Amended in Senate April 3, 2013

Senate BillNo. 209


Introduced by Senator Lieu

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(Principal coauthors: Assembly Members Gorell and Perea)

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February 11, 2013


An act to amendbegin delete Section 10752 ofend deletebegin insert Section 18038.5 of, and to amend, repeal, and add Section 18152.5 of,end insert the Revenue and Taxation Code, relating to taxation.

LEGISLATIVE COUNSEL’S DIGEST

SB 209, as amended, Lieu. begin deleteVehicle License Fee Law. end deletebegin insertIncome taxes: exclusion: deferral: qualified small business stock.end insert

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The Personal Income Tax Law, in modified conformity with federal law, provides various exclusions from gross income in computing tax liability.

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This bill would, in reference to specified federal income tax laws, 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, for taxable years beginning on or after January 1, 2008, and before January 1, 2013, as provided. The bill would additionally, for taxable years beginning on or after January 1, 2016, exclude, and provide for a deferral of, gross income related to the gain from the sale or exchange of qualified small business stock, as provided.

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The Vehicle License Fee Law, in lieu of an ad valorem property tax upon vehicles, imposes an annual license fee on specified vehicles subject to registration in this state in the amount of 0.65% of the market value of that vehicle, as provided.

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This bill would make technical, nonsubstantive changes to that provision.

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Vote: majority. Appropriation: no. Fiscal committee: begin deleteno end deletebegin insertyesend insert. State-mandated local program: no.

The people of the State of California do enact as follows:

P2    1begin insert

begin insertSECTION 1.end insert  

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begin insertSection 18038.5 of the end insertbegin insertRevenue and Taxation
2Code
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begin insert is amended to read:end insert

3

18038.5.  

(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
P3    1be taken into account for purposes of applying paragraph (2) of
2subdivision (c) of Section 18152.5.

3(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
4and (k) of Section 18152.5 shall apply.

5(c) This section shall apply to sales made after August 5, 1997begin insert,
6and before January 1, 2013, and to sales made on and after
7January 1, 2016end insert
.

8begin insert

begin insertSEC. 2.end insert  

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begin insertSection 18152.5 of the end insertbegin insertRevenue and Taxation Codeend insertbegin insert is
9amended to read:end insert

10

18152.5.  

(a) For purposes of this part, gross income shall not
11include 50 percent of any gain from the sale or exchange of
12qualified small business stock held for more than five years.

13(b) (1) If the taxpayer has eligible gain for the taxable year
14from one or more dispositions of stock issued by any corporation,
15the aggregate amount of the gain from dispositions of stock issued
16by the corporation which may be taken into account under
17subdivision (a) for the taxable year shall not exceed the greater of
18either of the following:

19(A) Ten million dollars ($10,000,000) reduced by the aggregate
20amount of eligible gain taken into account by the taxpayer under
21subdivision (a) for prior taxable years and attributable to
22dispositions of stock issued by the corporation.

23(B) Ten times the aggregate adjusted bases of qualified small
24business stock issued by the corporation and disposed of by the
25taxpayer during the taxable year. For purposes of subparagraph
26(B), the adjusted basis of any stock shall be determined without
27regard to any addition to basis after the date on which the stock
28was originally issued.

29(2) For purposes of this subdivision, the term “eligible gain”
30means any gain from the sale or exchange of qualified small
31business stock held for more than five years.

32(3) (A) In the case of a married individual filing a separate
33return, subparagraph (A) of paragraph (1) shall be applied by
34substituting five million dollars ($5,000,000) for ten million dollars
35($10,000,000).

36(B) In the case of a married taxpayer filing a joint return, the
37amount of gain taken into account under subdivision (a) shall be
38allocated equally between the spouses for purposes of applying
39this subdivision to subsequent taxable years.

P4    1(C) For purposes of this subdivision, marital status shall be
2determined under Section 7703 of the Internal Revenue Code.

3(c) For purposes of this section:

4(1) Except as otherwise provided in this section, the term
5“qualified small business stock” means any stock in a C corporation
6which is originally issued after August 10, 1993, if both of the
7following apply:

8(A) As of the date of issuance, the corporation is a qualified
9small business.

10(B) Except as provided in subdivisions (f) and (h), the stock is
11acquired by the taxpayer at its original issue (directly or through
12an underwriter) in either of the following manners:

13(i) In exchange for money or other property (not including
14stock).

15(ii) As compensation for services provided to the corporation
16(other than services performed as an underwriter of the stock).

17(2) (A) Stock in a corporation shall not be treated as qualified
18small business stock unless, during substantially all of the
19taxpayer’s holding period for the stock, the corporation meets the
20active business requirements of subdivision (e) and the corporation
21is a C corporation.

