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The bill would state that these provisions are not severable.end delete The provisions would be repealed on January 1, 2016.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 These provisions would be repealed on January 1, 2018.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 delete2⁄3 end delete.
Appropriation: begin deleteyes end delete.
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
11(2) Any portion of the cost previously taken into account under
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).
P3 1(3) If gain from any sale is not recognized by reason of
2subdivision (a), that gain shall be applied to reduce (in the order
3acquired) the basis for determining gain or loss of any qualified
4small business stock that is purchased by the taxpayer during the
560-day period described in subdivision (a).
6(4) For purposes of determining whether the nonrecognition of
7gain under subdivision (a) applies to stock that is sold, both of the
8following shall apply:
9(A) The taxpayer’s holding period for that stock and the stock
10referred to in paragraph (1) of subdivision (a) shall be determined
11without regard to Section 1223 of the Internal Revenue Code.
12(B) Only the first six months of the taxpayer’s holding period
13for the stock referred to in paragraph (1) of subdivision (a) shall
14be taken into account for purposes of applying paragraph (2) of
15subdivision (c) of Section 18152.5.
16(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
17and (k) of Section 18152.5 shall apply.
18(c) This section shall apply to sales made after August 5, 1997,
19and before January 1, 2013.
20(d) This section shall remain in effect only until January 1, 2016,
21and as of that date is repealed, unless a later enacted statute, that
22is enacted before January 1, 2016, deletes or extends that date.
Section 18152.5 of the Revenue and Taxation Code
24 is amended to read:
(a) For purposes of this part, gross income shall not
26include 38 percent of any gain from the sale or exchange of
27qualified small business stock held for more than five years.
28(b) (1) If the taxpayer has eligible gain for the taxable year
29from one or more dispositions of stock issued by any corporation,
30the aggregate amount of the gain from dispositions of stock issued
31by the corporation which may be taken into account under
32subdivision (a) for the taxable year shall not exceed the greater of
33either of the following:
34(A) Ten million dollars ($10,000,000) reduced by
35amount of eligible gain taken into account by the taxpayer under
36subdivision (a) for prior taxable years and attributable to
37dispositions of stock issued by the corporation.
38(B) Ten times the aggregate adjusted bases of qualified small
39business stock issued by the corporation and disposed of by the
40taxpayer during the taxable year. For purposes of this subparagraph,
P4 1the adjusted basis of any stock shall be determined without regard
2to any addition to basis after the date on which the stock was
4(2) For purposes of this subdivision, the term “eligible gain”
5means any gain from the sale or exchange of qualified small
6business stock held for more than five years.
7(3) (A) In the case of a married individual filing a separate
8return, subparagraph (A) of paragraph (1) shall be applied by
9 substituting five million dollars ($5,000,000) for ten million dollars
11(B) In the case of a married taxpayer filing a joint return, the
12amount of gain taken into account under subdivision (a) shall be
13allocated equally between the spouses for purposes of applying
14this subdivision to subsequent taxable years.
15(C) For purposes of this subdivision, marital status shall be
16determined under Section 7703 of the Internal Revenue Code.
17(c) For purposes of this section:
18(1) Except as otherwise provided in this section, the term
19“qualified small business stock” means any stock in a “C”
20corporation which is originally issued after August 10, 1993, if
21both of the following apply:
22(A) As of the date of issuance, the corporation is a qualified
24(B) Except as provided in subdivisions (f) and (h), the stock is
25acquired by the taxpayer at its original issue (directly or through
26an underwriter) in either of the following manners:
27(i) In exchange for money or other property (not including
29(ii) As compensation for services provided to the corporation
30(other than services performed as an underwriter of the stock).
31(2) (A) Stock in a corporation shall not be treated as qualified
32small business stock unless, during substantially all of the
33taxpayer’s holding period for the stock, the corporation meets the
34active business requirements of subdivision (e) and the corporation
35is a “C” corporation.
36(B) (i) Notwithstanding subdivision (e), a corporation shall be
37treated as meeting the active business requirements of subdivision
38(e) for any period during which the corporation qualifies as a
39specialized small business investment company.
P5 1(ii) For purposes of clause (i), the term “specialized small
2business investment company” means any eligible corporation (as
3defined in paragraph (4) of subdivision (e)) that is licensed to
4operate under Section 301(d) of the Small Business Investment
5Act of 1958 (as in effect on May 13, 1993).
