines the federal suspension or revocation of such status occurred for certain reasons unrelated to federal income tax law.

Specifically, this bill authorizes the FTB, in its discretion, to maintain an organization’s tax-exempt status pursuant to Section 501(c)(3) of the Internal Revenue Code (IRC) for state income tax purposes, instead of suspending or revoking the status upon such notification by the organization, provided that federal suspension or revocation is not related to: (1) fraud or intentional misrepresentation, (2) misuse or diversion of organized funds, (3) failure to file required returns or reports, or (4) other breaches of organizational reporting or governance requirements. This bill authorizes the FTB to prescribe regulations to implement such an evaluation process.

FISCAL EFFECT:

1. General Fund (GF) revenue loss of an unknown amount by allowing certain entities to remain exempt from state taxation that would otherwise become subject to tax. FTB estimates that for every $1 million of income that would be subject to state taxation absent this bill, the revenue increase would be approximately $90,000. Thus, this bill would result in foregone revenue loss of $90,000 for every $1 million that would remain exempt from state taxation pursuant to this bill.

By reducing GF revenue, this bill also likely decreases Proposition 98 GF spending by approximately 40% of the revenue loss (the exact amount depends on the operative test of the annual Proposition 98 guarantee).

1. Costs of an unknown amount to the FTB to adopt regulations to modify the FTB’s existing processes regarding the suspension or revocation of a tax-exempt organization’s status and implement a new evaluation process.

The Legislative Analyst’s Office recently warned of GF structural deficits of around $35 billion per year in the 2027-28 fiscal year and ongoing.

COMMENTS:

1. Purpose. According to the author:

Recent federal rhetoric and actions have raised serious concerns about the potential for abrupt challenges to nonprofit tax-exempt status when organizations are perceived by the federal administration to be acting outside their exempt purposes rather than genuine compliance issues.

AB 2084 authorizes the [FTB] to preserve a nonprofit’s state income-tax exempt status when a federal revocation occurs for reasons unrelated to legal eligibility for revocation. AB 2084 ensures that legitimate organizations are not immediately stripped of their status due to administrative issues or evolving federal interpretations.

This bill is sponsored by the California Association of Nonprofits and supported by other individual nonprofit organizations and the California Society of Enrolled Agents.

1. Tax-exempt Status. The vast majority of nonprofit organizations are tax-exempt entities pursuant to IRC Section 501(c)(3), which requires the entity to be organized and operated exclusively for religious, charitable, scientific, literary, educational, and other specified public purposes. Such an organization must apply to the Internal Revenue Service (IRS) for tax-exempt status by completing a form and providing copies of organizing documents and bylaws to demonstrate compliance with certain prohibitions, such as participating in political campaigns as a substantial part of the organization’s activities. The IRS automatically revokes an organization’s tax-exempt status if the organization fails to file the annual information return for three consecutive years and may also initiate an audit to question the activities of a tax-exempt organization.

Existing state law provides that if the IRS suspends or revokes the tax-exempt status of a California 501(c)(3) organization with state tax-exempt status based on such federal determination, the FTB must also suspend or revoke the organization’s state-level, tax-exempt status. This bill does not repeal this requirement of the FTB, but allows the FTB to use its discretion to maintain a 501(c)(3) organization’s tax-exempt status if the suspension or revocation is not related to fraud, misuse of funds, failure to file required reports, or other breaches of governance requirements. This bill authorizes the FTB to adopt regulations to implement a process to determine whether such factors resulted in the organization’s suspension or revocation.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: April 27, 2026

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Mike Gipson, Chair

ABPCA Bill Id:AB 2084 (

Author:Bauer-Kahan) – As Amended Ver:April 20, 2026

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Corporation Tax Law: tax-exempt organizations: revocation of tax-exempt status

SUMMARY: Provides the Franchise Tax Board (FTB) with discretion to maintain the tax-exempt status for state tax purposes of an organization that was tax-exempt pursuant to Internal Revenue Code (IRC) Section 501(c)(3) but had that status revoked or suspended for reasons other than those provided in existing law and regulations. Specifically, this bill:

1. Authorizes the FTB, in its discretion, to retain tax-exempt status for state income tax purposes if it determines that the suspension or revocation of its tax-exempt status for federal tax purposes is not related to any of the following:
   1. Fraud or intentional misrepresentation;
   2. Misuse or diversion of organizational funds;
   3. Failure to file necessary returns or reports; or,
   4. Other significant breaches of organizational reporting or governance requirements.
2. Authorizes the FTB to prescribe any regulations or procedures necessary to implement the evaluation process described above.
3. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Exempts the income of various types of nonprofit organizations from corporation taxes. (IRC Section 501(c) and Revenue and Taxation Code (R&TC) Section 23701.)
2. Exempts from taxation nonprofit organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, provided that no part of the net earnings inures to the benefit of any private shareholder or individual and no substantial part of its activities involve lobbying or political campaigning. (IRC Section 501(c)(3) and R&TC Section 23701d.)
3. Prohibits senior officials of the United States executive branch, including the president, from requesting, either directly or indirectly, that the Internal Revenue Service (IRS) conduct or cease an audit or other investigation of any taxpayer (including tax-exempt entities). Any officer or employee of the IRS receiving any such request shall report it to the Treasury Inspector General for Tax Administration. (IRC Section 7217.)
4. Requires nonprofit organizations to submit an application to the FTB to obtain California tax-exempt status and requires the FTB to review the application and issue a determination. This application is referred to as FTB Form 3500. (R&TC Section 23701(a).)
5. Provides a streamlined method for specified nonprofit organizations that have obtained a ruling, determination, or specified letter from the IRS regarding the organization's federal tax-exempt status to obtain state tax-exempt status by attaching their federal determination letter to their application to the FTB. This application is referred to as FTB Form 3500A. (R&TC Section 23701(a).)
6. Requires a nonprofit organization whose federal tax-exempt status is suspended or revoked to notify the FTB of the suspension or revocation if they received state tax-exempt status through the streamlined method based on their federal determination. (R&TC Section 23701(b)(3).)
7. Requires the FTB, upon notification that an organization's federal tax-exempt status was suspended or revoked, to suspend or revoke the organization's tax-exempt status for California income tax law purposes. (R&TC Section 23701(b)(3).)
8. Provides that these provisions shall not be construed to prevent the FTB from revoking the exemption of an organization that is not organized or operated in accordance with California law or IRC Sections 501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), 501(c)(7), or 501(c)(19). (R&TC Sections 23701a, 23701d, 23701e, 23701f, 23701g, and 23701w.)

