Muething

The question in this case is whether certain stock qualified as “small business stock” when sold. If it did, the transaction was not subject to California’s preference tax. The trial court concluded the stock at issue did qualify as “small business stock” and thus no part of the gain could be taxed as preference income. We disagree for the reasons set out below and reverse the judgment.

To resolve the issue we consider tax statutes that have been repealed, but still govern the disposition of considerable outstanding tax claims. Under the repealed law, capital gain from the sale of assets was subject to two kinds of income tax. One portion of the gain was taxed as ordinary income. The remainder of the gain in most cases did not escape taxation entirely, but was treated as an item of tax preference and separately taxed as preference income at rates different from the rates at which ordinary income was taxed. However, if the capital asset qualified as “small business stock,” the portion of capital gain not counted as ordinary income was also not considered to be preference income and escaped taxation entirely. (Lennane v. Franchise Tax Bd. (1994) 9 Cal.4th 263, 265-266 [ 36…