Internal Revenue Code:Sec. 1202. Partial exclusion for gain from certain small business stock
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter P - Capital Gains and Losses
PART I - TREATMENT OF CAPITAL GAINS
Statute
Sec. 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''.
(B) Certain rules to apply
Rules similar to the rules of paragraphs (5) and (7) of
section 1400B(b) shall apply for purposes of this paragraph.
(C) Gain after 2014 not qualified
Subparagraph (A) shall not apply to gain attributable to
periods after December 31, 2014.
(D) Treatment of DC zone
The District of Columbia Enterprise Zone shall not be treated
as an empowerment zone for purposes of this paragraph.
(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 -
(A) as of the date of issuance, such corporation is a
qualified small business, and
(B) except as provided in subsections (f) and (h), such stock
is acquired by the taxpayer at its original issue (directly or
through an underwriter) -
(i) in exchange for money or other property (not including
stock), or
(ii) as compensation for services provided to such
corporation (other than services performed as an underwriter
of such stock).
(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,
(B) the aggregate gross assets of such corporation
immediately after the issuance (determined by taking into
account amounts received in the issuance) do not exceed
$50,000,000, and
(C) such corporation agrees to submit such reports to the
Secretary and to shareholders as the Secretary may require to
carry out the purposes of this section.
(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 -
(i) ''more than 50 percent'' shall be substituted for ''at
least 80 percent'' each place it appears in section
1563(a)(1), and
(ii) section 1563(a)(4) shall not apply.
(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 -
(A) at least 80 percent (by value) of the assets of such
corporation are used by such corporation in the active conduct
of 1 or more qualified trades or businesses, and
(B) such corporation is an eligible corporation.
(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 -
(A) start-up activities described in section 195(c)(1)(A),
(B) activities resulting in the payment or incurring of
expenditures which may be treated as research and experimental
expenditures under section 174, or
(C) activities with respect to in-house research expenses
described in section 41(b)(4),
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,
(B) any banking, insurance, financing, leasing, investing, or
similar business,
(C) any farming business (including the business of raising
or harvesting trees),
(D) any business involving the production or extraction of
products of a character with respect to which a deduction is
allowable under section 613 or 613A, and
(E) any business of operating a hotel, motel, restaurant, or
similar business.
(4) Eligible corporation
For purposes of this subsection, the term ''eligible
corporation'' means any domestic corporation; except that such
term shall not include -
(A) a DISC or former DISC,
(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,
(C) a regulated investment company, real estate investment
trust, or REMIC, and
(D) a cooperative.
(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)).
(C) Subsidiary
For purposes of this paragraph, a corporation shall be
considered a subsidiary if the parent owns more than 50 percent
of the combined voting power of all classes of stock entitled
to vote, or more than 50 percent in value of all outstanding
stock, of such corporation.
(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.
(8) Computer software royalties
For purposes of paragraph (1), rights to computer software
which produces active business computer software royalties
(within the meaning of section 543(d)(1)) shall be treated as an
asset used in the active conduct of a 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 -
(1) the stock so acquired shall be treated as qualified small
business stock in the hands of the taxpayer, and
(2) the stock so acquired shall be treated as having been held
during the period during which the converted stock was held.
(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) -
(A) such amount shall be treated as gain described in
subsection (a), and
(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.
(4) Pass-thru entity
For purposes of this subsection, the term ''pass-thru entity''
means -
(A) any partnership,
(B) any S corporation,
(C) any regulated investment company, and
(D) any common trust fund.
(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 -
(A) having acquired such stock in the same manner as the
transferor, and
(B) having held such stock during any continuous period
immediately preceding the transfer during which it was held (or
treated as held under this subsection) by the transferor.
(2) Description of transfers
A transfer is described in this subsection if such transfer is
-
(A) by gift,
(B) at death, or
(C) from a partnership to a partner of stock with respect to
which requirements similar to the requirements of subsection
(g) are met at the time of the transfer (without regard to the
5-year holding period requirement).
(3) Certain rules made applicable
Rules similar to the rules of section 1244(d)(2) shall apply
for purposes of this section.