FISCAL EFFECT: The FTB estimates that, for every $1 million of income that will no longer be exempted from state taxation, the revenue increase to the state would be approximately $90,000. As such, Committee staff estimates the fiscal effect to exceed this Committee's Suspense File threshold.

COMMENTS:

1. The author has provided the following statement in support of this bill:

Nonprofit organizations play a vital role in serving communities and advancing charitable, educational, and public-interest missions. Recent federal rhetoric and actions have raised serious concerns about the potential for abrupt challenges to nonprofit tax-exempt status when organizations are perceived by the federal administration to be acting outside their exempt purposes rather than genuine compliance issues.

AB 2084 authorizes the California Franchise Tax Board to preserve a nonprofit's state income-tax exempt status when a federal revocation occurs for reasons unrelated to legal eligibility for revocation. AB 2084 ensures that legitimate organizations are not immediately stripped of their status due to administrative issues or evolving federal interpretations. AB 2084 promotes fairness and stability for nonprofits while preserving the state's ability to enforce compliance with tax-exempt requirements.

1. This bill is sponsored by the California Association of Nonprofits, which notes, in part:

Since it became available in 2008, the FTB Form 3500A has enabled many California nonprofits to pursue their state tax-exempt status based on their existing federal 501(c)(3) determination. This welcome efficiency creates what has become a precarious dependency: if the federal government revokes an organization's 501(c)(3) status, potentially as a targeting tactic against programmatic work deemed politically unfavorable, California is statutorily required to revoke that organization's state exemption as well. The FTB currently lacks the authority to delay this action, which can trigger immediate tax liabilities, loss of grant eligibility, and halt essential community services. FTB has indicated that 22% of California charities' tax-exempt status was granted through the Form 3500A process.

While CalNonprofits has and continues to urge these nonprofits to initiate the Form 3500 process with FTB to shore up their state tax-exempt status, this process can take up to eleven months. AB 2084 provides a pragmatic solution by amending Revenue and Taxation Code Section 23701b to allow the FTB to review and exercise discretion in these cases. It also gives nonprofits the time to seek independent state review.

1. This bill is supported by Planned Parenthood Affiliates of California, which notes, in part:

At the federal level, tax-exempt status for nonprofit organizations has been a focus of recent attention, including statements about targeting organizations' 501(c)3 tax-exempt status due to disagreements over policies, political activity, or Diversity, Equity, and Inclusion (DEI) initiatives. For many nonprofit organizations, losing this designation would cause significant consequences and create challenges for organizations to continue their work. AB 2084 helps to prevent disruptions to California nonprofit organizations by giving the state Franchise Tax Board greater discretion to review and preserve state tax-exempt status for nonprofits that may be subject to a revocation of their federal tax-exempt status for political reasons associated with mission-driven activities.

1. Committee Staff Comments:
   1. What problem does this bill seek to solve? The author and sponsor of this bill argue that this bill is necessary to protect California tax-exempt nonprofit organizations that may have their federal tax-exempt status suspended or revoked for politically motivated or other reasons that lack basis in existing federal law and regulation. This bill is focused on the subset of nonprofit organizations that qualified for tax-exempt status for state tax purposes in an expedited fashion based on their federal determination by the IRS.
      
      Under existing law, if the IRS suspends or revokes the tax-exempt status of a nonprofit organization and the organization received California tax-exempt status based on that federal determination, its state-level, tax-exempt status will also be revoked or suspended automatically by the FTB. While this bill does not change this requirement, it would allow the FTB to, in its discretion, maintain the 501(c)(3) organization's tax-exempt status only if the suspension or revocation is not related to any of the following:
      
      1. Fraud or intentional misrepresentation;
         
      2. Misuse or diversion of organizational funds;
         
      3. Failure to file required returns or reports; or,
         
      4. Other significant breaches of organizational reporting or governance requirements.
         
   2. Tax-exempt nonprofits: Nonprofit organizations are generally organized and operated as both nonprofit and tax-exempt entities. "Nonprofit" status refers to incorporation status under state corporation law; "tax-exempt" status refers to federal income tax exemption under the IRC and, if applicable, state tax law. The vast majority of tax-exempt entities qualify under IRC Section 501(c)(3) and, accordingly, must be organized and operated exclusively for religious, charitable, scientific, literary, educational, testing for public safety, preventing cruelty to children or animals, or fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).^[1]
      
      In addition to serving one of these public purposes, no part of the organization's net earnings can inure to the benefit of private shareholders or individuals, such as the creator's family members, board members, or persons controlled directly or indirectly by private interests. Further, organizations exempt under 501(c)(3) cannot, as a substantial part of their activities, attempt to influence legislation (subject to limited exceptions) or participate in political campaigns for or against any candidate for public office.

Organizations must apply to the IRS for tax-exempt status by completing the requisite form and provide copies of its organizing documents (e.g., articles of incorporation, constitution, trust document, etc.), bylaws (if adopted), and supplemental responses, if applicable, to demonstrate compliance with the above requirements.1

• 1. Remaining in good standing: Except for churches and other church-related organizations, tax-exempt organizations must still file annual information returns with the IRS. Organizations that normally have $50,000 or more in gross receipts must complete Form 990 or Form 990-EZ; small organizations – those whose annual gross receipts are normally less than $50,000 – must complete a shorter information return commonly referred to as the "e-Postcard".

