Rollover Gain with No Pain

Rollover Gain with No Pain

By David DuWaldt

July 15, 2008

Many taxpayers have heard about or even utilized the 60-day Individual Retirement Account rollover rule at one time or another. Did you know there is a 60-day rollover rule in connection with the sale of qualified small business stock (“QSB stock”)?   Essentially, within a 60-day period and if other requirements are met (e.g., the stock was held for at least 6 months), the taxpayer can purchase other QSB stock in order to defer all or part of the gain associated with a QSB stock sale.

In 1997, as part of the Taxpayer Relief Act of 1997, a new section 1045 was added to the Internal Revenue Code that provides for the rollover of gain from the sale of QSB stock. In the following year, the IRS Restructuring and Reform Act of 1998 provided some amendments to section 1045 including the expansion of the gain rollover treatment to additional taxpayers, other than corporations.

Just last August 2007 (with corrections made in October 2007), final regulations were issued by the Treasury Department with respect to the application of section 1045 to partnerships and these regulations include some interesting examples.

So what is QSB stock? Section 1202(c) of the Internal Revenue Code provides us with the definition, which includes:

  • It is stock of a C corporation (i.e., not an S corporation).
  • The stock was originally issued after August 10, 1993.
  • The stock was acquired at its original issue in exchange for money, property other than stock, or compensation for services provided.
  • The corporation must not have more than $50 million in gross assets (measured by adjusted basis) at any time on or after the original issue date of the stock.
  • The corporation did not redeem more than 5% of the outstanding stock over the periods described in section 1202(c)(3).
  • At least 80% of the assets of the corporation must be used in the active conduct of a qualified trade or business as described in section 1202(e)(3).

Under the appropriate facts and circumstances, the section 1045 rollover of QSB stock provides another useful strategy for deferring income taxes. As with all significant transactions, you should seek advice from a qualified tax professional in connection with any contemplated business sale.