Bill Text: CA SB209 | 2013-2014 | Regular Session | Amended
NOTE: There are more recent revisions of this legislation. Read Latest Draft
Bill Title: Income taxes: exclusion: deferral: qualified small business stock.
Spectrum: Slight Partisan Bill (Democrat 2-1)
Status: (Passed) 2013-10-04 - Chaptered by Secretary of State. Chapter 543, Statutes of 2013. [SB209 Detail]
Download: California-2013-SB209-Amended.html
Bill Title: Income taxes: exclusion: deferral: qualified small business stock.
Spectrum: Slight Partisan Bill (Democrat 2-1)
Status: (Passed) 2013-10-04 - Chaptered by Secretary of State. Chapter 543, Statutes of 2013. [SB209 Detail]
Download: California-2013-SB209-Amended.html
BILL NUMBER: SB 209 AMENDED
BILL TEXT
AMENDED IN SENATE MAY 24, 2013
AMENDED IN SENATE APRIL 3, 2013
INTRODUCED BY Senator Lieu
(Principal coauthors: Assembly Members Gorell and Perea)
FEBRUARY 11, 2013
An act to amend Section 18038.5 of, and to
amend, repeal, and add amend and repeal
Section 18152.5 of, and to add Section 18153 to, the
Revenue and Taxation Code, relating to taxation
taxation, and making an appropriation therefor .
LEGISLATIVE COUNSEL'S DIGEST
SB 209, as amended, Lieu. 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.
This bill would, in reference to specified federal income tax
laws, provide that gross income does not include 50%
38% of any gain from the sale or exchange of
qualified small business stock, as defined, held for more than 5
years, for taxable years beginning on or after January 1, 2008, and
before January 1, 2013, as provided. The bill would
additionally, for taxable years beginning on or after January 1,
2016, exclude, and provide for a deferral of, gross income related to
the gain from the sale or exchange of qualified small business
stock, as provided. The bill would make a continuous
appropriation from the General Fund to the Franchise Tax Board in
those amounts necessary to make payments required by this bill.
The bill would require the Franchise Tax Board to waive all
penalties and interest for taxes assessed and authorize a taxpayer to
enter into a written installment payment agreement with the
Franchise Tax Board for the payment of any taxes due, as a result of
the decision of Cutler v. Franchise Tax Board, as specified. The bill
would also require the Franchise Tax Board to waive all penalties
and interest for taxes assessed and authorize a taxpayer to enter
into a written installment payment agreement with the Franchise Tax
Board for the payment of any taxes due, if specified provisions of
the bill are held invalid, ineffective, or unconstitutional by a
court of competent jurisdiction.
The bill would make a legislative finding and declaration
regarding the public purpose served by the bill. The bill would state
that its provisions are severable.
Vote: majority 2/3 . Appropriation:
no yes . Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 18038.5 of the Revenue and Taxation Code is
amended to read:
18038.5. (a) In the case of any sale of qualified small business
stock held by a taxpayer other than a corporation for more than six
months and with respect to which that taxpayer elects the application
of this section, gain from that sale shall be recognized only to the
extent that the amount realized on that sale exceeds:
(1) The cost of any qualified small business stock purchased by
the taxpayer during the 60-day period beginning on the date of that
sale, reduced by
(2) Any portion of the cost previously taken into account under
this section.
This section shall not apply to any gain that is treated as
ordinary income for purposes of this part.
(b) For purposes of this section:
(1) The term "qualified small business stock" has the meaning
given that term by subdivision (c) of Section 18152.5.
(2) A taxpayer shall be treated as having purchased any property
if, but for paragraph (3), the unadjusted basis of that property in
the hands of the taxpayer would be its cost (within the meaning of
Section 1012 of the Internal Revenue Code).
(3) If gain from any sale is not recognized by reason of
subdivision (a), that gain shall be applied to reduce (in the order
acquired) the basis for determining gain or loss of any qualified
small business stock that is purchased by the taxpayer during the
60-day period described in subdivision (a).
(4) For purposes of determining whether the nonrecognition of gain
under subdivision (a) applies to stock that is sold, both of the
following shall apply:
(A) The taxpayer's holding period for that stock and the stock
referred to in paragraph (1) of subdivision (a) shall be determined
without regard to Section 1223 of the Internal Revenue Code.
(B) Only the first six months of the taxpayer's holding period for
the stock referred to in paragraph (1) of subdivision (a) shall be
taken into account for purposes of applying paragraph (2) of
subdivision (c) of Section 18152.5.
(5) Rules similar to the rules of subdivisions (f), (g), (h), (i),
(j), and (k) of Section 18152.5 shall apply.
(c) This section shall apply to sales made after August 5, 1997,
and before January 1, 2013, and to sales made on and after
January 1, 2016 2013 .