If an organization fails to file an annual information return with the IRS for three consecutive years, its tax-exempt status is automatically revoked. The IRS notifies the organization by sending a letter to the mailing address on record and the organization is added to a publicly available list of all organizations that have had their tax-exempt status automatically revoked. If an organization's tax-exempt status is revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file federal income tax returns and pay applicable income taxes. Additionally, an organization that loses its tax-exempt status is not eligible to receive tax-deductible contributions and will be removed from the IRS' list of tax-exempt organizations.1

• 1. Other ways tax-exempt status can be revoked: If the IRS questions the federal tax-exempt status of a nonprofit organization, it can initiate an audit (or "examination") of the organization, auditing one or more information returns that were filed by the entity. For the tax years under examination, the IRS is effectively determining whether the information returns were accurate and reflected full compliance with the applicable tax laws. The two most common types of audits are correspondence examinations and field examinations, the latter of which is much more invasive, involving one or more auditors on site reviewing information and documents and conducting interviews. Field exams generally take several months to conduct, at a minimum, and often much longer.^[2]

There are four potential outcomes of an IRS examination of an exempt organization: a no-change letter, a no-change letter with written advisories, a negotiated closing agreement, or a proposed revocation of exempt status. The first three outcomes enable the organization to retain its tax-exempt status, but in the second or third options, with certain conditions or required changes to ensure compliance with applicable laws and regulations.

If the IRS concludes an audit with a proposed revocation, the organization has 30 days (or longer if an extension is negotiated) to "protest" the proposed ruling and avail itself of the IRS appeals process. During the pendency of the IRS appeal, the organization remains tax-exempt; and during the pendency of the audit and appeal process, the IRS is barred by law from disclosing anything publicly about the matter. Once the protest is filed, it will be assigned to an IRS appeals officer, and the organization (and/or its representatives) will have the opportunity to have an appeals conference to make its case for denying the proposed revocation or otherwise proposing a settlement. The appeals conference is an informal meeting between the organization's representatives and the appeals officer; the IRS agent who conducted the underlying examination does not participate in the conference. The appeals officer (with the approval of their manager) has broad authority to order the IRS division conducting the examination to issue a no-change letter or no-change letter with written advisories, to negotiate a settlement with the organization, or to finalize the revocation.2

If the IRS appeals officer decides to uphold the proposed revocation, the organization will be issued a final adverse determination letter, at which point the entity will have lost its federal tax exemption and the organization has 90 days to petition the U.S. Tax Court, the U.S. Court of Federal Claims, or the U.S. District Court for the District of Columbia for a declaratory judgment as to its qualification for tax-exempt status.

Even if, following the IRS audit and appeal process (and any ensuing litigation), an organization's tax-exempt status is revoked, it still remains a nonprofit corporation (albeit a taxable one). Even post-revocation, the IRS and FTB have no authority to shut down a nonprofit, seize its assets, or otherwise take control of the organization.

• 1. Under threat: Following a series of executive orders (EOs) by President Donald Trump in early 2025, nonprofit organizations engaging in diversity, equity, inclusion and environmental justice (EJ) work may now face significant legal and financial risks. Two major EOs—"Ending Illegal Discrimination and Restoring Merit-Based Opportunity" and "Ending Radical Wasteful Government DEI Programs and Preferencing"—aim to eliminate federal support for DEI and EJ programs. These directives not only target public-sector efforts, but also extend to private nonprofits, foundations, and associations, requiring them to certify compliance with federal anti-discrimination laws and potentially subjecting them to federal scrutiny.
     
     Additionally, another EO issued on March 7, 2025 ordered the U.S. Secretary of Education to propose regulations that exclude from the Public Service Loan Forgiveness (PSLF) program nonprofit organizations that the administration believes do not qualify for 501(c)(3) tax-exempt status due to having a "substantial illegal purpose." The EO defined activities with a "substantial illegal purpose" to include those that aid or abet violations of federal immigration laws, support terrorism, aid or abet illegal discrimination, or violate state tort laws (including those against trespassing, disorderly conduct, or public nuisance), among others.

On July 10, 2020, President Trump posted on Twitter: "Too many Universities and School Systems are about Radical Left Indoctrination, not Education. Therefore, I am telling the Treasury Department to re-examine their Tax-Exempt Status...." Since re-taking office in January of 2025, President Trump has repeated similar remarks and explicitly called for the revocation of Harvard University's tax-exempt status on multiple occasions, culminating in officials at the Treasury Department sending the request targeting Harvard to the IRS's top lawyer at the time, Andrew De Mello.^[3]

Last year, President Trump suggested that Citizens for Responsibility and Ethics in Washington (CREW), a nonprofit watchdog group that has litigated against his executive actions and conducted investigations into what it alleges are conflicts of interest, should have its tax-exempt status scrutinized because, "The only charity they had is going after Donald Trump." In April 2025, Ed Martin, the former interim U.S. Attorney in Washington D.C., sent a letter to Wikimedia Foundation in April, alleging that it was "engaging in a series of activities that could violate its obligations" as a tax-exempt nonprofit.^[4] After the killing of Charlie Kirk, President Trump and other top officials threatened to use tools such as stripping groups of tax-exempt status and opening criminal racketeering probes to target these groups.^[5]

• 1. Diversity, equity, and inclusion: In June 2023, the U.S. Supreme Court ruled that Harvard University and the University of North Carolina's "race-conscious" admissions programs violate the equal protection clause of the 14th Amendment. Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023). While Chief Justice Roberts, writing for the majority, noted that schools could be mindful of applicants' race in a much more narrowly tailored way, such as through an application essay or narrative, some critics have felt the decision did not go far enough and that a school considering race in any form amounted to unconstitutional discrimination.

In March 2025, the U.S. Department of Justice announced that it had launched investigations into Stanford University and three University of California schools to ensure the schools "comply with a Supreme Court decision that prevents colleges and universities from discriminating when choosing students for admission." In April 2025, the American Alliance for Equal Rights filed complaints with the IRS asking that they audit and revoke the tax-exempt status of the Gates Foundation and two other 501(c)(3) foundations due to their race-restricted scholarship programs.

• 1. Bob Jones University: Over 30 years ago, the U.S. Supreme Court upheld the administrative revocation of an entity's tax-exempt status based on the organization's racially discriminatory admissions practices. Bob Jones University v. United States, 461 U.S. 574 (1983).

