Amended in Assembly September 11, 2013

Amended in Assembly September 4, 2013

Amended in Senate May 24, 2013

Amended in Senate April 3, 2013

Senate Bill No. 209

Introduced by Senator Lieu

(Principal coauthors: Assembly Members Gorell and Perea)

February 11, 2013

An act to amend and repeal Sections 18038.5 and 18152.5 of, and to add and repeal Section 18153 of, the Revenue and Taxation Code, relating to begin delete taxation, and making an appropriation therefor end delete begin insert taxation end insert .

LEGISLATIVE COUNSEL’S DIGEST

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. begin delete 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 state that these provisions are not severable. end delete The provisions would be repealed on January 1, 2016.

The bill, with regard to personal income tax, would provide that a penalty shall not be imposed with respect to the additional tax, as defined, of a taxpayer, and interest shall not accrue with respect to the additional tax of that taxpayer due for the taxable year. The bill would require the Franchise Tax Board, in the case of a liability for additional tax of a taxpayer, notwithstanding certain other eligibility requirements, to enter into an agreement to accept the full payment of the additional tax in installments over a period not to exceed 5 years. These provisions would be repealed on January 1, 2018.

The bill would authorize any claim for credit or refund pursuant to the bill to be filed within 180 days of its effective date, as provided.

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 not severable begin insert , except as provided end insert .

Vote:  begin delete ²⁄₃ end delete begin insert majority end insert . Appropriation:  begin delete yes end delete begin insert no end insert . Fiscal committee: yes. State-mandated local program: no.

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

SECTION 1.  

Section 18038.5 of the Revenue and Taxation
Code is amended to read:

18038.5.  

(a) In the case of any sale of qualified small business
stock held by a taxpayer other than a corporation for more than
six months and with respect to which that taxpayer elects the
application of this section, gain from that sale shall be recognized
only to the extent that the amount realized on that sale exceeds:

(1) The cost of any qualified small business stock purchased by
the taxpayer during the 60-day period beginning on the date of
that sale, reduced by

(2) Any portion of the cost previously taken into account under
this section.

This section shall not apply to any gain that is treated as ordinary
income for purposes of this part.

(b) For purposes of this section:

(1) The term “qualified small business stock” has the meaning
given that term by subdivision (c) of Section 18152.5.

(2) A taxpayer shall be treated as having purchased any property
if, but for paragraph (3), the unadjusted basis of that property in
the hands of the taxpayer would be its cost (within the meaning
of Section 1012 of the Internal Revenue Code).

(3) If gain from any sale is not recognized by reason of
subdivision (a), that gain shall be applied to reduce (in the order
acquired) the basis for determining gain or loss of any qualified
small business stock that is purchased by the taxpayer during the
60-day period described in subdivision (a).

(4) For purposes of determining whether the nonrecognition of
gain under subdivision (a) applies to stock that is sold, both of the
following shall apply:

(A) The taxpayer’s holding period for that stock and the stock
referred to in paragraph (1) of subdivision (a) shall be determined
without regard to Section 1223 of the Internal Revenue Code.

(B) Only the first six months of the taxpayer’s holding period
for the stock referred to in paragraph (1) of subdivision (a) shall
be taken into account for purposes of applying paragraph (2) of
subdivision (c) of Section 18152.5.

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

(c) This section shall apply to sales made after August 5, 1997,
and before January 1, 2013.

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

SEC. 2.  

Section 18152.5 of the Revenue and Taxation Code
is amended to read:

18152.5.  

(a) For purposes of this part, gross income shall not
include 38 percent of any gain from the sale or exchange of
qualified small business stock held for more than five years.

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

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

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

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

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

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

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

(c) For purposes of this section:

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

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

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

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

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

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

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

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

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

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

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

(d) For purposes of this section:

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

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

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

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

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

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

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

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

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

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

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

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

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

(B) The corporation is an eligible corporation.

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

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

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

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

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

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

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

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

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

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

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

(A) A DISC or former DISC.

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

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

(D) A cooperative.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(A) Any partnership.

