SB 209, as amended, Lieu. Income taxes: exclusion: deferral: 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 reference to specified federal income tax laws, provide that gross income does not include 38% 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 make a continuous appropriation from the General Fund to the Franchise Tax Board in those amounts necessary to make payments required by this bill.
The bill would require the Franchise Tax Board to waive all penalties and interest for taxes assessed and authorize a taxpayer to enter into a written installment payment agreement with the Franchise Tax Board for the payment of any taxes due, as a result of the decision of Cutler v. Franchise Tax Board, as specified. The bill would also require the Franchise Tax Board to waive all penalties and interest for taxes assessed and authorize a taxpayer to enter into a written installment payment agreement with the Franchise Tax Board for the payment of any taxes due, if specified provisions of the bill are held invalid, ineffective, or unconstitutional by a court of competent jurisdiction.end delete
The bill would make a legislative finding and declaration regarding the public purpose served by the bill. The bill would state that its provisions are severable.
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 amended to read:
(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
P3 1(2) Any portion of the cost previously taken into account under
section shall not apply to any gain that is treated as ordinary
4income for purposes of this part.
5(b) For purposes of this section:
6(1) The term “qualified small business stock” has the meaning
7given that term by subdivision (c) of Section 18152.5.
8(2) A taxpayer shall be treated as having purchased any property
9if, but for paragraph (3), the unadjusted basis of that property in
10the hands of the taxpayer would be its cost (within the meaning
11of Section 1012 of the Internal Revenue Code).
12(3) If gain from any sale is not recognized by reason of
13subdivision (a), that gain shall be applied to reduce (in the order
14acquired) the basis for determining gain or loss of any qualified
15small business stock that is purchased by the taxpayer during the
1660-day period described in subdivision (a).
17(4) For purposes of determining whether the nonrecognition of
18gain under subdivision (a) applies to stock that is sold, both of the
19following shall apply:
20(A) The taxpayer’s holding period for that stock and the stock
21referred to in paragraph (1) of subdivision (a) shall be determined
22without regard to Section 1223 of the Internal Revenue Code.
23(B) Only the first six months of the taxpayer’s holding period
24for the stock referred to in paragraph (1) of subdivision (a) shall
25be taken into account for purposes of applying paragraph (2) of
26subdivision (c) of Section 18152.5.
27(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
28and (k) of Section 18152.5 shall apply.
29(c) This section shall apply to sales made after August 5, 1997,
30and before January 1, 2013.
Section 18152.5 of the Revenue and Taxation Code
35 is amended to read:
(a) For purposes of this part, gross income shall not
37include 38 percent of any gain from the sale or exchange of
38qualified small business stock held for more than five years.
39(b) (1) If the taxpayer has eligible gain for the taxable year
40from one or more dispositions of stock issued by any corporation,
P4 1the aggregate amount of the gain from dispositions of stock issued
2by the corporation which may be taken into account under
3subdivision (a) for the taxable year shall not exceed the greater of
4either of the following:
5(A) Ten million dollars ($10,000,000) reduced by the
6amount of eligible gain taken into account by the taxpayer under
7subdivision (a) for prior taxable years and attributable to
8dispositions of stock issued by the corporation.
9(B) Ten times the aggregate adjusted bases of qualified small
10business stock issued by the corporation and disposed of by the
11taxpayer during the taxable year. For purposes of this subparagraph,
12the adjusted basis of any stock shall be determined without regard
13to any addition to basis after the date on which the stock was
15(2) For purposes of this subdivision, the term “eligible gain”
16means any gain from the sale or exchange of qualified small
17business stock held for more than five years.
18(3) (A) In the case of a married individual filing a separate
19return, subparagraph (A) of paragraph (1) shall be applied by
20substituting five million dollars ($5,000,000) for ten million dollars
22(B) In the case of a married taxpayer filing a joint return, the
23amount of gain taken into account under subdivision (a) shall be
24allocated equally between the spouses for purposes of applying
25this subdivision to subsequent taxable years.
26(C) For purposes of this subdivision, marital status shall be
27determined under Section 7703 of the Internal Revenue Code.