SEC. 2. Section 18152.5 of the Revenue and Taxation Code is
amended to read:
18152.5. (a) For purposes of this part, gross income shall not
include 50 38 percent of any gain from
the sale or exchange of qualified small business stock held for more
than five years.
(b) (1) If the taxpayer has eligible gain for the taxable year
from one or more dispositions of stock issued by any corporation, the
aggregate amount of the gain from dispositions of stock issued by
the corporation which may be taken into account under subdivision (a)
for the taxable year shall not exceed the greater of either of the
following:
(A) Ten million dollars ($10,000,000) reduced by the aggregate
amount of eligible gain taken into account by the taxpayer under
subdivision (a) for prior taxable years and attributable to
dispositions of stock issued by the corporation.
(B) Ten times the aggregate adjusted bases of qualified small
business stock issued by the corporation and disposed of by the
taxpayer during the taxable year. For purposes of
subparagraph (B) this subparagraph , the adjusted
basis of any stock shall be determined without regard to any
addition to basis after the date on which the stock was originally
issued.
(2) For purposes of this subdivision, the term "eligible gain"
means any gain from the sale or exchange of qualified small business
stock held for more than five years.
(3) (A) In the case of a married individual filing a separate
return, subparagraph (A) of paragraph (1) shall be applied by
substituting five million dollars ($5,000,000) for ten million
dollars ($10,000,000).
(B) In the case of a married taxpayer filing a joint return, the
amount of gain taken into account under subdivision (a) shall be
allocated equally between the spouses for purposes of applying this
subdivision to subsequent taxable years.
(C) For purposes of this subdivision, marital status shall be
determined under Section 7703 of the Internal Revenue Code.
(c) For purposes of this section:
(1) Except as otherwise provided in this section, the term
"qualified small business stock" means any stock in a "C" corporation
which is originally issued after August 10, 1993, if both of the
following apply:
(A) As of the date of issuance, the corporation is a qualified
small business.
(B) Except as provided in subdivisions (f) and (h), the stock is
acquired by the taxpayer at its original issue (directly or through
an underwriter) in either of the following manners:
(i) In exchange for money or other property (not including stock).
(ii) As compensation for services provided to the corporation
(other than services performed as an underwriter of the stock).
(2) (A) Stock in a corporation shall not be treated as qualified
small business stock unless, during substantially all of the taxpayer'
s holding period for the stock, the corporation meets the active
business requirements of subdivision (e) and the corporation is a "C"
corporation.
(B) (i) Notwithstanding subdivision (e), a corporation shall be
treated as meeting the active business requirements of subdivision
(e) for any period during which the corporation qualifies as a
specialized small business investment company.
(ii) For purposes of clause (i), the term "specialized small
business investment company" means any eligible corporation (as
defined in paragraph (4) of subdivision (e)) that is licensed to
operate under Section 301(d) of the Small Business Investment Act of
1958 (as in effect on May 13, 1993).
(3) (A) Stock acquired by the taxpayer shall not be treated as
qualified small business stock if, at any time during the four-year
period beginning on the date two years before the issuance of the
stock, the corporation issuing the stock purchased (directly or
indirectly) any of its stock from the taxpayer or from a related
person (within the meaning of Section 267(b) or 707(b)) to the
taxpayer.
(B) Stock issued by a corporation shall not be treated as
qualified small business stock if, during the two-year period
beginning on the date one year before the issuance of the stock, the
corporation made one or more purchases of its stock with an aggregate
value (as of the time of the respective purchases) exceeding 5
percent of the aggregate value of all of its stock as of the
beginning of the two-year period.
(C) If any transaction is treated under Section 304(a) of the
Internal Revenue Code as a distribution in redemption of the stock of
any corporation, for purposes of subparagraphs (A) and (B), the
corporation shall be treated as purchasing an amount of its stock
equal to the amount treated as a distribution in redemption of the
stock of the corporation under Section 304(a) of the Internal Revenue
Code.
(d) For purposes of this section:
(1) The term "qualified small business" means any domestic
corporation (as defined in Section 7701(a)(4) of the Internal Revenue
Code) which is a "C" corporation if all of the following apply:
(A) The aggregate gross assets of the corporation (or any
predecessor thereof) at all times on or after July 1, 1993, and
before the issuance did not exceed fifty million dollars
($50,000,000).
(B) The aggregate gross assets of the corporation immediately
after the issuance (determined by taking into account amounts
received in the issuance) do not exceed fifty million dollars
($50,000,000).
(C) At least 80 percent of the corporation's payroll, as measured
by total dollar value, is attributable to employment located within
California.
(D) The corporation agrees to submit those reports to the
Franchise Tax Board and to shareholders as the Franchise Tax Board
may require to carry out the purposes of this section.
(2) (A) For purposes of paragraph (1), the term "aggregate gross
assets" means the amount of cash and the aggregate adjusted basis of
other property held by the corporation.
