Federal law provides for an exclusion or deferral of gain from the sale or exchange of QSBS. California adopted QSBS provisions in 1993 which mirrored existing federal law, but required at least 80 percent of a company’s assets and payroll be within California in order to qualify (CR&TC sections 18152.5 and 18038.5).
In Cutler v. Franchise Tax Board (FTB) the taxpayer challenged the constitutionality of California’s assets and payroll requirements. The Courts held the statutes were discriminatory, invalid and unenforceable. To comply with the Court’s ruling, the FTB made the decision to disallow all QSBS exclusions and deferrals for ‘open’ tax years. FTB Notice 2012-3 was issued with instructions on how taxpayer’s should proceed.
On October 4, 2013, Governor Brown signed AB 1412 which retroactively allowed exclusion or deferral of gain from the sale or exchange of QSBS on a previously filed return for tax years 2008 to 2012. AB 1412 effectively negated actions being taken by FTB for those years based on the Cutler v. Franchise Tax Board Court ruling.
AB 1412 modifies the QSBS statutes as they were in effect for tax years 2008 – 2012; as a result, taxpayers not previously eligible for QSBS exclusion or deferral may now be able to amend their previously filed returns and take advantage of these rules. AB 1412 extended until June 30, 2014, the deadline to file a QSBS claim for refund for tax year 2008; for all other open years, an amended return must be filed according to the statute of limitations – which is generally four years from the date the return was filed or one year from the date of the overpayment, whichever is later. Amended returns should state in red “QSBS CLAIM FOR REFUND” at the top on the front page of the return. Include the refund amount in red, and mail the amended return to:
Cutler Claim for Refund 347 MS F381
Franchise Tax Board
C/O FTB Notice 2012-03
P.O. Box 1779
Rancho Cordova, CA 95741-1779
Courier Service Delivery or Private Courier Mail:
Franchise Tax Board
Sacramento, CA 95827
FTB is in the process of notifying taxpayers that any pending Notice of Proposed Assessments for tax years 2008 – 2012 based on the Cutler decision or FTB Notice 2012-3 will be withdrawn. Closing letters will be mailed to taxpayers who previously signed a limited QSBS waiver for 2008. For tax years 2008 – 2012 any unpaid tax, interest or penalty assessed as a result of the Cutler decision or FTB Notice 2012-3 will be abated. Refunds for payments made in connection with the Cutler decision or FTB Notice 2012-3 will be mailed. If you believe you are due a refund and have not heard from FTB on this matter, contact them at 916.845.3030.
For 2007 and prior tax years that are still open under the statute of limitations, FTB Notice 2012-3 still applies.
For further information contact the FTB by telephone at 800.852.5711, or by email at firstname.lastname@example.org.
*The principal author of FTB NOTICE 2012-03 is Ann Hodges of the Franchise Tax Board, Legal Division.
Revised Post 2/01/2014 3:15 PM CA – Cutler v. Franchise Tax Board & AB 1412
Original Post 7/29/2013 7:33 PM CA – Cutler v. Franchise Tax Board & FTB Notice 2012-03