6(3) (A) Stock acquired by the taxpayer shall not be treated as
7qualified small business stock if, at any time during the four-year
8period beginning on the date two years before the issuance of the
9stock, the corporation issuing the stock purchased (directly or
10indirectly) any of its stock from the taxpayer or from a related
11person (within the meaning of Section 267(b) or 707(b)) to the
13(B) Stock issued by a corporation shall not be treated as qualified
14small business stock if, during the two-year period beginning on
15the date one year before the issuance of the stock, the corporation
16made one or more purchases of its stock with an aggregate value
17(as of the time of the respective purchases) exceeding 5 percent
18of the aggregate value of all of its stock as of the beginning of the
20(C) If any transaction is treated under Section 304(a) of the
21Internal Revenue Code as a distribution in redemption of the stock
22of any corporation, for purposes of subparagraphs (A) and (B), the
23corporation shall be treated as purchasing an amount of its stock
24equal to the amount treated as a distribution in redemption of the
25stock of the corporation under Section 304(a) of the Internal
27(d) For purposes of this section:
28(1) The term “qualified small business” means any domestic
29corporation (as defined in Section 7701(a)(4) of the Internal
30Revenue Code) which is a “C” corporation if all of the following
32(A) The aggregate gross assets of the corporation (or any
33predecessor thereof) at all times on or after July 1, 1993, and before
34the issuance did not exceed fifty million dollars ($50,000,000).
35(B) The aggregate gross assets of the corporation immediately
36after the issuance (determined by taking into account amounts
37received in the issuance) do not exceed fifty million dollars
P6 1(C) At least 80 percent of the corporation’s payroll, as measured
2by total dollar value, is attributable to employment located within
4(D) The corporation agrees to submit those reports to the
5Franchise Tax Board and to shareholders as the Franchise Tax
6Board may require to carry out the purposes of this section.
7(2) (A) For purposes of paragraph (1), the term “aggregate
8gross assets” means the amount of cash and the aggregate adjusted
9basis of other property held by the corporation.
10(B) For purposes of subparagraph (A), the adjusted basis of any
11property contributed to the corporation (or other property with a
12basis determined in whole or in part by reference to the adjusted
13basis of property so contributed) shall be determined as if the basis
14of the property contributed to the corporation immediately after
15the contribution was equal to its fair market value as of the time
16of the contribution.
17(3) (A) All corporations which are members of the same
18parent-subsidiary controlled group shall be treated as one
19corporation for purposes of this subdivision.
20(B) For purposes of subparagraph (A), the term
21“parent-subsidiary controlled group” means any controlled group
22of corporations as defined in Section 1563(a)(1) of the Internal
23Revenue Code, except that both of the following shall apply:
24(i) “More than 50 percent” shall be substituted for “at least 80
25percent” each place it appears in Section 1563(a)(1) of the Internal
27(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
29(e) (1) For purposes
of paragraph (2) of subdivision (c), the
30requirements of this subdivision are met by a corporation for any
31period if during that period both of the following apply:
32(A) At least 80 percent (by value) of the assets of the corporation
33are used by the corporation in the active conduct of one or more
34qualified trades or businesses.
35(B) The corporation is an eligible corporation.
36(2) For purposes of paragraph (1), if, in connection with any
37future qualified trade or business, a corporation is engaged in:
38(A) Startup activities described in Section 195(c)(1)(A) of the
39Internal Revenue Code,
P7 1(B) Activities
resulting in the payment or incurring of
2expenditures which may be treated as research and experimental
3expenditures under Section 174 of the Internal Revenue Code, or
4(C) Activities with respect to in-house research expenses
5described in Section 41(b)(4) of the Internal Revenue Code, then
6assets used in those activities shall be treated as used in the active
7conduct of a qualified trade or business. Any determination under
8this paragraph shall be made without regard to whether a
9corporation has any gross income from those activities at the time
10of the determination.
11(3) For purposes of this subdivision, the term “qualified trade
12or business” means any trade or business other than any of the
trade or business involving the performance of services
15in the fields of health, law, engineering, architecture, accounting,
16actuarial science, performing arts, consulting, athletics, financial
17services, brokerage services, or any trade or business where the
18principal asset of the trade or business is the reputation or skill of
19one or more of its employees.
