• California: Legislature Punts Decision on Amount of Retroactive Tax on QSBS Assessments to Governor
  • September 27, 2013 | Authors: David M. Kall; Susan Millradt McGlone
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • The California legislature has sent two bills (S.B. 209 and A.B. 1412) to Governor Jerry Brown providing for partial or full legislative fixes for the retroactive tax assessments that may be imposed on as many as 2,500 California investors who benefited from an unconstitutional income tax exclusion from the sale of Qualified Small Business Stock (QSBS) during tax years 2008 and later.

    The purpose of the bills is to provide either partial or full relief to California taxpayers who have or will be receiving tax assessments from the Franchise Tax Board if they benefited from the QSBS exclusion, which was struck down by a state appellate court (Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012)) in tax years that are still open under the statute of limitations.

    A.B. 1412 would provide a full legislative fix and allow such California investors to exclude up to 50 percent of the gain from the sale of QSBS during tax years 2008 and later, which would eliminate the retroactive QSBS assessments. As originally proposed, S.B. 209 would also have provided for complete relief from QSBS assessments. However, due to a hostile amendment, S.B. 209 now only permits such California investors to exclude up to 38 percent of the gain from the sale of QSBS during tax years 2008 and later, which would mean California taxpayers receiving assessments from the Franchise Tax Board for previously excluded QSBS gain would be required to pay one-fourth of those assessments. A.B. 1412, which was a bill unrelated to S.B. 209, was amended to include full relief from QSBS assessments after lawmakers were unable to gain sufficient support to remove the hostile amendment from S.B. 209.

    Both bills relieve taxpayers of the obligation to pay any penalties or interest due to any payments that would be required to be paid due to the Cutler decision, require the Franchise Tax Board to enter into agreements with taxpayers to accept the full payment of such QSBS assessments in installments over a period not to exceed five years, and allow taxpayers an additional 180 days after the bill becomes effective to file any claims for credit or refund related to such act.

    Governor Brown has not taken a public position on the bills. He has until October 13, 2013 to decide whether to approve or veto the bills. If both bills are vetoed by Governor Brown, then California taxpayers will receive no relief from retroactive QSBS assessments.