(B) For purposes of subparagraph (A), the adjusted basis of any
property contributed to the corporation (or other property with a
basis determined in whole or in part by reference to the adjusted
basis of property so contributed) shall be determined as if the basis
of the property contributed to the corporation immediately after the
contribution was equal to its fair market value as of the time of
the contribution.
(3) (A) All corporations which are members of the same
parent-subsidiary controlled group shall be treated as one
corporation for purposes of this subdivision.
(B) For purposes of subparagraph (A), the term "parent-subsidiary
controlled group" means any controlled group of corporations as
defined in Section 1563(a)(1) of the Internal Revenue Code, except
that both of the following shall apply:
(i) "More than 50 percent" shall be substituted for "at least 80
percent" each place it appears in Section 1563(a)(1) of the Internal
Revenue Code.
(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
apply.
(e) (1) For purposes of paragraph (2) of subdivision (c), the
requirements of this subdivision are met by a corporation for any
period if during that period both of the following apply:
(A) At least 80 percent (by value) of the assets of the
corporation are used by the corporation in the active conduct of one
or more qualified trades or businesses.
(B) The corporation is an eligible corporation.
(2) For purposes of paragraph (1), if, in connection with any
future qualified trade or business, a corporation is engaged in:
(A) Startup activities described in Section 195(c)(1)(A) of the
Internal Revenue Code,
(B) Activities resulting in the payment or incurring of
expenditures which may be treated as research and experimental
expenditures under Section 174 of the Internal Revenue Code, or
(C) Activities with respect to in-house research expenses
described in Section 41(b)(4) of the Internal Revenue Code, then
assets used in those activities shall be treated as used in the
active conduct of a qualified trade or business. Any determination
under this paragraph shall be made without regard to whether a
corporation has any gross income from those activities at the time of
the determination.
(3) For purposes of this subdivision, the term "qualified trade or
business" means any trade or business other than any of the
following:
(A) Any trade or business involving the performance of services in
the fields of health, law, engineering, architecture, accounting,
actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or any trade or business where the
principal asset of the trade or business is the reputation or skill
of one or more of its employees.
(B) Any banking, insurance, financing, leasing, investing, or
similar business.
(C) Any farming business (including the business of raising or
harvesting trees).
(D) Any business involving the production or extraction of
products of a character with respect to which a deduction is
allowable under Section 613 or 613A of the Internal Revenue Code.
(E) Any business of operating a hotel, motel, restaurant, or
similar business.
(4) For purposes of this subdivision, the term "eligible
corporation" means any domestic corporation, except that the term
shall not include any of the following:
(A) A DISC or former DISC.
(B) A corporation with respect to which an election under Section
936 of the Internal Revenue Code is in effect or which has a direct
or indirect subsidiary with respect to which the election is in
effect.
(C) A regulated investment company, real estate investment trust
(REIT), or real estate mortgage investment conduit (REMIC).
(D) A cooperative.
(5) (A) For purposes of this subdivision, stock and debt in any
subsidiary corporation shall be disregarded and the parent
corporation shall be deemed to own its ratable share of the
subsidiary's assets, and to conduct its ratable share of the
subsidiary's activities.
(B) A corporation shall be treated as failing to meet the
requirements of paragraph (1) for any period during which more than
10 percent of the value of its assets (in excess of liabilities)
consists of stock or securities in other corporations which are not
subsidiaries of the corporation (other than assets described in
paragraph (6)).
(C) For purposes of this paragraph, a corporation shall be
considered a subsidiary if the parent owns more than 50 percent of
the combined voting power of all classes of stock entitled to vote,
or more than 50 percent in value of all outstanding stock, of the
corporation.
(6) For purposes of subparagraph (A) of paragraph (1), the
following assets shall be treated as used in the active conduct of a
qualified trade or business:
(A) Assets that are held as a part of the reasonably required
working capital needs of a qualified trade or business of the
corporation.
(B) Assets that are held for investment and are reasonably
expected to be used within two years to finance research and
experimentation in a qualified trade or business or increases in
working capital needs of a qualified trade or business. For periods
after the corporation has been in existence for at least two years,
in no event may more than 50 percent of the assets of the corporation
qualify as used in the active conduct of a qualified trade or
business by reason of this paragraph.
(7) A corporation shall not be treated as meeting the requirements
of paragraph (1) for any period during which more than 10 percent of
the total value of its assets consists of real property that is not
used in the active conduct of a qualified trade or business. For
purposes of the preceding sentence, the ownership of, dealing in, or
renting of, real property shall not be treated as the active conduct
of a qualified trade or business.
(8) For purposes of paragraph (1), rights to computer software
that produces active business computer software royalties (within the
meaning of Section 543(d)(1) of the Internal Revenue Code) shall be
treated as an asset used in the active conduct of a trade or
business.
(f) If any stock in a corporation is acquired solely through the
conversion of other stock in the corporation that is qualified small
business stock in the hands of the taxpayer, both of the following
shall apply:
(1) The stock so acquired shall be treated as qualified small
business stock in the hands of the taxpayer.
