BY BARBARA ROSENBAUM AND LORI SHROUT
Just a little business
called Facebook ...
Facebook’s decision to go public
has been big news, with the value of the
social-networking giant soaring to over
early investors and employees with stock
options are looking at large gains when they
decide to sell their stock, leaving lawmakers
giddy thinking about the anticipated tax haul.
Reuters reported that california lawmakers
are already drawing up plans for spending
the revenue generated by those selling their
These early investors and Facebook employees could benefit from internal Revenue
code section 1202, which provides a partial
exclusion for gain from the sale of certain
up plans for
Facebook a small business? absurd, yet
the section 1202 definition of “small” may
generally, stock is classified as small-business stock if the following conditions
;The issuing corporation must be a domestic c corporation.
;stock must be issued after aug. 10, 1993.
;stock must be acquired by the taxpayer
at its original issue in exchange for money,
property, or as compensation for services.
;aggregate gross assets of the corporation
both before and immediately after shares
Barbara Rosenbaum is a senior tax shareholder and Lori Shrout is a manager at
CPA and business advisory firm Gumbiner
were acquired did not exceed $50 million.
aga means the cash plus the total ad-
justed book basis (not fair market value) of
other property held by the corporation. The
book basis of the company at the time early
investors bought in, or stock options were ac-
quired, could very well have been below the
$50 million mark.
under internal Revenue code section 1202,
certain non-corporate taxpayers can exclude
from income 50 percent of the gain from the
sale or exchange of qualified small-business
stock held for more than five years. For most
taxpayers, a federal alternative Minimum tax
adjustment eliminates the benefit of the 50
california has its own version of iRc section 1202, similar to the federal exclusion.
However, california also requires that the
following conditions be satisfied:
;at least 80 percent of the corporation’s
payroll, measured by total dollar value, must
be attributable to employment located within
;at least 80 percent (by value) of the assets
of the corporation must be used by the corporation in the active conduct of one or more
qualified trades or businesses in california.
These two 80 percent requirements (both
payroll and assets in california) must be met
during “substantially all” of the taxpayers’
california corporations that meet this definition of a small business are supposed to file
a Form Ftb 3565, Small Business Stock Questionnaire, with the Franchise tax board and
mail copies to each of their shareholders. if a
corporation does not file, the stockholders can
still claim the exclusion, but they must prove
that the stock satisfies the requirement.
We have been unable to determine if Facebook meets this 80 percent requirement for
california purposes. if you have stock in Facebook, and received a copy of the Ftb 3565,
then it would appear it does.
Those who are holding some of these early
shares and facing these huge gains may want
to talk with a tax professional to minimize the
potential tax impact. at
Hats off to Miller & Bahnson
Kudos to Professors Paul Miller
and Paul Bahnson for their spirit of accounting article, “some evidence that the aiCPa’s
management has lost its focus,” (December
2011, page 20).
one would think that the items listed
— from the ill-fated “Cognitor” to the recent
letter-writing campaign on an independent
board to oversee private standards — would
bring some reaction from the membership.
The people that are most affected by the
various efforts to expand the american in-
stitute of CPas, the smaller practice units,
have abdicated their responsibilities to their
profession, and themselves, by not speaking
out and/or writing to the aiCPa management
to express their discontent with what the in-
stitute is doing.
true, smaller practice units are fighting
hard to properly service their clients and
hone their professional skills, but they must
make their opinions heard.
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