22(B) (i) Notwithstanding subdivision (e), a corporation shall be
23treated as meeting the active business requirements of subdivision
24(e) for any period during which the corporation qualifies as a
25specialized small business investment company.

26(ii) For purposes of clause (i), the term “specialized small
27business investment company” means any eligible corporation (as
28defined in paragraph (4) of subdivision (e)) that is licensed to
29operate under Section 301(d) of the Small Business Investment
30Act of 1958 (as in effect on May 13, 1993).

31(3) (A) Stock acquired by the taxpayer shall not be treated as
32qualified small business stock if, at any time during the four-year
33period beginning on the date two years before the issuance of the
34stock, the corporation issuing the stock purchased (directly or
35indirectly) any of its stock from the taxpayer or from a related
36person (within the meaning of Section 267(b) or 707(b)) to the
37taxpayer.

38(B) Stock issued by a corporation shall not be treated as qualified
39small business stock if, during the two-year period beginning on
40the date one year before the issuance of the stock, the corporation
P5    1made one or more purchases of its stock with an aggregate value
2(as of the time of the respective purchases) exceeding 5 percent
3of the aggregate value of all of its stock as of the beginning of the
4two-year period.

5(C) If any transaction is treated under Section 304(a) of the
6Internal Revenue Code as a distribution in redemption of the stock
7of any corporation, for purposes of subparagraphs (A) and (B), the
8corporation shall be treated as purchasing an amount of its stock
9equal to the amount treated as a distribution in redemption of the
10stock of the corporation under Section 304(a) of the Internal
11Revenue Code.

12(d) For purposes of this section:

13(1) The term “qualified small business” means any domestic
14corporation (as defined in Section 7701(a)(4) of the Internal
15Revenue Code) which is a C corporation if all of the following
16apply:

17(A) The aggregate gross assets of the corporation (or any
18predecessor thereof) at all times on or after July 1, 1993, and before
19the issuance did not exceed fifty million dollars ($50,000,000).

20(B) The aggregate gross assets of the corporation immediately
21after the issuance (determined by taking into account amounts
22received in the issuance) do not exceed fifty million dollars
23($50,000,000).

24(C) At least 80 percent of the corporation’s payroll, as measured
25by total dollar value, is attributable to employment located within
26California.

27(D) The corporation agrees to submit those reports to the
28Franchise Tax Board and to shareholders as the Franchise Tax
29Board may require to carry out the purposes of this section.

30(2) (A) For purposes of paragraph (1), the term “aggregate
31gross assets” means the amount of cash and the aggregate adjusted
32basis of other property held by the corporation.

33(B) For purposes of subparagraph (A), the adjusted basis of any
34property contributed to the corporation (or other property with a
35basis determined in whole or in part by reference to the adjusted
36basis of property so contributed) shall be determined as if the basis
37of the property contributed to the corporation immediately after
38the contribution was equal to its fair market value as of the time
39of the contribution.

P6    1(3) (A) All corporations which are members of the same
2parent-subsidiary controlled group shall be treated as one
3corporation for purposes of this subdivision.

4(B) For purposes of subparagraph (A), the term
5“parent-subsidiary controlled group” means any controlled group
6of corporations as defined in Section 1563(a)(1) of the Internal
7Revenue Code, except that both of the following shall apply:

8(i) “More than 50 percent” shall be substituted for “at least 80
9percent” each place it appears in Section 1563(a)(1) of the Internal
10Revenue Code.

11(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
12apply.

13(e) (1) For purposes of paragraph (2) of subdivision (c), the
14requirements of this subdivision are met by a corporation for any
15period if during that period both of the following apply:

16(A) At least 80 percent (by value) of the assets of the corporation
17are used by the corporation in the active conduct of one or more
18qualified trades or businessesbegin delete in Californiaend delete.

19(B) The corporation is an eligible corporation.

20(2) For purposes of paragraph (1), if, in connection with any
21future qualified trade or business, a corporation is engaged in:

22(A) Startup activities described in Section 195(c)(1)(A) of the
23Internal Revenue Code,

24(B) Activities resulting in the payment or incurring of
25expenditures which may be treated as research and experimental
26expenditures under Section 174 of the Internal Revenue Code, or

27(C) Activities with respect to in-house research expenses
28described in Section 41(b)(4) of the Internal Revenue Code, then
29assets used in those activities shall be treated as used in the active
30conduct of a qualified trade or business. Any determination under
31this paragraph shall be made without regard to whether a
32corporation has any gross income from those activities at the time
33of the determination.

34(3) For purposes of this subdivision, the term “qualified trade
35or business” means any trade or business other than any of the
36following:

37(A) Any trade or business involving the performance of services
38in the fields of health, law, engineering, architecture, accounting,
39actuarial science, performing arts, consulting, athletics, financial
40services, brokerage services, or any trade or business where the
P7    1principal asset of the trade or business is the reputation or skill of
2one or more of its employees.