On January 19, 1976, the IRS officially revoked the tax-exempt status of Bob Jones University (BJU), a nonprofit religious and educational organization, based on its racially discriminatory policies.^[6] Id. at 581. BJU's sponsors genuinely believed that the Bible forbade interracial dating and marriage. Id. at 580. In furtherance of these beliefs, BJU excluded all African-Americans from admission until 1971. Id. Beginning that year, BJU began accepting applications from African-Americans, but only from those individuals "married within their race." Id. Then, in 1975, the U.S. Court of Appeals for the Fourth Circuit's decision in McCrary v. Runyon, 515 F.2d 1082 (1975), prohibited racial exclusion in private schools. Id. Following this decision, BJU began allowing unmarried African-Americans to enroll, but prohibited both interracial dating and marriage. Id.

Following the revocation of its tax-exempt status, BJU brought suit to recover $21 in tax paid to the IRS. Id. at 582. The U.S. District Court for the District of South Carolina held that the revocation of BJU's tax-exempt status exceeded the delegated powers of the IRS and violated BJU's rights under the Religion Clauses of the First Amendment. Id. The Court of Appeals for the Fourth Circuit, in turn, reversed. Id.

On review, the Supreme Court upheld the IRS's revocation of BJU's tax-exempt status. The Court noted that racial discrimination in education violates deeply and widely accepted views of basic justice. Id. at 592. The Court acknowledged that, when the nation's first charitable exemption law was enacted in 1894, racially segregated school facilities would not have been viewed as against public policy. Nevertheless, the Court noted that contemporary standards must be considered when determining whether certain activities confer a public benefit entitled to preferential tax treatment. Thus, the Court concluded that an educational institution that, for whatever reason, practices racial discrimination, cannot be viewed as exercising beneficial influences in community life, and should not be encouraged by having all taxpayers share in its support by way of preferential tax treatment. Id. at 595. Moreover, the Court validated the IRS's administrative action by noting:

[I]t would be anomalous for the Executive, Legislative, and Judicial Branches to reach conclusions that add up to a firm public policy on racial discrimination, and at the same time have the IRS blissfully ignore what all three branches of the Federal Government had declared.

Id. at 598.

One commenter has argued that this precedent could provide some justification for the revocation of tax-exempt status from colleges and universities in light of Students for Fair Admissions.^[7] However, others have rejected this interpretation because the IRS does not have the authority to determine fundamental public policy and then revoke exemptions on the basis of that determination.^[8] Writing in response to the argument above, a group of law professors with expertise in tax and nonprofit law, argue:

Bob Jones University teaches that we must distinguish "public policy" from "fundamental public policy." Public policy includes all actions and decisions by governmental bodies to address societal issues. As in Bob Jones University, fundamental public policy involves core values. A new presidential administration is free to establish a new public policy. But such a new public policy does not create a fundamental public policy. Fundamental public policies do not change with changes in presidential administrations. Charities do not gain, and then lose, and then perhaps regain exemption depending on the positions of whatever U.S. president is in office. If the IRS fails to observe the distinction between public policy and fundamental public policy in revoking Harvard's exemption, Harvard will have several avenues for seeking judicial review.

• 1. What happens during FTB's review period? As currently drafted, this bill may permit an organization to continue operating and remain in good standing in California during the FTB’s review period until a final determination is made. However, the bill does not address key operational and compliance implications that may arise if the organization is ultimately denied state exemption status retroactive to the federal revocation date. Specifically, it is unclear how the organization should treat contributions received during the review period, or what legal or administrative status the organization would hold while its exemption is under review. To provide clarity, the author may wish to amend the bill to specify the treatment of contributions received during that time and other potential administrative concerns.
     
  2. Prior legislation:
     
     1. AB 1318 (Bonta), Chapter 451, Statutes of 2025, provided that, where 501(c)(3) tax-exempt status is used to determine eligibility for any state grant or service contract, or for the disbursement of state or local funds, an organization that is exempt from California taxes is also deemed eligible.
        
     2. SB 834 (Wiener), of the 2021-22 Legislative Session, would have, under the CT Law, required the Attorney General to notify the FTB of any finding that a tax-exempt organization was actively engaged in, or incited the active engagement in, illegal activities, including those related to the January 6, 2021, attempted insurrection at the United States Capitol. The bill also restated the FTB’s existing authority to revoke the tax-exempt status of an organization found to be in violation. SB 834 was vetoed by Governor Newsom, whose veto message stated, in part:

This bill allows the FTB to revoke the tax-exempt status of a nonprofit, charitable organization if the California Attorney General determines the organization has engaged in treason, insurrection, conspiracy, government overthrow, or mutiny by members of the military. Without question, extremist groups that participate in anti-government acts such as those that took place during the insurrection on January 6, 2021, should be renounced and investigated for their participation. However, these are issues that should be evaluated through the judicial system with due process and a right to a hearing.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Nonprofits

California Society of Enrolled Agents

CPCA Advocates, Subsidiary of the California Primary Care Association

Planned Parenthood Affiliates of California

Opposition

None on file

Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098

1. Publication 557 Tax-Exempt Status for Your Organization, Internal Revenue Service (Rev. January 2025, https://www.irs.gov/pub/irs-pdf/p557.pdf. ↑

2. Jeffrey Scott Tenenbaum, How the IRS Can—and Cannot—Revoke Federal Tax-Exempt Status, American Bar Association (May 6, 2025), https://www.americanbar.org/groups/business_law/resources/
   business-law-today/2025-may/how-irs-revoke-federal-tax-exempt-status/. ↑

3. Brian Schwartz and Douglas Belkin, Trump Administration Asks IRS to Start Process to Revoke Harvard's Tax-Exempt Status, The Wall Street Journal (April 16, 2025), https://www.wsj.com/us-news/education/trump-administration-asks-irs-to-start-process-to-revoke-harvards-tax-exempt-status-2a1c93cf. ↑

4. Oremus and Mark, U.S. attorney for D.C. accuses Wikipedia of 'propaganda,' threatens nonprofit status, Washington Post (April 25, 2025), https://www.washingtonpost.com/technology/2025/04/25/wikipedia-nonprofit-ed-martin-letter/. ↑

