SB 1386, as introduced, Walters. 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. Existing law provides, in reference to specified federal income tax laws, 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, and requires the qualified small business have at least 80% of its payroll attributable to employment in California. These provisions are repealed on January 1, 2016.
This bill would remove the repeal date of those provisions. This bill would add the same exclusions from gross income as described above for sales made in taxable years beginning on or after January 1, 2015.
This bill would take effect immediately as a tax levy.
Vote: majority. Appropriation: no. 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
2stock held by a taxpayer other than a corporation for more than
3six months and with respect to which that taxpayer elects the
4application of this section, gain from that sale shall be recognized
5only to the extent that the amount realized on that sale exceeds:
6(1) The cost of any qualified small business stock purchased by
7the taxpayer during the 60-day period beginning on the date of
8that sale, reduced by
9(2) Any portion of the cost previously taken into account under
10this section.
11This section shall not apply to any gain that is treated as ordinary
12income for purposes of this part.
13(b) For purposes of this section:
14(1) The term “qualified small business stock” has the meaning
15given that term by subdivision (c) of Section 18152.5.
16(2) A taxpayer shall be treated as having purchased any property
17if, but for paragraph (3), the unadjusted basis of that property in
18the hands of the taxpayer would be its cost (within the meaning
19of Section 1012 of the Internal Revenue Code).
20(3) If gain from any sale is not recognized by reason of
21subdivision (a), that gain shall be applied to reduce (in the order
22acquired) the basis for determining gain or loss of any qualified
23small business stock that is purchased by the taxpayer during the
2460-day period described in subdivision (a).
25(4) For purposes of determining whether the nonrecognition of
26gain under subdivision (a) applies to stock that is sold, both of the
27following shall apply:
28(A) The taxpayer’s holding period for that stock and the stock
29referred to in paragraph (1) of subdivision (a) shall be determined
30without regard to Section 1223 of the Internal Revenue Code.
31(B) Only the first six months of the taxpayer’s holding period
32for the stock referred to in paragraph (1) of subdivision (a) shall
33be taken into account for purposes of applying paragraph (2) of
34subdivision (c) of Section 18152.5.
35(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
36and (k) of Section 18152.5 shall apply.
37(c) This section shall apply to sales made after August 5,
1997,
38and before January 1, 2013.
P3 1(d) 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 18038.6 is added to the Revenue and Taxation
5Code, to read:
(a) In the case of any sale of qualified small business
7stock held by a taxpayer other than a corporation for more than
8six months and with respect to which that taxpayer elects the
9application of this section, gain from that sale shall be recognized
10only to the extent that the amount realized on that sale exceeds:
11(1) The cost of any qualified small business stock purchased by
12the taxpayer during the 60-day period beginning on the date of
13that sale, reduced by
14(2) Any portion of the cost previously taken into account under
15this section.
16This section shall not apply to any gain that is treated as ordinary
17income for purposes of this part.
18(b) For purposes of this section:
19(1) The term “qualified small business stock” has the meaning
20given that term by subdivision (c) of Section 18152.5.
21(2) A taxpayer shall be treated as having purchased any property
22if, but for paragraph (3), the unadjusted basis of that property in
23the hands of the taxpayer would be its cost (within the meaning
24of Section 1012 of the Internal Revenue Code).
25(3) If gain from any sale is not recognized by reason of
26subdivision (a), that gain shall be applied to reduce (in the order
27acquired) the basis for determining gain or loss of any qualified
28small business stock that is purchased by the taxpayer during the
2960-day period described in subdivision (a).
30(4) For purposes of determining whether the nonrecognition of
31gain under subdivision (a) applies to stock that is sold, both of the
32following shall apply:
33(A) The taxpayer’s holding period for that stock and the stock
34referred to in paragraph (1) of subdivision (a) shall be determined
35without regard to Section 1223 of the Internal Revenue Code.
36(B) Only the first six months of the taxpayer’s holding period
37for the stock referred to in paragraph (1) of subdivision (a) shall
38be taken into account for purposes of applying paragraph (2) of
39subdivision (c) of Section 18152.5.
P4 1(5) Rules similar to the rules of subdivisions (f), (g), (h), (i), (j),
2and (k) of Section 18152.5 shall apply.
3(c) This section shall apply to sales, including installment sales,
4occurring in taxable years beginning on and after January 1, 2015.