(B) Any “S” corporation.

(C) Any regulated investment company.

(D) Any common trust fund.

(h) For purposes of this section:

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

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

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

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

(A) By gift.

(B) At death.

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

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

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

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

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

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

(i) For purposes of this section:

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

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

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

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

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

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

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

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

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

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

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

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

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

begin delete

(m) Notwithstanding Section 13340 of the Government Code,
and without regard to fiscal year, there is hereby continuously
appropriated from the General Fund to the Franchise Tax Board
those amounts necessary to make the payments required by the
act adding this subdivision.

end delete begin delete

(n)

end delete

begin insert (m) end insert  The amendments made to this section by the act adding this
subdivision shall apply to sales, including installment sales,
occurring in each taxable year beginning on or after January 1,
2008, and before January 1, 2013, and installment payments
received in taxable years beginning on or after January 1, begin delete 2013, end delete
begin insert 2008, end insert for sales of qualified small business stock made in taxable
years beginning begin delete on or after January 1, 2008, and end delete before January
1, 2013.

begin delete

(o)

end delete

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

SEC. 3.  

Section 18153 is added to the Revenue and Taxation
Code, to read:

18153.  

(a) In the case of a taxpayer subject to tax under this
part:

(1) A penalty shall not be imposed with respect to the additional
tax of that taxpayer.

(2) Interest shall not accrue with respect to the additional tax
of that taxpayer due for the taxable year.

(3) In the case of a liability for additional tax of a taxpayer under
this part, notwithstanding any other eligibility requirements
contained in Section 19008, the Franchise Tax Board shall enter
into an agreement under Section 19008 to accept the full payment
of the additional tax in installments over a period not to exceed
five years.

(b) For purposes of subdivision (a), the term “additional tax”
means:

(1) The increase in tax for a taxable year beginning on or after
January 1, 2008, and before January 1, 2013, to the extent that the
increase is attributable to the amendments made to Section 18152.5
by the act adding this section.

(2) If Section 18152.5, as amended by the act adding this section,
is for any reason held invalid, ineffective, or unconstitutional by
an appellate court of competent jurisdiction, the term “additional
tax” means the increase in tax for a taxable year beginning on or
after January 1, 2008, and before January 1, 2013, to the extent
that the increase is attributable to the implementation of the
appellate court holding invalidating Section 18152.5, as amended
by the act adding this section, coupled with the implementation of
the decision of the California Court of Appeal, Frank Cutler v.
Franchise Tax Board, (2012) 208 Cal.App.4th 1247, as announced
in Franchise Tax Board Notice 2012-03, dated December 21, 2012.

(c) This section shall remain in effect only until January 1, 2018,
and as of that date is repealed, unless a later enacted statute, that
is enacted before January 1, 2018, deletes or extends that date.

SEC. 4.  

The Legislature finds and declares that the retroactive
application of the amendments made to Section 18152.5 of the
Revenue and Taxation Code and the addition of Section 18153 begin delete of end delete
begin insert to end insert the Revenue and Taxation Code by this act serve a public
purpose by providing equitable tax treatment and fair tax relief to
taxpayers that are stimulating the economy of the state and do not
constitute a gift of public funds within the meaning of Section 6
of Article XVI of the California Constitution.

SEC. 5.  

Notwithstanding any other law, any claim for credit
or refund for taxable years beginning on or after January 1, 2008,
and ending before January 1, 2009, resulting from this act may be
filed within 180 days of the effective date of this act.

SEC. 6.  

(a) Except as set forth in subdivision (b), the
provisions of this act are not severable. If any provision of this act
or its application is held invalid, that invalidity shall apply to the
other provisions or applications of this act.

(b) The provisions of Section 18153 of the Revenue and
Taxation Code as added by Section 3 of this act are severable from
the remainder of this act. If any provision of the remainder of this
act is held invalid, that invalidity shall not affect the provisions or
applications of Section 18153 of the Revenue and Taxation Code
as added by Section 3 of this act that can be given effect without
the invalid provision or application.