Investors in tax case get reprieve from the state

SACRAMENTO — A controversial tax bill isn’t in the mail after all, at least for 90 days.

After a firestorm of criticism, the California Franchise Tax Board, which collects the state income tax, has temporarily opted not to send out bills to about 2,000 taxpayers telling them they collectively owe $120 million in back taxes.

State tax collectors originally mailed notices in December telling affected taxpayers they would be dunned retroactively after a court threw out as unconstitutional an investment tax break because it discriminated against Californians who invested outside the state. As a result, shareholders in small businesses could be on the hook for taxes on income from the sale of stock from 2008 through 2012, plus interest.

The taxpayers, as expected, reacted with outrage at being billed for taxes that weren’t legally due at the time they filed their now-disputed returns. They were taking advantage of the socalled qualified small business capital gains incentive. It had been approved by the state Legislature and the governor two decades ago, and eligible taxpayers have been getting it ever since.

A hastily organized lobbying group, California Business Defense, began pressuring lawmakers and the governor to find a solution that wouldn’t unfairly hit investors with unexpected and what they called arbitrary, retroactive tax bills.

Fixing the problems is expected to require passage of a law. At least two bills that might be used to address the tax issue have been introduced this legislative session.

The Franchise Tax Board, for now, has agreed not to send out any tax-due notices for at least three months.

“What this means in plain English is that the FTB is giving us time to fix this situation before mailing the actual bills,” said Brian Overstreet, a spokesman for the taxpayers group. “With the waivers in place … no one will actually owe any money and there are no collection or appeal actions needed.”

marc.lifsher@latimes.com