Section 18152.5 of the Revenue and Taxation Code
6 is amended to read:
(a) For purposes of this part, gross income shall not
8include 50 percent of any gain from the sale or exchange of
9qualified small business stock held for more than five years.
10(b) (1) If the taxpayer has eligible gain for the taxable year
11from one or more dispositions of stock issued by any corporation,
12the aggregate amount of the gain from dispositions of stock issued
13by the corporation which may be taken into account under
14subdivision (a) for the taxable year shall not exceed the greater of
15either of the following:
16(A) Ten million dollars ($10,000,000) reduced by the aggregate
17amount of eligible gain taken into account by the taxpayer under
18subdivision (a) for prior taxable
years and attributable to
19dispositions of stock issued by the corporation.
20(B) Ten times the aggregate adjusted bases of qualified small
21business stock issued by the corporation and disposed of by the
22taxpayer during the taxable year. For purposes of subparagraph
23(B), the adjusted basis of any stock shall be determined without
24regard to any addition to basis after the date on which the stock
25was originally issued.
26(2) For purposes of this subdivision, the term “eligible gain”
27means any gain from the sale or exchange of qualified small
28business stock held for more than five years.
29(3) (A) In the case of a married individual filing a separate
30return, subparagraph (A) of paragraph (1) shall be applied by
31substituting five million dollars ($5,000,000) for ten million dollars
32($10,000,000).
33(B) In the case of a married taxpayer filing a joint return, the
34amount of gain taken into account under subdivision (a) shall be
35allocated equally between the spouses for purposes of applying
36this subdivision to subsequent taxable years.
37(C) For purposes of this subdivision, marital status shall be
38determined under Section 7703 of the Internal Revenue Code.
39(c) For purposes of this section:
P5 1(1) Except as otherwise provided in this section, the term
2“qualified small business stock” means any stock in a C corporation
3which is originally issued after August 10, 1993, if both of the
4following apply:
5(A) As of the date of issuance, the corporation is a qualified
6small business.
7(B) Except as provided in subdivisions (f) and (h), the stock is
8acquired by the taxpayer at its original issue (directly or through
9an underwriter) in either of the following manners:
10(i) In exchange for money or other property (not including
11stock).
12(ii) As compensation for services provided to the corporation
13(other than services performed as an underwriter of the stock).
14(2) (A) Stock in a corporation shall not be treated as qualified
15small business stock unless, during substantially all of the
16taxpayer’s holding period for the stock, the corporation meets the
17active business requirements of subdivision (e) and the corporation
18is a C corporation.
19(B) (i) Notwithstanding subdivision (e), a corporation shall be
20treated as meeting the active business requirements of subdivision
21(e) for any period during which the corporation qualifies as a
22specialized small business investment company.
23(ii) For purposes of clause (i), the term “specialized small
24business investment company” means any eligible corporation (as
25defined in paragraph (4) of subdivision (e)) that is licensed to
26operate under Section 301(d) of the Small Business Investment
27Act of 1958 (as in effect on May 13, 1993).
28(3) (A) Stock acquired by the taxpayer shall not be treated as
29qualified small business stock if, at any time during the four-year
30period beginning on the date two years before the issuance of the
31stock, the corporation issuing the stock purchased (directly or
32indirectly) any of its stock from the taxpayer or from a related
33person (within the meaning of Section 267(b) or 707(b)) to the
34taxpayer.
35(B) Stock issued by a corporation shall not be treated as qualified
36small business stock if, during the two-year period beginning on
37the date one year before the issuance of the stock, the corporation
38made one or more purchases of its stock with an aggregate value
39(as of the time of the respective purchases) exceeding 5 percent
P6 1of the aggregate value of all of its stock as of the beginning of the
2two-year period.
3(C) If any transaction is treated under Section 304(a) of the
4Internal Revenue Code as a distribution in redemption of the stock
5of any corporation, for purposes of subparagraphs (A) and (B), the
6corporation shall be treated as purchasing an amount of its stock
7equal to the amount treated as a distribution in redemption of the
8stock of the corporation under Section 304(a) of the Internal
9Revenue
Code.
10(d) For purposes of this section:
11(1) The term “qualified small business” means any domestic
12corporation (as defined in Section 7701(a)(4) of the Internal
13Revenue Code) which is a C corporation if all of the following
14apply:
15(A) The aggregate gross assets of the corporation (or any
16predecessor thereof) at all times on or after July 1, 1993, and before
17the issuance did not exceed fifty million dollars ($50,000,000).