(2) The stock so acquired shall be treated as having been held
during the period during which the converted stock was held.
(g) (1) If any amount included in gross income by reason of
holding an interest in a pass-through
pass-thru entity meets the requirements of paragraph (2), then
both of the following shall apply:
(A) The amount shall be treated as gain described in subdivision
(a).
(B) For purposes of applying subdivision (b), the amount shall be
treated as gain from a disposition of stock in the corporation
issuing the stock disposed of by the pass-through
pass-thru entity and the taxpayer's proportionate share of
the adjusted basis of the pass-through
pass-thru entity in the stock shall be taken into account.
(2) An amount meets the requirements of this paragraph if both of
the following apply:
(A) The amount is attributable to gain on the sale or exchange by
the pass-through pass-thru entity of
stock that is qualified small business stock in the hands of the
entity (determined by treating the entity as an individual) and that
was held by that entity for more than five years.
(B) The amount is includable in the gross income of the taxpayer
by reason of the holding of an interest in the entity that was held
by the taxpayer on the date on which the pass-through
pass-thru entity acquired the stock and at all
times thereafter before the disposition of the stock by the
pass-through pass-thru entity.
(3) Paragraph (1) shall not apply to any amount to the extent the
amount exceeds the amount to which paragraph (1) would have applied
if the amount was determined by reference to the interest the
taxpayer held in the pass-through pass-thru
entity on the date the qualified small business stock was
acquired.
(4) For purposes of this subdivision, the term
"pass-through "pass-thru entity" means any of
the following:
(A) Any partnership.
(B) Any "S" corporation.
(C) Any regulated investment company.
(D) Any common trust fund.
(h) For purposes of this section:
(1) In the case of a transfer described in paragraph (2), the
transferee shall be treated as meeting both of the following:
(A) Having acquired the stock in the same manner as the
transferor.
(B) Having held the stock during any continuous period immediately
preceding the transfer during which it was held (or treated as held
under this subdivision) by the transferor.
(2) A transfer is described in this subdivision if the transfer is
any of the following:
(A) By gift.
(B) At death.
(C) From a partnership to a partner of stock with respect to which
requirements similar to the requirements of subdivision (g) are met
at the time of the transfer (without regard to the five-year holding
period requirement).
(3) Rules similar to the rules of Section 1244(d)(2) of the
Internal Revenue Code shall apply for purposes of this section.
(4) (A) In the case of a transaction described in Section 351 of
the Internal Revenue Code or a reorganization described in Section
368 of the Internal Revenue Code, if qualified small business stock
is exchanged for other stock that would not qualify as qualified
small business stock but for this subparagraph, the other stock shall
be treated as qualified small business stock acquired on the date on
which the exchanged stock was acquired.
(B) This section shall apply to gain from the sale or exchange of
stock treated as qualified small business stock by reason of
subparagraph (A) only to the extent of the gain that would have been
recognized at the time of the transfer described in subparagraph (A)
if Section 351 or 368 of the Internal Revenue Code had not applied at
that time. The preceding sentence shall not apply if the stock that
is treated as qualified small business stock by reason of
subparagraph (A) is issued by a corporation that (as of the time of
the transfer described in subparagraph (A)) is a qualified small
business.
(C) For purposes of this paragraph, stock treated as qualified
small business stock under subparagraph (A) shall be so treated for
subsequent transactions or reorganizations, except that the
limitation of subparagraph (B) shall be applied as of the time of the
first transfer to which the limitation applied (determined after the
application of the second sentence of subparagraph (B)).
(D) In the case of a transaction described in Section 351 of the
Internal Revenue Code, this paragraph shall apply only if immediately
after the transaction the corporation issuing the stock owns
directly or indirectly stock representing control (within the meaning
of Section 368(c) of the Internal Revenue Code) of the corporation
whose stock was exchanged.
(i) For purposes of this section:
(1) In the case where the taxpayer transfers property (other than
money or stock) to a corporation in exchange for stock in the
corporation, both of the following shall apply:
(A) The stock shall be treated as having been acquired by the
taxpayer on the date of the exchange.
(B) The basis of the stock in the hands of the taxpayer shall in
no event be less than the fair market value of the property
exchanged.
(2) If the adjusted basis of any qualified small business stock is
adjusted by reason of any contribution to capital after the date on
which the stock was originally issued, in determining the amount of
the adjustment by reason of the contribution, the basis of the
contributed property shall in no event be treated as less than its
fair market value on the date of the contribution.
(j) (1) If the taxpayer has an offsetting short position with
respect to any qualified small business stock, subdivision (a) shall
not apply to any gain from the sale or exchange of the stock unless
both of the following apply:
(A) The stock was held by the taxpayer for more than five years as
of the first day on which there was such a short position.
(B) The taxpayer elects to recognize gain as if the stock was sold
on that first day for its fair market value.
