AB 901, as introduced, Wieckowski. Income taxes: exclusion: qualified small business stock.
The Personal Income Tax Law, in modified conformity with federal law, provides various exclusions from gross income in computing tax liability.
This bill would, in modified conformity with federal income tax law, provide that gross income does not include 50% of any gain from the sale or exchange of qualified small business stock, as defined, held for more than 5 years, as provided.
This bill would declare that the retroactive application of this provision serves a public purpose.
This bill would make an appropriation from the General Fund of an amount sufficient to make the refunds required pursuant to the changes in law made by this act, including by providing for the waiver of interest and penalties.
This bill would declare that it is to take effect immediately as an urgency statute.
Vote: 2⁄3. Appropriation: yes. Fiscal committee: yes. State-mandated local program: no.
The people of the State of California do enact as follows:
Section 18038.5 of the Revenue and Taxation
2Code is repealed.
(a) In the case of any sale of qualified small business
4stock held by a taxpayer other than a corporation for more than
5six months and with respect to which that taxpayer elects the
6application of this section, gain from that sale shall be recognized
7only to the extent that the amount realized on that sale exceeds:
8(1) The cost of any qualified small business stock purchased by
9the taxpayer during the 60-day period beginning on the date of
10that sale, reduced by
11(2) Any portion of the cost previously taken into account under
12this section.
13This section shall not apply to any gain that is treated as ordinary
14income for purposes of this part.
15(b) For purposes of this section:
16(1) The term “qualified small business stock” has the meaning
17given that term by subdivision (c) of Section 18152.5.
18(2) A taxpayer shall be treated as having purchased any property
19if, but for paragraph (3), the unadjusted basis of that property in
20the hands of the taxpayer would be its cost (within the meaning
21of Section 1012 of the Internal Revenue Code).
22(3) If gain from any sale is not recognized by reason of
23subdivision (a), that gain shall be applied to reduce (in the order
24acquired) the basis for determining gain or loss of any qualified
25small business stock that is purchased by the taxpayer during the
2660-day period described in subdivision (a).
27(4) For purposes of determining whether the nonrecognition of
28gain under subdivision (a) applies to stock that is sold, both of the
29following shall apply:
30(A) The taxpayer’s holding period for that stock and the stock
31referred to in paragraph (1) of subdivision (a) shall be determined
32without regard to Section 1223 of the Internal Revenue Code.
33(B) Only the first six months of the taxpayer’s holding period
34for the stock referred to in paragraph (1) of subdivision (a) shall
35be taken into account for purposes of applying paragraph (2) of
36subdivision (c) of Section 18152.5.
37(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
38and (k) of Section 18152.5 shall apply.
P3 1(c) This section shall apply to sales made after August 5, 1997.
Section 18038.5 is added to the Revenue and Taxation
3Code, to read:
(a) In the case of any sale of qualified small business
5stock held by a taxpayer other than a corporation for more than
6six months and with respect to which that taxpayer elects the
7application of this section, gain from that sale shall be recognized
8only to the extent that the amount realized on that sale exceeds:
9(1) The cost of any qualified small business stock purchased by
10the taxpayer during the 60-day period beginning on the date of
11that sale, reduced by
12(2) Any portion of the cost previously taken into account under
13this section.
14This section shall not apply to any gain that is treated as ordinary
15income for
purposes of this part.
16(b) For purposes of this section:
17(1) The term “qualified small business stock” has the meaning
18given that term by subdivision (c) of Section 18152.5.
19(2) A taxpayer shall be treated as having purchased any property
20if, but for paragraph (3), the unadjusted basis of that property in
21the hands of the taxpayer would be its cost (within the meaning
22of Section 1012 of the Internal Revenue Code).
23(3) If gain from any sale is not recognized by reason of
24subdivision (a), that gain shall be applied to reduce (in the order
25acquired) the basis for determining gain or loss of any qualified
26small business stock that is purchased by the taxpayer during the
2760-day period described in subdivision (a).
28(4) For purposes of determining whether the nonrecognition of
29gain under subdivision (a) applies to stock that is sold, both of the
30following shall apply:
31(A) The taxpayer’s holding period for that stock and the stock
32referred to in paragraph (1) of subdivision (a) shall be determined
33without regard to Section 1223 of the Internal Revenue Code.
34(B) Only the first six months of the taxpayer’s holding period
35for the stock referred to in paragraph (1) of subdivision (a) shall
36be taken into account for purposes of applying paragraph (2) of
37subdivision (c) of Section 18152.5.
38(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
39and (k) of Section 18152.5 shall apply.
40(c) This section shall apply to sales made after August 5, 1997.
Section 18152.5 of the Revenue and Taxation Code
2 is repealed.
(a) For purposes of this part, gross income shall not
4include 50 percent of any gain from the sale or exchange of
5qualified small business stock held for more than five years.