18(B) The aggregate gross assets of the corporation immediately
19after the issuance (determined by taking into account amounts
20received in the issuance) do not exceed fifty million dollars
21($50,000,000).
22(C) At least 80 percent of the corporation’s payroll, as measured
23by
total dollar value, is attributable to employment located within
24California.
25(D) The corporation agrees to submit those reports to the
26Franchise Tax Board and to shareholders as the Franchise Tax
27Board may require to carry out the purposes of this section.
28(2) (A) For purposes of paragraph (1), the term “aggregate
29gross assets” means the amount of cash and the aggregate adjusted
30basis of other property held by the corporation.
31(B) For purposes of subparagraph (A), the adjusted basis of any
32property contributed to the corporation (or other property with a
33basis determined in whole or in part by reference to the adjusted
34basis of property so contributed) shall be determined as if the basis
35of the property contributed to the corporation immediately after
36the contribution was equal to its fair
market value as of the time
37of the contribution.
38(3) (A) All corporations which are members of the same
39parent-subsidiary controlled group shall be treated as one
40corporation for purposes of this subdivision.
P7 1(B) For purposes of subparagraph (A), the term
2“parent-subsidiary controlled group” means any controlled group
3of corporations as defined in Section 1563(a)(1) of the Internal
4Revenue Code, except that both of the following shall apply:
5(i) “More than 50 percent” shall be substituted for “at least 80
6percent” each place it appears in Section 1563(a)(1) of the Internal
7Revenue Code.
8(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
9apply.
10(e) (1) For purposes of paragraph (2) of subdivision (c), the
11requirements of this subdivision are met by a corporation for any
12period if during that period both of the following apply:
13(A) At least 80 percent (by value) of the assets of the corporation
14are used by the corporation in the active conduct of one or more
15qualified trades or businesses.
16(B) The corporation is an eligible corporation.
17(2) For purposes of paragraph (1), if, in connection with any
18future qualified trade or business, a corporation is engaged inbegin insert one
19of the followingend insert:
20(A) Startup activities described in Section 195(c)(1)(A) of the
21Internal Revenuebegin delete Code,end deletebegin insert
Code.end insert
22(B) Activities resulting in the payment or incurring of
23expenditures which may be treated as research and experimental
24expenditures under Section 174 of the Internal Revenue Codebegin delete, orend deletebegin insert.end insert
25(C) Activities with respect to in-house research expenses
26described in Section 41(b)(4) of the Internal Revenue Code, then
27assets used in those activities shall be treated as used in the active
28conduct of a qualified trade or business. Any determination under
29this paragraph shall be made without regard to whether a
30corporation has any gross income from those activities at the time
31of the determination.
32(3) For purposes of this subdivision, the term “qualified trade
33or business” means any trade or business other than any of the
34following:
35(A) Any trade or business involving the performance of services
36in the fields of health, law, engineering, architecture, accounting,
37actuarial science, performing arts, consulting, athletics, financial
38services, brokerage services, or any trade or business where the
39principal asset of the trade or business is the reputation or skill of
40one or more of its employees.
P8 1(B) Any banking, insurance, financing, leasing, investing, or
2similar business.
3(C) Any farming business (including the business of raising or
4harvesting trees).
5(D) Any business involving the production or extraction of
6products of a character
with respect to which a deduction is
7allowable under Section 613 or 613A of the Internal Revenue
8Code.
9(E) Any business of operating a hotel, motel, restaurant, or
10similar business.
11(4) For purposes of this subdivision, the term “eligible
12corporation” means any domestic corporation, except that the term
13shall not include any of the following:
14(A) A DISC or former DISC.
15(B) A corporation with respect to which an election under
16Section 936 of the Internal Revenue Code is in effect or which has
17a direct or indirect subsidiary with respect to which the election
18is in effect.
19(C) A regulated investment company, real estate investment
20trust (REIT), or real estate mortgage investment conduit
(REMIC).
21(D) A cooperative.
22(5) (A) For purposes of this subdivision, stock and debt in any
23subsidiary corporation shall be disregarded and the parent
24corporation shall be deemed to own its ratable share of the
25subsidiary’s assets, and to conduct its ratable share of the
26subsidiary’s activities.