3(B) Any banking, insurance, financing, leasing, investing, or
4similar business.

5(C) Any farming business (including the business of raising or
6harvesting trees).

7(D) Any business involving the production or extraction of
8products of a character with respect to which a deduction is
9allowable under Section 613 or 613A of the Internal Revenue
10Code.

11(E) Any business of operating a hotel, motel, restaurant, or
12similar business.

13(4) For purposes of this subdivision, the term “eligible
14corporation” means any domestic corporation, except that the term
15shall not include any of the following:

16(A) A DISC or former DISC.

17(B) A corporation with respect to which an election under
18Section 936 of the Internal Revenue Code is in effect or which has
19a direct or indirect subsidiary with respect to which the election
20is in effect.

21(C) A regulated investment company, real estate investment
22trust (REIT), or real estate mortgage investment conduit (REMIC).

23(D) A cooperative.

24(5) (A) For purposes of this subdivision, stock and debt in any
25subsidiary corporation shall be disregarded and the parent
26corporation shall be deemed to own its ratable share of the
27subsidiary’s assets, and to conduct its ratable share of the
28subsidiary’s activities.

29(B) A corporation shall be treated as failing to meet the
30requirements of paragraph (1) for any period during which more
31than 10 percent of the value of its assets (in excess of liabilities)
32consists of stock or securities in other corporations which are not
33subsidiaries of the corporation (other than assets described in
34paragraph (6)).

35(C) For purposes of this paragraph, a corporation shall be
36considered a subsidiary if the parent owns more than 50 percent
37of the combined voting power of all classes of stock entitled to
38vote, or more than 50 percent in value of all outstanding stock, of
39the corporation.

P8    1(6) For purposes of subparagraph (A) of paragraph (1), the
2following assets shall be treated as used in the active conduct of
3a qualified trade or business:

4(A) Assets that are held as a part of the reasonably required
5working capital needs of a qualified trade or business of the
6corporation.

7(B) Assets that are held for investment and are reasonably
8expected to be used within two years to finance research and
9experimentation in a qualified trade or business or increases in
10working capital needs of a qualified trade or business. For periods
11after the corporation has been in existence for at least two years,
12in no event may more than 50 percent of the assets of the
13corporation qualify as used in the active conduct of a qualified
14trade or business by reason of this paragraph.

15(7) A corporation shall not be treated as meeting the
16 requirements of paragraph (1) for any period during which more
17than 10 percent of the total value of its assets consists of real
18property that is not used in the active conduct of a qualified trade
19or business. For purposes of the preceding sentence, the ownership
20of, dealing in, or renting of, real property shall not be treated as
21the active conduct of a qualified trade or business.

22(8) For purposes of paragraph (1), rights to computer software
23that produces active business computer software royalties (within
24the meaning of Section 543(d)(1) of the Internal Revenue Code)
25shall be treated as an asset used in the active conduct of a trade or
26business.

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27(9) A corporation shall not be treated as meeting the
28requirements of paragraph (1) for any period during which more
29than 20 percent of the corporation’s total payroll expense is
30attributable to employment located outside of California.

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31(f) If any stock in a corporation is acquired solely through the
32conversion of other stock in the corporation that is qualified small
33business stock in the hands of the taxpayer, both of the following
34shall apply:

35(1) The stock so acquired shall be treated as qualified small
36business stock in the hands of the taxpayer.

37(2) The stock so acquired shall be treated as having been held
38during the period during which the converted stock was held.

P9    1(g) (1) If any amount included in gross income by reason of
2holding an interest in a pass-through entity meets the requirements
3of paragraph (2), then both of the following shall apply:

4(A) The amount shall be treated as gain described in subdivision
5(a).

6(B) For purposes of applying subdivision (b), the amount shall
7be treated as gain from a disposition of stock in the corporation
8issuing the stock disposed of by the pass-through entity and the
9taxpayer’s proportionate share of the adjusted basis of the
10pass-through entity in the stock shall be taken into account.

11(2) An amount meets the requirements of this paragraph if both
12of the following apply:

13(A) The amount is attributable to gain on the sale or exchange
14by the pass-through entity of stock that is qualified small business
15stock in the hands of the entity (determined by treating the entity
16as an individual) and that was held by that entity for more than
17five years.

18(B) The amount is includable in the gross income of the taxpayer
19by reason of the holding of an interest in the entity that was held
20by the taxpayer on the date on which the pass-through entity
21acquired the stock and at all times thereafter before the disposition
22of the stock by the pass-through entity.

23(3) Paragraph (1) shall not apply to any amount to the extent
24the amount exceeds the amount to which paragraph (1) would have
25applied if the amount was determined by reference to the interest
26the taxpayer held in the pass-through entity on the date the qualified
27small business stock was acquired.

