California Franchise Tax Board Appeal


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Read more about this bi-partisan effort to roll back a recent decision by the Franchise Tax Board that will cost California Small businesses some $120 million, by some estimates.

Senator Lieu and Assemblyman Gorrell are driving this effort in the legisalture. Take a minute to send this letter off after inserting your name & logo. Just hit the save button - it will save as a word file which you can modify and send off. Thanks.

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California Franchise Tax Board Appeal

  1. 1. Insert logo hereMarch 21, 2013Ms. Selvi Stanislaus, Executive OfficerCalifornia Franchise Tax BoardPO Box 115Rancho Cordova, CA 95741-0115RE: Retroactively Taxing Small Business Owners and InvestorsPosition: OPPOSEThe ** Your Company, Name**, respectfully OPPOSE the recent decision by the Franchise Tax Board (FTB) staff tocancel Californias Qualified Small Business Stock (QSBS) Tax Incentives.For many years, California has been in the forefront when it comes to appreciating, supporting and assisting smallbusiness owners and investors. Small businesses are the driving force of job creation and their success is critical as thestate continues to push for job creation and an improved economy. Small businesses comprise nearly 80% of our Chambermembership and are a primary force in creating the jobs that will help California reduce its current high unemploymentrate and return our state to economic prosperity.We cannot incentivize investment in businesses or job growth if uncertainty arises in programs, incentives, or taxcredits the State of California currently offers to businesses. Asking thousands of small business owners and investors toretroactively pay the state four years of assessments totaling over $120 million dollars plus interest is a way toincentivize businesses and investors to locate anywhere except California, an alarming trend we have seen develop andescalate over the past few years as the result of increasingly high taxes and prohibitive regulations. This decision doesnthelp.The recent unilateral decision by Franchise Tax Board ("FTB") staff to cancel Californias Qualified Small Business Stock("QSBS") Tax Incentives, in itself, is a step in the wrong direction for attracting new entrepreneurs and investors.However, along with canceling the program, the decision of the FTB staff to retroactively tax more than 2,500 entrepreneursand investors could be detrimental to our competiveness, job growth and the states overall economy.Ironically, FTB staff cites last year s California appellate court decision in Cutler v. Franchise Tax Board (ataxpayer win) as justification for this oppressive measure. Notably, the staff decision on how to implement Cutler wasdone behind closed doors, outside the public meeting process, without the approval of FTB Board Members andwithout the input of interested parties. Disturbingly, FTB staff released Notice 2012-3, which "notified" the public ofits unilateral decision, this past December 21, the Friday before Christmas when affected taxpayers were likelypreoccupied with holiday plans. In any event, we have serious concerns not only with respect to the legality of theFTB staff decision on due process grounds, but also with the message this sends to our member businesses andentrepreneurs.Claiming the FTB has little choice but to invalidate the tax exclusion after the August ruling in Cutler and will beissuing tax assessments is not acceptable, inconsistent with the law as we understand it and contradicts prior FTB action.Our understanding of the applicable law is that when an appellate court determines that a particular provision of astatute is unconstitutional because it discriminates against interstate commerce, the state has flexibility in terms of howto "level the playing field" to cure the discrimination. The state can: 1 . issue refunds to the discriminated class; 2. retroactively assess the favored class as long as the period of retroactivity is "modest" so as to comply with due process requirements (which is questionable in this case); 3 . or they can pick some combination of both, again subject to due process and other constitutional considerations.Under no circumstances is FTB staff required to issue retroactive QSBS assessments going back to 2008. That is simplynot true and there is nothing in the Cutler case, or any other we are aware of, that says so. FIB staff chose to do sofor whatever reason. There is just no getting around it.If you are looking for proof, look no further than FIBs own Notice 2000-9, which addressed the U.S. SupremeCourts decision in Hunt-Wesson v. Franchise Tax Board. 120 S.Ct. 1022 (2000). In that case, the high court
  2. 2. invalidated provisions of Californias interest deduction statute (Rev. & Tax. Code§ 24344), also on CommerceClause grounds. There, the FTB Board Members, not staff, decided to preserve the statute as a whole and toissue refunds to the discriminated class. The FTB Board Members did not announce that the whole statute was nulland void and proceed to retroactively assess taxpayers, as FTB staff is doing here. The FTB staff proceeded toimplement this Board-level directive, which is discussed in Notice 2000-9-and does so to this very day.Now that it is perfectly clear that the FTB can issue refunds and is not required to issue retroactive assessments, we have toanswer two very important questions; (1) whether it is prudent to issue retroactive assessments from a policy perspective;and (2) whether the Legislature intended such a draconian result if certain provisions of the QSBS statutes were heldunconstitutional in court. The answer to both questions is "NO."California lost 1.3 million jobs in the Great Recession, but we are now creating jobs at a faster pace than anyother state in the country. A decision like the one made by FTB could not only damage our current job recovery, butit could also help other states leverage their States business certainty to incentivize California Small Businesses toleave our state.In passing the QSBS tax incentives, the Legislature did not intend in any way for such a harsh response from theFTB in the event two of the many requirements of the QSBS statutes were held unlawful, one that sucker puncheslaw abiding taxpayers who relied on the law as written, planned their affairs accordingly and paid their taxes. Thisis evident by state law that says that where a particular provision of a statute is held unconstitutional, theremaining portions of the statute survive. Rev. & Tax. Code § 17033. The Legislature is deemed to be aware of this ruleat the time it passed the QSBS tax incentive statutes and did not intend for the retroactive tax approach chosen byFTB staff.In conclusion, the FTB approach must be one that does not punish California Small Businesses and those who investin them and who have done everything we asked of them and then some.Therefore, the **Your Company, Name** respectfully requests that you convene a meeting of the three-memberBoard as soon as practicable to reverse this legally questionable and unquestionably bad tax policy.Respectfully,** Your Name**Cc: Fax to: Ms. Selvi Stanislaus, EO, CA FTB 916.845.3191 Senator Ted Lieu 916.323.2543 Senator Joel Anderson 916.447.9008 Senator Bill Emmerson 916.327.2272 Senator Richard Roth 916.327.2187 Assemblymember Jeff Gorrell 916.319.2144 Assemblymember Melissa Melendez 916.319.2167 Assemblymember Marie Waldron 916.319.2175 Assemblymember Brian Nestande 916.319.2142