Zeev, Section 1202 permits taxpayers who hold "qualified small business stock" for more than 5 years to exclude 50% of the gain realized on the sale of the stock, subject to certain limits. Gain eligible for the exclusion is limited to the greater of $10 million, or 10 times the taxpayer's basis. To issue qualified small business stock (i.e., stock qualifying for exclusion of gain under §1202), the corporation must be a C corporation and can not have gross assets in excess of $50 million at the time the stock is issued. The stock must be issued after August 10, 1993, (the date of enactment of the Revenue Reconciliation Act of 1993) to qualify for the exclusion.
In order to prevent evasion of the requirement that the stock be newly issued, stock acquired by the taxpayer will not be treated as qualified small business stock if the issuing corporation purchases, directly or indirectly, any stock from the stockholder, or a related person within two years of the issuance of the stock (i.e., either two years before or two years after the issuance of the stock). In addition, stock issued by a corporation will not be treated as qualified small business stock if, within one year of the issuance (i.e., within one year before, or one year after issuance) it redeems more than 5% of the value of its stock as of the beginning of such two-year period.
A taxpayer cannot exclude gain from the sale of qualified small business stock if the taxpayer (or a related person) held an offsetting short position with respect to that stock anytime before the 5-year holding period is satisfied. If the taxpayer (or a related person) acquires an offsetting short position with respect to qualified small business stock after the 5-year holding period is satisfied, the taxpayer must elect to treat the acquisition of the offsetting short position as a sale of the qualified small business stock for its fair market value in order to exclude any gain from that stock.
There are plenty of other fine points in the law to prevent abuse of Congress' intent.
Colin |
