§ 1202. Partial exclusion for gain from certain small business stock
(a)
Exclusion
(1)
In general
In the case of a taxpayer other than a corporation, gross income shall not include 50 percent of any gain from the sale or exchange of qualified small business stock held for more than 5 years.
(2)
Empowerment zone businesses
(A)
In general
In the case of qualified small business stock acquired after the date of the enactment of this paragraph in a corporation which is a qualified business entity (as defined in section
1397C
(b)) during substantially all of the taxpayer’s holding period for such stock, paragraph (1) shall be applied by substituting “60 percent” for “50 percent”.
(3)
Special rules for 2009 and certain periods in 2010
In the case of qualified small business stock acquired after the date of the enactment of this paragraph and on or before the date of the enactment of the Creating Small Business Jobs Act of 2010—
(b)
Per-issuer limitation on taxpayer’s eligible gain
(1)
In general
If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of—
(A)
$10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or
(B)
10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year.
For purposes of subparagraph (B), the adjusted basis of any stock shall be determined without regard to any addition to basis after the date on which such stock was originally issued.
(2)
Eligible gain
For purposes of this subsection, the term “eligible gain” means any gain from the sale or exchange of qualified small business stock held for more than 5 years.
(3)
Treatment of married individuals
(A)
Separate returns
In the case of a separate return by a married individual, paragraph (1)(A) shall be applied by substituting “$5,000,000” for “$10,000,000”.
(B)
Allocation of exclusion
In the case of any joint return, the amount of gain taken into account under subsection (a) shall be allocated equally between the spouses for purposes of applying this subsection to subsequent taxable years.
(C)
Marital status
For purposes of this subsection, marital status shall be determined under section
7703.
(c)
Qualified small business stock
For purposes of this section—
(1)
In general
Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if—
(2)
Active business requirement; etc.
(A)
In general
Stock in a corporation shall not be treated as qualified small business stock unless, during substantially all of the taxpayer’s holding period for such stock, such corporation meets the active business requirements of subsection (e) and such corporation is a C corporation.
(B)
Special rule for certain small business investment companies
(i)
Waiver of active business requirement
Notwithstanding any provision of subsection (e), a corporation shall be treated as meeting the active business requirements of such subsection for any period during which such corporation qualifies as a specialized small business investment company.
(ii)
Specialized small business investment company
For purposes of clause (i), the term “specialized small business investment company” means any eligible corporation (as defined in subsection (e)(4)) which is licensed to operate under section 301(d) of the Small Business Investment Act of 1958 (as in effect on May 13, 1993).
(3)
Certain purchases by corporation of its own stock
(A)
Redemptions from taxpayer or related person
Stock acquired by the taxpayer shall not be treated as qualified small business stock if, at any time during the 4-year period beginning on the date 2 years before the issuance of such stock, the corporation issuing such stock purchased (directly or indirectly) any of its stock from the taxpayer or from a person related (within the meaning of section
267
(b) or
707
(b)) to the taxpayer.
(B)
Significant redemptions
Stock issued by a corporation shall not be treated as qualified business stock if, during the 2-year period beginning on the date 1 year before the issuance of such stock, such corporation made 1 or more purchases of its stock with an aggregate value (as of the time of the respective purchases) exceeding 5 percent of the aggregate value of all of its stock as of the beginning of such 2-year period.
(C)
Treatment of certain transactions
If any transaction is treated under section
304
(a) as a distribution in redemption of the stock of any corporation, for purposes of subparagraphs (A) and (B), such corporation shall be treated as purchasing an amount of its stock equal to the amount treated as such a distribution under section
304
(a).
(d)
Qualified small business
For purposes of this section—
(1)
In general
The term “qualified small business” means any domestic corporation which is a C corporation if—
(A)
the aggregate gross assets of such corporation (or any predecessor thereof) at all times on or after the date of the enactment of the Revenue Reconciliation Act of 1993 and before the issuance did not exceed $50,000,000,
(2)
Aggregate gross assets
(A)
In general
For purposes of paragraph (1), the term “aggregate gross assets” means the amount of cash and the aggregate adjusted bases of other property held by the corporation.
(B)
Treatment of contributed property
For purposes of subparagraph (A), the adjusted basis of any property contributed to the corporation (or other property with a basis determined in whole or in part by reference to the adjusted basis of property so contributed) shall be determined as if the basis of the property contributed to the corporation (immediately after such contribution) were equal to its fair market value as of the time of such contribution.
(3)
Aggregation rules
(A)
In general
All corporations which are members of the same parent-subsidiary controlled group shall be treated as 1 corporation for purposes of this subsection.
(B)
Parent-subsidiary controlled group
For purposes of subparagraph (A), the term “parent-subsidiary controlled group” means any controlled group of corporations as defined in section
1563
(a)(1), except that—
(e)
Active business requirement
(1)
In general
For purposes of subsection (c)(2), the requirements of this subsection are met by a corporation for any period if during such period—
(2)
Special rule for certain activities
For purposes of paragraph (1), if, in connection with any future qualified trade or business, a corporation is engaged in—
(B)
activities resulting in the payment or incurring of expenditures which may be treated as research and experimental expenditures under section
174, or
assets used in such activities shall be treated as used in the active conduct of a qualified trade or business. Any determination under this paragraph shall be made without regard to whether a corporation has any gross income from such activities at the time of the determination.