5. Foxman, Reilly, and Korte, Trump Readies Tax Audits, Criminal Probes of Liberal Groups, Bloomberg Tax (September 18, 2025), https://news.bloombergtax.com/daily-tax-report/trump-readies-tax-audits-criminal-probes-of-liberal-groups. ↑

6. Prior to 1970, the IRS granted tax-exempt status to private schools under Internal Revenue Code Section 501(c)(3), without regard to their racial admissions policies. Bob Jones University, supra at 577. Then, on January 12, 1970, a three-judge District Court for the District of Columbia issued a preliminary injunction barring the IRS from affording tax-exempt status to private schools in Mississippi with racially discriminatory admissions practices. Id. at 578. Roughly six months later, the IRS announced that it could "no longer legally justify allowing tax-exempt status to private schools which [sic] practice racial discrimination." Id. The IRS also announced that it could not "treat gifts to such schools as charitable deductions for income tax purposes." Id. This revised policy on discrimination was formalized in Revenue Ruling 71-447, which noted that "[a]ll charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy." Id. at 579. ↑

7. Marie Sapirie, Harvard Has a Precedent Problem in Fight to Keep Exempt Status, TaxNotes Federal (May 13, 2025), https://www.taxnotes.com/tax-notes-today-federal/exempt-organizations/harvard-has-precedent-problem-fight-keep-exempt-status/2025/05/13/7s5wx. ↑

8. April, Galle, Hackney, and Hitoshi Mayer, Harvard Does Have Options if It Loses Tax-Exempt Status, TaxNotes Federal (May 21, 2025), https://www.taxnotes.com/tax-notes-today-federal/exempt-organizations/harvard-does-have-options-if-it-loses-tax-exempt-status/2025/05/21/7s7fz. ↑

Date of Hearing: April 13, 2026

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Mike Gipson, Chair

ABPCA Bill Id:AB 2084 (

Author:Bauer-Kahan) – As Amended Ver:March 27, 2026

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Corporation Tax Law: tax-exempt organizations: revocation of tax-exempt status

SUMMARY: Provides the Franchise Tax Board (FTB) with the discretion to retain an organization's tax-exempt status for state income tax purposes if it determines the organization's suspension or revocation of federal tax-exempt status was not for reasons specified by existing federal law and regulations. Specifically, this bill:

1. Authorizes the FTB, in its discretion, to retain an organization's tax-exempt status for state income tax purposes if it determines that the suspension or revocation of its tax-exempt status for federal tax purposes is not related to any of the following:
   1. Fraud or intentional misrepresentation;
   2. Misuse or diversion of organizational funds;
   3. Failure to file necessary returns or reports; or,
   4. Other significant breaches of organizational reporting or governance requirements.
2. Authorizes the FTB to prescribe any regulations or procedures necessary to implement the evaluation process described above.
3. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Exempts the income of various types of nonprofit organizations from corporation taxes. (Internal Revenue Code (IRC) Section 501(c) and Revenue and Taxation Code (R&TC) Section 23701.)
2. Exempts from taxation nonprofit organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, provided that no part of the net earnings inures to the benefit of any private shareholder or individual and no substantial part of its activities involve lobbying or political campaigning. (IRC Section 501(c)(3) and R&TC Section 23701d.)
3. Prohibits senior officials of the United States executive branch, including the president, from requesting, either directly or indirectly, that the Internal Revenue Service (IRS) conduct or cease an audit or other investigation of any taxpayer (including tax-exempt entities). Any officer or employee of the IRS receiving any such request shall report it to the Treasury Inspector General for Tax Administration. (IRC Section 7217.)
4. Requires nonprofit organizations to submit an application to the FTB to obtain California tax-exempt status and requires the FTB to review the application and issue a determination. This application is referred to as FTB Form 3500. (R&TC Section 23701(a).)
5. Provides a streamlined method for specified nonprofit organizations that have obtained a ruling, determination, or specified letter from the IRS regarding the organization's federal tax-exempt status to obtain state tax-exempt status by attaching their federal determination letter to their application to the FTB. This application is referred to as FTB Form 3500A. (R&TC Section 23701(a).)
6. Requires a nonprofit organization whose federal tax-exempt status is suspended or revoked to notify the FTB of the suspension or revocation if they received state tax-exempt status through the streamlined method based on their federal determination. (R&TC Section 23701(b)(3).)
7. Requires the FTB, upon notification that an organization's federal tax-exempt status was suspended or revoked, to suspend or revoke the organization's tax-exempt status for California income tax law purposes. (R&TC Section 23701(b)(3).)
8. Provides that these provisions shall not be construed to prevent the FTB from revoking the exemption of an organization that is not organized or operated in accordance with California law or IRC Sections 501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), 501(c)(7), or 501(c)(19). (R&TC Sections 23701a, 23701d, 23701e, 23701f, 23701g, and 23701w.)

FISCAL EFFECT: The FTB estimates that, for every $1 million of income that will no longer be exempted from state taxation, the revenue increase to the state would be approximately $90,000. As such, Committee staff estimates the fiscal effect to exceed this Committee's Suspense File threshold.

COMMENTS:

1. The author has provided the following statement in support of this bill:

Nonprofit organizations play a vital role in serving communities and advancing charitable, educational, and public-interest missions. Recent federal rhetoric and actions have raised serious concerns about the potential for abrupt challenges to nonprofit tax-exempt status when organizations are perceived by the federal administration to be acting outside their exempt purposes rather than genuine compliance issues.

AB 2084 authorizes the California Franchise Tax Board to preserve a nonprofit's state income-tax exempt status when a federal revocation occurs for reasons unrelated to legal eligibility for revocation. AB 2084 ensures that legitimate organizations are not immediately stripped of their status due to administrative issues or evolving federal interpretations. AB 2084 promotes fairness and stability for nonprofits while preserving the state's ability to enforce compliance with tax-exempt requirements.

