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Ending California ‘retroactive tax’ is goal of bipartisan legislation effort backed by BOE chair

Assemblyman Jeff GorellSACRAMENTO, Calif. /California Newswire/ — Today, in an effort to provide relief to California taxpayers stunned with the imposition of a “retroactive tax,” Sen. Ted W. Lieu, Asm. Jeff Gorell and Board of Equalization Chair Jerome E. Horton today announced a joint effort to craft a bipartisan, comprehensive solution to the problem created by the recent California Court of Appeal decision in Frank Cutler v. Franchise Tax Board.

“Our goal is to fix this problem,” Lieu, D-Torrance, said in support of a real solution. “Since it can’t be done administratively, we’ll fix it legislatively. Californians planned and based their actions on the language of the law as it existed. Going backward in time and changing the rules innocent taxpayers relied upon violates the very essence of the rule of law.”

Horton, a former lawmaker and BOE representative on FTB, said a solution was needed to help California’s economy and provide reliability for taxpayers.

“California businesses should be able to rely on the Legislature to get it right or amend the law to make it right,” Horton said. “This legislation addresses the constitutional concerns in the Cutler decision, and relieves future taxpayers of the penalty and interest associated with relying on a law prior to it being found unconstitutional.”

Principally, Senate Bill 209, authored jointly by Sen. Lieu and Asm. Gorell, will be amended to bring relief to thousands of taxpayers who were recently notified that the FTB would retroactively assess those who claimed California’s Qualified Small Business Stock (QSBS) tax benefits. In addition, Assembly Bill 1203 was also jointly authored to establish a prohibition against state agencies from seeking penalties and interest when applying retroactive tax increases as a result of a court ruling like that in this case.

“Retroactive tax increases for those small businesses that complied with the law and played by the rules is simply unfair and builds upon the perception that the state is hostile to business,” Asm. Gorell, R-Camarillo, said. “We want to unwind this poor decision and bring relief to small business owners throughout the state, while also setting prohibitions against this kind of surprise tax increase again for the future.”

The issue stems from a decision by the California Court of Appeal, in the Cutler v. Franchise Tax Board case, wherein the Court ruled that the California QSBS deferral and exclusion was unconstitutional and the Franchise Tax Board administratively implement the Court’s decision. The QSBS tax credit law, passed in 1993, was intended to spur investment in California startups and small businesses. The incentive allowed for the exclusion of 50 percent of capital gains earned from investments in businesses valued less than $50 million that have at least 80 percent of their staff and assets in California.

Faced with a court ruling that found several aspects of the tax provisions to be in violation of the U.S. Constitution’s Commerce Clause, and constrained by the original enacting Legislature’s intent to only provide the QSBS tax credit to investors in businesses that maintained at least 80 percent of their assets and payroll within California, the Tax Board’s only option was to enforce the Court of Appeal’s decision, which ended the 20-year-old capital gains tax break. This resulted in the retroactive taxation of thousands of investors for tax liabilities, plus interest and penalties, going back to 2008.

As a result, entrepreneurs throughout the state are now facing exceptionally large tax bills – as high as tens of thousands to hundreds of thousands each. It is estimated that California will recoup as much as $120 million in back taxes.

Lieu, Gorell and Horton plan to hold a joint town hall/media briefing to be held Thursday, March 14, 2013. The exact time, location or conference call dial-in information will be provided on Gorell’s Web site.

“We want to hear from the public and make sure we get it right,” Lieu said. “Collaborating with interested parties including lawmakers, affected taxpayers and the tax-practitioner community will help ensure this new law is meaningful and has a favorable impact.”

For more information, visit Assm. Jeff Gorell’s website at: http://www.assembly.ca.gov/Gorell

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