6(b) (1) If the taxpayer has eligible gain for the taxable year
7from one or more dispositions of stock issued by any corporation,
8the aggregate amount of the gain from dispositions of stock issued
9by the corporation which may be taken into account under
10subdivision (a) for the taxable year shall not exceed the greater of
11either of the following:
12(A) Ten million dollars ($10,000,000) reduced by the aggregate
13amount of eligible gain taken into account by the taxpayer under
14subdivision (a) for prior taxable years and attributable to
15dispositions of stock issued by the corporation.
16(B) Ten times the aggregate adjusted bases of qualified small
17business stock issued by the corporation and disposed of by the
18taxpayer during the taxable year. For purposes of subparagraph
19(B), the adjusted basis of any stock shall be determined without
20regard to any addition to basis after the date on which the stock
21was originally issued.
22(2) For purposes of this subdivision, the term “eligible gain”
23means any gain from the sale or exchange of qualified small
24business stock held for more than five years.
25(3) (A) In the case of a married individual filing a separate
26return, subparagraph (A) of paragraph (1) shall be applied by
27substituting five million dollars ($5,000,000) for ten million dollars
28($10,000,000).
29(B) In the case of a married taxpayer filing a joint return, the
30amount of gain taken into account under subdivision (a) shall be
31allocated equally between the spouses for purposes of applying
32this subdivision to subsequent taxable years.
33(C) For purposes of this subdivision, marital status shall be
34determined under Section 7703 of the Internal Revenue Code.
35(c) For purposes of this section:
36(1) Except as otherwise provided in this section, the term
37“qualified small business stock” means any stock in a C corporation
38which is originally issued after August 10, 1993, if both of the
39following apply:
P5 1(A) As of the date of issuance, the corporation is a qualified
2small business.
3(B) Except as provided in subdivisions (f) and (h), the stock is
4acquired by the taxpayer at its original issue (directly or through
5an underwriter) in either of the following manners:
6(i) In exchange for money or other property (not including
7stock).
8(ii) As compensation for services provided to the corporation
9(other than services performed as an underwriter of the stock).
10(2) (A) Stock in a corporation shall not be treated as qualified
11small business stock unless, during substantially all of the
12taxpayer’s holding period for the stock, the corporation meets the
13active business requirements of subdivision (e) and the corporation
14is a C corporation.
15(B) (i) Notwithstanding subdivision (e), a corporation shall be
16treated as meeting the active business requirements of subdivision
17(e) for any period during which the corporation qualifies as a
18specialized small business investment company.
19(ii) For purposes of clause (i), the term “specialized small
20business investment company” means any eligible corporation (as
21defined in paragraph (4) of subdivision (e)) that is licensed to
22operate under Section 301(d) of the Small Business Investment
23Act of 1958 (as in effect on May 13, 1993).
24(3) (A) Stock acquired by the taxpayer shall not be treated as
25qualified small business stock if, at any time during the four-year
26period beginning on the date two years before the issuance of the
27stock, the corporation issuing the stock purchased (directly or
28indirectly) any of its stock from the taxpayer or from a related
29person (within the meaning of Section 267(b) or 707(b)) to the
30taxpayer.
31(B) Stock issued by a corporation shall not be treated as qualified
32small business stock if, during the two-year period beginning on
33the date one year before the issuance of the stock, the corporation
34made one or more purchases of its stock with an aggregate value
35(as of the time of the respective purchases) exceeding 5 percent
36of the aggregate value of all of its stock as of the beginning of the
37two-year period.
38(C) If any transaction is treated under Section 304(a) of the
39Internal Revenue Code as a distribution in redemption of the stock
40of any corporation, for purposes of subparagraphs (A) and (B), the
P6 1corporation shall be treated as purchasing an amount of its stock
2equal to the amount treated as a distribution in redemption of the
3stock of the corporation under Section 304(a) of the Internal
4Revenue Code.
5(d) For purposes of this section:
6(1) The term “qualified small business” means any domestic
7corporation (as defined in Section 7701(a)(4) of the Internal
8Revenue Code) which is a C corporation if all of the following
9apply:
10(A) The aggregate gross assets of the corporation (or any
11predecessor thereof) at all times on or after July 1, 1993, and before
12the issuance did not exceed fifty million dollars ($50,000,000).
13(B) The aggregate gross assets of the corporation immediately
14after the issuance (determined by taking into account amounts
15received in the issuance) do not exceed fifty million dollars
16($50,000,000).
17(C) At least 80 percent of the corporation’s payroll, as measured
18by total dollar value, is attributable to employment located within
19California.
20(D) The corporation agrees to submit those reports to the
21Franchise Tax Board and to shareholders as the Franchise Tax
22Board may require to carry out the purposes of this section.
23(2) (A) For purposes of paragraph (1), the term “aggregate
24gross assets” means the amount of cash and the aggregate adjusted
25basis of other property held by the corporation.
