Krauthammer: 'America Is Headed the Way of Cyprus'

Syndicated columnist Charles Krauthammer said Tuesday that America is "headed the way of Cyprus."

Such was said on Fox News's Special Report near the end of a discussion about the state of California retroactively collecting taxes and interest after a court struck down a pro-business initiative established years ago.

CHARLES KRAUTHAMMER: I think we do have to revise our doomsday pronouncements. We had been saying up to now America’s headed the way of Greece. I would say it’s headed the way of Cyprus, because if you start to confiscate people’s money retroactively you’ve got a real problem on your hands. And I guess, I think if you put it to a vote for the people of that state, you’d get the same result that you got today in Cyprus in the parliament where nobody, not a single member of the parliament supported an agreement that the government itself had proposed. The government party, not one of them voted yes. It abstained entirely on a proposal that it had agreed to. So that tells you how unpopular it is.

As a little background, California's Franchise Tax Board explained last month:

Federal income tax law provides for the exclusion or deferral of gain from the sale or exchange of qualified small business stock (QSBS). Beginning in 1993, California adopted its own standalone QSBS provisions dealing with exclusions, which generally mirrored existing federal law. However, California law required that at least 80 percent of the company's payroll at the time the stock was purchased must be within California and 80 percent of assets and payroll must be within California during the taxpayer's holding period for the stock in order to qualify for a QSBS gain exclusion or deferral. In 1998, California adopted its own standalone QSBS provision dealing with deferrals.

The provisions in California law regarding the 80 percent asset and payroll requirements were found to be unconstitutional in August 2012 by the California Court of Appeal in Cutler v. Franchise Tax Board (FTB). The court's decision made California's entire QSBS statute invalid and unenforceable. As a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. It is important to note that the court's decision in Cutler did not change the federal treatment of QSBS.

Because QSBS gain exclusions and deferrals are no longer valid for California purposes, taxpayers who previously took advantage of California's preferential treatment of QSBS in years still open for assessment under the four-year statute of limitations (generally 2008 and later) must now recompute their taxable income for each affected year without excluding or deferring gains from the disposition of QSBS. For 2007 (and prior) tax years still open under the statute of limitations, a QSBS gain exclusion or deferral will be allowed if the taxpayer meets all other requirements under California law, i.e., those other than the 80 percent asset and payroll requirements.

Maybe Charles is right.