28(4) For purposes of this subdivision, the term “pass-through
29entity” means any of the following:

30(A) Any partnership.

31(B) Any S corporation.

32(C) Any regulated investment company.

33(D) Any common trust fund.

34(h) For purposes of this section:

35(1) In the case of a transfer described in paragraph (2), the
36transferee shall be treated as meeting both of the following:

37(A) Having acquired the stock in the same manner as the
38transferor.

P10   1(B) Having held the stock during any continuous period
2immediately preceding the transfer during which it was held (or
3treated as held under this subdivision) by the transferor.

4(2) A transfer is described in this subdivision if the transfer is
5any of the following:

6(A) By gift.

7(B) At death.

8(C) From a partnership to a partner of stock with respect to
9which requirements similar to the requirements of subdivision (g)
10are met at the time of the transfer (without regard to the five-year
11holding period requirement).

12(3) Rules similar to the rules of Section 1244(d)(2) of the
13Internal Revenue Code shall apply for purposes of this section.

14(4) (A) In the case of a transaction described in Section 351 of
15the Internal Revenue Code or a reorganization described in Section
16368 of the Internal Revenue Code, if qualified small business stock
17is exchanged for other stock that would not qualify as qualified
18small business stock but for this subparagraph, the other stock
19shall be treated as qualified small business stock acquired on the
20date on which the exchanged stock was acquired.

21(B) This section shall apply to gain from the sale or exchange
22of stock treated as qualified small business stock by reason of
23subparagraph (A) only to the extent of the gain that would have
24been recognized at the time of the transfer described in
25subparagraph (A) if Section 351 or 368 of the Internal Revenue
26Code had not applied at that time. The preceding sentence shall
27not apply if the stock that is treated as qualified small business
28stock by reason of subparagraph (A) is issued by a corporation
29that (as of the time of the transfer described in subparagraph (A))
30is a qualified small business.

31(C) For purposes of this paragraph, stock treated as qualified
32small business stock under subparagraph (A) shall be so treated
33for subsequent transactions or reorganizations, except that the
34 limitation of subparagraph (B) shall be applied as of the time of
35the first transfer to which the limitation applied (determined after
36the application of the second sentence of subparagraph (B)).

37(D) In the case of a transaction described in Section 351 of the
38Internal Revenue Code, this paragraph shall apply only if
39immediately after the transaction the corporation issuing the stock
40owns directly or indirectly stock representing control (within the
P11   1meaning of Section 368(c) of the Internal Revenue Code) of the
2corporation whose stock was exchanged.

3(i) For purposes of this section:

4(1) In the case where the taxpayer transfers property (other than
5money or stock) to a corporation in exchange for stock in the
6corporation, both of the following shall apply:

7(A) The stock shall be treated as having been acquired by the
8taxpayer on the date of the exchange.

9(B) The basis of the stock in the hands of the taxpayer shall in
10no event be less than the fair market value of the property
11exchanged.

12(2) If the adjusted basis of any qualified small business stock
13is adjusted by reason of any contribution to capital after the date
14on which the stock was originally issued, in determining the
15amount of the adjustment by reason of the contribution, the basis
16of the contributed property shall in no event be treated as less than
17its fair market value on the date of the contribution.

18(j) (1) If the taxpayer has an offsetting short position with
19respect to any qualified small business stock, subdivision (a) shall
20not apply to any gain from the sale or exchange of the stock unless
21both of the following apply:

22(A) The stock was held by the taxpayer for more than five years
23as of the first day on which there was such a short position.

24(B) The taxpayer elects to recognize gain as if the stock was
25sold on that first day for its fair market value.

26(2) For purposes of paragraph (1), the taxpayer shall be treated
27as having an offsetting short position with respect to any qualified
28small business stock if any of the following apply:

29(A) The taxpayer has made a short sale of substantially identical
30property.

31(B) The taxpayer has acquired an option to sell substantially
32identical property at a fixed price.

33(C) To the extent provided in regulations, the taxpayer has
34entered into any other transaction that substantially reduces the
35risk of loss from holding the qualified small business stock. For
36purposes of the preceding sentence, any reference to the taxpayer
37shall be treated as including a reference to any person who is
38related (within the meaning of Section 267(b) or 707(b) of the
39Internal Revenue Code) to the taxpayer.

P12   1(k) The Franchise Tax Board may prescribe those regulations
2as may be appropriate to carry out the purposes of this section,
3including regulations to prevent the avoidance of the purposes of
4this section through splitups, shell corporations, partnerships, or
5otherwise.

6(l) It is the intent of the Legislature that, in construing this
7section, any regulations that may be promulgated by the Secretary
8 of the Treasury under Section 1202(k) of the Internal Revenue
9Code shall apply to the extent that those regulations do not conflict
10with this section or with any regulations that may be promulgated
11by the Franchise Tax Board.

