Franchise Tax Board:
Lawmakers Ask FTB to Reverse Course on Cutler

The Franchise Tax Board’s response to the December 2012 appellate court decision in Frank Cutler v. Franchise Tax Board has caused a media frenzy, and lawmakers aren’t shying away. This week, 38 California legislators signed a letter to FTB Executive Officer Selvi Stanislaus, criticizing her agency’s response to the Cutler decision.

The court ruled that California’s qualified small business stock statutes are unconstitutional because they treat in-state and out-of-state businesses differently. Before the holidays, the FTB decided that the remedy to this decision was to retroactively assess taxpayers (back to the 2008 taxable year) who claimed any qualified small business stock incentives.

In response to a letter sent to Ms. Stanislaus by Senator Ted Lieu, Board of Equalization Chairman and FTB Member Jerome Horton defended FTB staff. In his February 1 letter to Senator Lieu, Mr. Horton wrote: “Undeniably, the power to make any changes to the law must originate from the Legislature, not from an administrative agency such as the FTB.”

The FTB’s decision to apply the Cutler decision retroactively has turned out to be a public relations disaster. Letter after letter has been sent to the FTB, lawmakers, and the three-member FTB by taxpayers, practitioners, business groups and other organizations.

The latest letter, signed by a bipartisan group of lawmakers, was initiated by Assemblyman Henry Perea (D-Fresno), and follows similar letters and statements from Senator Lieu (D-Torrance), Assemblyman Bob Wieckowski (D-Fremont) and Board of Equalization Member George Runner. The bipartisan letter points out: “Under no circumstances is FTB 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. FTB staff chose to do so for whatever reason. There is just no getting around it.”

The letter goes on to request that an FTB meeting be convened “as soon as possible to reverse this legally questionable and unquestionably bad tax policy.”

February 22, 2013
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