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Changes to 2011 Forms

Updates to the Schedule D (565) on 02/13/2013 –– Capital Gain or Loss

We replaced text on the Instructions, Page 1, Column 2, Qualified Small Business Stock.

Previous Version

Qualified Small Business Stock
California law does not conform to the federal law changes in regard to the increase in the percentage of the gain exclusion for the sale of qualified small business stock acquired after February 17, 2009, and before January 1, 2011. Current 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. However, for California purposes, at least 80% of the issuing corporation’s payroll must be attributable to employment located within California, and 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.

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.

The partnership also must separately state the amount of the gain that qualifies for the 50% exclusion under R&TC Section 18152.5 on Schedule K, line 11. Each partner must determine if he or she qualifies for the gain at the partner level.

Revised Version

Qualified Small Business Stock
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.

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.

Impact

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.

Back to Tax Form Changes for 2011