27(B) A corporation shall be treated as failing to meet the
28requirements of paragraph (1) for any period during which more
29than 10 percent of the value of its assets (in excess of liabilities)
30consists of stock or securities in other corporations which are not
31subsidiaries of the corporation (other than assets described in
32paragraph (6)).
33(C) For purposes of this paragraph, a corporation shall be
34considered a subsidiary if the parent owns
more than 50 percent
35of the combined voting power of all classes of stock entitled to
36vote, or more than 50 percent in value of all outstanding stock, of
37the corporation.
38(6) For purposes of subparagraph (A) of paragraph (1), the
39following assets shall be treated as used in the active conduct of
40a qualified trade or business:
P9 1(A) Assets that are held as a part of the reasonably required
2working capital needs of a qualified trade or business of the
3corporation.
4(B) Assets that are held for investment and are reasonably
5expected to be used within two years to finance research and
6experimentation in a qualified trade or business or increases in
7working capital needs of a qualified trade or business. For periods
8after the corporation has been in existence for at least two years,
9in no event may more than 50 percent of
the assets of the
10corporation qualify as used in the active conduct of a qualified
11trade or business by reason of this paragraph.
12(7) A corporation shall not be treated as meeting the
13requirements of paragraph (1) for any period during which more
14than 10 percent of the total value of its assets consists of real
15property that is not used in the active conduct of a qualified trade
16or business. For purposes of the preceding sentence, the ownership
17of, dealing in, or renting of, real property shall not be treated as
18the active conduct of a qualified trade or business.
19(8) For purposes of paragraph (1), rights to computer software
20that produces active business computer software royalties (within
21the meaning of Section 543(d)(1) of the Internal Revenue Code)
22shall be treated as an asset used in the active conduct of a trade or
23business.
24(f) If any stock in a corporation is acquired solely through the
25conversion of other stock in the corporation that is qualified small
26business stock in the hands of the taxpayer, both of the following
27shall apply:
28(1) The stock so acquired shall be treated as qualified small
29business stock in the hands of the taxpayer.
30(2) The stock so acquired shall be treated as having been held
31during the period during which the converted stock was held.
32(g) (1) If any amount included in gross income by reason of
33holding an interest in a pass-thru entity meets the requirements of
34paragraph (2), then both of the following shall apply:
35(A) The amount shall be treated as gain described in
subdivision
36(a).
37(B) For purposes of applying subdivision (b), the amount shall
38be treated as gain from a disposition of stock in the corporation
39issuing the stock disposed of by the pass-thru entity and the
P10 1taxpayer’s proportionate share of the adjusted basis of the pass-thru
2entity in the stock shall be taken into account.
3(2) An amount meets the requirements of this paragraph if both
4of the following apply:
5(A) The amount is attributable to gain on the sale or exchange
6by the pass-thru entity of stock that is qualified small business
7stock in the hands of the entity (determined by treating the entity
8as an individual) and that was held by that entity for more than
9five years.
10(B) The amount is includable in the gross income of the taxpayer
11by reason
of the holding of an interest in the entity that was held
12by the taxpayer on the date on which the pass-thru entity acquired
13the stock and at all times thereafter before the disposition of the
14stock by the pass-thru entity.
15(3) Paragraph (1) shall not apply to any amount to the extent
16the amount exceeds the amount to which paragraph (1) would have
17applied if the amount was determined by reference to the interest
18the taxpayer held in the pass-thru entity on the date the qualified
19small business stock was acquired.
20(4) For purposes of this subdivision, the term “pass-thru entity”
21means any of the following:
22(A) Any partnership.
23(B) Any “S” corporation.
24(C) Any regulated investment company.
25(D) Any common trust fund.
26(h) For purposes of this section:
27(1) In the case of a transfer described in paragraph (2), the
28transferee shall be treated as meeting both of the following:
29(A) Having acquired the stock in the same manner as the
30transferor.
31(B) Having held the stock during any continuous period
32immediately preceding the transfer during which it was held (or
33treated as held under this subdivision) by the transferor.
34(2) A transfer is described in this subdivision if the transfer is
35any of the following:
36(A) By gift.
37(B) At death.
38(C) From a partnership to a partner of stock with respect to
39which requirements similar to the requirements of subdivision (g)
P11 1are met at the time of the transfer (without regard to the five-year
2holding period requirement).
3(3) Rules similar to the rules of Section 1244(d)(2) of the
4Internal Revenue Code shall apply for purposes of this section.