26(B) For purposes of subparagraph (A), the adjusted basis of any
27property contributed to the corporation (or other property with a
28basis determined in whole or in part by reference to the adjusted
29basis of property so contributed) shall be determined as if the basis
30of the property contributed to the corporation immediately after
31the contribution was equal to its fair market value as of the time
32of the contribution.
33(3) (A) All corporations which are members of the same
34parent-subsidiary controlled group shall be treated as one
35corporation for purposes of this subdivision.
36(B) For purposes of subparagraph (A), the term
37“parent-subsidiary controlled group” means any controlled group
38of corporations as defined in Section 1563(a)(1) of the Internal
39Revenue Code, except that both of the following shall apply:
P7 1(i) “More than 50 percent” shall be substituted for “at least 80
2percent” each place it appears in Section 1563(a)(1) of the Internal
3Revenue Code.
4(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
5apply.
6(e) (1) For purposes of paragraph (2) of subdivision (c), the
7requirements of this subdivision are met by a corporation for any
8period if during that period both of the following apply:
9(A) At least 80 percent (by value) of the assets of the corporation
10are used by the corporation in the active conduct of one or more
11qualified trades or businesses in California.
12(B) The corporation is an eligible corporation.
13(2) For purposes of paragraph (1), if, in connection with any
14future qualified trade or business, a corporation is engaged in:
15(A) Startup activities described in Section 195(c)(1)(A) of the
16Internal Revenue Code,
17(B) Activities resulting in the payment or incurring of
18expenditures which may be treated as research and experimental
19expenditures under Section 174 of the Internal Revenue Code, or
20(C) Activities with respect to in-house research expenses
21described in Section 41(b)(4) of the Internal Revenue Code, then
22assets used in those activities shall be treated as used in the active
23conduct of a qualified trade or business. Any determination under
24this paragraph shall be made without regard to whether a
25corporation has any gross income from those activities at the time
26of the determination.
27(3) For purposes of this subdivision, the term “qualified trade
28or business” means any trade or business other than any of the
29following:
30(A) Any trade or business involving the performance of services
31in the fields of health, law, engineering, architecture, accounting,
32actuarial science, performing arts, consulting, athletics, financial
33services, brokerage services, or any trade or business where the
34principal asset of the trade or business is the reputation or skill of
35one or more of its employees.
36(B) Any banking, insurance, financing, leasing, investing, or
37similar business.
38(C) Any farming business (including the business of raising or
39harvesting trees).
P8 1(D) Any business involving the production or extraction of
2products of a character with respect to which a deduction is
3allowable under Section 613 or 613A of the Internal Revenue
4Code.
5(E) Any business of operating a hotel, motel, restaurant, or
6similar business.
7(4) For purposes of this subdivision, the term “eligible
8corporation” means any domestic corporation, except that the term
9shall not include any of the following:
10(A) A DISC or former DISC.
11(B) A corporation with respect to which an election under
12Section 936 of the Internal Revenue Code is in effect or which has
13a direct or indirect subsidiary with respect to which the election
14is in effect.
15(C) A regulated investment company, real estate investment
16trust (REIT), or real estate mortgage investment conduit (REMIC).
17(D) A cooperative.
18(5) (A) For purposes of this subdivision, stock and debt in any
19subsidiary corporation shall be disregarded and the parent
20corporation shall be deemed to own its ratable share of the
21subsidiary’s assets, and to conduct its ratable share of the
22subsidiary’s activities.
23(B) A corporation shall be treated as failing to meet the
24requirements of paragraph (1) for any period during which more
25than 10 percent of the value of its assets (in excess of liabilities)
26consists of stock or securities in other corporations which are not
27subsidiaries of the corporation (other than assets described in
28paragraph (6)).
29(C) For purposes of this paragraph, a corporation shall be
30considered a subsidiary if the parent owns more than 50 percent
31of the combined voting power of all classes of stock entitled to
32vote, or more than 50 percent in value of all outstanding stock, of
33the corporation.
34(6) For purposes of subparagraph (A) of paragraph (1), the
35following assets shall be treated as used in the active conduct of
36a qualified trade or business:
37(A) Assets that are held as a part of the reasonably required
38working capital needs of a qualified trade or business of the
39corporation.
P9 1(B) Assets that are held for investment and are reasonably
2expected to be used within two years to finance research and
3experimentation in a qualified trade or business or increases in
4working capital needs of a qualified trade or business. For periods
5after the corporation has been in existence for at least two years,
6in no event may more than 50 percent of the assets of the
7corporation qualify as used in the active conduct of a qualified
8trade or business by reason of this paragraph.
9(7) A corporation shall not be treated as meeting the
10requirements of paragraph (1) for any period during which more
11than 10 percent of the total value of its assets consists of real
12property that is not used in the active conduct of a qualified trade
13or business. For purposes of the preceding sentence, the ownership
14of, dealing in, or renting of, real property shall not be treated as
15the active conduct of a qualified trade or business.
