The restrictions enumerated in Section 23737 are in addition to and not in limitation of the restrictions contained in Section 23701d. Even though an organization has not violated any of the terms of Section 23737, it still may not qualify for tax exemption in view of the general provisions of Section 23701d. Thus, if an officer, director, trustee or fiduciary of the organization (whether or not he is also a creator of such organization) enters into a transaction with the organization, such transaction will be closely scrutinized in light of the fiduciary principle requiring undivided loyalty to ascertain whether the organization is in fact being operated for the stated exempt purposes.

For any income year beginning after December 31, 1950, any organization described in Section 23701d other than an organization described in Section 23736 shall not be exempt under Section 23701d if the amounts accumulated out of income during the income year or any prior income year, (including income years beginning prior to January 1, 1951), and not actually paid out for exempt purposes by the end of the income year are unreasonable. Amounts accumulated out of income become unreasonable when more income is accumulated than is needed, or when the duration of the accumulation is longer than is needed, in order to carry out the purpose constituting the basis for the organization's exemption. Furthermore, an organization shall not be exempt under Section 23701d if amounts accumulated out of income are used to a substantial degree for purposes or functions other than those constituting the basis for the organization's exemptions, or if such amounts are invested in such a manner as to jeopardize the carrying out of the purpose or function constituting the basis for the organization's exemption.

For the purpose of Section 23737, the term “income” means gains, profits, and income determined under the principles applicable in determining the earnings or profits of a corporation. The amount accumulated out of income during the income year or any prior income year shall be determined under the principles applicable in determining the accumulated earnings or profits of a corporation. In determining the reasonableness of an accumulation out of income, there will be disregarded the following: (1) the accumulation of gain upon the sale or exchange of a donated asset to the extent that such gain represents the excess of the fair market value of such asset when acquired by the organization over its substituted basis in the hands of the organization; (2) the accumulation of gain upon the sale or exchange of property held for the production of investment income, such as dividends, interest, and rents, where the proceeds of such sale or exchange are within a reasonable time reinvested in property acquired and held in good faith for the production of investment income.

Where the conditions specified in paragraphs (a), (b), and (c) of Section 23737 are present in any case must be determined from all the facts. The conditions specified in Section 23737 may result from the use of only one organization or of a chain of two or more organizations.

An organization that has lost its exempt status by reason of the provisions of Section 23737 may, in order to re-establish its exemption, file a claim for exemption with the Franchise Tax Board. Form 190, the exemption application, a copy of which may be obtained from any branch office, shall be used for this purpose. The claim for exemption must contain or be accompanied by information or evidence showing that the circumstances that caused the loss of exemption under Section 23737 no longer exist, and an affidavit, by a principal officer of such organization authorized to make such affidavit, that the organization will not knowingly again violate the terms of Section 23737. See Section 23701 for proof of exemption requirements in general. The provisions of Section 23737 contemplate that an organization denied exemption thereunder will be subject to taxation for at least one full income year. For the purpose of this regulation, the term “income year” means the established annual accounting period of the organization next succeeding the year in which the transaction occurred; or, if the organization has no such established annual accounting period, the “income year” of the organization means the calendar year next succeeding the year in which the transaction occurred.

In the case of an organization denied exemption under Section 23701d solely by reason of the provisions of Section 23737, deductions otherwise allowable under Sections 24357 to 24359, inclusive, for gifts or contributions to such organizations shall not be disallowed.

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This regulation is substantially the same as Section 29.3814-1, Fed. Reg. 111.