1. This bill is sponsored by the California Association of Nonprofits, which notes, in part:

Since it became available in 2008, the FTB Form 3500A has enabled many California nonprofits to pursue their state tax-exempt status based on their existing federal 501(c)(3) determination. This welcome efficiency creates what has become a precarious dependency: if the federal government revokes an organization's 501(c)(3) status, potentially as a targeting tactic against programmatic work deemed politically unfavorable, California is statutorily required to revoke that organization's state exemption as well. The FTB currently lacks the authority to delay this action, which can trigger immediate tax liabilities, loss of grant eligibility, and halt essential community services. FTB has indicated that 22% of California charities' tax-exempt status was granted through the Form 3500A process.

While CalNonprofits has and continues to urge these nonprofits to initiate the Form 3500 process with FTB to shore up their state tax-exempt status, this process can take up to eleven months. AB 2084 provides a pragmatic solution by amending Revenue and Taxation Code Section 23701b to allow the FTB to review and exercise discretion in these cases. It also gives nonprofits the time to seek independent state review.

1. This bill is supported by Planned Parenthood Affiliates of California, which notes, in part:

At the federal level, tax-exempt status for nonprofit organizations has been a focus of recent attention, including statements about targeting organizations' 501(c)3 tax-exempt status due to disagreements over policies, political activity, or Diversity, Equity, and Inclusion (DEI) initiatives. For many nonprofit organizations, losing this designation would cause significant consequences and create challenges for organizations to continue their work. AB 2084 helps to prevent disruptions to California nonprofit organizations by giving the state Franchise Tax Board greater discretion to review and preserve state tax-exempt status for nonprofits that may be subject to a revocation of their federal tax-exempt status for political reasons associated with mission-driven activities.

1. Committee Staff Comments:
   1. What problem does this bill seek to solve? The author and sponsor of this bill argue that this bill is necessary to protect California tax-exempt nonprofit organizations that may have their federal tax-exempt status suspended or revoked for politically motivated or other reasons that lack basis in existing federal law and regulation. In particular, this bill is focused on the subset of nonprofit organizations that qualified for tax-exempt status for state tax purposes based on their federal determination by the IRS.
      
      Under existing law, if the IRS suspends or revokes the tax-exempt status of a nonprofit organization and the organization received California tax-exempt status based on that federal determination, its state-level, tax-exempt status will also be revoked or suspended automatically by the FTB. While this bill does not change this requirement, it would allow the FTB to, in its discretion, maintain the organization's tax-exempt status only if the suspension or revocation is not related to any of the following:
      
      1. Fraud or intentional misrepresentation;
         
      2. Misuse or diversion of organizational funds;
         
      3. Failure to file required returns or reports; or,
         
      4. Other significant breaches of organizational reporting or governance requirements.
         
   2. Tax-exempt nonprofits: Nonprofit organizations are generally organized and operated as both nonprofit and tax-exempt entities. "Nonprofit" status refers to incorporation status under state corporation law; "tax-exempt" status refers to federal income tax exemption under the IRC and, if applicable, state tax law. The vast majority of tax-exempt entities qualify under IRC Section 501(c)(3) and, accordingly, must be organized and operated exclusively for religious, charitable, scientific, literary, educational, testing for public safety, preventing cruelty to children or animals, or fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).^[1]
      
      In addition to serving one of these public purposes, no part of the organization's net earnings can inure to the benefit of private shareholders or individuals, such as the creator's family members, board members, or persons controlled directly or indirectly by private interests. Further, organizations exempt under 501(c)(3) cannot, as a substantial part of their activities, attempt to influence legislation (subject to limited exceptions) or participate in political campaigns for or against any candidate for public office.

Organizations must apply to the IRS for tax-exempt status by completing the requisite form and provide copies of its organizing documents (e.g., articles of incorporation, constitution, trust document, etc.), bylaws (if adopted), and supplemental responses, if applicable, to demonstrate compliance with the above requirements.1

• 1. Remaining in good standing: Except for churches and other church-related organizations, tax-exempt organizations must still file annual information returns with the IRS. Organizations that normally have $50,000 or more in gross receipts must complete Form 990 or Form 990-EZ; small organizations – those whose annual gross receipts are normally less than $50,000 – must complete a shorter information return commonly referred to as the "e-Postcard".

If an organization fails to file an annual information return with the IRS for three consecutive years, its tax-exempt status is automatically revoked. The IRS notifies the organization by sending a letter to the mailing address on record and the organization is added to a publicly available list of all organizations that have had their tax-exempt status automatically revoked. If an organization's tax-exempt status is revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file federal income tax returns and pay applicable income taxes. Additionally, an organization that loses its tax-exempt status is not eligible to receive tax-deductible contributions and will be removed from the IRS' list of tax-exempt organizations.1

• 1. Other ways tax-exempt status can be revoked: If the IRS questions the federal tax-exempt status of a nonprofit organization, it can initiate an audit (or "examination") of the organization, auditing one or more information returns that were filed by the entity. For the tax years under examination, the IRS is effectively determining whether the information returns were accurate and reflected full compliance with the applicable tax laws. The two most common types of audits are correspondence examinations and field examinations, the latter of which is much more invasive, involving one or more auditors on site reviewing information and documents and conducting interviews. Field exams generally take several months to conduct, at a minimum, and often much longer.^[2]

There are four potential outcomes of an IRS examination of an exempt organization: a no-change letter, a no-change letter with written advisories, a negotiated closing agreement, or a proposed revocation of exempt status. The first three outcomes enable the organization to retain its tax-exempt status, but in the second or third options, with certain conditions or required changes to ensure compliance with applicable laws and regulations.

If the IRS concludes an audit with a proposed revocation, the organization has 30 days (or longer if an extension is negotiated) to "protest" the proposed ruling and avail itself of the IRS appeals process. During the pendency of the IRS appeal, the organization remains tax-exempt; and during the pendency of the audit and appeal process, the IRS is barred by law from disclosing anything publicly about the matter. Once the protest is filed, it will be assigned to an IRS appeals officer, and the organization (and/or its representatives) will have the opportunity to have an appeals conference to make its case for denying the proposed revocation or otherwise proposing a settlement. The appeals conference is an informal meeting between the organization's representatives and the appeals officer; the IRS agent who conducted the underlying examination does not participate in the conference. The appeals officer (with the approval of their manager) has broad authority to order the IRS division conducting the examination to issue a no-change letter or no-change letter with written advisories, to negotiate a settlement with the organization, or to finalize the revocation.2

If the IRS appeals officer decides to uphold the proposed revocation, the organization will be issued a final adverse determination letter, at which point the entity will have lost its federal tax exemption and the organization has 90 days to petition the U.S. Tax Court, the U.S. Court of Federal Claims, or the U.S. District Court for the District of Columbia for a declaratory judgment as to its qualification for tax-exempt status.