16(8) For purposes of paragraph (1), rights to computer software
17that produces active business computer software royalties (within
18the meaning of Section 543(d)(1) of the Internal Revenue Code)
19shall be treated as an asset used in the active conduct of a trade or
20business.
21(9) A corporation shall not be treated as meeting the
22requirements of paragraph (1) for any period during which more
23than 20 percent of the corporation’s total payroll expense is
24attributable to employment located outside of California.
25(f) If any stock in a corporation is acquired solely through the
26conversion of other stock in the corporation that is qualified small
27business stock in the hands of the taxpayer, both of the following
28shall apply:
29(1) The stock so acquired shall be treated as qualified small
30business stock in the hands of the taxpayer.
31(2) The stock so acquired shall be treated as having been held
32during the period during which the converted stock was held.
33(g) (1) If any amount included in gross income by reason of
34holding an interest in a pass-through entity meets the requirements
35of paragraph (2), then both of the following shall apply:
36(A) The amount shall be treated as gain described in subdivision
37(a).
38(B) For purposes of applying subdivision (b), the amount shall
39be treated as gain from a disposition of stock in the corporation
40issuing the stock disposed of by the pass-through entity and the
P10 1taxpayer’s proportionate share of the adjusted basis of the
2pass-through entity in the stock shall be taken into account.
3(2) An amount meets the requirements of this paragraph if both
4of the following apply:
5(A) The amount is attributable to gain on the sale or exchange
6by the pass-through entity of stock that is qualified small business
7stock in the hands of the entity (determined by treating the entity
8as an individual) and that was held by that entity for more than
9five years.
10(B) The amount is includable in the gross income of the taxpayer
11by reason of the holding of an interest in the entity that was held
12by the taxpayer on the date on which the pass-through entity
13acquired the stock and at all times thereafter before the disposition
14of the stock by the pass-through entity.
15(3) Paragraph (1) shall not apply to any amount to the extent
16the amount exceeds the amount to which paragraph (1) would have
17applied if the amount was determined by reference to the interest
18the taxpayer held in the pass-through entity on the date the qualified
19small business stock was acquired.
20(4) For purposes of this subdivision, the term “pass-through
21entity” means any of the following:
22(A) Any partnership.
23(B) Any S corporation.
24(C) Any regulated investment company.
25(D) Any common trust fund.
26(h) For purposes of this section:
27(1) In the case of a transfer described in paragraph (2), the
28transferee shall be treated as meeting both of the following:
29(A) Having acquired the stock in the same manner as the
30transferor.
31(B) Having held the stock during any continuous period
32immediately preceding the transfer during which it was held (or
33treated as held under this subdivision) by the transferor.
34(2) A transfer is described in this subdivision if the transfer is
35any of the following:
36(A) By gift.
37(B) At death.
38(C) From a partnership to a partner of stock with respect to
39which requirements similar to the requirements of subdivision (g)
P11 1are met at the time of the transfer (without regard to the five-year
2holding period requirement).
3(3) Rules similar to the rules of Section 1244(d)(2) of the
4Internal Revenue Code shall apply for purposes of this section.
5(4) (A) In the case of a transaction described in Section 351 of
6the Internal Revenue Code or a reorganization described in Section
7368 of the Internal Revenue Code, if qualified small business stock
8is exchanged for other stock that would not qualify as qualified
9small business stock but for this subparagraph, the other stock
10shall be treated as qualified small business stock acquired on the
11date on which the exchanged stock was acquired.
12(B) This section shall apply to gain from the sale or exchange
13of stock treated as qualified small business stock by reason of
14subparagraph (A) only to the extent of the gain that would have
15been recognized at the time of the transfer described in
16subparagraph (A) if Section 351 or 368 of the Internal Revenue
17Code had not applied at that time. The preceding sentence shall
18not apply if the stock that is treated as qualified small business
19stock by reason of subparagraph (A) is issued by a corporation
20that (as of the time of the transfer described in subparagraph (A))
21is a qualified small business.
22(C) For purposes of this paragraph, stock treated as qualified
23small business stock under subparagraph (A) shall be so treated
24for subsequent transactions or reorganizations, except that the
25limitation of subparagraph (B) shall be applied as of the time of
26the first transfer to which the limitation applied (determined after
27the application of the second sentence of subparagraph (B)).
28(D) In the case of a transaction described in Section 351 of the
29Internal Revenue Code, this paragraph shall apply only if
30immediately after the transaction the corporation issuing the stock
31owns directly or indirectly stock representing control (within the
32meaning of Section 368(c) of the Internal Revenue Code) of the
33corporation whose stock was exchanged.
34(i) For purposes of this section:
35(1) In the case where the taxpayer transfers property (other than
36money or stock) to a corporation in exchange for stock in the
37corporation, both of the following shall apply:
38(A) The stock shall be treated as having been acquired by the
39taxpayer on the date of the exchange.
P12 1(B) The basis of the stock in the hands of the taxpayer shall in
2no event be less than the fair market value of the property
3exchanged.
