Governor Signs Bill Providing Retroactive Tax Relief to Sellers of Qualified Small Business Stock

by Manatt, Phelps & Phillips, LLP
Contact

On October 4, 2013, Governor Brown signed into law California Assembly Bill 1412 (Stats. 2013, ch. 546) ("AB 1412"), which provides tax relief to those individual taxpayers affected by the decision in Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012). Under the new law, which is retroactive in application, individual taxpayers who previously sold qualified small business stock ("QSBS") and deferred or excluded 50% of the gain for open tax years (generally, 2008 through 2012) will continue to qualify for such gain deferral or exclusion irrespective of the percentage of the QSBS issuer's assets used in the conduct of business in California or the percentage of its California payroll.

Earlier this year, we released guidance concerning the California Court of Appeal's decision in Cutler and the response by the Franchise Tax Board ("FTB"). (Please see FTB Announces Temporary Reprieve on Retroactive Assessment of Qualified Small Business Stock Taxes and FTB Retroactively Denies “Qualified Small Business Stock” Personal Income Tax Benefits.) By way of brief background, the Court of Appeal overturned then-existing state laws providing for gain deferral or 50% exclusion upon the sale of QSBS. The Court of Appeal held that such tax incentives, which required QSBS issuers to have 80% or more of their assets and payroll in California, discriminated against interstate commerce, and therefore, were unconstitutional. Consequently, in FTB Notice 2012-03, the FTB declared that California's QSBS statutes were invalid and also issued corresponding Notices of Proposed Assessment (the "NPAs") to affected taxpayers.

With the enactment of AB 1412, taxpayers who previously filed their tax returns for open tax years and timely made a QSBS election to exclude or defer gain on the sale of QSBS will no longer be required to recompute their taxable incomes, file amended returns or pay retroactive taxes, interest or penalties for such tax years. In response to the passage of AB 1412, the FTB has recently released detailed guidance in the form of an updated FAQ on its website. For those taxpayers who filed their tax returns for open tax years and were contacted by the FTB regarding improper QSBS elections, the FTB indicates it will now take the following actions:

  • The NPAs will be withdrawn.
  • Closing letters will be mailed to taxpayers who signed a limited QSBS waiver for 2008.
  • Unpaid taxes, interest, or penalties assessed as a result of Cutler or FTB Notice 2012-03 will be abated in full.
  • Refunds for payments received by the FTB pursuant to Cutler or FTB Notice 2012-03 will be issued. No action is needed by taxpayers to request refunds, unless they do not hear from the FTB by November 30, 2013.

For those taxpayers who filed tax returns for open tax years but did not previously make a QSBS election, such taxpayers may file refund claims for gains realized that otherwise qualified for gain exclusion or deferral but for California's in-state property and payroll requirements for QSBS issuers. However, the FTB has stated that in accordance with AB 1412, the QSBS issuer must have met the 80% California payroll requirement at the time the taxpayer acquired the QSBS to claim the gain exclusion or partial deferral by filing an amended return(s) (claim for refund) for open tax years. Taxpayers have until June 30, 2014, to file a QSBS claim for refund for tax year 2008.

In summary, AB 1412 provides a significant retroactive remedy for those taxpayers who sold QSBS after January 1, 2008, and before January 1, 2013. Under AB 1412, QSBS treatment is available for gains realized from installment sales occurring during the foregoing period until January 1, 2016, at which time QSBS treatment is repealed. It should be noted that, for those in-state QSBS issuers that may have expanded to include out-of-state business operations, AB 1412 also removes the unconstitutional defect that had limited QSBS gain exclusion or deferral to only in-state businesses.

As discussed above, California taxpayers should consider filing refund claims for gains realized from the sale of QSBS for open tax years that may have otherwise qualified for gain exclusion or deferral but for the active in-state business requirement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP
Contact
more
less

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.