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. http://sd28.senate.ca.gov/news/2013-03-07-sacramento-bee-lawmakers-try-halt-state-s-retroactive-taxes

1. Insert logo here
March 21, 2013
Ms. Selvi Stanislaus, Executive Officer
California Franchise Tax Board
PO Box 115
Rancho Cordova, CA 95741-0115
RE: Retroactively Taxing Small Business Owners and Investors
Position: OPPOSE
The ** Your Company, Name**, respectfully OPPOSE the recent decision by the Franchise Tax Board (FTB) staff to
cancel California's Qualified Small Business Stock (QSBS) Tax Incentives.
For many years, California has been in the forefront when it comes to appreciating, supporting and assisting small
business owners and investors. Small businesses are the driving force of job creation and their success is critical as the
state continues to push for job creation and an improved economy. Small businesses comprise nearly 80% of our Chamber
membership and are a primary force in creating the jobs that will help California reduce its current high unemployment
rate and return our state to economic prosperity.
We cannot incentivize investment in businesses or job growth if uncertainty arises in programs, incentives, or tax
credits the State of California currently offers to businesses. Asking thousands of small business owners and investors to
retroactively pay the state four years of assessments totaling over $120 million dollars plus interest is a way to
incentivize businesses and investors to locate anywhere except California, an alarming trend we have seen develop and
escalate over the past few years as the result of increasingly high taxes and prohibitive regulations. This decision doesn't
help.
The recent unilateral decision by Franchise Tax Board ("FTB") staff to cancel California's 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 entrepreneurs
and investors could be detrimental to our competiveness, job growth and the state's overall economy.
Ironically, FTB staff cites last year 's California appellate court decision in Cutler v. Franchise Tax Board (a
taxpayer win) as justification for this oppressive measure. Notably, the staff decision on how to implement Cutler was
done behind closed doors, outside the public meeting process, without the approval of FTB Board Members and
without the input of interested parties. Disturbingly, FTB staff released Notice 2012-3, which "notified" the public of
its unilateral decision, this past December 21, the Friday before Christmas when affected taxpayers were likely
preoccupied with holiday plans. In any event, we have serious concerns not only with respect to the legality of the
FTB staff decision on due process grounds, but also with the message this sends to our member businesses and
entrepreneurs.
Claiming the FTB has little choice but to invalidate the tax exclusion after the August ruling in Cutler and will be
issuing 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 a
statute is unconstitutional because it discriminates against interstate commerce, the state has flexibility in terms of how
to "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 simply
not true and there is nothing in the Cutler case, or any other we are aware of, that says so. FIB staff chose to do so
for whatever reason. There is just no getting around it.
If you are looking for proof, look no further than FIB's own Notice 2000-9, which addressed the U.S. Supreme
Court's decision in Hunt-Wesson v. Franchise Tax Board. 120 S.Ct. 1022 (2000). In that case, the high court

2. invalidated provisions of California's interest deduction statute (Rev. & Tax. Code§ 24344), also on Commerce
Clause grounds. There, the FTB Board Members, not staff, decided to preserve the statute as a whole and to
issue refunds to the discriminated class. The FTB Board Members did not announce that the whole statute was null
and void and proceed to retroactively assess taxpayers, as FTB staff is doing here. The FTB staff proceeded to
implement 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 to
answer 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 held
unconstitutional 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 any
other state in the country. A decision like the one made by FTB could not only damage our current job recovery, but
it could also help other states leverage their State's business certainty to incentivize California Small Businesses to
leave our state.
In passing the QSBS tax incentives, the Legislature did not intend in any way for such a harsh response from the
FTB in the event two of the many requirements of the QSBS statutes were held unlawful, one that sucker punches
law abiding taxpayers who relied on the law as written, planned their affairs accordingly and paid their taxes. This
is evident by state law that says that where a particular provision of a statute is held unconstitutional, the
remaining portions of the statute survive. Rev. & Tax. Code § 17033. The Legislature is deemed to be aware of this rule
at the time it passed the QSBS tax incentive statutes and did not intend for the retroactive tax approach chosen by
FTB staff.
In conclusion, the FTB approach must be one that does not punish California Small Businesses and those who invest
in 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-member
Board 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