(2) For purposes of paragraph (1), the taxpayer shall be treated
as having an offsetting short position with respect to any qualified
small business stock if any of the following apply:
(A) The taxpayer has made a short sale of substantially identical
property.
(B) The taxpayer has acquired an option to sell substantially
identical property at a fixed price.
(C) To the extent provided in regulations, the taxpayer has
entered into any other transaction that substantially reduces the
risk of loss from holding the qualified small business stock. For
purposes of the preceding sentence, any reference to the taxpayer
shall be treated as including a reference to any person who is
related (within the meaning of Section 267(b) or 707(b) of the
Internal Revenue Code) to the taxpayer.
(k) The Franchise Tax Board may prescribe those regulations as may
be appropriate to carry out the purposes of this section, including
regulations to prevent the avoidance of the purposes of this section
through splitups, shell corporations, partnerships, or otherwise.
( l ) It is the intent of the Legislature that, in
construing this section, any regulations that may be promulgated by
the Secretary of the Treasury under Section 1202(k) of the Internal
Revenue Code shall apply to the extent that those regulations do not
conflict with this section or with any regulations that may be
promulgated by the Franchise Tax Board.
(m) Notwithstanding Section 13340 of the Government Code, and
without regard to fiscal year, there is hereby continuously
appropriated from the General Fund to the Franchise Tax Board those
amounts necessary to make the payments required by the act adding
this subdivision.
(m)
(n) The amendments made to this section by the act
adding this subdivision shall apply to each taxable year beginning on
or after January 1, 2008, and before January 1, 2013.
(n)
(o) This section shall remain in effect only until
January 1, 2016, and as of that date is repealed, unless a later
enacted statute, that is enacted before January 1, 2016, deletes or
extends that date.
SEC. 3. Section 18152.5 is added to the Revenue
and Taxation Code, to read:
18152.5. (a) For each taxable year beginning on or after January
1, 2016, for purposes of this part, gross income shall not include 50
percent of any gain from the sale or exchange of qualified small
business stock held for more than five years.
(b) (1) If the taxpayer has eligible gain for the taxable year
from one or more dispositions of stock issued by any corporation, the
aggregate amount of the gain from dispositions of stock issued by
the corporation that may be taken into account under subdivision (a)
for the taxable year shall not exceed the greater of either of the
following:
(A) Ten million dollars ($10,000,000) reduced by the aggregate
amount of eligible gain taken into account by the taxpayer under
subdivision (a) for prior taxable years and attributable to
dispositions of stock issued by the corporation.
(B) Ten times the aggregate adjusted bases of qualified small
business stock issued by the corporation and disposed of by the
taxpayer during the taxable year. For purposes of subparagraph (B),
the adjusted basis of any stock shall be determined without regard to
any addition to the basis after the date on which the stock was
originally issued.
(2) For purposes of this subdivision, the term "eligible gain"
means any gain from the sale or exchange of qualified small business
stock held for more than five years.
(3) (A) In the case of a married individual filing a separate
return, subparagraph (A) of paragraph (1) shall be applied by
substituting five million dollars ($5,000,000) for ten million
dollars ($10,000,000).
(B) In the case of a married taxpayer filing a joint return, the
amount of gain taken into account under subdivision (a) shall be
allocated equally between the spouses for purposes of applying this
subdivision to subsequent taxable years.
(C) For purposes of this subdivision, marital status shall be
determined under Section 7703 of the Internal Revenue Code.
(c) For purposes of this section:
(1) Except as otherwise provided in this section, the term
"qualified small business stock" means any stock in a "C" corporation
that is originally issued after August 10, 1993, and before January
1, 2013, or issued after January 1, 2016, if both of the following
apply:
(A) As of the date of issuance, the corporation is a qualified
small business.
(B) Except as provided in subdivisions (f) and (h), the stock is
acquired by the taxpayer at its original issue (directly or through
an underwriter) in either of the following manners:
(i) In exchange for money or other property (not including stock).
(ii) As compensation for services provided to the corporation
(other than services performed as an underwriter of the stock).
(2) (A) Stock in a corporation shall not be treated as qualified
small business stock unless, during substantially all of the taxpayer'
s holding period for the stock, the corporation meets the active
business requirements of subdivision (e) and the corporation is a "C"
corporation.
(B) (i) Notwithstanding subdivision (e), a corporation shall be
treated as meeting the active business requirements of subdivision
(e) for any period during which the corporation qualifies as a
specialized small business investment company.
(ii) For
purposes of clause (i), the term "specialized small business
investment company" means any eligible corporation (as defined in
paragraph (4) of subdivision (e)) that is licensed to operate under
Section 301(d) of the Small Business Investment Act of 1958 (as in
effect on May 13, 1993).