Even if, following the IRS audit and appeal process (and any ensuing litigation), an organization's tax-exempt status is revoked, it still remains a nonprofit corporation (albeit a taxable one). Even post-revocation, the IRS and FTB have no authority to shut down a nonprofit, seize its assets, or otherwise take control of the organization.

• 1. Under threat: Following a series of executive orders (EOs) by President Donald Trump in early 2025, nonprofit organizations engaging in diversity, equity, inclusion and environmental justice (EJ) work may now face significant legal and financial risks. Two major EOs—"Ending Illegal Discrimination and Restoring Merit-Based Opportunity" and "Ending Radical Wasteful Government DEI Programs and Preferencing"—aim to eliminate federal support for DEI and EJ programs. These directives not only target public-sector efforts, but also extend to private nonprofits, foundations, and associations, requiring them to certify compliance with federal anti-discrimination laws and potentially subjecting them to federal scrutiny.
     
     Additionally, another EO issued on March 7, 2025 ordered the U.S. Secretary of Education to propose regulations that exclude from the Public Service Loan Forgiveness (PSLF) program nonprofit organizations that the administration believes do not qualify for 501(c)(3) tax-exempt status due to having a "substantial illegal purpose." The EO defined activities with a "substantial illegal purpose" to include those that aid or abet violations of federal immigration laws, support terrorism, aid or abet illegal discrimination, or violate state tort laws (including those against trespassing, disorderly conduct, or public nuisance), among others.

On July 10, 2020, President Trump posted on Twitter: "Too many Universities and School Systems are about Radical Left Indoctrination, not Education. Therefore, I am telling the Treasury Department to re-examine their Tax-Exempt Status...." Since re-taking office in January of 2025, President Trump has repeated similar remarks and explicitly called for the revocation of Harvard University's tax-exempt status on multiple occasions, culminating in officials at the Treasury Department sending the request targeting Harvard to the IRS's top lawyer at the time, Andrew De Mello.^[3]

Last year, President Trump suggested that Citizens for Responsibility and Ethics in Washington (CREW), a nonprofit watchdog group that has litigated against his executive actions and conducted investigations into what it alleges are conflicts of interest, should have its tax-exempt status scrutinized because, "The only charity they had is going after Donald Trump." In April 2025, Ed Martin, the former interim U.S. Attorney in Washington D.C., sent a letter to Wikimedia Foundation in April, alleging that it was "engaging in a series of activities that could violate its obligations" as a tax-exempt nonprofit.^[4] After the killing of Charlie Kirk, President Trump and other top officials threatened to use tools such as stripping groups of tax-exempt status and opening criminal racketeering probes to target these groups.^[5]

• 1. Diversity, equity, and inclusion: In June 2023, the U.S. Supreme Court ruled that Harvard University and the University of North Carolina's "race-conscious" admissions programs violate the equal protection clause of the 14th Amendment. Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023). While Chief Justice Roberts, writing for the majority, noted that schools could be mindful of applicants' race in a much more narrowly tailored way, such as through an application essay or narrative, some critics have felt the decision did not go far enough and that a school considering race in any form amounted to unconstitutional discrimination.

In March 2025, the U.S. Department of Justice announced that it had launched investigations into Stanford University and three University of California schools to ensure the schools "comply with a Supreme Court decision that prevents colleges and universities from discriminating when choosing students for admission." In April 2025, the American Alliance for Equal Rights filed complaints with the IRS asking that they audit and revoke the tax-exempt status of the Gates Foundation and two other 501(c)(3) foundations due to their race-restricted scholarship programs.

• 1. Bob Jones University: Over 30 years ago, the U.S. Supreme Court upheld the administrative revocation of an entity's tax-exempt status based on the organization's racially discriminatory admissions practices. Bob Jones University v. United States, 461 U.S. 574 (1983).

On January 19, 1976, the IRS officially revoked the tax-exempt status of Bob Jones University (BJU), a nonprofit religious and educational organization, based on its racially discriminatory policies.^[6] Id. at 581. BJU's sponsors genuinely believed that the Bible forbade interracial dating and marriage. Id. at 580. In furtherance of these beliefs, BJU excluded all African-Americans from admission until 1971. Id. Beginning that year, BJU began accepting applications from African-Americans, but only from those individuals "married within their race." Id. Then, in 1975, the U.S. Court of Appeals for the Fourth Circuit's decision in McCrary v. Runyon, 515 F.2d 1082 (1975), prohibited racial exclusion in private schools. Id. Following this decision, BJU began allowing unmarried African-Americans to enroll, but prohibited both interracial dating and marriage. Id.

Following the revocation of its tax-exempt status, BJU brought suit to recover $21 in tax paid to the IRS. Id. at 582. The U.S. District Court for the District of South Carolina held that the revocation of BJU's tax-exempt status exceeded the delegated powers of the IRS and violated BJU's rights under the Religion Clauses of the First Amendment. Id. The Court of Appeals for the Fourth Circuit, in turn, reversed. Id.

On review, the Supreme Court upheld the IRS's revocation of BJU's tax-exempt status. The Court noted that racial discrimination in education violates deeply and widely accepted views of basic justice. Id. at 592. The Court acknowledged that, when the nation's first charitable exemption law was enacted in 1894, racially segregated school facilities would not have been viewed as against public policy. Nevertheless, the Court noted that contemporary standards must be considered when determining whether certain activities confer a public benefit entitled to preferential tax treatment. Thus, the Court concluded that an educational institution that, for whatever reason, practices racial discrimination, cannot be viewed as exercising beneficial influences in community life, and should not be encouraged by having all taxpayers share in its support by way of preferential tax treatment. Id. at 595. Moreover, the Court validated the IRS's administrative action by noting:

[I]t would be anomalous for the Executive, Legislative, and Judicial Branches to reach conclusions that add up to a firm public policy on racial discrimination, and at the same time have the IRS blissfully ignore what all three branches of the Federal Government had declared.

