BILL ANALYSIS                                                                                                                                                                                                    Ó

                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair

          SB 209 (Lieu) - Income Taxes: Exclusions: Deferral: Qualified  
          Small Business Stock
          Amended: April 3, 2013          Policy Vote: G&F 6-1
          Urgency: No                     Mandate: No
          Hearing Date: May 23, 2013      Consultant: Robert Ingenito

          Bill Summary: SB 209 would reenact a recently struck-down income  
          exclusion for gains when selling qualified small business stock  
          (QSBS). Under the measure, (1) taxpayers who did not already  
          claim the QSBS exclusion between 2008 and 2012 could do so, (2)  
          the Franchise Tax Board (FTB) would not issue notices of  
          proposed assessments (NPAs, essentially tax bills) and seek  
          interest for taxable years 2008 through 2011, (3) the QSBS  
          exclusion would be suspended for taxable years 2013 through  
          2015, and (4) the QSBS exclusion (specifically the element not  
          struck down by the court) would resume beginning January 1,  

          Fiscal Impact (as approved on May 23, 2013): 
                 The bill would require changes to existing tax forms and  
               instructions, as well as information systems, resulting in  
               an unknown increase (greater than $50,000 General Fund) to  
               the FTB's printing, processing and information technology  

                 Relative to the scenario that existed before the courts  
               ruled the QSBS statute invalid, this measure would result  
               in a cumulative net revenue increase of about $9 million. 

          Background: As originally enacted, federal law allowed taxpayers  
          to defer the entire gain or exclude from income 50 percent of  
          the gain from the sale of QSBS in specified circumstances. In  
          1993, the State enacted a statute that was generally identical  
          to the federal version, with three exceptions:

                 A requirement that when the stock was issued, at least  
               80 percent of the corporation's payroll was in the State.


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                 A requirement that, during substantially all of the  
               taxpayer's holding period of the subject stock, at least 80  
               percent (by value) of the corporation's assets was used in  
               the active conduct of one or more qualified trades or  
               businesses in the State.

                 A requirement that, during substantially all of the  
               taxpayer's holding period of the subject stock, at least 80  
               percent of the corporation's payroll expense was  
               attributable to employment in the State.

          A California Court of Appeal, hearing the case of a taxpayer who  
          didn't meet one of these tests, ruled in August 2012 that two of  
          the incentive's three requirements discriminated against the  
          interstate commerce clause of the U.S. Constitution. In  
          response, FTB invalidated all QSBS deferrals and exclusions  
          taxpayers claimed in each taxable year within the statute of  
          limitations (2008). FTB directed affected taxpayers to file  
          amended returns without QSBS deferrals or exclusions back to  
          2008, and pay any resulting tax due, along with potential  

          Proposed Law: SB 209 would reenact California's QSBS deferral  
          and 50 percent exclusion statutes with the requirement that the  
          firm have 80 percent of its payroll in the state at issuance  
          (the one requirement not struck down by the Court of Appeal).   
          SB 209 reenactment applies to the 2008 through 2012 taxable  
          years, thereby absolving taxpayers who claimed the deferral or  
          exclusion and expect to soon receive NPAs from FTB.  The measure  
          then enacts the QSBS deferral and exclusion again beginning in  
          the 2016 taxable year.  

          Related Legislation: AB 901 (Wieckowski) would provide  
          retroactive tax relief for taxpayers who claimed QSBS  
          Staff Comments: From the perspective that the entire QSBS  
          statute is invalid in the aftermath of the Court of Appeal  
          ruling, SB 209 would lead to a revenue loss for the period 2008  
          through 2012, and ongoing beginning in 2016 (because the  
          baseline under this scenario is that the QSBS exclusion is  
          completely "off the table"). Specifically, FTB estimates the  
          following General Fund revenue losses: $45 million in 2012-13,  


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          $34 million in 2013-14, $9 million in 2014-15, $58 million in  
          2015-16, and roughly $45 million annually thereafter. The  
          revenue loss results from (1) allowing the QSBS exclusion to  
          taxpayers who have not already claimed it previously for the  
          period 2008 to 2012, and (2) not issuing NPAs (nor seeking  
          interest) for the period 2008 to 2011.

          Alternatively, from the viewpoint that the portion of the QSBS  
          exclusion statute that was not struck down by the Court of  
          Appeal is current law, the bill's current calculated net revenue  
          loss would be considerably smaller. Revenue losses would still  
          result from (1) allowing taxpayers to claim the QSBS exclusion  
          from 2008 to 2012 who did not do so previously, and (2) a larger  
          number of taxpayers qualifying for the exclusion beginning in  
          2016. Both result from the bill only including the 80 percent  
          payroll requirement, whereas the previous statute had the other  
          two requirements that were struck down. However, these revenue  
          losses would be nearly offset because under the bill, the QSBS  
          exclusion "goes dark" from 2013 to 2015. Current calculations of  
          the net impact of these two effects results in a small revenue  
          loss. However, reducing the percentage of the exclusion, from 50  
          percent down closer to 38 percent, could result with the bill  
          having no aggregate net impact on General Fund revenues.

          The committee amendments would (1) enact a retroactive QSBS  
          exclusion at 38 percent instead of 50 percent, for 2008 through  
          2012, (2) waive penalties and interest on implementation-related  
          liabilities and authorize installment payments, (3) delete  
          provisions establishing the new QSBS exclusion, and (4) provide  
          for the remedy, in the event that the retroactive QSBS is ruled  
          to be discriminatory and overturned, that taxpayer will be  
          entitled only to the waiver of penalties and interest and the  
          installment payment period of up to five years.