$10 million reduced by gain excluded in prior taxable years with respect to stock of the same corporation, and

10 times the taxpayer's basis in qualified small business stock issued by the same corporation and disposed of by the taxpayer during the taxable year.

Qualified small business stock must be issued after August 10, 1993 and must be acquired by the taxpayer upon original issuance in exchange for money or other property (not including stock) or as compensation for services. The stock must be issued by a domestic C corporation (i.e., it cannot be issued by an S corporation) the gross assets of which did not exceed $50 million (i) at all times on or after July 1, 1993 (on or after August 10, 1993 for the federal exclusion) and immediately prior to issuance of the stock and (ii) immediately after issuance of the stock taking into account amounts received upon the stock's issuance.

• The California exclusion additionally requires at least 80 percent of the issuing corporation's payroll to be attributable to employment located in California at the time of the stock's issuance.

Further, stock in a corporation will not constitute qualified small business stock unless throughout substantially all of the taxpayer's holding period for the stock the corporation remains a C corporation and at least 80 percent (by value) of the corporation's assets are used in the active conduct of one or more qualified trades or businesses.

• The California exclusion requires the active business or businesses to be conducted within California and considers the corporation to fail to meet the active business test for any period during which more than 20 percent of its payroll is attributable to employment located outside California.

The following do not constitute qualified trades or businesses:

Service businesses in the fields of, among others, health, law, engineering, architecture, accounting, performing arts, athletics, and financial or brokerage services,

Any banking, insurance, financing, leasing, investing or similar business,

Farming,

Any business involving the production or extraction of products of a character for which depletion is available and

Any business of operating a hotel, motel, restaurant or similar business.

Numerous special rules apply regarding such matters as start-up companies and operations (including research and development), a limitation on permitted real estate holdings, tax-free and other transfers of stock, stock redemptions and stock held by partnerships, S corporations and other "pass-through" entities.

It is not completely clear that the FTB has the authority to deny the California 50 percent exclusion on the sole ground that FTB Form 3565 was not timely filed. While both the federal and California statutes permit the IRS and FTB, respectively, to require the filing of information returns (I.R.C. § 1202(d)(1)(C); Cal.Rev.& Tax.Code § 18152.5(d)(1)(D)), the only explicit statutory penalty for failing to file those returns is $50, not denial of the shareholder's eligibility for the 50 percent exclusion (I.R.C. § 6652(k); Cal.Rev& Tax.Code § 19133.5). The FTB contends that the $50 penalty is directed only to the stock's corporate issuer and that the corporation's failure to file a timely information return causes the shareholder to fail to meet statutory prerequisites for the exclusion.