20(B) Any banking, insurance, financing, leasing, investing, or
22(C) Any farming business (including the business of raising or
24(D) Any business involving the production or extraction of
25products of a character with respect to which a deduction is
26allowable under Section 613 or 613A of the Internal Revenue
28(E) Any business of operating a hotel, motel, restaurant, or
30(4) For purposes of this subdivision, the term “eligible
31corporation” means any domestic corporation, except that the term
32shall not include any of the following:
33(A) A DISC or former DISC.
34(B) A corporation with respect to which an election under
35Section 936 of the Internal Revenue Code is in effect or which has
36a direct or indirect subsidiary with respect to which the election
37is in effect.
38(C) A regulated investment company, real estate investment
39trust (REIT), or real estate mortgage investment conduit (REMIC).
40(D) A cooperative.
P8 1(5) (A) For purposes of this subdivision, stock and debt in any
2subsidiary corporation shall be disregarded and the parent
3corporation shall be deemed to own its ratable share of the
4subsidiary’s assets, and to conduct its ratable share of the
6(B) A corporation shall be treated as failing to meet the
7requirements of paragraph (1) for any period during which more
8than 10 percent of the value of its assets (in excess of liabilities)
9consists of stock or securities in other corporations which are not
10subsidiaries of the corporation (other than assets described in
purposes of this paragraph, a corporation shall be
13considered a subsidiary if the parent owns more than 50 percent
14of the combined voting power of all classes of stock entitled to
15vote, or more than 50 percent in value of all outstanding stock, of
17(6) For purposes of subparagraph (A) of paragraph (1), the
18following assets shall be treated as used in the active conduct of
19a qualified trade or business:
20(A) Assets that are held as a part of the reasonably required
21working capital needs of a qualified trade or business of the
23(B) Assets that are held for investment and are reasonably
24expected to be used within two years to finance research and
25experimentation in a qualified trade or business or increases in
26 working capital needs of a qualified trade or business. For periods
27after the corporation has been in existence for at least two years,
28in no event may more than 50 percent of the assets of the
29corporation qualify as used in the active conduct of a qualified
30trade or business by reason of this paragraph.
31(7) A corporation shall not be treated as meeting the
32requirements of paragraph (1) for any period during which more
33than 10 percent of the total value of its assets consists of real
34property that is not used in the active conduct of a qualified trade
35or business. For purposes of the preceding sentence, the ownership
36of, dealing in, or renting of, real property shall not be treated as
37the active conduct of a qualified trade or business.
38(8) For purposes of paragraph
(1), rights to computer software
39that produces active business computer software royalties (within
40the meaning of Section 543(d)(1) of the Internal Revenue Code)
P9 1shall be treated as an asset used in the active conduct of a trade or
3(f) If any stock in a corporation is acquired solely through the
4conversion of other stock in the corporation that is qualified small
5business stock in the hands of the taxpayer, both of the following
7(1) The stock so acquired shall be treated as qualified small
8business stock in the hands of the taxpayer.
9(2) The stock so acquired shall be treated as having been held
10during the period during which the converted stock was held.
11(g) (1) If any amount included in gross income by reason of
12holding an interest in a pass-thru entity meets the requirements of
13paragraph (2), then both of the following shall apply:
14(A) The amount shall be treated as gain described in subdivision
16(B) For purposes of applying subdivision (b), the amount shall
17be treated as gain from a disposition of stock in the corporation
18issuing the stock disposed of by the pass-thru entity and the
19taxpayer’s proportionate share of the adjusted basis of the pass-thru
20entity in the stock shall be taken into account.
21(2) An amount meets the requirements of this paragraph if both
22of the following apply:
23(A) The amount is attributable to gain on the sale or exchange
24by the pass-thru entity of stock that is qualified small business
25stock in the hands of the entity (determined by treating the entity
26as an individual) and that was held by that entity for more than
28(B) The amount is includable in the gross income of the taxpayer
29by reason of the holding of an interest in the entity that was held
30by the taxpayer on the date on which the pass-thru entity acquired
31the stock and at all times thereafter before the disposition of the
32stock by the pass-thru entity.
33(3) Paragraph (1) shall not apply to any amount to the extent
34the amount exceeds the amount to which paragraph (1) would have
35applied if the amount was determined by reference to the interest
36the taxpayer held in the pass-thru entity on the date the qualified
37small business stock was acquired.