Id. at 598.

One commenter has argued that this precedent could provide some justification for the revocation of tax-exempt status from colleges and universities in light of Students for Fair Admissions.^[7] However, others have rejected this interpretation because the IRS does not have the authority to determine fundamental public policy and then revoke exemptions on the basis of that determination.^[8] Writing in response to the argument above, a group of law professors with expertise in tax and nonprofit law, argue:

Bob Jones University teaches that we must distinguish "public policy" from "fundamental public policy." Public policy includes all actions and decisions by governmental bodies to address societal issues. As in Bob Jones University, fundamental public policy involves core values. A new presidential administration is free to establish a new public policy. But such a new public policy does not create a fundamental public policy. Fundamental public policies do not change with changes in presidential administrations. Charities do not gain, and then lose, and then perhaps regain exemption depending on the positions of whatever U.S. president is in office. If the IRS fails to observe the distinction between public policy and fundamental public policy in revoking Harvard's exemption, Harvard will have several avenues for seeking judicial review.

• 1. What happens during FTB's review period? As currently drafted, this bill may permit an organization to continue operating and remain in good standing in California during the FTB’s review period until a final determination is made. However, the bill does not address key operational and compliance implications that may arise if the organization is ultimately denied state exemption status retroactive to the federal revocation date. Specifically, it is unclear how the organization should treat contributions received during the review period, or what legal or administrative status the organization would hold while its exemption is under review. To provide clarity, the author may wish to amend the bill to specify the treatment of contributions received during that time and other potential administrative concerns.
     
  2. Prior legislation:
     
     1. AB 1318 (Bonta), Chapter 451, Statutes of 2025, provided that, where 501(c)(3) tax-exempt status is used to determine eligibility for any state grant or service contract, or for the disbursement of state or local funds, an organization that is exempt from California taxes is also deemed eligible.
        
     2. SB 834 (Wiener), of the 2021-22 Legislative Session, would have, under the CT Law, required the Attorney General to notify the FTB of any finding that a tax-exempt organization was actively engaged in, or incited the active engagement in, illegal activities, including those related to the January 6, 2021, attempted insurrection at the United States Capitol. The bill also restated the FTB’s existing authority to revoke the tax-exempt status of an organization found to be in violation. SB 834 was vetoed by Governor Newsom, whose veto message stated, in part:

This bill allows the FTB to revoke the tax-exempt status of a nonprofit, charitable organization if the California Attorney General determines the organization has engaged in treason, insurrection, conspiracy, government overthrow, or mutiny by members of the military. Without question, extremist groups that participate in anti-government acts such as those that took place during the insurrection on January 6, 2021, should be renounced and investigated for their participation. However, these are issues that should be evaluated through the judicial system with due process and a right to a hearing.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Nonprofits

CPCA Advocates, Subsidiary of the California Primary Care Association

Planned Parenthood Affiliates of California

Opposition

None on file

Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098

1. Publication 557 Tax-Exempt Status for Your Organization, Internal Revenue Service (Rev. January 2025, https://www.irs.gov/pub/irs-pdf/p557.pdf. ↑

2. Jeffrey Scott Tenenbaum, How the IRS Can—and Cannot—Revoke Federal Tax-Exempt Status, American Bar Association (May 6, 2025), https://www.americanbar.org/groups/business_law/resources/
   business-law-today/2025-may/how-irs-revoke-federal-tax-exempt-status/. ↑

3. Brian Schwartz and Douglas Belkin, Trump Administration Asks IRS to Start Process to Revoke Harvard's Tax-Exempt Status, The Wall Street Journal (April 16, 2025), https://www.wsj.com/us-news/education/trump-administration-asks-irs-to-start-process-to-revoke-harvards-tax-exempt-status-2a1c93cf. ↑

4. Oremus and Mark, U.S. attorney for D.C. accuses Wikipedia of 'propaganda,' threatens nonprofit status, Washington Post (April 25, 2025), https://www.washingtonpost.com/technology/2025/04/25/wikipedia-nonprofit-ed-martin-letter/. ↑

5. Foxman, Reilly, and Korte, Trump Readies Tax Audits, Criminal Probes of Liberal Groups, Bloomberg Tax (September 18, 2025), https://news.bloombergtax.com/daily-tax-report/trump-readies-tax-audits-criminal-probes-of-liberal-groups. ↑

6. Prior to 1970, the IRS granted tax-exempt status to private schools under Internal Revenue Code Section 501(c)(3), without regard to their racial admissions policies. Bob Jones University, supra at 577. Then, on January 12, 1970, a three-judge District Court for the District of Columbia issued a preliminary injunction barring the IRS from affording tax-exempt status to private schools in Mississippi with racially discriminatory admissions practices. Id. at 578. Roughly six months later, the IRS announced that it could "no longer legally justify allowing tax-exempt status to private schools which [sic] practice racial discrimination." Id. The IRS also announced that it could not "treat gifts to such schools as charitable deductions for income tax purposes." Id. This revised policy on discrimination was formalized in Revenue Ruling 71-447, which noted that "[a]ll charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy." Id. at 579. ↑

7. Marie Sapirie, Harvard Has a Precedent Problem in Fight to Keep Exempt Status, TaxNotes Federal (May 13, 2025), https://www.taxnotes.com/tax-notes-today-federal/exempt-organizations/harvard-has-precedent-problem-fight-keep-exempt-status/2025/05/13/7s5wx. ↑

8. April, Galle, Hackney, and Hitoshi Mayer, Harvard Does Have Options if It Loses Tax-Exempt Status, TaxNotes Federal (May 21, 2025), https://www.taxnotes.com/tax-notes-today-federal/exempt-organizations/harvard-does-have-options-if-it-loses-tax-exempt-status/2025/05/21/7s7fz. ↑