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Multistate Tax Alert: California Court of Appeal Holds Qualified Small Business Stock Gain Deferral Statute Unconstitutional


In Cutler v. California Franchise Tax Board, the California Court of Appeal recently declared unconstitutional California Revenue and Taxation Code Section  18038.5, which provides capital gain deferral for an individual taxpayer’s sale of stock in certain qualified small businesses. As explained by the court, the deferral statute “favors domestic corporations” (i.e., corporations with 80% of their property and payroll in California) and thus is facially discriminatory in violation of the U.S. Commerce Clause.

The attached alert provides a general background of the statutory provisions at issue, summarizes the appellate court’s analysis, discusses the issues left undecided, and provides some general considerations for taxpayers.

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