Cutler

FACTS

When plaintiff filed the underlying lawsuit seeking a tax refund, Revenue and Taxation Code sections 18038.5 and 18152.5 allowed an individual taxpayer to defer gains on the sale of qualified small business stock if the taxpayer purchased other qualified small business stock within 60 days. The deferral was available, however, only if the stock sold and purchased was issued by corporations that used 80 percent of their assets in the conduct of business in California and that maintained 80 percent of their payrolls in California. In 1998, plaintiff sold stock in an internet start-up company and used some of the proceeds to purchase stock in several other small businesses. The stock he sold did not

2 meet the California property and payroll requirement. Plaintiff nevertheless deferred that part of the gain from the sale that he invested in three other small businesses on his 1998 California tax return. The Franchise Tax Board (the Board) disallowed the deferral. Plaintiff filed a protest; the Board denied the protest; and plaintiff appealed to the State Board of Equalization. Plaintiff paid the $442,000 in tax, penalties and interest that the Board assessed. The State Board…