5(4) (A) In the case of a transaction described in Section 351 of
6the Internal Revenue Code or a reorganization described in Section
7368 of the Internal Revenue Code, if qualified small business stock
8is exchanged for other stock that would not qualify as qualified
9small business stock but for this subparagraph, the other stock
10shall be treated as qualified small business stock
acquired on the
11date on which the exchanged stock was acquired.
12(B) This section shall apply to gain from the sale or exchange
13of stock treated as qualified small business stock by reason of
14subparagraph (A) only to the extent of the gain that would have
15been recognized at the time of the transfer described in
16subparagraph (A) if Section 351 or 368 of the Internal Revenue
17Code had not applied at that time. The preceding sentence shall
18not apply if the stock that is treated as qualified small business
19stock by reason of subparagraph (A) is issued by a corporation
20that (as of the time of the transfer described in subparagraph (A))
21is a qualified small business.
22(C) For purposes of this paragraph, stock treated as qualified
23small business stock under subparagraph (A) shall be so treated
24for subsequent transactions or reorganizations, except that the
25limitation of subparagraph (B)
shall be applied as of the time of
26the first transfer to which the limitation applied (determined after
27the application of the second sentence of subparagraph (B)).
28(D) In the case of a transaction described in Section 351 of the
29Internal Revenue Code, this paragraph shall apply only if
30immediately after the transaction the corporation issuing the stock
31owns directly or indirectly stock representing control (within the
32meaning of Section 368(c) of the Internal Revenue Code) of the
33corporation whose stock was exchanged.
34(i) For purposes of this section:
35(1) In the case where the taxpayer transfers property (other than
36money or stock) to a corporation in exchange for stock in the
37corporation, both of the following shall apply:
38(A) The stock shall be
treated as having been acquired by the
39taxpayer on the date of the exchange.
P12 1(B) The basis of the stock in the hands of the taxpayer shall in
2no event be less than the fair market value of the property
3exchanged.
4(2) If the adjusted basis of any qualified small business stock
5is adjusted by reason of any contribution to capital after the date
6on which the stock was originally issued, in determining the
7amount of the adjustment by reason of the contribution, the basis
8of the contributed property shall in no event be treated as less than
9its fair market value on the date of the contribution.
10(j) (1) If the taxpayer has an offsetting short position with
11respect to any qualified small business stock, subdivision (a) shall
12not apply to any gain from the sale or exchange of the stock unless
13both of
the following apply:
14(A) The stock was held by the taxpayer for more than five years
15as of the first day on which there was such a short position.
16(B) The taxpayer elects to recognize gain as if the stock was
17sold on that first day for its fair market value.
18(2) For purposes of paragraph (1), the taxpayer shall be treated
19as having an offsetting short position with respect to any qualified
20small business stock if any of the following apply:
21(A) The taxpayer has made a short sale of substantially identical
22property.
23(B) The taxpayer has acquired an option to sell substantially
24identical property at a fixed price.
25(C) To the
extent provided in regulations, the taxpayer has
26entered into any other transaction that substantially reduces the
27risk of loss from holding the qualified small business stock. For
28purposes of the preceding sentence, any reference to the taxpayer
29shall be treated as including a reference to any person who is
30related (within the meaning of Section 267(b) or 707(b) of the
31Internal Revenue Code) to the taxpayer.
32(k) The Franchise Tax Board may prescribe those regulations
33as may be appropriate to carry out the purposes of this section,
34including regulations to prevent the avoidance of the purposes of
35this section throughbegin delete splitups,end deletebegin insert split-ups,end insert shell corporations,
36partnerships, or otherwise.
37(l) It is the intent of the Legislature that, in construing this
38section, any regulations that may be promulgated by the Secretary
39of the Treasury under Section 1202(k) of the Internal Revenue
40Code shall apply to the extent that those regulations do not conflict
P13 1with this section or with any regulations that may be promulgated
2by the Franchise Tax Board.
3(m) The amendments made to this section bybegin delete the act adding this begin insert Chapter 546 of the Statutes of 2013end insert shall apply to
4subdivisionend delete
5sales, including installment sales, occurring in each taxable year
6beginning on or after January 1, 2008, and before January 1, 2013,
7and installment payments received in taxable years beginning on
8or after January 1, 2008, for sales of qualified small business stock
9
made in taxable years beginning before January 1, 2013.
