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State & Local Tax Bulletin (October 2013)

California Reinstates Qualified Small
Business Stock Benefits




By Kerne H. O. Matsubara, a tax partner in the San Francisco office of Pillsbury Winthrop Shaw Pittman LLP.

If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our October 2013 State & Local Tax Bulletin (a 153K pdf file), containing a printed version of this article and also available via ftp at:

    ftp.pmstax.com/state/bull310.pdf.

This bulletin concerning state and local tax matters is part of the Tax Page, a World Wide Web demonstration project, no portion of which is intended and cannot be construed as legal or tax advice. Comments are welcome on the design or content of this material.

On October 4, 2013, California Governor Brown signed Assembly Bill 1412 ("AB 1412"), retroactively reinstating the California qualified small business stock ("QSBS") gain exclusion and rollover for tax years 2008 to 2012. Cal.Rev.& Tax.Code §§ 18038.5, 18152.5.

AB 1412 was enacted in response to retroactive assessments by the Franchise Tax Board ("FTB") against taxpayers who claimed California QSBS benefits in 2008-2012. See FTB Notice 2012-03. The FTB based the assessments on its position that California's QSBS statutes were invalid and unenforceable in their entirety as a result of the California Court of Appeal's decision in Cutler. Cutler v. Franchise Tax Board, 208 Cal.App.4th 1247 (2102); see our February 2013 Tax Bulletin for a discussion of the Cutler decision and the FTB's response and our September 1998 Tax Bulletin for a discussion of the requirements and limitations applicable to QSBS and gain from its disposition.

AB 1412 re-enacts and modifies the QSBS statutes by eliminating the requirement that 80 percent of the stock-issuing corporation's business activity occur in California during the stock holding period. However, the 80-percent California payroll requirement at the time of stock acquisition must still be met. The Court in Cutler did not specifically address this requirement, the constitutionality of which is questionable under the Commerce Clause.

The FTB set forth procedures for taxpayers in light of AB 1412. See FTB Tax News, October 7, 2013. The FTB indicated that taxpayers who filed their 2008-2012 tax returns and received notices of proposed assessments will have such notices withdrawn. Taxpayers who filed their 2008-2012 tax returns and did not claim the QSBS benefit may file amended returns and claim a refund, if the statute of limitations is open. In general, the California statute of limitations is four years from the date the return was timely filed, or one year from the date of overpayment, whichever is later. In addition, AB 1412 allows taxpayers until June 30, 2014 to file a QSBS claim for refund for the 2008 tax year.


This material is not intended to constitute a complete analysis of all tax considerations. Internal Revenue Service regulations generally provide that, for the purpose of avoiding United States federal tax penalties, a taxpayer may rely only on formal written opinions meeting specific regulatory requirements. This material does not meet those requirements. Accordingly, this material was not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal or other tax penalties or of promoting, marketing or recommending to another party any tax-related matters.


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