This sounds like a pretty routine announcement out of Sacramento:
The California Franchise Tax Board (FTB) recently issued FTB Notice 2012-03, stating that the FTB will disallow the exclusion or deferral of gain under California’s qualified small business stock (QSBS) statute for all tax years beginning on or after January 1, 2008. FTB Notice 2012-03 comes on the heels of the California Court of Appeal’s decision in Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012), where the court held that California’s QSBS rules impermissibly favor California corporations in violation of the commerce clause of the U. S. Constitution. Rather than simply striking the particular offending provisions from the California QSBS statute, the FTB has deemed the entire California QSBS statute to be invalid and unenforceable, thereby impacting all California taxpayers who have claimed QSBS exclusion or deferral benefits in recent years. The Cutler decision and FTB Notice 2012-03 impact only the California QSBS rules, and do not affect the availability of federal QSBS benefits under the Internal Revenue Code.
“Impacting”? Well, yeah, kind of:
That may sound like a relatively minor matter, especially if you don’t own startup shares or aren’t an active investor. And in light of California’s financial woes, it would certainly be intellectually understandable if the state had decided to drop the exemption going forward. But the changes don’t stop there. Under the California Franchise Tax Board’s interpretation of a 2012 state Court of Appeals ruling, which found part of the tax law to be unconstitutional, anyone who acted in good faith to claim the now-deceased QSB incentive on their 2011 California return owes the state back taxes on the excluded or deferred income.
And the same goes for 2010. And 2009. And 2008.
And, what’s more, these taxpayers will also be hit with back interest and possible penalties.
“A bad, bad precedent,” says Warren Meyer of Coyote Blog. I have to figure that there are weasels in the District of Columbia facepalming right about now: “Why the hell didn’t we think of that?”
Sooner or later, they will.