4(2) If the adjusted basis of any qualified small business stock
5is adjusted by reason of any contribution to capital after the date
6on which the stock was originally issued, in determining the
7amount of the adjustment by reason of the contribution, the basis
8of the contributed property shall in no event be treated as less than
9its fair market value on the date of the contribution.
10(j) (1) If the taxpayer has an offsetting short position with
11respect to any qualified small business stock, subdivision (a) shall
12not apply to any gain from the sale or exchange of the stock unless
13both of the following apply:
14(A) The stock was held by the taxpayer for more than five years
15as of the first day on which there was such a short position.
16(B) The taxpayer elects to recognize gain as if the stock was
17sold on that first day for its fair market value.
18(2) For purposes of paragraph (1), the taxpayer shall be treated
19as having an offsetting short position with respect to any qualified
20small business stock if any of the following apply:
21(A) The taxpayer has made a short sale of substantially identical
22property.
23(B) The taxpayer has acquired an option to sell substantially
24identical property at a fixed price.
25(C) To the extent provided in regulations, the taxpayer has
26entered into any other transaction that substantially reduces the
27risk of loss from holding the qualified small business stock. For
28purposes of the preceding sentence, any reference to the taxpayer
29shall be treated as including a reference to any person who is
30related (within the meaning of Section 267(b) or 707(b) of the
31Internal Revenue Code) to the taxpayer.
32(k) The Franchise Tax Board may prescribe those regulations
33as may be appropriate to carry out the purposes of this section,
34including regulations to prevent the avoidance of the purposes of
35this section through splitups, shell corporations, partnerships, or
36otherwise.
37(l) It is the intent of the Legislature that, in construing this
38section, any regulations that may be promulgated by the Secretary
39of the Treasury under Section 1202(k) of the Internal Revenue
40Code shall apply to the extent that those regulations do not conflict
P13 1with this section or with any regulations that may be promulgated
2by the Franchise Tax Board.
Section 18152.5 is added to the Revenue and Taxation
4Code, to read:
(a) For purposes of this part, gross income shall not
6include 50 percent of any gain from the sale or exchange of
7qualified small business stock held for more than five years.
8(b) (1) If the taxpayer has eligible gain for the taxable year
9from one or more dispositions of stock issued by any corporation,
10the aggregate amount of the gain from dispositions of stock issued
11by the corporation which may be taken into account under
12subdivision (a) for the taxable year shall not exceed the greater of
13either of the following:
14(A) Ten million dollars ($10,000,000) reduced by the aggregate
15amount of eligible gain taken into account by the taxpayer
under
16subdivision (a) for prior taxable years and attributable to
17dispositions of stock issued by the corporation.
18(B) Ten times the aggregate adjusted bases of qualified small
19business stock issued by the corporation and disposed of by the
20taxpayer during the taxable year. For purposes of subparagraph
21(B), the adjusted basis of any stock shall be determined without
22regard to any addition to basis after the date on which the stock
23was originally issued.
24(2) For purposes of this subdivision, the term “eligible gain”
25means any gain from the sale or exchange of qualified small
26business stock held for more than five years.
27(3) (A) In the case of a married individual filing a separate
28return, subparagraph (A) of paragraph (1) shall be applied by
29substituting five million dollars ($5,000,000) for ten
million dollars
30($10,000,000).
31(B) In the case of a married taxpayer filing a joint return, the
32amount of gain taken into account under subdivision (a) shall be
33allocated equally between the spouses for purposes of applying
34this subdivision to subsequent taxable years.
35(C) For purposes of this subdivision, marital status shall be
36determined under Section 7703 of the Internal Revenue Code.
37(c) For purposes of this section:
38(1) Except as otherwise provided in this section, the term
39“qualified small business stock” means any stock in a C corporation
P14 1which is originally issued after August 10, 1993, if both of the
2following apply:
3(A) As of the date of issuance, the corporation is a qualified
4
small business.
5(B) Except as provided in subdivisions (f) and (h), the stock is
6acquired by the taxpayer at its original issue (directly or through
7an underwriter) in either of the following manners:
8(i) In exchange for money or other property (not including
9stock).
10(ii) As compensation for services provided to the corporation
11(other than services performed as an underwriter of the stock).
12(2) (A) Stock in a corporation shall not be treated as qualified
13small business stock unless, during substantially all of the
14taxpayer’s holding period for the stock, the corporation meets the
15active business requirements of subdivision (e) and the corporation
16is a C corporation.
17(B) (i) Notwithstanding subdivision (e), a corporation shall be
18treated as meeting the active business requirements of subdivision
19(e) for any period during which the corporation qualifies as a
20specialized small business investment company.
21(ii) For purposes of clause (i), the term “specialized small
22business investment company” means any eligible corporation (as
23defined in paragraph (4) of subdivision (e)) that is licensed to
24operate under Section 301(d) of the Small Business Investment
25Act of 1958 (as in effect on May 13, 1993).