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12(m) The amendments made to this section by the act adding this
13subdivision shall apply to each taxable year beginning on or after
14January 1, 2008, and before January 1, 2013.

end insert
begin insert

15(n) This section shall remain in effect only until January 1, 2016,
16and as of that date is repealed, unless a later enacted statute, that
17is enacted before January 1, 2016, deletes or extends that date.

end insert
18begin insert

begin insertSEC. 3.end insert  

end insert

begin insertSection 18152.5 is added to the end insertbegin insertRevenue and Taxation
19Code
end insert
begin insert, to read:end insert

begin insert
20

begin insert18152.5.end insert  

(a) For each taxable year beginning on or after
21January 1, 2016, for purposes of this part, gross income shall not
22include 50 percent of any gain from the sale or exchange of
23qualified small business stock held for more than five years.

24(b) (1) If the taxpayer has eligible gain for the taxable year
25from one or more dispositions of stock issued by any corporation,
26the aggregate amount of the gain from dispositions of stock issued
27by the corporation that may be taken into account under
28subdivision (a) for the taxable year shall not exceed the greater
29of either of the following:

30(A) Ten million dollars ($10,000,000) reduced by the aggregate
31amount of eligible gain taken into account by the taxpayer under
32subdivision (a) for prior taxable years and attributable to
33dispositions of stock issued by the corporation.

34(B) Ten times the aggregate adjusted bases of qualified small
35business stock issued by the corporation and disposed of by the
36taxpayer during the taxable year. For purposes of subparagraph
37(B), the adjusted basis of any stock shall be determined without
38regard to any addition to the basis after the date on which the
39stock was originally issued.

P13   1(2) For purposes of this subdivision, the term “eligible gain”
2means any gain from the sale or exchange of qualified small
3business stock held for more than five years.

4(3) (A) In the case of a married individual filing a separate
5return, subparagraph (A) of paragraph (1) shall be applied by
6substituting five million dollars ($5,000,000) for ten million dollars
7($10,000,000).

8(B) In the case of a married taxpayer filing a joint return, the
9amount of gain taken into account under subdivision (a) shall be
10allocated equally between the spouses for purposes of applying
11this subdivision to subsequent taxable years.

12(C) For purposes of this subdivision, marital status shall be
13determined under Section 7703 of the Internal Revenue Code.

14(c) For purposes of this section:

15(1) Except as otherwise provided in this section, the term
16“qualified small business stock” means any stock in a “C”
17corporation that is originally issued after August 10, 1993, and
18before January 1, 2013, or issued after January 1, 2016, if both
19of the following apply:

20(A) As of the date of issuance, the corporation is a qualified
21small business.

22(B) Except as provided in subdivisions (f) and (h), the stock is
23acquired by the taxpayer at its original issue (directly or through
24an underwriter) in either of the following manners:

25(i) In exchange for money or other property (not including
26stock).

27(ii) As compensation for services provided to the corporation
28(other than services performed as an underwriter of the stock).

29(2) (A) Stock in a corporation shall not be treated as qualified
30small business stock unless, during substantially all of the
31taxpayer’s holding period for the stock, the corporation meets the
32active business requirements of subdivision (e) and the corporation
33is a “C” corporation.

34(B) (i) Notwithstanding subdivision (e), a corporation shall be
35treated as meeting the active business requirements of subdivision
36(e) for any period during which the corporation qualifies as a
37specialized small business investment company.

38(ii) For purposes of clause (i), the term “specialized small
39business investment company” means any eligible corporation (as
40defined in paragraph (4) of subdivision (e)) that is licensed to
P14   1operate under Section 301(d) of the Small Business Investment
2Act of 1958 (as in effect on May 13, 1993).

3(3) (A) Stock acquired by the taxpayer shall not be treated as
4qualified small business stock if, at any time during the four-year
5period beginning on the date two years before the issuance of the
6stock, the corporation issuing the stock purchased (directly or
7indirectly) any of its stock from the taxpayer or from a related
8person (within the meaning of Section 267(b) or 707(b) of the
9Internal Revenue Code) to the taxpayer.

10(B) Stock issued by a corporation shall not be treated as
11qualified small business stock if, during the two-year period
12beginning on the date one year before the issuance of the stock,
13the corporation made one or more purchases of its stock with an
14aggregate value (as of the time of the respective purchases)
15exceeding 5 percent of the aggregate value of all of its stock as of
16the beginning of the two-year period.

17(C) If any transaction is treated under Section 304(a) of the
18Internal Revenue Code as a distribution in redemption of the stock
19of any corporation, for purposes of subparagraphs (A) and (B),
20the corporation shall be treated as purchasing an amount of its
21stock equal to the amount treated as a distribution in redemption
22of the stock of the corporation under Section 304(a) of the Internal
23Revenue Code.

