Los Angeles Business Journal

Angel Investors May Get Tax Break Back

By Howard Fine Tuesday, March 5, 2013

Two state legislators have responded to the uproar over a state tax agency’s decision to retroactively take away a tax break for angel investors.

They introduced legislation on Tuesday to restore the tax break for those who previously used it and to prevent future retroactive tax increases.

State Sen. Ted Lieu, D-Torrance, and Assemblyman Jeff Gorell, R-Camarillo, announced Tuesday they will amend an existing bill, SB 209, to allow angel investors who took the state tax break over the past five years to keep it.

“Retroactive tax increases for those small businesses that complied with the law and played by the rules is simply unfair and builds upon the perception that the state is hostile to business,” Gorell said.

In response to a court decision last summer invalidating the tax break for angel investors, the state Franchise Tax Board last December not only ended the tax break going forward but also ordered about 2,000 angel investors who took the tax break between 2008 and 2012 to pay it back with interest. That decision could cost those investors tens of thousands of dollars in back taxes.

The tax break – a 50 percent exclusion from taxation of income generated by the sale of stock in certain types of corporations – was enacted by the Legislature in 1993 to boost investment in technology and manufacturing startups. But there was a condition: 80 percent of the company’s assets and payroll had to be within California.

One angel investor who had been denied the tax break because of this condition sued the FTB in federal court, claiming the in-state provision violated federal interstate commerce protections. The court ruled the in-state provision invalid, prompting the FTB to make the decision to take away the tax break retroactively.

The FTB said that the Legislature was the only body that could act to prevent this from being applied retroactively.