(3) (A) Stock acquired by the taxpayer shall not be treated as
qualified small business stock if, at any time during the four-year
period beginning on the date two years before the issuance of the
stock, the corporation issuing the stock purchased (directly or
indirectly) any of its stock from the taxpayer or from a related
person (within the meaning of Section 267(b) or 707(b) of the
Internal Revenue Code) to the taxpayer.
(B) Stock issued by a corporation shall not be treated as
qualified small business stock if, during the two-year period
beginning on the date one year before the issuance of the stock, the
corporation made one or more purchases of its stock with an aggregate
value (as of the time of the respective purchases) exceeding 5
percent of the aggregate value of all of its stock as of the
beginning of the two-year period.
(C) If any transaction is treated under Section 304(a) of the
Internal Revenue Code as a distribution in redemption of the stock of
any corporation, for purposes of subparagraphs (A) and (B), the
corporation shall be treated as purchasing an amount of its stock
equal to the amount treated as a distribution in redemption of the
stock of the corporation under Section 304(a) of the Internal Revenue
Code.
(d) For purposes of this section:
(1) The term "qualified small business" means any domestic
corporation (as defined in Section 7701(a)(4) of the Internal Revenue
Code) that is a "C" corporation if all of the following apply:
(A) The aggregate gross assets of the corporation (or any
predecessor thereof) at all times on or after July 1, 1993, and
before the issuance did not exceed fifty million dollars
($50,000,000).
(B) The aggregate gross assets of the corporation immediately
after the issuance (determined by taking into account amounts
received in the issuance) do not exceed fifty million dollars
($50,000,000).
(C) At least 80 percent of the corporation's payroll, as measured
by total dollar value, is attributable to employment located within
California.
(D) The corporation agrees to submit those reports to the
Franchise Tax Board and to shareholders as the Franchise Tax Board
may require to carry out the purposes of this section.
(2) (A) For purposes of paragraph (1), the term "aggregate gross
assets" means the amount of cash and the aggregate adjusted basis of
other property held by the corporation.
(B) For purposes of subparagraph (A), the adjusted basis of any
property contributed to the corporation (or other property with a
basis determined in whole or in part by reference to the adjusted
basis of property so contributed) shall be determined as if the basis
of the property contributed to the corporation immediately after the
contribution was equal to its fair market value as of the time of
the contribution.
(3) (A) All corporations that are members of the same
parent-subsidiary controlled group shall be treated as one
corporation for purposes of this subdivision.
(B) For purposes of subparagraph (A), the term "parent-subsidiary
controlled group" means any controlled group of corporations as
defined in Section 1563(a)(1) of the Internal Revenue Code, except
that both of the following shall apply:
(i) "More than 50 percent" shall be substituted for "at least 80
percent" each place it appears in Section 1563(a)(1) of the Internal
Revenue Code.
(ii) Section 1563(a)(4) of the Internal Revenue Code shall not
apply.
(e) (1) For purposes of paragraph (2) of subdivision (c), the
requirements of this subdivision are met by a corporation for any
period if during that period both of the following apply:
(A) At least 80 percent (by value) of the assets of the
corporation are used by the corporation in the active conduct of one
or more qualified trades or businesses.
(B) The corporation is an eligible corporation.
(2) For purposes of paragraph (1), if, in connection with any
future qualified trade or business, a corporation is engaged in:
(A) Startup activities described in Section 195(c)(1)(A) of the
Internal Revenue Code,
(B) Activities resulting in the payment or incurring of
expenditures that may be treated as research and experimental
expenditures under Section 174 of the Internal Revenue Code, or
(C) Activities with respect to in-house research expenses
described in Section 41(b)(4) of the Internal Revenue Code, then
assets used in those activities shall be treated as used in the
active conduct of a qualified trade or business. Any determination
under this paragraph shall be made without regard to whether a
corporation has any gross income from those activities at the time of
the determination.
(3) For purposes of this subdivision, the term "qualified trade or
business" means any trade or business other than any of the
following:
(A) Any trade or business involving the performance of services in
the fields of health, law, engineering, architecture, accounting,
actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or any trade or business where the
principal asset of the trade or business is the reputation or skill
of one or more of its employees.
(B) Any banking, insurance, financing, leasing, investing, or
similar business.
(C) Any farming business (including the business of raising or
harvesting trees).
(D) Any business involving the production or extraction of
products of a character with respect to which a deduction is
allowable under Section 613 or 613A of the Internal Revenue Code.
(E) Any business of operating a hotel, motel, restaurant, or
similar business.
(4) For purposes of this subdivision, the term "eligible
corporation" means any domestic corporation, except that the term
shall not include any of the following:
(A) A DISC or former DISC.
(B) A corporation with respect to which an election under Section
936 of the Internal Revenue Code is in effect or which has a direct
or indirect subsidiary with respect to which the election is in
effect.
(C) A regulated investment company, real estate investment trust
(REIT), or real estate mortgage investment conduit (REMIC).
(D) A cooperative.