24(d) For purposes of this section:

25(1) The term “qualified small business” means any domestic
26corporation (as defined in Section 7701(a)(4) of the Internal
27Revenue Code) that is a “C” corporation if all of the following
28apply:

29(A) The aggregate gross assets of the corporation (or any
30predecessor thereof) at all times on or after July 1, 1993, and
31before the issuance did not exceed fifty million dollars
32($50,000,000).

33(B) The aggregate gross assets of the corporation immediately
34after the issuance (determined by taking into account amounts
35received in the issuance) do not exceed fifty million dollars
36($50,000,000).

37(C) At least 80 percent of the corporation’s payroll, as measured
38by total dollar value, is attributable to employment located within
39California.

P15   1(D) The corporation agrees to submit those reports to the
2Franchise Tax Board and to shareholders as the Franchise Tax
3Board may require to carry out the purposes of this section.

4(2) (A) For purposes of paragraph (1), the term “aggregate
5gross assets” means the amount of cash and the aggregate adjusted
6basis of other property held by the corporation.

7(B) For purposes of subparagraph (A), the adjusted basis of
8any property contributed to the corporation (or other property
9with a basis determined in whole or in part by reference to the
10adjusted basis of property so contributed) shall be determined as
11if the basis of the property contributed to the corporation
12immediately after the contribution was equal to its fair market
13value as of the time of the contribution.

14(3) (A) All corporations that are members of the same
15parent-subsidiary controlled group shall be treated as one
16corporation for purposes of this subdivision.

17(B) For purposes of subparagraph (A), the term
18“parent-subsidiary controlled group” means any controlled group
19of corporations as defined in Section 1563(a)(1) of the Internal
20Revenue Code, except that both of the following shall apply:

21(i) “More than 50 percent” shall be substituted for “at least 80
22percent” each place it appears in Section 1563(a)(1) of the Internal
23Revenue Code.

24(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
25apply.

26(e) (1) For purposes of paragraph (2) of subdivision (c), the
27requirements of this subdivision are met by a corporation for any
28period if during that period both of the following apply:

29(A) At least 80 percent (by value) of the assets of the corporation
30are used by the corporation in the active conduct of one or more
31qualified trades or businesses.

32(B) The corporation is an eligible corporation.

33(2) For purposes of paragraph (1), if, in connection with any
34future qualified trade or business, a corporation is engaged in:

35(A) Startup activities described in Section 195(c)(1)(A) of the
36Internal Revenue Code,

37(B) Activities resulting in the payment or incurring of
38expenditures that may be treated as research and experimental
39expenditures under Section 174 of the Internal Revenue Code, or

P16   1(C) Activities with respect to in-house research expenses
2described in Section 41(b)(4) of the Internal Revenue Code, then
3assets used in those activities shall be treated as used in the active
4conduct of a qualified trade or business. Any determination under
5this paragraph shall be made without regard to whether a
6corporation has any gross income from those activities at the time
7of the determination.

8(3) For purposes of this subdivision, the term “qualified trade
9or business” means any trade or business other than any of the
10following:

11(A) Any trade or business involving the performance of services
12in the fields of health, law, engineering, architecture, accounting,
13actuarial science, performing arts, consulting, athletics, financial
14services, brokerage services, or any trade or business where the
15principal asset of the trade or business is the reputation or skill
16of one or more of its employees.

17(B) Any banking, insurance, financing, leasing, investing, or
18similar business.

19(C) Any farming business (including the business of raising or
20harvesting trees).

21(D) Any business involving the production or extraction of
22products of a character with respect to which a deduction is
23allowable under Section 613 or 613A of the Internal Revenue
24 Code.

25(E) Any business of operating a hotel, motel, restaurant, or
26similar business.

27(4) For purposes of this subdivision, the term “eligible
28corporation” means any domestic corporation, except that the
29term shall not include any of the following:

30(A) A DISC or former DISC.

31(B) A corporation with respect to which an election under
32Section 936 of the Internal Revenue Code is in effect or which has
33a direct or indirect subsidiary with respect to which the election
34is in effect.

35(C) A regulated investment company, real estate investment
36trust (REIT), or real estate mortgage investment conduit (REMIC).

37(D) A cooperative.

38(5) (A) For purposes of this subdivision, stock and debt in any
39subsidiary corporation shall be disregarded and the parent
40corporation shall be deemed to own its ratable share of the
P17   1subsidiary’s assets, and to conduct its ratable share of the
2subsidiary’s activities.

3(B) A corporation shall be treated as failing to meet the
4requirements of paragraph (1) for any period during which more
5than 10 percent of the value of its assets (in excess of liabilities)
6consists of stock or securities in other corporations that are not
7subsidiaries of the corporation (other than assets described in
8paragraph (6)).