38(4) For purposes of this subdivision, the term “pass-thru entity”
39means any of the following:
40(A) Any partnership.
P10 1(B) Any “S” corporation.
2(C) Any regulated investment company.
3(D) Any common trust fund.
4(h) For purposes of this section:
5(1) In the case of a transfer described in paragraph (2), the
6transferee shall be treated as meeting both of the following:
7(A) Having acquired the stock in the same manner as the
9(B) Having held the stock during any continuous period
10immediately preceding the transfer during which it was held (or
11treated as held under this subdivision) by the transferor.
12(2) A transfer is described in this subdivision if the transfer is
13any of the following:
14(A) By gift.
15(B) At death.
16(C) From a partnership to a partner of stock with respect to
17which requirements similar to the requirements of subdivision (g)
18are met at the time of the transfer (without regard to the five-year
19holding period requirement).
20(3) Rules similar to the rules of Section 1244(d)(2) of the
21Internal Revenue Code shall apply for purposes of this section.
22(4) (A) In the case of a transaction described in Section 351 of
23the Internal Revenue Code or a reorganization described in Section
24368 of the Internal Revenue Code, if qualified small business stock
25is exchanged for other stock that would not qualify as qualified
26small business stock but for this subparagraph, the other stock
27shall be treated as qualified small business stock acquired on the
28date on which the exchanged stock was acquired.
29(B) This section shall apply to gain from the sale or exchange
30of stock treated as qualified small business stock by reason of
31subparagraph (A) only to the extent of the gain that would have
32been recognized at the time of the transfer described in
33subparagraph (A) if Section 351 or 368 of the Internal Revenue
34Code had not applied at that time. The preceding sentence shall
35not apply if the stock that is treated as qualified small business
36stock by reason of subparagraph (A) is issued by a corporation
37that (as of the time of the transfer described in subparagraph (A))
38is a qualified small business.
39(C) For purposes of this paragraph, stock treated as qualified
40small business stock under subparagraph (A) shall be so treated
P11 1for subsequent transactions or reorganizations, except that the
2limitation of subparagraph (B) shall be applied as of the time of
3the first transfer to which the limitation applied (determined after
4the application of the second sentence of subparagraph (B)).
5(D) In the case of a transaction described in Section 351 of the
6Internal Revenue Code, this paragraph shall apply only if
7immediately after the transaction the corporation issuing the stock
8owns directly or indirectly stock representing control (within the
9meaning of Section 368(c) of the Internal Revenue Code) of the
10corporation whose stock was exchanged.
11(i) For purposes of this section:
12(1) In the case where the taxpayer transfers property (other than
13money or stock) to a corporation in exchange for stock in the
14corporation, both of the following shall apply:
15(A) The stock shall be treated as having been
acquired by the
16taxpayer on the date of the exchange.
17(B) The basis of the stock in the hands of the taxpayer shall in
18no event be less than the fair market value of the property
20(2) If the adjusted basis of any qualified small business stock
21is adjusted by reason of any contribution to capital after the date
22on which the stock was originally issued, in determining the
23amount of the adjustment by reason of the contribution, the basis
24of the contributed property shall in no event be treated as less than
25its fair market value on the date of the contribution.
26(j) (1) If the taxpayer has an offsetting short position with
27respect to any qualified small business stock, subdivision (a) shall
28not apply to any gain from the sale or exchange of the stock unless
29both of the following apply:
30(A) The stock was held by the taxpayer for more than five years
31as of the first day on which there was such a short position.
32(B) The taxpayer elects to recognize gain as if the stock was
33sold on that first day for its fair market value.
34(2) For purposes of paragraph (1), the taxpayer shall be treated
35as having an offsetting short position with respect to any qualified
36small business stock if any of the following apply:
37(A) The taxpayer has made a short sale of substantially identical
39(B) The taxpayer
has acquired an option to sell substantially
40identical property at a fixed price.
P12 1(C) To the extent provided in regulations, the taxpayer has
2entered into any other transaction that substantially reduces the
3risk of loss from holding the qualified small business stock. For
4purposes of the preceding sentence, any reference to the taxpayer
5shall be treated as including a reference to any person who is
6related (within the meaning of Section 267(b) or 707(b) of the
7Internal Revenue Code) to the taxpayer.