28(c) For purposes of this section:
29(1) Except as otherwise provided in this section, the term
30“qualified small business stock” means any stock in a “C”
31corporation which is originally issued after August 10, 1993, if
32both of the following apply:
33(A) As of the date of issuance, the corporation is a qualified
35(B) Except as provided in subdivisions (f) and (h), the stock is
36acquired by the taxpayer at its original issue (directly or through
37an underwriter) in either of the following manners:
38(i) In exchange for money or other property (not including
P5 1(ii) As compensation for services provided to the corporation
2(other than services performed as an underwriter of the stock).
3(2) (A) Stock in a corporation shall not be treated as qualified
4small business stock unless, during substantially all of the
5taxpayer’s holding period for the stock, the corporation meets the
6active business requirements of subdivision (e) and the corporation
7is a “C” corporation.
8(B) (i) Notwithstanding subdivision (e), a corporation shall be
9treated as meeting the active business requirements of subdivision
10(e) for any period during which the corporation qualifies as a
11specialized small business investment company.
12(ii) For purposes of clause (i), the term “specialized small
13business investment company” means any eligible corporation (as
14defined in paragraph (4) of subdivision (e)) that is licensed to
15operate under Section 301(d) of the Small Business Investment
16Act of 1958 (as in effect on May 13, 1993).
17(3) (A) Stock acquired by the taxpayer shall not be treated as
18qualified small business stock if, at any time during the four-year
19period beginning on the date two years before the issuance of the
20stock, the corporation issuing the stock purchased (directly or
21indirectly) any of its stock from the taxpayer or from a related
22person (within the meaning of Section 267(b) or 707(b)) to the
24(B) Stock issued by a corporation shall not be treated as qualified
25small business stock if, during the two-year period beginning on
26the date one year before the issuance of the stock, the corporation
27made one or more purchases of its stock with an aggregate value
28(as of the time of the respective purchases) exceeding 5 percent
29of the aggregate value of all of its stock as of the beginning of the
31(C) If any transaction is treated under Section 304(a) of the
32Internal Revenue Code as a distribution in redemption of the stock
33of any corporation, for purposes of subparagraphs (A) and (B), the
34corporation shall be treated as purchasing an amount of its stock
35equal to the amount treated as a distribution in redemption of the
36stock of the corporation under Section 304(a) of the Internal
38(d) For purposes of this section:
39(1) The term “qualified small business” means any domestic
40corporation (as defined in Section 7701(a)(4) of the Internal
P6 1Revenue Code) which is a “C” corporation if all of the following
3(A) The aggregate gross assets of the corporation (or any
4predecessor thereof) at all times on or after July 1, 1993, and before
5the issuance did not exceed fifty million dollars ($50,000,000).
6(B) The aggregate gross assets of the corporation immediately
7after the issuance (determined by taking into account amounts
8received in the issuance) do not exceed fifty million dollars
10(C) At least 80 percent of the corporation’s payroll, as measured
11by total dollar value, is attributable to employment located within
13(D) The corporation agrees to submit those reports to the
14Franchise Tax Board and to shareholders as the Franchise Tax
15Board may require to carry out the purposes of this section.
16(2) (A) For purposes of paragraph (1), the term “aggregate
17gross assets” means the amount of cash and the aggregate adjusted
18basis of other property held by the corporation.
19(B) For purposes of subparagraph (A), the adjusted basis of any
20property contributed to the corporation (or other property with a
21basis determined in whole or in part by reference to the adjusted
22basis of property so contributed) shall be determined as if the basis
23of the property contributed to the corporation immediately after
24the contribution was equal to its fair market value as of the time
25of the contribution.
26(3) (A) All corporations which are members of the same
27parent-subsidiary controlled group shall be treated as one
28corporation for purposes of this subdivision.
29(B) For purposes of subparagraph (A), the term
30“parent-subsidiary controlled group” means any controlled group
31of corporations as defined in Section 1563(a)(1) of the Internal
32Revenue Code, except that both of the following shall apply:
33(i) “More than 50 percent” shall be substituted for “at least 80
34percent” each place it appears in Section 1563(a)(1) of the Internal
36(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
38(e) (1) For purposes
of paragraph (2) of subdivision (c), the
39requirements of this subdivision are met by a corporation for any
40period if during that period both of the following apply:
P7 1(A) At least 80 percent (by value) of the assets of the corporation
2are used by the corporation in the active conduct of one or more
3qualified trades or businesses.
