Friday, December 21, 2012

Small Business Stock Exclusion for California Declared Unconstitutional

The Cutler case was a win for the taxpayers who filed the appeal, but is turning out to be a costly decision for all other small business stock owners.

The FTB has determined that because the California Court of Appeal held that R&TC §§18152.5 and 18038.5 (California’s small business stock provisions) are unconstitutional, they are now invalid and unenforceable. (FTB Notice 2012-03)

The FTB will deny the small business stock exclusion and deferral for 2012 and later years. They will also disallow exclusions claimed by taxpayers for years beginning on or after January 1, 2008. This means they expect taxpayers who benefited from a small business stock exclusion or deferral for a year beginning on or after January 1, 2008, to file an amended return, or they can expect a bill from the FTB.

Taxpayers who claimed the exclusion or deferral for years beginning before January 1, 2008, are not being asked to amend returns because the statute of limitations is close to expiring or has expired for most of these returns. If these taxpayers are involved in a pending audit or appeal, they may still be allowed the exclusion or deferral.

For the full text of the Notice, go to: