Taxpayers were entitled to exclude 50% of the gain from their sale of corporate stock as gain from the sale of qualified small business stock for California personal income tax purposes. Contrary to the contentions of the Franchise Tax Board (FTB), the corporation met the active business requirements provided by statute, including the 80% payroll test (i.e., 80% or more of the corporation’s total payroll expense attributable to employment in California), for each of the taxpayers’ holding periods for the stock. The taxpayers had asserted that the FTB erred in determining whether the corporation met the 80% payroll test because the FTB included severance pay and other termination costs related to reducing the corporation’s staff outside of California as part of the corporation’s payroll expenses attributable to employment. Also, as an alternate approach for determining whether the 80% payroll test had been met, the taxpayers had proposed applying an apportionment percentage to determine the number of qualifying months of California payroll.
Letter Decision, Appeal of Lin, Nos. 477812, 477856, and 477868, California State Board of Equalization, February 24, 2011, ¶405-446
Explanations at ¶15-620