(3)
Qualified trade or business
For purposes of this subsection, the term “qualified trade or business” means any trade or business other than—
(A)
any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees,
(4)
Eligible corporation
For purposes of this subsection, the term “eligible corporation” means any domestic corporation; except that such term shall not include—
(B)
a corporation with respect to which an election under section
936 is in effect or which has a direct or indirect subsidiary with respect to which such an election is in effect,
(5)
Stock in other corporations
(A)
Look-thru in case of subsidiaries
For purposes of this subsection, stock and debt in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets, and to conduct its ratable share of the subsidiary’s activities.
(B)
Portfolio stock or securities
A corporation shall be treated as failing to meet the requirements of paragraph (1) for any period during which more than 10 percent of the value of its assets (in excess of liabilities) consists of stock or securities in other corporations which are not subsidiaries of such corporation (other than assets described in paragraph (6)).
(6)
Working capital
For purposes of paragraph (1)(A), any assets which—
(A)
are held as a part of the reasonably required working capital needs of a qualified trade or business of the corporation, or
(B)
are held for investment and are reasonably expected to be used within 2 years to finance research and experimentation in a qualified trade or business or increases in working capital needs of a qualified trade or business,
shall be treated as used in the active conduct of a qualified trade or business. For periods after the corporation has been in existence for at least 2 years, in no event may more than 50 percent of the assets of the corporation qualify as used in the active conduct of a qualified trade or business by reason of this paragraph.
(7)
Maximum real estate holdings
A corporation shall not be treated as meeting the requirements of paragraph (1) for any period during which more than 10 percent of the total value of its assets consists of real property which is not used in the active conduct of a qualified trade or business. For purposes of the preceding sentence, the ownership of, dealing in, or renting of real property shall not be treated as the active conduct of a qualified trade or business.
(f)
Stock acquired on conversion of other stock
If any stock in a corporation is acquired solely through the conversion of other stock in such corporation which is qualified small business stock in the hands of the taxpayer—
(g)
Treatment of pass-thru entities
(1)
In general
If any amount included in gross income by reason of holding an interest in a pass-thru entity meets the requirements of paragraph (2)—
(B)
for purposes of applying subsection (b), such amount shall be treated as gain from a disposition of stock in the corporation issuing the stock disposed of by the pass-thru entity and the taxpayer’s proportionate share of the adjusted basis of the pass-thru entity in such stock shall be taken into account.
(2)
Requirements
An amount meets the requirements of this paragraph if—
(A)
such amount is attributable to gain on the sale or exchange by the pass-thru entity of stock which is qualified small business stock in the hands of such entity (determined by treating such entity as an individual) and which was held by such entity for more than 5 years, and
(B)
such amount is includible in the gross income of the taxpayer by reason of the holding of an interest in such entity which was held by the taxpayer on the date on which such pass-thru entity acquired such stock and at all times thereafter before the disposition of such stock by such pass-thru entity.
(3)
Limitation based on interest originally held by taxpayer
Paragraph (1) shall not apply to any amount to the extent such amount exceeds the amount to which paragraph (1) would have applied if such amount were determined by reference to the interest the taxpayer held in the pass-thru entity on the date the qualified small business stock was acquired.
(h)
Certain tax-free and other transfers
For purposes of this section—
(1)
In general
In the case of a transfer described in paragraph (2), the transferee shall be treated as—
(4)
Incorporations and reorganizations involving nonqualified stock
(A)
In general
In the case of a transaction described in section
351 or a reorganization described in section
368, if qualified small business stock is exchanged for other stock which would not qualify as qualified small business stock but for this subparagraph, such other stock shall be treated as qualified small business stock acquired on the date on which the exchanged stock was acquired.
(B)
Limitation
This section shall apply to gain from the sale or exchange of stock treated as qualified small business stock by reason of subparagraph (A) only to the extent of the gain which would have been recognized at the time of the transfer described in subparagraph (A) if section
351 or
368 had not applied at such time. The preceding sentence shall not apply if the stock which is treated as qualified small business stock by reason of subparagraph (A) is issued by a corporation which (as of the time of the transfer described in subparagraph (A)) is a qualified small business.
(C)
Successive application
For purposes of this paragraph, stock treated as qualified small business stock under subparagraph (A) shall be so treated for subsequent transactions or reorganizations, except that the limitation of subparagraph (B) shall be applied as of the time of the first transfer to which such limitation applied (determined after the application of the second sentence of subparagraph (B)).
(D)
Control test
In the case of a transaction described in section
351, this paragraph shall apply only if, immediately after the transaction, the corporation issuing the stock owns directly or indirectly stock representing control (within the meaning of section 368(c)) of the corporation whose stock was exchanged.
(i)
Basis rules
For purposes of this section—
(1)
Stock exchanged for property
In the case where the taxpayer transfers property (other than money or stock) to a corporation in exchange for stock in such corporation—
(2)
Treatment of contributions to capital
If the adjusted basis of any qualified small business stock is adjusted by reason of any contribution to capital after the date on which such stock was originally issued, in determining the amount of the adjustment by reason of such contribution, the basis of the contributed property shall in no event be treated as less than its fair market value on the date of the contribution.
(j)
Treatment of certain short positions
(1)
In general
If the taxpayer has an offsetting short position with respect to any qualified small business stock, subsection (a) shall not apply to any gain from the sale or exchange of such stock unless—
(2)
Offsetting short position
For purposes of paragraph (1), the taxpayer shall be treated as having an offsetting short position with respect to any qualified small business stock if—
(B)
the taxpayer has acquired an option to sell substantially identical property at a fixed price, or
(k)
Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations to prevent the avoidance of the purposes of this section through split-ups, shell corporations, partnerships, or otherwise.