10(n) This section shall remain in effect only until January 1, 2016,
11and as of that date is repealed, unless a later enacted statute, that
12is enacted before
January 1, 2016, deletes or extends that date.
Section 18152.6 is added to the Revenue and Taxation
14Code, to read:
(a) For purposes of this part, gross income shall not
16include 50 percent of any gain from the sale or exchange of
17qualified small business stock held for more than five years.
18(b) (1) If the taxpayer has eligible gain for the taxable year from
19one or more dispositions of stock issued by any corporation, the
20aggregate amount of the gain from dispositions of stock issued by
21the corporation which may be taken into account under subdivision
22(a) for the taxable year shall not exceed the greater of either of the
23following:
24(A) Ten million dollars
($10,000,000) reduced by the aggregate
25amount of eligible gain taken into account by the taxpayer under
26subdivision (a) for prior taxable years and attributable to
27dispositions of stock issued by the corporation.
28(B) Ten times the aggregate adjusted bases of qualified small
29business stock issued by the corporation and disposed of by the
30taxpayer during the taxable year. For purposes of subparagraph
31(B), the adjusted basis of any stock shall be determined without
32regard to any addition to basis after the date on which the stock
33was originally issued.
34(2) For purposes of this subdivision, the term “eligible gain”
35means any gain from the sale or exchange of qualified small
36business stock held for more than five years.
37(3) (A) In the case of a married individual filing a separate
38return, subparagraph (A) of paragraph (1) shall be applied by
39substituting five million dollars ($5,000,000) for ten million dollars
40($10,000,000).
P14 1(B) In the case of a married taxpayer filing a joint return, the
2amount of gain taken into account under subdivision (a) shall be
3allocated equally between the spouses for purposes of applying
4this subdivision to subsequent taxable years.
5(C) For purposes of this subdivision, marital status shall be
6determined under Section 7703 of the Internal Revenue Code.
7(c) For purposes of this section:
8(1) Except as otherwise provided in this section, the term
9“qualified small business stock” means any stock in a C corporation
10which is originally issued after August 10, 1993, if both of the
11following apply:
12(A) As of the date of issuance, the corporation is a qualified
13small business.
14(B) Except as provided in subdivisions (f) and (h), the stock is
15acquired by the taxpayer at its original issue (directly or through
16an underwriter) in either of the following manners:
17(i) In exchange for money or other property (not including
18stock).
19(ii) As compensation for services provided to the corporation
20(other than services performed as an underwriter of the stock).
21(2) (A) Stock in a corporation shall not be treated as qualified
22small business stock unless, during substantially all of the
23taxpayer’s holding period for the stock, the corporation meets the
24active business requirements of subdivision (e) and the corporation
25is a C corporation.
26(B) (i) Notwithstanding subdivision (e), a corporation shall be
27treated as meeting the active
business requirements of subdivision
28(e) for any period during which the corporation qualifies as a
29specialized small business investment company.
30(ii) For purposes of clause (i), the term “specialized small
31business investment company” means any eligible corporation (as
32defined in paragraph (4) of subdivision (e)) that is licensed to
33operate under Section 301(d) of the Small Business Investment
34Act of 1958 (as in effect on May 13, 1993).
35(3) (A) Stock acquired by the taxpayer shall not be treated as
36qualified small business stock if, at any time during the four-year
37period beginning on the date two years before the issuance of the
38stock, the corporation issuing the stock purchased (directly or
39indirectly) any of its stock from the taxpayer or from
a related
P15 1person (within the meaning of Section 267(b) or 707(b)) to the
2taxpayer.
3(B) Stock issued by a corporation shall not be treated as qualified
4small business stock if, during the two-year period beginning on
5the date one year before the issuance of the stock, the corporation
6made one or more purchases of its stock with an aggregate value
7(as of the time of the respective purchases) exceeding 5 percent
8of the aggregate value of all of its stock as of the beginning of the
9two-year period.
10(C) If any transaction is treated under Section 304(a) of the
11Internal Revenue Code as a distribution in redemption of the stock
12of any corporation, for purposes of subparagraphs (A) and (B), the
13corporation shall be treated as purchasing an amount of its stock
14
equal to the amount treated as a distribution in redemption of the
15stock of the corporation under Section 304(a) of the Internal
16Revenue Code.