(5) (A) For purposes of this subdivision, stock and debt in any
subsidiary corporation shall be disregarded and the parent
corporation shall be deemed to own its ratable share of the
subsidiary's assets, and to conduct its ratable share of the
subsidiary's activities.
(B) A corporation shall be treated as failing to meet the
requirements of paragraph (1) for any period during which more than
10 percent of the value of its assets (in excess of liabilities)
consists of stock or securities in other corporations that are not
subsidiaries of the corporation (other than assets described in
paragraph (6)).
(C) For purposes of this paragraph, a corporation shall be
considered a subsidiary if the parent owns more than 50 percent of
the combined voting power of all classes of stock entitled to vote,
or more than 50 percent in value of all outstanding stock, of the
corporation.
(6) For purposes of subparagraph (A) of paragraph (1), the
following assets shall be treated as used in the active conduct of a
qualified trade or business:
(A) Assets that are held as a part of the reasonably required
working capital needs of a qualified trade or business of the
corporation.
(B) Assets that are held for investment and are reasonably
expected to be used within two years to finance research and
experimentation in a qualified trade or business or increases in the
working capital needs of a qualified trade or business. For periods
after the corporation has been in existence for at least two years,
in no event may more than 50 percent of the assets of the corporation
qualify as used in the active conduct of a qualified trade or
business by reason of this paragraph.
(7) A corporation shall not be treated as meeting the requirements
of paragraph (1) for any period during which more than 10 percent of
the total value of its assets consists of real property that is not
used in the active conduct of a qualified trade or business. For
purposes of the preceding sentence, the ownership of, dealing in, or
renting of, real property shall not be treated as the active conduct
of a qualified trade or business.
(8) For purposes of paragraph (1), rights to computer software
that produces active business computer software royalties (within the
meaning of Section 543(d)(1) of the Internal Revenue Code) shall be
treated as an asset used in the active conduct of a trade or
business.
(f) If any stock in a corporation is acquired solely through the
conversion of other stock in the corporation that is qualified small
business stock in the hands of the taxpayer, both of the following
shall apply:
(1) The stock so acquired shall be treated as qualified small
business stock in the hands of the taxpayer.
(2) The stock so acquired shall be treated as having been held
during the period during which the converted stock was held.
(g) (1) If any amount included in gross income by reason of
holding an interest in a pass-thru entity meets the requirements of
paragraph (2), then both of the following shall apply:
(A) The amount shall be treated as gain described in subdivision
(a).
(B) For purposes of applying subdivision (b), the amount shall be
treated as gain from a disposition of stock in the corporation
issuing the stock disposed of by the pass-thru entity and the
taxpayer's proportionate share of the adjusted basis of the pass-thru
entity in the stock shall be taken into account.
(2) An amount meets the requirements of this paragraph if both of
the following apply:
(A) The amount is attributable to gain on the sale or exchange by
the pass-thru entity of stock that is qualified small business stock
in the hands of the entity (determined by treating the entity as an
individual) and that was held by that entity for more than five
years.
(B) The amount is includable in the gross income of the taxpayer
by reason of the holding of an interest in the entity that was held
by the taxpayer on the date on which the pass-thru entity acquired
the stock and at all times thereafter before the disposition of the
stock by the pass-thru entity.
(3) Paragraph (1) shall not apply to any amount to the extent the
amount exceeds the amount to which paragraph (1) would have applied
if the amount was determined by reference to the interest the
taxpayer held in the pass-thru entity on the date the qualified small
business stock was acquired.
(4) For purposes of this subdivision, the term "pass-thru entity"
means any of the following:
(A) Any partnership.
(B) Any "S" corporation.
(C) Any regulated investment company.
(D) Any common trust fund.
(h) For purposes of this section:
(1) In the case of a transfer described in paragraph (2), the
transferee shall be treated as meeting both of the following:
(A) Having acquired the stock in the same manner as the
transferor.
(B) Having held the stock during any continuous period immediately
preceding the transfer during which it was held (or treated as held
under this subdivision) by the transferor.
(2) A transfer is described in this subdivision if the transfer is
any of the following:
(A) By gift.
(B) At death.
(C) From a partnership to a partner of stock with respect to which
requirements similar to the requirements of subdivision (g) are met
at the time of the transfer (without regard to the five-year holding
period requirement).
(3) Rules similar to the rules of Section 1244(d)(2) of the
Internal Revenue Code shall apply for purposes of this section.
(4) (A) In the case of a transaction described in Section 351 of
the Internal Revenue Code or a reorganization described in Section
368 of the Internal Revenue Code, if qualified small business stock
is exchanged for other stock that would not qualify as qualified
small business stock but for this subparagraph, the other stock shall
be treated as qualified small business stock acquired on the date on
which the exchanged stock was acquired.