26(3) (A) Stock acquired by the taxpayer shall not be treated as
27qualified small business stock if, at any time during the four-year
28period beginning on the date two years before the issuance of the
29stock, the corporation issuing the stock purchased (directly or
30indirectly) any of its stock from the
taxpayer or from a related
31person (within the meaning of Section 267(b) or 707(b)) to the
32taxpayer.
33(B) Stock issued by a corporation shall not be treated as qualified
34small business stock if, during the two-year period beginning on
35the date one year before the issuance of the stock, the corporation
36made one or more purchases of its stock with an aggregate value
37(as of the time of the respective purchases) exceeding 5 percent
38of the aggregate value of all of its stock as of the beginning of the
39two-year period.
P15 1(C) If any transaction is treated under Section 304(a) of the
2Internal Revenue Code as a distribution in redemption of the stock
3of any corporation, for purposes of subparagraphs (A) and (B), the
4corporation shall be treated as purchasing an amount of its stock
5equal to the amount treated as a distribution in redemption of the
6stock of the corporation under Section 304(a)
of the Internal
7Revenue Code.
8(d) For purposes of this section:
9(1) The term “qualified small business” means any domestic
10corporation (as defined in Section 7701(a)(4) of the Internal
11Revenue Code) which is a C corporation if all of the following
12apply:
13(A) The aggregate gross assets of the corporation (or any
14predecessor thereof) at all times on or after July 1, 1993, and before
15the issuance did not exceed fifty million dollars ($50,000,000).
16(B) The aggregate gross assets of the corporation immediately
17after the issuance (determined by taking into account amounts
18received in the issuance) do not exceed fifty million dollars
19($50,000,000).
20(C) The corporation agrees to submit those
reports to the
21Franchise Tax Board and to shareholders as the Franchise Tax
22Board may require to carry out the purposes of this section.
23(2) (A) For purposes of paragraph (1), the term “aggregate
24gross assets” means the amount of cash and the aggregate adjusted
25basis of other property held by the corporation.
26(B) For purposes of subparagraph (A), the adjusted basis of any
27property contributed to the corporation (or other property with a
28basis determined in whole or in part by reference to the adjusted
29basis of property so contributed) shall be determined as if the basis
30of the property contributed to the corporation immediately after
31the contribution was equal to its fair market value as of the time
32of the contribution.
33(3) (A) All corporations which are members of the same
34
parent-subsidiary controlled group shall be treated as one
35corporation for purposes of this subdivision.
36(B) For purposes of subparagraph (A), the term
37“parent-subsidiary controlled group” means any controlled group
38of corporations as defined in Section 1563(a)(1) of the Internal
39Revenue Code, except that both of the following shall apply:
P16 1(i) “More than 50 percent” shall be substituted for “at least 80
2percent” each place it appears in Section 1563(a)(1) of the Internal
3Revenue Code.
4(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
5apply.
6(e) (1) For purposes of paragraph (2) of subdivision (c), the
7requirements of this subdivision are met by a corporation for any
8period if during that period the corporation is an
eligible
9corporation.
10(2) For purposes of paragraph (1), if, in connection with any
11future qualified trade or business, a corporation is engaged in:
12(A) Startup activities described in Section 195(c)(1)(A) of the
13Internal Revenue Code,
14(B) Activities resulting in the payment or incurring of
15expenditures which may be treated as research and experimental
16expenditures under Section 174 of the Internal Revenue Code, or
17(C) Activities with respect to in-house research expenses
18described in Section 41(b)(4) of the Internal Revenue Code, then
19assets used in those activities shall be treated as used in the active
20conduct of a qualified trade or business. Any determination under
21this paragraph shall be made without regard to whether a
22corporation has any gross
income from those activities at the time
23of the determination.
24(3) For purposes of this subdivision, the term “qualified trade
25or business” means any trade or business other than any of the
26following:
27(A) Any trade or business involving the performance of services
28in the fields of health, law, engineering, architecture, accounting,
29actuarial science, performing arts, consulting, athletics, financial
30services, brokerage services, or any trade or business where the
31principal asset of the trade or business is the reputation or skill of
32one or more of its employees.
33(B) Any banking, insurance, financing, leasing, investing, or
34similar business.
35(C) Any farming business (including the business of raising or
36harvesting trees).
37(D) Any business involving the production or extraction of
38products of a character with respect to which a deduction is
39allowable under Section 613 or 613A of the Internal Revenue
40Code.
P17 1(E) Any business of operating a hotel, motel, restaurant, or
2similar business.
3(4) For purposes of this subdivision, the term “eligible
4corporation” means any domestic corporation, except that the term
5shall not include any of the following:
6(A) A DISC or former DISC.
7(B) A corporation with respect to which an election under
8Section 936 of the Internal Revenue Code is in effect or which has
9a direct or indirect subsidiary with respect to which the election
10is in effect.
