In Cutler v. Franchise Tax Board, which was litigated by Reed Smith, a California Court of Appeal held that the California property and payroll requirements of California’s Qualified Small Business Stock provisions were invalid. These provisions provided a tax deferral or partial exclusion to investors if the companies they invested in had substantially all (80 percent) of their assets and employee costs in California. The court struck down this requirement because it violated the Commerce Clause of the U.S. Constitution.
In response to the court’s decision, the FTB wrongly declared that the entire gain deferral statute was invalidated—even the parts that were not unconstitutional. What’s worse, in an action that’s legally questionable and unquestionably bad policy, the FTB declared that it would retroactively tax investors who previously benefited from the Qualified Small Business Stock deferral provisions. (FTB Notice No. 2012-03 (12/21/12).)
California is the world leader in startup businesses, but losing this tax incentive would drive more businesses out of the state. Now, rather than expanding this benefit to keep California competitive, investors are receiving notices from the FTB stating that they owe additional taxes, plus interest going back to 2008.
Reed Smith has formed a coalition to stop the FTB from unilaterally imposing retroactive taxes on California residents. We are pursuing legislative and legal means to prevent the FTB from taking its aggressive position, and instead applying the Cutler decision in a reasonable manner. For more information on joining our pursuit, please contact Marty Dakessian at +1 213 457 8310 or at
. Follow on Twitter @FightRetroTax.
For analysis and insight on how the FTB’s retroactive qualified small business stock tax impacts California’s economy and startups, visit engine.is.
- Text of Senator Lieu's Bill - SB 209
- Cutler v. Franchise Tax Board Decision
- Term Sheet
- FTB Notice 2000-9, December 19, 2000
- FTB Notice 2012-03, December 21, 2012
- Letter from SBE Chairman Jerome Horton to Senator Ted Lieu, February 1, 2013
- Letter from SBE Member George Runner to the FTB Urging Reconsideration, February 5, 2013
- Letter from Senator Ted Lieu to FTB Urging Reconsideration, January 28, 2013
- Memorandum of Law Concluding the FTB's Retroactive Application is Improper, February 4, 2013
- News Release Announcing Coalition Formation, February 5, 2013
- Letter from California Legislators to FTB Executive Director Rebuking FT
- L.A. Daily Journal Article – Reaction of Startup Investors to FTB’s Actions
- Sen. Governance and Finance Committee Analysis of SB 209