(B) This section shall apply to gain from the sale or exchange of
stock treated as qualified small business stock by reason of
subparagraph (A) only to the extent of the gain that would have been
recognized at the time of the transfer described in subparagraph (A)
if Section 351 or 368 of the Internal Revenue Code had not applied at
that time. The preceding sentence shall not apply if the stock that
is treated as qualified small business stock by reason of
subparagraph (A) is issued by a corporation that (as of the time of
the transfer described in subparagraph (A)) is a qualified small
business.
(C) For purposes of this paragraph, stock treated as qualified
small business stock under subparagraph (A) shall be so treated for
subsequent transactions or reorganizations, except that the
limitation of subparagraph (B) shall be applied as of the time of the
first transfer to which the limitation applied (determined after the
application of the second sentence of subparagraph (B)).
(D) In the case of a transaction described in Section 351 of the
Internal Revenue Code, this paragraph shall apply only if immediately
after the transaction the corporation issuing the stock owns
directly or indirectly stock representing control (within the meaning
of Section 368(c) of the Internal Revenue Code) of the corporation
whose stock was exchanged.
(i) For purposes of this section:
(1) In the case where the taxpayer transfers property (other than
money or stock) to a corporation in exchange for stock in the
corporation, both of the following shall apply:
(A) The stock shall be treated as having been acquired by the
taxpayer on the date of the exchange.
(B) The basis of the stock in the hands of the taxpayer shall not
be less than the fair market value of the property exchanged.
(2) If the adjusted basis of any qualified small business stock is
adjusted by reason of any contribution to capital after the date on
which the stock was originally issued, in determining the amount of
the adjustment by reason of the contribution, the basis of the
contributed property shall not be treated as less than its fair
market value on the date of the contribution.
(j) (1) If the taxpayer has an offsetting short position with
respect to any qualified small business stock, subdivision (a) shall
not apply to any gain from the sale or exchange of the stock unless
both of the following apply:
(A) The stock was held by the taxpayer for more than five years as
of the first day on which there was such a short position.
(B) The taxpayer elects to recognize gain as if the stock was sold
on that first day for its fair market value.
(2) For purposes of paragraph (1), the taxpayer shall be treated
as having an offsetting short position with respect to any qualified
small business stock if any of the following apply:
(A) The taxpayer has made a short sale of substantially identical
property.
(B) The taxpayer has acquired an option to sell substantially
identical property at a fixed price.
(C) To the extent provided in regulations, the taxpayer has
entered into any other transaction that substantially reduces the
risk of loss from holding the qualified small business stock. For
purposes of the preceding sentence, any reference to the taxpayer
shall be treated as including a reference to any person who is
related (within the meaning of Section 267(b) or 707(b) of the
Internal Revenue Code) to the taxpayer.
(k) The Franchise Tax Board may prescribe those regulations as may
be appropriate to carry out the purposes of this section, including
regulations to prevent the avoidance of the purposes of this section
through splitups, shell corporations, partnerships, or otherwise.
( l ) It is the intent of the Legislature
that, in construing this section, any regulations that may be
promulgated by the Secretary of the Treasury under Section 1202(k) of
the Internal Revenue Code shall apply to the extent that those
regulations do not conflict with this section or with any regulations
that may be promulgated by the Franchise Tax Board.
(m) This section shall become operative on January 1, 2016.
SEC. 3. Section 18153 is added to the
Revenue and Taxation Code , to read:
18153. (a) (1) The Franchise Tax Board shall waive all penalties
and interest for taxes assessed as a result of the decision of Cutler
v. Franchise Tax Bd. (208 Cal.App.4th 1247) for each taxable year
beginning on or after January 1, 2008, and before January 1, 2013.
(2) A taxpayer may enter into a written installment payment
agreement with the Franchise Tax Board for the payment of any taxes
due as a result of the decision of Cutler v. Franchise Tax Bd. (208
Cal.App.4th 1247) in installments for a period of up to five years.
(b) If Section 18152.5 is for any reason held invalid,
ineffective, or unconstitutional by a court of competent
jurisdiction, both of the following shall apply:
(1) The Franchise Tax Board shall waive all penalties and interest
imposed as a result of Section 18152.5 held invalid, ineffective, or
unconstitutional, for each taxable year beginning on or after
January 1, 2008, and before January 1, 2013.
(2) A taxpayer may enter into a written installment payment
agreement with the Franchise Tax Board for the payment of any taxes
due, as a result of Section 18152.5 held invalid, ineffective, or
unconstitutional, in installments for a period of up to five years.
SEC. 4. The Legislature finds and declares that
the retroactive application of the amendments made to Section 18152.5
and the addition of Section 18153 by this act serve a public purpose
by providing equitable tax treatment and fair tax relief to
taxpayers that are stimulating the economy of the state and does not
constitute a gift of public funds within the meaning of Section 6 of
Article XVI of the California Constitution.
SEC. 5. The provisions of this act are severable.
If any provision of this act or its application is held invalid, that
invalidity shall not affect other provisions or applications that
can be given effect without the invalid provision or application.