4(B) The corporation is an eligible corporation.
5(2) For purposes of paragraph (1), if, in connection with any
6future qualified trade or business, a corporation is engaged in:
7(A) Startup activities described in Section 195(c)(1)(A) of the
8Internal Revenue Code,
resulting in the payment or incurring of
10expenditures which may be treated as research and experimental
11expenditures under Section 174 of the Internal Revenue Code, or
12(C) Activities with respect to in-house research expenses
13described in Section 41(b)(4) of the Internal Revenue Code, then
14assets used in those activities shall be treated as used in the active
15conduct of a qualified trade or business. Any determination under
16this paragraph shall be made without regard to whether a
17corporation has any gross income from those activities at the time
18of the determination.
19(3) For purposes of this subdivision, the term “qualified trade
20or business” means any trade or business other than any of the
22(A) Any trade
or business involving the performance of services
23in the fields of health, law, engineering, architecture, accounting,
24actuarial science, performing arts, consulting, athletics, financial
25services, brokerage services, or any trade or business where the
26principal asset of the trade or business is the reputation or skill of
27one or more of its employees.
28(B) Any banking, insurance, financing, leasing, investing, or
30(C) Any farming business (including the business of raising or
32(D) Any business involving the production or extraction of
33products of a character with respect to which a deduction is
34allowable under Section 613 or 613A of the Internal Revenue
36(E) Any business of operating a hotel, motel, restaurant, or
38(4) For purposes of this subdivision, the term “eligible
39corporation” means any domestic corporation, except that the term
40shall not include any of the following:
P8 1(A) A DISC or former DISC.
2(B) A corporation with respect to which an election under
3Section 936 of the Internal Revenue Code is in effect or which has
4a direct or indirect subsidiary with respect to which the election
5is in effect.
6(C) A regulated investment company, real estate investment
7trust (REIT), or real estate mortgage investment conduit (REMIC).
8(D) A cooperative.
9(5) (A) For purposes of this subdivision, stock and debt in any
10subsidiary corporation shall be disregarded and the parent
11corporation shall be deemed to own its ratable share of the
12subsidiary’s assets, and to conduct its ratable share of the
14(B) A corporation shall be treated as failing to meet the
15requirements of paragraph (1) for any period during which more
16than 10 percent of the value of its assets (in excess of liabilities)
17consists of stock or securities in other corporations which are not
18subsidiaries of the corporation (other than assets described in
purposes of this paragraph, a corporation shall be
21considered a subsidiary if the parent owns more than 50 percent
22of the combined voting power of all classes of stock entitled to
23vote, or more than 50 percent in value of all outstanding stock, of
25(6) For purposes of subparagraph (A) of paragraph (1), the
26following assets shall be treated as used in the active conduct of
27a qualified trade or business:
28(A) Assets that are held as a part of the reasonably required
29working capital needs of a qualified trade or business of the
31(B) Assets that are held for investment and are reasonably
32expected to be used within two years to finance research and
33experimentation in a qualified trade or business or increases in
34 working capital needs of a qualified trade or business. For periods
35after the corporation has been in existence for at least two years,
36in no event may more than 50 percent of the assets of the
37corporation qualify as used in the active conduct of a qualified
38trade or business by reason of this paragraph.
39(7) A corporation shall not be treated as meeting the
40requirements of paragraph (1) for any period during which more
P9 1than 10 percent of the total value of its assets consists of real
2property that is not used in the active conduct of a qualified trade
3or business. For purposes of the preceding sentence, the ownership
4of, dealing in, or renting of, real property shall not be treated as
5the active conduct of a qualified trade or business.
6(8) For purposes of paragraph
(1), rights to computer software
7that produces active business computer software royalties (within
8the meaning of Section 543(d)(1) of the Internal Revenue Code)
9shall be treated as an asset used in the active conduct of a trade or
11(f) If any stock in a corporation is acquired solely through the
12conversion of other stock in the corporation that is qualified small
13business stock in the hands of the taxpayer, both of the following
15(1) The stock so acquired shall be treated as qualified small
16business stock in the hands of the taxpayer.
17(2) The stock so acquired shall be treated as having been held
18during the period during which the converted stock was held.