8(k) The Franchise Tax Board may prescribe those regulations
9as may be appropriate to carry out the purposes of this section,
10including regulations to prevent the avoidance of the purposes of
11this section through splitups, shell corporations, partnerships, or
13(l) It is the intent of the Legislature that, in construing this
14section, any regulations that may be promulgated by the Secretary
15of the Treasury under Section 1202(k) of the Internal Revenue
16Code shall apply to the extent that those regulations do not conflict
17with this section or with any regulations that may be promulgated
18by the Franchise Tax Board.
19(m) Notwithstanding Section 13340 of the Government Code,
20and without regard to fiscal year, there is hereby continuously
21appropriated from the General Fund to the Franchise Tax Board
22those amounts necessary to make the payments required by the
23act adding this subdivision.
25 The amendments made to this section by the act adding this
26subdivision shall apply to sales, including installment sales,
27occurring in each taxable year beginning on or after January 1,
282008, and before January 1, 2013, and installment payments
29received in taxable years beginning on or after January 1,
begin delete 2013,end delete
30 for sales of qualified small business stock made in taxable
begin delete on or after January 1, 2008, andend delete before January
34 This section shall remain in effect only until January 1, 2016,
35and as of that date is repealed, unless a later enacted statute, that
36is enacted before January 1, 2016, deletes or extends that date.
Section 18153 is added to the Revenue and Taxation
38Code, to read:
(a) In the case of a taxpayer subject to tax under this
P13 1(1) A penalty shall not be imposed with respect to the additional
2tax of that taxpayer.
3(2) Interest shall not accrue with respect to the additional tax
4of that taxpayer due for the taxable year.
5(3) In the case of a liability for additional tax of a taxpayer under
6this part, notwithstanding any other eligibility requirements
7contained in Section 19008, the Franchise Tax Board shall enter
8into an agreement under Section 19008 to accept the full payment
9of the additional tax in installments over a period not to exceed
11(b) For purposes of subdivision (a), the term “additional tax”
13(1) The increase in tax for a taxable year beginning on or after
14January 1, 2008, and before January 1, 2013, to the extent that the
15increase is attributable to the amendments made to Section 18152.5
16by the act adding this section.
17(2) If Section 18152.5, as amended by the act adding this section,
18is for any reason held invalid, ineffective, or unconstitutional by
19an appellate court of competent jurisdiction, the term “additional
20tax” means the increase in tax for a taxable year beginning on or
21after January 1, 2008, and before January 1, 2013, to the extent
22that the increase is attributable to the implementation of the
23appellate court holding invalidating Section 18152.5, as amended
24by the act adding this section, coupled with the implementation of
25 the decision of the California Court of Appeal, Frank Cutler v.
26Franchise Tax Board, (2012) 208 Cal.App.4th 1247, as announced
27in Franchise Tax Board Notice 2012-03, dated December 21, 2012.
28(c) This section shall remain in effect only until January 1, 2018,
29and as of that date is repealed, unless a later enacted statute, that
30is enacted before January 1, 2018, deletes or extends that date.
The Legislature finds and declares that the retroactive
32application of the amendments made to Section 18152.5 of the
33Revenue and Taxation Code and the addition of Section 18153
begin delete ofend delete
34 the Revenue and Taxation Code by this act serve a public
35purpose by providing equitable tax treatment and fair tax relief to
36taxpayers that are stimulating the economy of the state and do not
37constitute a gift of public funds within the meaning of Section 6
38of Article XVI of the California Constitution.
Notwithstanding any other law, any claim for credit
40or refund for taxable years beginning on or after January 1, 2008,
P14 1and ending before January 1, 2009, resulting from this act may be
2filed within 180 days of the effective date of this act.
(a) Except as set forth in subdivision (b), the
4provisions of this act are not severable. If any provision of this act
5or its application is held invalid, that invalidity shall apply to the
6other provisions or applications of this act.
7(b) The provisions of Section 18153 of the Revenue and
8Taxation Code as added by Section 3 of this act are severable from
9the remainder of this act. If any provision of the remainder of this
10act is held invalid, that invalidity shall not affect the provisions or
11applications of Section 18153 of the Revenue and Taxation Code
12as added by Section 3 of this act that can be given effect without
13 the invalid provision or application.