Posts Tagged ‘QSB’

Sometimes, Pigs Do Fly (California Repeals FTB’s QSB Tax Grab)

Sunday, October 6th, 2013

I look out the window of my office, and I saw the pig that flies:

A flying pig?

[The Flying Pig is via a Creative Commons license, from Wikipedia. And, no, I didn’t see one flying by my office in Las Vegas.]

California Governor Jerry Brown signed legislation “repealing” the Franchise Tax Board’s grab of revenue via the QSB decision. For those who don’t remember, last year a court ruled that California couldn’t discriminate against owners of Qualified Small Business Stock who reinvested the proceeds in a non-California company. So the Franchise Tax Board had ruled that anyone who did this would be subject to back taxes on the proceeds of their QSB stock. It was a decision that had California’s tech community in an uproar.

Kudos to Governor Jerry Brown who officially put the end to the FTB’s tax grab. He signed legislation that through legislation states that entrepreneurs and others who followed the law do not have to pay back taxes, penalties, and interest to California.

So pigs did fly in Sacramento…at least for one day.

Two QSB Relief Bills on Governor Brown’s Desk

Sunday, September 15th, 2013

The California legislature heard from business owners, and the business owners were angry. Their anger had to do with how California’s Franchise Tax Board decided to implement a court decision on Qualified Small Business Stock. The FTB decided that the best method would be retroactive tax increases on QSB sales.

The California legislature, to their credit, passed two separate relief measures. The first would do away with the retroactivity in full; the second would eliminate 76% of the tax. Why would such transactions be taxed at a 24% rate? The theory is the state might have to issue refunds; collecting some tax would pay for the refunds.

It will be up to Governor Brown as to which bill he will sign. Of course, he could veto both measures, in which case the fight would likely move to the courts. Vetoing both measures would also cement California’s place at the bottom of states that are friendly toward small businesses.

News From California Regarding QSBS

Thursday, February 28th, 2013

Two pieces of news out of California regarding the Qualified Small Business Stock situation. For those who aren’t aware, a court last year ruled that California couldn’t discriminate against out-of-state Qualified Small Business Stock (QSB). The Franchise Tax Board interpreted that ruling to mean that for any open tax year, the state would challenge the QSB deductions for anyone who took it. For 2012 on, the California deduction was eliminated, so this is an issue impacting entrepreneurs for tax years 2008 through 2011.

The FTB announced today that they will begin sending Notices of Proposed Assessment (NPAs) in early April. The FTB has also established a simplified procedure to protest the NPAs and it’s clearly noted in their FAQ web page on this issue.

(As much as I think the FTB’s implementation of the Cutter decision is wrong, I want to give the FTB kudos to them for an easily understood webpage and instructions on this issue. I also want to thank them, especially Susan Maples (the FTB’s Tax Practitioner Liaison), for reaching out to the tax professional community in communicating the issues.)

Meanwhile, the tech community remains extremely displeased with the FTB’s actions. Brian Overstreet, the man who began sounding the alarm, has set up a new website on this issue. There’s a very anti-California article on that highlights this issue. Legal action is almost a certainty; many of these entrepreneurs have the deep pockets necessary to fight the FTB.

Entrepreneur Rant on FTB’s Retroactive QSB Ruling

Tuesday, January 15th, 2013

Back in December, I reported on how the Franchise Tax Board (California’s income tax agency) would interpret the Cutter decision. I didn’t spend much time on it, as the subject of Qualified Small Business stock (QSB) doesn’t impact many of my blog readers. The FTB decided that since the appellate court ruled as aspect of California’s law on sale of QSB stock unconstitutional, one way around the issue was to void the law in its entirety. And send individuals who took the QSB deduction penalty and interest notices. Surprise!

That said, an entrepreneur named Brian Overstreet has written a column that is about as nasty as can be toward the FTB and California. (I recommend reading the entire column.) As Mr. Overstreet notes the impact:

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

Of course, there’s definitely a constitutional issue here, too. Given that some of the impacted entrepreneurs have deep pockets, I expect this ruling to head to court. I suspect the FTB can do this for the current tax year (2012; the ruling was announced in December) but I doubt it will hold up for prior tax years.

The other issue is one any entrepreneur in California should consider. As Mr. Overstreet noted, “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

FTB Announces Procedures for Cutler Decision

Friday, December 21st, 2012

Back in August, a California court ruled that California’s qualified small business stock exclusion and deferral statutes were unconstitutional. The Franchise Tax Board, California’s income tax agency, announced how it will implement the decision today. For individuals who took the exclusion/deferral, you should discuss this with your tax professional.

Court Rules that California Can’t Discriminate on Small Business Stock Tax Deferrals

Thursday, August 30th, 2012

If you sell stock in a small business (one with $50 million of assets or less), and then take the proceeds and reinvest them within 60 days in another small business, you can defer the gain. California law has a similar provision, but it has the proviso that both companies must have at least 80% of their assets and payrolls within California.

Frank Cutler invested in a start-up company, and sold his shares in 1998 and reinvested those shares within the allotted 60 days. The start-up shares he sold didn’t meet the California provision (the companies he reinvested in did). Mr. Cutler took the deferral on both his federal and California returns. California’s Franchise Tax Board–the income tax agency in California–denied his deduction. Mr. Cutler went through the administrative appeals and lost. He then paid his tax and filed a claim for refund which was denied. He then took his case to court and lost at the state superior court level. The result of his appeal was handed down yesterday.

The problem with the law according to Mr. Cutler was the commerce clause — specifically, the dormant commerce clause. As the Court noted,

Fulton tells us that in this negative aspect—also referred to as the dormant commerce clause—the clause “ „prohibits economic protectionism—that is, “regulatory measures designed to benefit instate economic interests by burdening out-of-state competitors.” ‟ ” [The Fulton is the US Supreme Court case Fulton Corp. v. Faulkner (1996) 516 U.S. 325, 330]”

And on this issue the Court could not see how the California law was not discriminatory:

The deferral of taxation occurs in connection with a sale (and subsequent purchase) of qualified small business stock, rather than in connection with dividends on the stock, and the deferral of gain is provided only for individual taxpayers, not for corporations. But we are unable to see how these distinctions could in any way sustain a departure from the analysis—and the conclusion—dictated by Fulton and the body of commerce clause jurisprudence that preceded and followed Fulton. The fact remains that the purpose and effect of the statute is, as Fulton forbids, to “favor investment in corporations doing business within the State” (Fulton, supra, 516 U.S. at p. 343), and the statute operates as a “disincentive . . . to buying stock in corporations doing business out of state.” (Id. at p. 341.) As in Fulton, the statute “favors domestic corporations over their foreign competitors in raising capital among [California] residents and tends, at least, to discourage domestic corporations from plying their trades in interstate commerce.” (Id. at p. 333.)

The Board insists the California property and payroll requirement does not discriminate against interstate commerce. But it offers no cogent analysis to support its assertion.

Mr. Cutler hasn’t won a refund yet–the case was remanded back to superior court for a ruling on the correct remedy. Other individuals who took similar positions on their tax returns (and whose deferrals were denied by the FTB) may wish to consider making protective claims for refund depending on the ultimate resolution of the Cutler case. It is possible that the case could be appealed to the California Supreme Court, too.

One final note: The court decision is quite readable even for the layperson. A news story on the case is also available.