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More on the Implementation of Cutler v. Franchise Tax Board

What Happened to California's Qualified Small Business Stock?

In Cutler v. Franchise Tax Board, a California appeals court decided California's Qualified Small Business Stock (QSBS) provisions unconstitutional and invalid. 

On December 21, 2012, we issued FTB Notice 2012-3 outlining the procedures that we will use in applying the court’s decision along with answers to Frequently Asked Questions (FAQs).

In our FAQs, we stated that if your client claimed a QSBS exclusion or deferral on their 2008 California personal income tax return, they could either file an amended return or wait to be contacted.

We began contacting taxpayers identified as having reported QSBS gain exclusions or deferrals. We are sending letters informing them that the QSBS gain must be reported in full on their California tax returns. Taxpayers will be given an opportunity to respond, in case they believe they did not report QSBS gains. We will then issue Notices of Proposed Assessment (NPAs) reversing the exclusion or deferral and including the gain from their sale of stock in full. Normal protest and appeals procedures still apply. 

For further information on QSBS and the Cutler decision, read FTB Notice 2012-03 and our Frequently Asked Questions. You may also contact us at 800.852.5711 or email us at

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