What a taxpayer thought was going to be good news for California taxpayers turned out to be bad news.
After the Second District Court of Appeal held that California’s statute for a qualified (Internal Revenue Code Section 1202) small business stock exclusion is unconstitutional because it favored California corporations (Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247), the California Franchise Tax Board announced that the statute is invalid, and therefore taxpayers may not claim the exclusion on their California income tax returns. (FTB Notice 2012-03.)
The exclusion should not be claimed on a 2012 California income tax return. In addition, the California Franchise Tax Board says it will disallow the exclusion for any year for which the statute of limitations hasn’t closed. That means the Franchise Tax Board will send a Notice of Proposed Assessment to taxpayers who claimed the exclusion for tax years 2008 – 2011. Alternatively, a taxpayer may file an amended income tax return and pay the tax.
Some taxpayers have extended the statute of limitations relating to examinations or litigation for years before 2008. Additional tax for disallowing the exclusion will also apply for those taxpayers for those years.
See your tax advisor to discuss your situation.