17(d) For purposes of this section:
18(1) The term “qualified small business” means any domestic
19corporation (as defined in Section 7701(a)(4) of the Internal
20Revenue Code) which is a C corporation if all of the following
21apply:
22(A) The aggregate gross assets of the corporation (or any
23predecessor thereof) at all times on or after July 1, 1993, and before
24the issuance did not exceed fifty million dollars ($50,000,000).
25(B) The aggregate gross assets of the corporation immediately
26after the issuance (determined by taking into account amounts
27received in the issuance) do not exceed fifty million dollars
28($50,000,000).
29(C) At least 80 percent of the corporation’s payroll, as measured
30by total dollar value, is attributable to employment located within
31California.
32(D) The corporation agrees to submit those reports to the
33Franchise Tax Board and to shareholders as the Franchise Tax
34Board may require to carry out the purposes of this section.
35(2) (A) For purposes of paragraph (1),
the term “aggregate gross
36assets” means the amount of cash and the aggregate adjusted basis
37of other property held by the corporation.
38(B) For purposes of subparagraph (A), the adjusted basis of any
39property contributed to the corporation (or other property with a
40basis determined in whole or in part by reference to the adjusted
P16 1basis of property so contributed) shall be determined as if the basis
2of the property contributed to the corporation immediately after
3the contribution was equal to its fair market value as of the time
4of the contribution.
5(3) (A) All corporations which are members of the same
6parent-subsidiary controlled group shall be treated as one
7corporation for purposes of this subdivision.
8(B) For purposes of subparagraph (A), the term
9“parent-subsidiary controlled group” means any controlled group
10of corporations as defined in Section 1563(a)(1) of the Internal
11Revenue Code, except that both of the following shall apply:
12(i) “More than 50 percent” shall be substituted for “at least 80
13percent” each place it appears in Section 1563(a)(1) of the Internal
14Revenue Code.
15(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
16apply.
17(e) (1) For purposes of paragraph (2) of subdivision (c), the
18requirements of this subdivision are met by a
corporation for any
19period if during that period both of the following apply:
20(A) At least 80 percent (by value) of the assets of the corporation
21are used by the corporation in the active conduct of one or more
22qualified trades or businesses.
23(B) The corporation is an eligible corporation.
24(2) For purposes of paragraph (1), if, in connection with any
25future qualified trade or business, a corporation is engaged in one
26of the following:
27(A) Startup activities described in Section 195(c)(1)(A) of
the
28Internal Revenue Code.
29(B) Activities resulting in the payment or incurring of
30expenditures which may be treated as research and experimental
31expenditures under Section 174 of the Internal Revenue Code.
32(C) Activities with respect to in-house research expenses
33described in Section 41(b)(4) of the Internal Revenue Code, then
34assets used in those activities shall be treated as used in the active
35conduct of a qualified trade or business. Any determination under
36this paragraph shall be made without regard to whether a
37corporation has any gross income from those activities at the time
38of the determination.
P17 1(3) For purposes
of this subdivision, the term “qualified trade
2or business” means any trade or business other than any of the
3following:
4(A) Any trade or business involving the performance of services
5in the fields of health, law, engineering, architecture, accounting,
6actuarial science, performing arts, consulting, athletics, financial
7services, brokerage services, or any trade or business where the
8principal asset of the trade or business is the reputation or skill of
9one or more of its employees.
10(B) Any banking, insurance, financing, leasing, investing, or
11similar business.
12(C) Any farming business (including the business of raising
or
13harvesting trees).
14(D) Any business involving the production or extraction of
15products of a character with respect to which a deduction is
16allowable under Section 613 or 613A of the Internal Revenue
17Code.
18(E) Any business of operating a hotel, motel, restaurant, or
19similar business.
20(4) For purposes of this subdivision, the term “eligible
21corporation” means any domestic corporation, except that the term
22shall not include any of the following:
23(A) A DISC or former DISC.
24(B) A corporation with respect to which an election under
25Section 936 of the Internal Revenue Code is in effect or which has
26a direct or indirect subsidiary with respect to which the election
27is in effect.
28(C) A regulated investment company, real estate investment
29trust (REIT), or real estate mortgage investment conduit (REMIC).
30(D) A cooperative.
31(5) (A) For purposes of this subdivision, stock and debt in any
32subsidiary corporation shall be disregarded and the parent
33corporation shall be deemed to own its ratable share of the
34subsidiary’s assets, and to
conduct its ratable share of the
35subsidiary’s activities.