9(C) For purposes of this paragraph, a corporation shall be
10considered a subsidiary if the parent owns more than 50 percent
11of the combined voting power of all classes of stock entitled to
12vote, or more than 50 percent in value of all outstanding stock, of
13the corporation.

14(6) For purposes of subparagraph (A) of paragraph (1), the
15following assets shall be treated as used in the active conduct of
16a qualified trade or business:

17(A) Assets that are held as a part of the reasonably required
18working capital needs of a qualified trade or business of the
19corporation.

20(B) Assets that are held for investment and are reasonably
21expected to be used within two years to finance research and
22experimentation in a qualified trade or business or increases in
23the working capital needs of a qualified trade or business. For
24periods after the corporation has been in existence for at least two
25years, in no event may more than 50 percent of the assets of the
26corporation qualify as used in the active conduct of a qualified
27trade or business by reason of this paragraph.

28(7) A corporation shall not be treated as meeting the
29requirements of paragraph (1) for any period during which more
30 than 10 percent of the total value of its assets consists of real
31property that is not used in the active conduct of a qualified trade
32or business. For purposes of the preceding sentence, the ownership
33of, dealing in, or renting of, real property shall not be treated as
34the active conduct of a qualified trade or business.

35(8) For purposes of paragraph (1), rights to computer software
36that produces active business computer software royalties (within
37the meaning of Section 543(d)(1) of the Internal Revenue Code)
38shall be treated as an asset used in the active conduct of a trade
39or business.

P18   1(f) If any stock in a corporation is acquired solely through the
2conversion of other stock in the corporation that is qualified small
3business stock in the hands of the taxpayer, both of the following
4shall apply:

5(1) The stock so acquired shall be treated as qualified small
6business stock in the hands of the taxpayer.

7(2) The stock so acquired shall be treated as having been held
8during the period during which the converted stock was held.

9(g) (1) If any amount included in gross income by reason of
10holding an interest in a pass-thru entity meets the requirements of
11paragraph (2), then both of the following shall apply:

12(A) The amount shall be treated as gain described in subdivision
13(a).

14(B) For purposes of applying subdivision (b), the amount shall
15be treated as gain from a disposition of stock in the corporation
16issuing the stock disposed of by the pass-thru entity and the
17taxpayer’s proportionate share of the adjusted basis of the
18pass-thru entity in the stock shall be taken into account.

19(2) An amount meets the requirements of this paragraph if both
20of the following apply:

21(A) The amount is attributable to gain on the sale or exchange
22by the pass-thru entity of stock that is qualified small business
23stock in the hands of the entity (determined by treating the entity
24as an individual) and that was held by that entity for more than
25five years.

26(B) The amount is includable in the gross income of the taxpayer
27by reason of the holding of an interest in the entity that was held
28by the taxpayer on the date on which the pass-thru entity acquired
29the stock and at all times thereafter before the disposition of the
30stock by the pass-thru entity.

31(3) Paragraph (1) shall not apply to any amount to the extent
32the amount exceeds the amount to which paragraph (1) would
33have applied if the amount was determined by reference to the
34interest the taxpayer held in the pass-thru entity on the date the
35qualified small business stock was acquired.

36(4) For purposes of this subdivision, the term “pass-thru entity”
37means any of the following:

38(A) Any partnership.

39(B) Any “S” corporation.

40(C) Any regulated investment company.

P19   1(D) Any common trust fund.

2(h) For purposes of this section:

3(1) In the case of a transfer described in paragraph (2), the
4transferee shall be treated as meeting both of the following:

5(A) Having acquired the stock in the same manner as the
6transferor.

7(B) Having held the stock during any continuous period
8immediately preceding the transfer during which it was held (or
9treated as held under this subdivision) by the transferor.

10(2) A transfer is described in this subdivision if the transfer is
11any of the following:

12(A) By gift.

13(B) At death.

14(C) From a partnership to a partner of stock with respect to
15which requirements similar to the requirements of subdivision (g)
16are met at the time of the transfer (without regard to the five-year
17holding period requirement).

18(3) Rules similar to the rules of Section 1244(d)(2) of the
19Internal Revenue Code shall apply for purposes of this section.

20(4) (A) In the case of a transaction described in Section 351 of
21the Internal Revenue Code or a reorganization described in Section
22368 of the Internal Revenue Code, if qualified small business stock
23is exchanged for other stock that would not qualify as qualified
24small business stock but for this subparagraph, the other stock
25shall be treated as qualified small business stock acquired on the
26date on which the exchanged stock was acquired.