11(C) A regulated investment company, real estate investment
12trust (REIT), or real estate mortgage investment conduit (REMIC).
13(D) A cooperative.
14(5) (A) For purposes of this subdivision, stock and debt in any
15subsidiary corporation shall be disregarded and the parent
16corporation shall be deemed to own its ratable share of the
17subsidiary’s assets, and to conduct its ratable share of the
18subsidiary’s activities.
19(B) A corporation shall be treated as failing to meet the
20requirements of paragraph (1) for any period during which more
21than 10 percent of the value of its assets (in excess of liabilities)
22consists of stock or securities in other corporations which are not
23subsidiaries of the corporation (other than assets described in
24
paragraph (6)).
25(C) For purposes of this paragraph, a corporation shall be
26considered a subsidiary if the parent owns more than 50 percent
27of the combined voting power of all classes of stock entitled to
28vote, or more than 50 percent in value of all outstanding stock, of
29the corporation.
30(6) For purposes of subparagraph (A) of paragraph (1), the
31following assets shall be treated as used in the active conduct of
32a qualified trade or business:
33(A) Assets that are held as a part of the reasonably required
34working capital needs of a qualified trade or business of the
35corporation.
36(B) Assets that are held for investment and are reasonably
37expected to be used within two years to finance research and
38experimentation in a qualified trade or business or
increases in
39working capital needs of a qualified trade or business. For periods
40after the corporation has been in existence for at least two years,
P18 1in no event may more than 50 percent of the assets of the
2corporation qualify as used in the active conduct of a qualified
3trade or business by reason of this paragraph.
4(7) A corporation shall not be treated as meeting the
5requirements of paragraph (1) for any period during which more
6than 10 percent of the total value of its assets consists of real
7property that is not used in the active conduct of a qualified trade
8or business. For purposes of the preceding sentence, the ownership
9of, dealing in, or renting of, real property shall not be treated as
10the active conduct of a qualified trade or business.
11(8) For purposes of paragraph (1), rights to computer software
12that produces active business computer software royalties (within
13the
meaning of Section 543(d)(1) of the Internal Revenue Code)
14shall be treated as an asset used in the active conduct of a trade or
15business.
16(f) If any stock in a corporation is acquired solely through the
17conversion of other stock in the corporation that is qualified small
18business stock in the hands of the taxpayer, both of the following
19shall apply:
20(1) The stock so acquired shall be treated as qualified small
21business stock in the hands of the taxpayer.
22(2) The stock so acquired shall be treated as having been held
23during the period during which the converted stock was held.
24(g) (1) If any amount included in gross income by reason of
25holding an interest in a pass-through entity meets the requirements
26of paragraph (2), then both
of the following shall apply:
27(A) The amount shall be treated as gain described in subdivision
28(a).
29(B) For purposes of applying subdivision (b), the amount shall
30be treated as gain from a disposition of stock in the corporation
31issuing the stock disposed of by the pass-through entity and the
32taxpayer’s proportionate share of the adjusted basis of the
33pass-through entity in the stock shall be taken into account.
34(2) An amount meets the requirements of this paragraph if both
35of the following apply:
36(A) The amount is attributable to gain on the sale or exchange
37by the pass-through entity of stock that is qualified small business
38stock in the hands of the entity (determined by treating the entity
39as an individual) and that was held by that entity for more
than
40five years.
P19 1(B) The amount is includable in the gross income of the taxpayer
2by reason of the holding of an interest in the entity that was held
3by the taxpayer on the date on which the pass-through entity
4acquired the stock and at all times thereafter before the disposition
5of the stock by the pass-through entity.
6(3) Paragraph (1) shall not apply to any amount to the extent
7the amount exceeds the amount to which paragraph (1) would have
8applied if the amount was determined by reference to the interest
9the taxpayer held in the pass-through entity on the date the qualified
10small business stock was acquired.
11(4) For purposes of this subdivision, the term “pass-through
12entity” means any of the following:
13(A) Any partnership.
14(B) Any S corporation.
15(C) Any regulated investment company.
16(D) Any common trust fund.
17(h) For purposes of this section:
18(1) In the case of a transfer described in paragraph (2), the
19transferee shall be treated as meeting both of the following:
20(A) Having acquired the stock in the same manner as the
21transferor.
22(B) Having held the stock during any continuous period
23immediately preceding the transfer during which it was held (or
24treated as held under this subdivision) by the transferor.
25(2) A transfer
is described in this subdivision if the transfer is
26any of the following:
27(A) By gift.
28(B) At death.
29(C) From a partnership to a partner of stock with respect to
30which requirements similar to the requirements of subdivision (g)
31are met at the time of the transfer (without regard to the five-year
32holding period requirement).
33(3) Rules similar to the rules of Section 1244(d)(2) of the
34Internal Revenue Code shall apply for purposes of this section.