19(g) (1) If any amount included in gross income by reason of
20holding an interest in a pass-thru entity meets the requirements of
21paragraph (2), then both of the following shall apply:
22(A) The amount shall be treated as gain described in subdivision
24(B) For purposes of applying subdivision (b), the amount shall
25be treated as gain from a disposition of stock in the corporation
26issuing the stock disposed of by the pass-thru entity and the
27taxpayer’s proportionate share of the adjusted basis of the pass-thru
28entity in the stock shall be taken into account.
29(2) An amount meets the requirements of this paragraph if both
30of the following apply:
31(A) The amount is attributable to gain on the sale or exchange
32by the pass-thru entity of stock that is qualified small business
33stock in the hands of the entity (determined by treating the entity
34as an individual) and that was held by that entity for more than
36(B) The amount is includable in the gross income of the taxpayer
37by reason of the holding of an interest in the entity that was held
38by the taxpayer on the date on which the pass-thru entity acquired
39the stock and at all times thereafter before the disposition of the
40stock by the pass-thru entity.
P10 1(3) Paragraph (1) shall not apply to any amount to the extent
2the amount exceeds the amount to which paragraph (1) would have
3applied if the amount was determined by reference to the interest
4the taxpayer held in the pass-thru entity on the date the qualified
5small business stock was acquired.
6(4) For purposes of this subdivision, the term “pass-thru entity”
7means any of the following:
8(A) Any partnership.
9(B) Any “S” corporation.
10(C) Any regulated investment company.
11(D) Any common trust fund.
12(h) For purposes of this section:
13(1) In the case of a transfer described in paragraph (2), the
14transferee shall be treated as meeting both of the following:
15(A) Having acquired the stock in the same manner as the
17(B) Having held the stock during any continuous period
18immediately preceding the transfer during which it was held (or
19treated as held under this subdivision) by the transferor.
20(2) A transfer is described in this subdivision if the transfer is
21any of the following:
22(A) By gift.
23(B) At death.
24(C) From a partnership to a partner of stock with respect to
25which requirements similar to the requirements of subdivision (g)
26are met at the time of the transfer (without regard to the five-year
27holding period requirement).
28(3) Rules similar to the rules of Section 1244(d)(2) of the
29Internal Revenue Code shall apply for purposes of this section.
30(4) (A) In the case of a transaction described in Section 351 of
31the Internal Revenue Code or a reorganization described in Section
32368 of the Internal Revenue Code, if qualified small business stock
33is exchanged for other stock that would not qualify as qualified
34small business stock but for this subparagraph, the other stock
35shall be treated as qualified small business stock acquired on the
36date on which the exchanged stock was acquired.
37(B) This section shall apply to gain from the sale or exchange
38of stock treated as qualified small business stock by reason of
39subparagraph (A) only to the extent of the gain that would have
40been recognized at the time of the transfer described in
P11 1subparagraph (A) if Section 351 or 368 of the Internal Revenue
2Code had not applied at that time. The preceding sentence shall
3not apply if the stock that is treated as qualified small business
4stock by reason of subparagraph (A) is issued by a corporation
5that (as of the time of the transfer described in subparagraph (A))
6is a qualified small business.
7(C) For purposes of this paragraph, stock treated as qualified
8small business stock under subparagraph (A) shall be so treated
9for subsequent transactions or reorganizations, except that the
10limitation of subparagraph (B) shall be applied as of the time of
11the first transfer to which the limitation applied (determined after
12the application of the second sentence of subparagraph (B)).
13(D) In the case of a transaction described in Section 351 of the
14Internal Revenue Code, this paragraph shall apply only if
15immediately after the transaction the corporation issuing the stock
16owns directly or indirectly stock representing control (within the
17meaning of Section 368(c) of the Internal Revenue Code) of the
18corporation whose stock was exchanged.
19(i) For purposes of this section:
20(1) In the case where the taxpayer transfers property (other than
21money or stock) to a corporation in exchange for stock in the
22corporation, both of the following shall apply:
23(A) The stock shall be
treated as having been acquired by the
24taxpayer on the date of the exchange.