27(B) This section shall apply to gain from the sale or exchange
28of stock treated as qualified small business stock by reason of
29subparagraph (A) only to the extent of the gain that would have
30been recognized at the time of the transfer described in
31subparagraph (A) if Section 351 or 368 of the Internal Revenue
32Code had not applied at that time. The preceding sentence shall
33not apply if the stock that is treated as qualified small business
34stock by reason of subparagraph (A) is issued by a corporation
35that (as of the time of the transfer described in subparagraph (A))
36is a qualified small business.

37(C) For purposes of this paragraph, stock treated as qualified
38small business stock under subparagraph (A) shall be so treated
39for subsequent transactions or reorganizations, except that the
40limitation of subparagraph (B) shall be applied as of the time of
P20   1the first transfer to which the limitation applied (determined after
2the application of the second sentence of subparagraph (B)).

3(D) In the case of a transaction described in Section 351 of the
4Internal Revenue Code, this paragraph shall apply only if
5immediately after the transaction the corporation issuing the stock
6owns directly or indirectly stock representing control (within the
7meaning of Section 368(c) of the Internal Revenue Code) of the
8corporation whose stock was exchanged.

9(i) For purposes of this section:

10(1) In the case where the taxpayer transfers property (other
11than money or stock) to a corporation in exchange for stock in the
12corporation, both of the following shall apply:

13(A) The stock shall be treated as having been acquired by the
14taxpayer on the date of the exchange.

15(B) The basis of the stock in the hands of the taxpayer shall not
16be less than the fair market value of the property exchanged.

17(2) If the adjusted basis of any qualified small business stock is
18adjusted by reason of any contribution to capital after the date on
19which the stock was originally issued, in determining the amount
20of the adjustment by reason of the contribution, the basis of the
21contributed property shall not be treated as less than its fair market
22value on the date of the contribution.

23(j) (1) If the taxpayer has an offsetting short position with
24respect to any qualified small business stock, subdivision (a) shall
25not apply to any gain from the sale or exchange of the stock unless
26both of the following apply:

27(A) The stock was held by the taxpayer for more than five years
28as of the first day on which there was such a short position.

29(B) The taxpayer elects to recognize gain as if the stock was
30sold on that first day for its fair market value.

31(2) For purposes of paragraph (1), the taxpayer shall be treated
32as having an offsetting short position with respect to any qualified
33small business stock if any of the following apply:

34(A) The taxpayer has made a short sale of substantially identical
35property.

36(B) The taxpayer has acquired an option to sell substantially
37identical property at a fixed price.

38(C) To the extent provided in regulations, the taxpayer has
39entered into any other transaction that substantially reduces the
40risk of loss from holding the qualified small business stock. For
P21   1purposes of the preceding sentence, any reference to the taxpayer
2shall be treated as including a reference to any person who is
3related (within the meaning of Section 267(b) or 707(b) of the
4Internal Revenue Code) to the taxpayer.

5(k) The Franchise Tax Board may prescribe those regulations
6as may be appropriate to carry out the purposes of this section,
7including regulations to prevent the avoidance of the purposes of
8this section through splitups, shell corporations, partnerships, or
9otherwise.

10(l) It is the intent of the Legislature that, in construing this
11section, any regulations that may be promulgated by the Secretary
12of the Treasury under Section 1202(k) of the Internal Revenue
13Code shall apply to the extent that those regulations do not conflict
14with this section or with any regulations that may be promulgated
15by the Franchise Tax Board.

16(m) This section shall become operative on January 1, 2016.

end insert
begin delete
17

SECTION 1.  

Section 10752 of the Revenue and Taxation Code
18 is amended to read:

19

10752.  

(a) The annual amount of the license fee for any
20vehicle, other than a trailer or semitrailer, as described in
21subdivision (a) of Section 5014.1 of the Vehicle Code or a
22commercial motor vehicle described in Section 9400.1 of the
23Vehicle Code, or a trailer coach that is required to be moved under
24permit as authorized in Section 35790 of the Vehicle Code, shall
25be a sum equal to the following percentage of the market value of
26the vehicle as determined by the department:

27(1) Sixty-five hundredths of 1 percent on and after January 1,
282005, and before May 19, 2009.

29(2) One percent for initial and renewal registrations due on and
30after May 19, 2009, but before July 1, 2011.

31(3) Sixty-five hundredths of 1 percent for initial and renewal
32registrations due on and after July 1, 2011.

33(b) The annual amount of the license fee for any commercial
34vehicle as described in Section 9400.1 of the Vehicle Code, shall
35be a sum equal to 0.65 percent of the market value of the vehicle
36as determined by the department.

37(c) Notwithstanding Chapter 5 (commencing with Section
3811001) or any other law, all revenues, including penalties, less
39refunds, attributable to that portion of the rate imposed pursuant
P22   1to this section in excess of 0.65 percent shall be deposited into the
2General Fund.

end delete


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