This site uses cookies to provide you with a more responsive and personalized service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.

Bookmark Email Print this page

Multistate Tax Alert: California Enacts Legislation Retroactively



California Governor Brown recently signed Assembly Bill 1412 (“A.B. 1412”),1 which retroactively provides, for individual taxpayers, capital gain deferral and exclusion regarding the sale of Qualified Small Business Stock (“QSBS”) in tax years 2008 through 2012. The new law reverses California Franchise Tax Board (“FTB”) procedures set forth in FTB Notice 2012-03, which provided for the retroactive assessment of tax for tax years 2008 through 2012. The FTB Notice had been issued in response to the California Court of Appeal’s decision in Cutler v. Franchise Tax Board that found portions of California’s prior QSBS election provisions unconstitutional.2 A.B. 1412 also extends the statute of limitations for the 2008 tax year to 180 days from the legislation’s January 1, 2014 effective date for purposes of filing a refund claim based on the modified QSBS provisions. We summarize the enacted legislation in this External Tax Alert.3


Prior to the enactment of A.B. 1412, Cal. Rev. & Tax. Code §§ 18038.5 and 18152.5 provided a 100% capital gain deferral and a 50% capital gain exclusion, respectively, to individual taxpayers who sold QSBS. However, these provisions contained certain qualifications, including requiring the company issuing the stock to use at least 80% of its assets within California and maintain 80% of its payroll within the state.4 The California Court of Appeal in Cutler held that these asset and payroll requirements, as related to gain deferral under Section 18038.5, were unconstitutional in violation of the U.S. Commerce Clause.5 The FTB responded to Cutler by issuing FTB Notice 2012-03, which outlined the procedures to be followed by the FTB, including FTB: (1) denial of taxpayer QSBS gain deferral and exclusion beginning in 2008, and (2) issuance of tax assessments (with penalties and interest) to taxpayers that utilized the provisions in prior tax filings.6

We summarize the enacted legislation in the attached Tax Alert, please click to download. 

To receive these alerts and stay connected, please sign up for our weekly newsletter State Tax Matters.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

1 Stats 2013 ch 546 (A.B. 1412) (signed Oct. 4, 2013), effective January 1, 2014. A copy of the law as adopted is available at:
2 Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012).
3 This Alert addresses the reinstatement of the QSBS gain exclusion and deferral provisions, specifically the amendments and additions enacted to address the constitutionality concerns raised in Cutler. This Alert does not address all requirements necessary for taxpayers to utilize the QSBS election.
4 Cal. Rev. & Tax. Code § 18152.5(e)(1)(A), (e)(9) (2013).
5 A copy of our earlier Tax Alert that discussed the Cutler decision is accessible at: Assets/Documents/Tax/us_tax_multistate_CA_Alert_9-10-2012.pdf.
6 A copy of our earlier Tax Alert that discussed FTB Notice 2012-03 is accessible at: Assets/Documents/Tax/us_tax_multistate_CA_Alert_1-03-2013.pdf.

Share this page

Email this Send to LinkedIn Send to Facebook Tweet this More sharing options

Stay connected