35(4) (A) In the case of a transaction described in Section 351 of
36the Internal Revenue Code or a reorganization described in Section
37368 of the Internal Revenue Code, if qualified small business stock
38is exchanged for other
stock that would not qualify as qualified
39small business stock but for this subparagraph, the other stock
P20 1shall be treated as qualified small business stock acquired on the
2date on which the exchanged stock was acquired.
3(B) This section shall apply to gain from the sale or exchange
4of stock treated as qualified small business stock by reason of
5subparagraph (A) only to the extent of the gain that would have
6been recognized at the time of the transfer described in
7subparagraph (A) if Section 351 or 368 of the Internal Revenue
8Code had not applied at that time. The preceding sentence shall
9not apply if the stock that is treated as qualified small business
10stock by reason of subparagraph (A) is issued by a corporation
11that (as of the time of the transfer described in subparagraph (A))
12is a qualified small business.
13(C) For purposes of this paragraph, stock treated as qualified
14small
business stock under subparagraph (A) shall be so treated
15for subsequent transactions or reorganizations, except that the
16limitation of subparagraph (B) shall be applied as of the time of
17the first transfer to which the limitation applied (determined after
18the application of the second sentence of subparagraph (B)).
19(D) In the case of a transaction described in Section 351 of the
20Internal Revenue Code, this paragraph shall apply only if
21immediately after the transaction the corporation issuing the stock
22owns directly or indirectly stock representing control (within the
23meaning of Section 368(c) of the Internal Revenue Code) of the
24corporation whose stock was exchanged.
25(i) For purposes of this section:
26(1) In the case where the taxpayer transfers property (other than
27money or stock) to a corporation in exchange for
stock in the
28corporation, both of the following shall apply:
29(A) The stock shall be treated as having been acquired by the
30taxpayer on the date of the exchange.
31(B) The basis of the stock in the hands of the taxpayer shall in
32no event be less than the fair market value of the property
33exchanged.
34(2) If the adjusted basis of any qualified small business stock
35is adjusted by reason of any contribution to capital after the date
36on which the stock was originally issued, in determining the
37amount of the adjustment by reason of the contribution, the basis
38of the contributed property shall in no event be treated as less than
39its fair market value on the date of the contribution.
P21 1(j) (1) If the taxpayer has an offsetting short position
with
2respect to any qualified small business stock, subdivision (a) shall
3not apply to any gain from the sale or exchange of the stock unless
4both of the following apply:
5(A) The stock was held by the taxpayer for more than five years
6as of the first day on which there was such a short position.
7(B) The taxpayer elects to recognize gain as if the stock was
8sold on that first day for its fair market value.
9(2) For purposes of paragraph (1), the taxpayer shall be treated
10as having an offsetting short position with respect to any qualified
11small business stock if any of the following apply:
12(A) The taxpayer has made a short sale of substantially identical
13property.
14(B) The taxpayer has
acquired an option to sell substantially
15identical property at a fixed price.
16(C) To the extent provided in regulations, the taxpayer has
17entered into any other transaction that substantially reduces the
18risk of loss from holding the qualified small business stock. For
19purposes of the preceding sentence, any reference to the taxpayer
20shall be treated as including a reference to any person who is
21related (within the meaning of Section 267(b) or 707(b) of the
22Internal Revenue Code) to the taxpayer.
23(k) The Franchise Tax Board may prescribe those regulations
24as may be appropriate to carry out the purposes of this section,
25including regulations to prevent the avoidance of the purposes of
26this section through splitups, shell corporations, partnerships, or
27otherwise.
28(l) It is the intent of the Legislature that, in
construing this
29section, any regulations that may be promulgated by the Secretary
30of the Treasury under Section 1202(k) of the Internal Revenue
31Code shall apply to the extent that those regulations do not conflict
32with this section or with any regulations that may be promulgated
33by the Franchise Tax Board.
34(m) This section shall apply to each taxable year beginning on
35or after January 1, 2008.
There is hereby appropriated from the General Fund
37an amount sufficient to make the refunds required pursuant to the
38repeal and the addition of Sections 18038.5 and 18152.5 of the
39Revenue and Taxation Code made by Sections 1 to 4, inclusive,
P22 1of this act including by providing for the waiver of interest and
2penalties.
The Legislature finds and declares that the retroactive
4application of Sections 18038.5 and 18152.5 serves a public
5purpose and is necessary to prevent undue hardship to taxpayers
6that would otherwise have been subject to taxation, interest, and
7penalties through circumstances beyond their control and to provide
8relief to taxpayers to rectify any unconstitutional deprivation.
This act is an urgency statute necessary for the
10immediate preservation of the public peace, health, or safety within
11the meaning of Article IV of the Constitution and shall go into
12immediate effect. The facts constituting the necessity are:
13In order to prevent undue hardship to taxpayers that would
14otherwise have been subject to taxation, interest, and penalties
15through circumstances beyond their control and to provide relief
16to taxpayers to rectify any unconstitutional deprivation, it is
17necessary that this act take effect immediately.
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