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California bill addresses capital gains for small business

Federal taxes are of course enormously important. They affect every single taxpayer across the nation. Indeed, their reach goes overseas as well, to Americans living abroad or with bank accounts there.

But state taxes are very important as well. Even in states that don't have an income tax, plenty of tax issues can arise, and so can tax litigation.

California most certainly has an income tax. This month, the legislature is considering a proposal to prevent it from applying to retroactively to sales of certain business investments.

Formally, the proposal is Senate Bill 209. It is intended to reverse a court decision last year. The court decision held that a tax break on capital gains taxes for investors in small California companies was invalid.

The tax break reduced by half the capital gains that could be taxes from these investments. The legislature had put the break in place in 1993.

But the courts struck it down in 2012. The reason for striking it down was concern about improper state interference in interstate commerce. Regulation of interstate commerce is, after all, primarily a federal responsibility.

The California Franchise Tax Board has not hesitated to follow up on the 2012 court ruling. The board has taken the position that anyone who used the capital gains break in question after 2008 would have to repay the money they saved on taxes, as well as interest and tax penalties. We wrote about this issue in our February 24 post.

There is at least $120 at stake in the controversy. Taxpayers who were negatively affected by the court ruling have turned to the legislature for help. And that, in turn, led to the proposal known as SB 209. The bill is still alive in the legislature, having recently cleared a committee  hurdle.

Source: "California Senate Committee OKs bill to block retroactive taxes," Sacramento Bee, 5-1-13

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