Los Angeles Business Journal

Support Grows to Retain Tax Break for Angel Investors

By Howard Fine Tuesday, February 5, 2013

Opposition is growing to a state tax board’s recent decision to take away a state tax break for angel investors – and make those who used it pay retroactively.

On Tuesday, one of the state’s most powerful tax officials urged the state Franchise Tax Board to reverse its decision. That follows a similar letter last week from a Los Angeles area state senator.

In a letter sent Tuesday to the FTB, George Runner, one of five members of the Board of Equalization, called the FTB’s decision “unwarranted and unfair to taxpayers.” The Board of Equalization collects sales taxes and also hears appeals from taxpayers protesting FTB actions.

“Understandably, affected taxpayers are outraged by this action,” Runner said in his letter. “They made business decisions in good faith based on existing California tax law. It is not possible for them to undo these decisions in response to the FTB’s retroactive actions….FTB’s action sends entirely the wrong message to investors, entrepreneurs and job creators doing business in our state.”

Meanwhile, state Sen. Ted Lieu, D-Redondo Beach, sent a letter last week calling the FTB’s decision “unfair to law-abiding taxpayers.” He said the retroactive nature of the decision violated the legislative intent when the Legislature passed the tax break 19 years ago.

“The legislature that enacted the tax incentive would NEVER have intended for taxpayers to rely on the law for years and the sock it to them by retroactively taking the benefit away after the reliance actions already occurred,” Lieu said in his letter.

The tax break allows investors in small technology and manufacturing companies to exclude from taxation 50 percent of gains on their investment, as long as 80 percent of the company’s operations and assets are within California.

After the FTB rejected one investor’s claim for the tax break for violating that 80 percent rule, the investor sued, claiming the rule violated interstate commerce laws. A state appellate court last summer sided with the investor and said the rule likely was discriminatory and therefore unconstitutional.

But instead of just scrapping the 80 percent rule, FTB staff in December eliminated the entire tax break. And, citing case law that says all discrimination must be remedied, the board also voided all the tax breaks going back five years.

That move angered angel investors, who said it could deter future investment in start-up companies.