36(B) A corporation shall be treated as failing to meet the
37requirements of paragraph (1) for any period during which more
38than 10 percent of the value of its assets (in excess of liabilities)
39consists of stock or securities in other corporations which are not
P18 1subsidiaries of the corporation (other than assets described in
2paragraph (6)).
3(C) For purposes of this paragraph, a corporation shall be
4considered a subsidiary if the parent owns more than 50 percent
5of the combined voting power of all classes of stock entitled to
6vote, or more than 50 percent in value of all outstanding stock, of
7the corporation.
8(6) For purposes of subparagraph (A) of paragraph (1), the
9following assets shall be treated as used in the active conduct of
10a qualified trade or business:
11(A) Assets that are held as a part of the reasonably required
12working capital needs of a qualified trade or business of the
13corporation.
14(B) Assets that are held for investment and are reasonably
15expected to be used within two years to finance research and
16experimentation in a qualified trade or business or increases in
17working capital needs of a qualified trade or business. For periods
18after the corporation has been in existence for at least two years,
19in no event may more than 50 percent of the assets of the
20corporation qualify as
used in the active conduct of a qualified
21trade or business by reason of this paragraph.
22(7) A corporation shall not be treated as meeting the
23requirements of paragraph (1) for any period during which more
24than 10 percent of the total value of its assets consists of real
25property that is not used in the active conduct of a qualified trade
26or business. For purposes of the preceding sentence, the ownership
27of, dealing in, or renting of, real property shall not be treated as
28the active conduct of a qualified trade or business.
29(8) For purposes of paragraph (1), rights to computer software
30that produces active business computer software royalties (within
31the meaning of Section 543(d)(1) of the Internal Revenue Code)
32shall be treated as an asset used in
the active conduct of a trade or
33business.
34(f) If any stock in a corporation is acquired solely through the
35conversion of other stock in the corporation that is qualified small
36business stock in the hands of the taxpayer, both of the following
37shall apply:
38(1) The stock so acquired shall be treated as qualified small
39business stock in the hands of the taxpayer.
P19 1(2) The stock so acquired shall be treated as having been held
2during the period during which the converted stock was held.
3(g) (1)
If any amount included in gross income by reason of
4holding an interest in a pass-thru entity meets the requirements of
5paragraph (2), then both of the following shall apply:
6(A) The amount shall be treated as gain described in subdivision
7(a).
8(B) For purposes of applying subdivision (b), the amount shall
9be treated as gain from a disposition of stock in the corporation
10issuing the stock disposed of by the pass-thru entity and the
11taxpayer’s proportionate share of the adjusted basis of the pass-thru
12entity in the stock shall be taken into account.
13(2) An amount meets the requirements of this paragraph if both
14of the
following apply:
15(A) The amount is attributable to gain on the sale or exchange
16by the pass-thru entity of stock that is qualified small business
17stock in the hands of the entity (determined by treating the entity
18as an individual) and that was held by that entity for more than
19five years.
20(B) The amount is includable in the gross income of the taxpayer
21by reason of the holding of an interest in the entity that was held
22by the taxpayer on the date on which the pass-thru entity acquired
23the stock and at all times thereafter before the disposition of the
24stock by the pass-thru entity.
25(3) Paragraph (1) shall not apply to any
amount to the extent
26the amount exceeds the amount to which paragraph (1) would have
27applied if the amount was determined by reference to the interest
28the taxpayer held in the pass-thru entity on the date the qualified
29small business stock was acquired.
30(4) For purposes of this subdivision, the term “pass-thru entity”
31means any of the following:
32(A) Any partnership.
33(B) Any “S” corporation.
34(C) Any regulated investment company.
35(D) Any common trust fund.
36(h) For purposes of this section:
37(1) In the case of a transfer described in paragraph (2), the
38transferee shall be treated as meeting both of the following:
39(A) Having acquired the stock in the same manner as the
40transferor.
P20 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
34limitation 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
P21 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 respect
19to any qualified small business stock, subdivision (a) shall not
20apply 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.
P22 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 split-ups, 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
8of 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.
12(m) This section shall apply to sales, including installment sales,
13occurring in taxable years beginning on or after January 1, 2015.
This act provides for a tax levy within the meaning of
15Article IV of the Constitution and shall go into immediate effect.
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