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BLOOMBERG/BUREAU OF NATIONAL AFFAIRS: Two-Bill Solution for Small Business Stock
September 10, 2013
Reproduced with permission from Daily Tax Report, 175 DTR H-1 (Sept. 10, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
Taxpayers Await California Governor's Nod
By Laura Mahoney
Sept. 9 — Investors in California startup companies who used a tax benefit that has been ruled unconstitutional may get a reprieve after all from tax assessments going back to 2008 under a new compromise emerging in the final week of the legislative session.
A bill introduced late Sept. 6 would relieve as many as 2,500 entrepreneurs from retroactive tax bills the state's Franchise Tax Board is issuing to them because they were able to exclude 50 percent of gains from the sale of qualified small business stock (QSBS) from income tax under an unconstitutional law.
The bill (A.B. 1412) goes farther than another pending bill on the topic, S.B. 209, which would exclude only 38 percent of the gain from income tax back to 2008.
Lawmakers might approve both measures, giving Gov. Jerry Brown (D) a choice about whether the entrepreneurs should be relieved of the tax bills, which are estimated to total $200 million, and if so, by how much.
“The goal is to send both bills to the governor,” Sen. Ted Lieu (D), author of S.B. 209 and principal co-author of A.B. 1412 told Bloomberg BNA Sept. 9. “The governor can decide whether to hold taxpayers 75 percent harmless or 100 percent harmless.”
The new QSBS provisions were introduced by amending them into A.B. 1412, a bill originally dealing with another topic that already passed the Assembly, is pending in the Senate and is close to reaching the governor's desk. The two-bill approach emerged after Lieu and several Assembly members were unable to secure similar amendments to S.B. 209, which is pending in the Assembly and is also only a few steps from the governor's desk, Lieu and Assembly staff members told Bloomberg BNA.
Brown hasn't taken a position on the bills. The 2013 legislative session ends Sept. 13. Both bills need final votes on the floor of both houses to approve the last-minute amendments and reach the governor.
Both bills are an attempt to insulate the entrepreneurs from an August 2012 ruling in the state court of appeal in the case Cutler v. Franchise Tax Bd. (168 DTR K-1, 8/30/12). The court struck down the 20-year-old qualified small business stock statute, which allowed investors to exclude 50 percent of the gain from sale of small business stock from personal income tax if the investment was tied to a California company, saying it discriminated against interstate commerce.
Null and Void
The FTB interpreted the ruling to mean the entire statute is null and void, and the only option to remedy the discrimination is to issue assessments to taxpayers who benefited from the discriminatory law and are within the statute of limitations.
The FTB has begun issuing issue assessments for 2008 through 2012 to taxpayers who used the QSBS exclusion, and no longer allows the exclusion going forward.
Lieu, backed by a coalition of entrepreneurs, has argued the taxpayers shouldn't pay the price of retroactive tax assessments because lawmakers made a mistake when they enacted the unconstitutional law in 1993.
As he originally proposed S.B. 209 in April, the bill would have eliminated the retroactive assessments and allowed the exclusion from 2008 through 2012. Hostile amendments made in the Senate in May cut the exclusion from 50 percent to 38 percent for the open years. The retroactive income tax payments from entrepreneurs on 12 percent of the gains would pay for refunds to taxpayers who didn't originally qualify for the QSBS exclusion but who could now file amended returns and make new claims for refunds (102 DTR H-2, 5/28/13).
Lieu and the coalition, called California Business Defense, continued to push for the 50 percent exclusion in the years open under the statute of limitations.
“We will make as strong a case as possible that the governor should sign the bill with the full 50 percent,” Brian Overstreet, an entrepreneur who launched the coalition, told Bloomberg BNA Sept. 9.
No Penalties or Interest
Both bills would relieve taxpayers of penalties and interest on payments they would be required to make in the wake of the Cutler ruling. A.B. 1412 would require the FTB to enter into installment payments with taxpayers, and give taxpayers 180 days from the bill's enactment to file refund claims for the 2008 tax year because the statute of limitations is running out for that year.
Neither bill would restart the QSBS law in 2016, as Lieu originally proposed, to reflect one interpretation of the Cutler ruling that part of the law is still standing (66 DTR H-2, 4/5/13).According to Lieu, the court struck down only one provision, which required that 80 percent of a company's property and payroll be in California during the time the stock is held.
Another provision to require 80 percent of property and payroll to be in the state at the time the stock is issued wasn't before the court and still stands, Lieu and the supporters have argued. FTB has disagreed, saying the entire statute is no longer valid.
Lieu originally proposed that in 2016, only the requirement for California-based payroll and property at the time of stock issuance would be in effect.
Majority Votes Needed
Both bills also will state that they don't require an appropriation from the state general fund, making them majority-vote bills rather than two-thirds vote bills, Lieu said. Without a partial restart of the QSBS provisions in 2016, the measures both would result in overall revenue gains.
Several technical amendments to S.B. 209, including the shift from a two-thirds vote to a majority-vote requirement, are likely to be made in the Assembly before a vote on the floor, Lieu and an Assembly staff member told Bloomberg BNA.
A.B. 1412 also declares the Legislature's intent behind the bill is to “serve a public purpose by providing equitable tax treatment and fair tax relief to taxpayers that are stimulating the economy of the state,” and that the bill wouldn't constitute a gift of public funds.
To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at firstname.lastname@example.org
To contact the editor responsible for this story: Cheryl Saenz at email@example.com
For More Information
Additional information about the bills is at http://leginfo.legislature.ca.gov/.