25(B) The basis of the stock in the hands of the taxpayer shall in
26no event be less than the fair market value of the property
28(2) If the adjusted basis of any qualified small business stock
29is adjusted by reason of any contribution to capital after the date
30on which the stock was originally issued, in determining the
31amount of the adjustment by reason of the contribution, the basis
32of the contributed property shall in no event be treated as less than
33its fair market value on the date of the contribution.
34(j) (1) If the taxpayer has an offsetting short position with
35respect to any qualified small business stock, subdivision (a) shall
36not apply to any gain from the sale or exchange of the stock unless
37both of the following apply:
38(A) The stock was held by the taxpayer for more than five years
39as of the first day on which there was such a short position.
P12 1(B) The taxpayer elects to recognize gain as if the stock was
2sold on that first day for its fair market value.
3(2) For purposes of paragraph (1), the taxpayer shall be treated
4as having an offsetting short position with respect to any qualified
5small business stock if any of the following apply:
6(A) The taxpayer has made a short sale of substantially identical
8(B) The taxpayer has acquired an option to sell substantially
9identical property at a fixed price.
10(C) To the extent provided in regulations, the taxpayer has
11entered into any other transaction that substantially reduces the
12risk of loss from holding the qualified small business stock. For
13purposes of the preceding sentence, any reference to the taxpayer
14shall be treated as including a reference to any person who is
15related (within the meaning of Section 267(b) or 707(b) of the
16Internal Revenue Code) to the taxpayer.
17(k) The Franchise Tax Board may prescribe those regulations
18as may be appropriate to carry out the purposes of this section,
19including regulations to prevent the avoidance of the purposes of
20this section through splitups, shell corporations, partnerships, or
22(l) It is the intent of the Legislature that, in construing this
23section, any regulations that may be promulgated by the Secretary
24of the Treasury under Section 1202(k) of the Internal Revenue
25Code shall apply to the extent that those regulations do not conflict
26with this section or with any regulations that may be promulgated
27by the Franchise Tax Board.
28(m) Notwithstanding Section 13340 of the Government Code,
29and without regard to fiscal year, there is hereby continuously
30appropriated from the General Fund to the Franchise Tax Board
31those amounts necessary to make the payments required by the
32act adding this subdivision.
33(n) The amendments made to this section by the act adding this
34subdivision shall apply to
begin delete eachend delete taxable year beginning on or after January 1,
362008, and before January 1,
begin delete 2013.end delete
P13 1(o) This section shall remain in effect only until January 1, 2016,
2and as of that date is repealed, unless a later enacted statute, that
3is enacted before January 1, 2016, deletes or extends that date.
Section 18153 is added to the Revenue and Taxation
5Code, to read:
(a) (1) The Franchise Tax Board shall waive all
7penalties and interest for taxes assessed as a result of the decision
8of Cutler v. Franchise Tax Bd. (208 Cal.App.4th 1247) for each
9taxable year beginning on or after January 1, 2008, and before
10January 1, 2013.
11(2) A taxpayer may enter into a written installment payment
12agreement with the Franchise Tax Board for the payment of any
13taxes due as a result of the decision of Cutler v. Franchise Tax Bd.
14(208 Cal.App.4th 1247) in installments for a period of up to five
16(b) If Section 18152.5 is for any reason held invalid, ineffective,
17or unconstitutional by a court of competent jurisdiction, both of
18the following shall apply:
19(1) The Franchise Tax Board shall waive all penalties and
20interest imposed as a result of Section 18152.5 held invalid,
21ineffective, or unconstitutional, for each taxable year beginning
22on or after January 1, 2008, and before January 1, 2013.
23(2) A taxpayer may enter into a written installment payment
24agreement with the Franchise Tax Board for the payment of any
25taxes due, as a result of Section 18152.5 held invalid, ineffective,
26or unconstitutional, in installments for a period of up to five years.
The Legislature finds and declares that the retroactive
23application of the amendments made to Section 18152.5 and the addition of Section 18153 by this act serve a public purpose
26by providing equitable tax treatment and fair tax relief to taxpayers
27that are stimulating the economy of the state and
begin delete doesend delete
28constitute a gift of public funds within the meaning of Section 6
29of Article XVI of the California Constitution.
The provisions of this act are severable. If any
31provision of this act or its application is held invalid, that invalidity
32shall not affect other provisions or applications that can be given
33effect without the invalid provision or application.