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Changes to 2011 Forms

Updates to the Schedule P (541) Instructions on 02/21/2013 –– Instructions for 541 Schedule P, Alternative Minimum Tax and Credit Limitations - Fiduciaries

We replaced text on Page 5, Line 4s, Other Adjustments, last bullet.

Previous Version

Qualified small business stock exclusion (R&TC Section 18152.5). California law provides an exclusion similar to the federal exclusion under IRC Section 1202 and allows exclusion of 50% of the gain on the sale of qualifying small business stock originally issued after August 10, 1993, and held for more than five years. However, for California purposes, 80% of the issuing corporation’s payroll as measured by total dollar value must be attributable to employment located within California, and at least 80% of the value of the assets of the corporation must be used by the corporation in the active conduct of one or more qualified trades or businesses in California. If the estate or trust excluded gain as allowed under R&TC Section 18152.5, multiply the excluded amount by 50% and enter it on this line as a positive amount.

The estate or trust (except a common trust fund) may not pass through the exclusion for the gain on qualified small business stock (R&TC Section 18152.5) to a beneficiary. Therefore, it would also not pass through the adjustment related to this exclusion to the beneficiary. When the estate or trust completes its first Schedule P (541) as explained in General Information G, Alternative Minimum Taxable Income (AMTI) Exclusion, it should include the adjustment for the exclusion of the gain on qualified small business stock. When the estate or trust completes its second Schedule P (541) for the beneficiary, it should not include the adjustment for the exclusion of the gain on qualified small business stock, since the exclusion may not be passed through to the beneficiary, see R&TC Section 18152.5(g)(4).

Revised Version

Note: text deleted.

Reason for the changes

The Court of Appeal’s held in Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247, that the qualified small business stock exclusion and deferral statutes under California Revenue and Taxation Code (R&TC) Sections 18152.5 and 18038.5 are unconstitutional. These sections are now invalid and unenforceable.

Impact

This revision increases the tax liability for taxpayers who reported a qualified small business stock exclusion or deferral for taxable years beginning on or after January 1, 2008.

Back to Tax Form Changes for 2011