Changes to 2011 Forms
Updates to the Schedule D (541) on 02/20/2013 –– Capital Gain or Loss
We replaced text on:
- Instructions, Side 1, General Information A Purpose, Qualified Small Business Stock
- Instructions, Page 1, Specific Line Instructions, Line 1
- Instructions, Page 1, Specific Line Instructions, Line 4
- California law does not conform to federal law changes in regards to the increase in the percentage of the gain exclusion for the sales of qualified small business stock acquired after February 17, 2009. California law allows an exclusion of 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. For California purposes, 80% of the issuing corporation’s payroll must be attributable to employment located within California. Also, at least 80% of the value of the corporation’s assets must be used by the corporation to actively conduct one or more qualified trades or businesses in California.
Estates and trusts are eligible for the exclusion; however, estates and trusts (other than common trust funds) may not pass through the exclusion to their beneficiaries. See R&TC Section 17750.
R&TC Section 18038.5 also provides for the deferral of gain from the sale of small business stock that has been held for six months or more, if qualified replacement stock is purchased within 60 days after the sale giving rise to the gain. Report gain deferred from the sale of qualified small business stock in accordance with the instructions contained in Revenue Procedure 98-48.
- Line 1 - If the estate or trust qualifies for the R&TC Section 18152.5 exclusion of gain on qualified small business stock, report 100% of the gain on line 1. Directly below the line on which you reported the gain, enter in column (a) “Section 18152.5 exclusion” and enter as a (loss) in column (g) 50% of the gain. Also report 50% of the exclusion as a positive number on Schedule P (541), Alternative Minimum Tax – Fiduciaries, line 4s.
- Line 4 – Report the amount from Form 1099-DIV, box 2a, on line 4. If you received a Form 1099-DIV, Dividends and Distributions, with a gain in box 2c, part of that gain (which is also included in box 2a) may be eligible for the R&TC Section 18152.5 exclusion. California does not have a special capital gain tax rate. In column (a) of line 1, enter the name of the corporation whose stock was sold. In column (g) of line 1, enter the amount of your allowable exclusion as a loss.
- California does not conform to IRC Section 1045 and IRC Section 1202.
In Cutler v. Franchise Tax Board (2012) 208 Cal App 4th 1247, 146 Cal Rptr. 3d 244, the California Court of Appeal found that the California qualified small business stock (QSBS) provisions of R&TC Sections 18038.5 and 18152.5 discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. R&TC Sections 18038.5 and 18152.5 provided for a California deferral and exclusion of gain from the sale of QSBS if eighty percent of the corporation's property and payroll was located in California for substantially all of the taxpayer's holding period of the stock. An unconstitutional statute is invalid and unenforceable. Therefore, the California deferral and exclusion are not available.
- Note: text deleted.
- Line 4 – Report the amount from Form 1099-DIV, box 2a, on line 4.
Reason for the changes
The Court of Appeal’s held in Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247, that the qualified small business stock exclusion and deferral statutes under California Revenue and Taxation Code (R&TC) Sections 18152.5 and 18038.5 are unconstitutional. These sections are now invalid and unenforceable.
This revision increases the tax liability for taxpayers who reported a qualified small business stock exclusion or deferral for taxable years beginning on or after January 1, 2008.