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California Tax Relief for Sellers of Qualified Small Business Stock




by:
D. Matthew Richardson
Sheppard, Mullin, Richter & Hampton LLP - Los Angeles Office

 
October 10, 2013

Previously published on October 8, 2013

On Friday October 3, 2013, Governor Brown signed into law AB 1412, which provides full relief for individuals affected by the decision in Cutler v. Franchise Tax Board, where the California Court of Appeal held that the California tax incentives relating to the sale of qualified small business stock discriminated against interstate commerce and were therefore unconstitutional.

Under the new legislation, which is retroactive in application, all shareholders selling qualified small business stock (QSBS) will qualify for the gain deferral and 50% exclusion incentives, regardless of the percentage of the corporation’s assets used in the conduct of business in California or the percentage of corporation’s California payroll.

The Franchise Tax Board had previously taken the position, expressed in FTB Notice 2012-03, that the court’s decision in Cutler made California’s entire QSBS statute invalid and unenforceable, and, as a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. Taxpayers who previously took advantage of California’s treatment of QSBS in years still open for assessment under the 4-year statute of limitations rule (generally 2008 and later) were therefore required to recompute their taxable income for each affected year and file amended returns without excluding or deferring gains from the disposition of QSBS. With the enactment of AB 1412, there is now full (retroactive) relief for individuals affected by the Cutler decision.

For taxpayers who filed their 2008 - 2012 tax returns and were contacted by the FTB regarding their QSBS election, the FTB will notify them of the following:

  • Pending Notices of Proposed Assessments based on the Cutler decision or FTB Notice 2012-3 will be withdrawn.
  • Closing letters will be mailed to taxpayers who signed a limited QSBS waiver for 2008.
  • Unpaid tax, interest, or penalty assessed as a result of the Cutler decision/FTB Notice 2012-3 will be abated.
  • Refunds for payments received related to the Cutler decision/FTB Notice 2012-3 will be issued. No action is needed by taxpayers to request refunds, unless they do not hear from the FTB by November 30, 2013.

Taxpayers who filed their 2008 - 2012 tax returns and did not claim the QSBS election may now do so. However, the FTB’s position is that the QSBS must have met the 80% California payroll requirement at the time of acquisition to claim the 50% gain exclusion or deferral in order to file an amended return (claim for refund) if the statute of limitations is open.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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