(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 -
(A) such stock shall be treated as having been acquired by
the taxpayer on the date of such exchange, and
(B) the basis of such stock in the hands of the taxpayer
shall in no event be less than the fair market value of the
property exchanged.
(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
-
(A) such stock was held by the taxpayer for more than 5 years
as of the first day on which there was such a short position,
and
(B) the taxpayer elects to recognize gain as if such stock
were sold on such first day for its fair market value.
(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 -
(A) the taxpayer has made a short sale of substantially
identical property,
(B) the taxpayer has acquired an option to sell substantially
identical property at a fixed price, or
(C) to the extent provided in regulations, the taxpayer has
entered into any other transaction which substantially reduces
the risk of loss from holding such qualified small business
stock.
For purposes of the preceding sentence, any reference to the
taxpayer shall be treated as including a reference to any person
who is related (within the meaning of section 267(b) or 707(b))
to the taxpayer.
(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.
Sources
(Added Pub. L. 103-66, title XIII, Sec. 13113(a), Aug. 10, 1993,
107 Stat. 422; amended Pub. L. 104-188, title I, Sec. 1621(b)(7),
Aug. 20, 1996, 110 Stat. 1867; Pub. L. 106-554, Sec. 1(a)(7) (title
I, Sec. 117(a), (b)(2)), Dec. 21, 2000, 114 Stat. 2763, 2763A-604.)
References in Text
REFERENCES IN TEXT
The date of the enactment of this paragraph, referred to in
subsec. (a)(2)(A), is the date of enactment of Pub. L. 106-554,
which was approved Dec. 21, 2000.
The date of the enactment of the Revenue Reconciliation Act of
1993, referred to in subsecs. (c)(1) and (d)(1)(A), is the date of
enactment of Pub. L. 103-66, which was approved Aug. 10, 1993.
Section 301(d) of the Small Business Investment Act of 1958,
referred to in subsec. (c)(2)(B)(ii), was classified to section
681(d) of Title 15, Commerce and Trade, prior to repeal by Pub. L.
104-208, div. D, title II, Sec. 208(b)(3)(A), Sept. 30, 1996, 110
Stat. 3009-742.
Miscellaneous
PRIOR PROVISIONS
A prior section 1202, acts Aug. 16, 1954, ch. 736, 68A Stat. 320;
Oct. 4, 1976, Pub. L. 94-455, title XIX, Sec. 1901(b)(33)(M), 90
Stat. 1802; Nov. 6, 1978, Pub. L. 95-600, title IV, Sec. 402(a), 92
Stat. 2867; Apr. 1, 1980, Pub. L. 96-222, title I, Sec.
104(a)(2)(A), 94 Stat. 214, authorized deduction for capital gains,
prior to repeal by Pub. L. 99-514, title III, Sec. 301(a), (c),
Oct. 22, 1986, 100 Stat. 2216, 2218, applicable to taxable years
beginning after Dec. 31, 1986.
AMENDMENTS
2004 - Subsec.835(b)(9),Pub.L.108-357, amended Sec.1202(e)(4)
(C) by deleting reference to a "FASIT".
2000 - Pub. L. 106-554, Sec. 1(a)(7) (title I, Sec. 117(b)(2)),
substituted ''Partial'' for ''50-percent'' in section catchline.
Subsec. (a). Pub. L. 106-554, Sec. 1(a)(7) (title I, Sec.
117(a)), amended heading and text of subsec. (a) generally. Prior
to amendment, text read as follows: ''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.''
1996 - Subsec. (e)(4)(C). Pub. L. 104-188 substituted ''REMIC, or
FASIT'' for ''or REMIC''.
EFFECTIVE DATE OF 2000 AMENDMENT
Amendment by Pub. L. 106-554 applicable to stock acquired after
Dec. 21, 2000, see section 1(a)(7) (title I, Sec. 117(c)) of Pub.
L. 106-554, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by Pub. L. 104-188 effective Sept. 1, 1997, see section
1621(d) of Pub. L. 104-188, set out as a note under section 26 of
this title.
EFFECTIVE DATE
Section applicable to stock issued after Aug. 10, 1993, see
section 13113(e) of Pub. L. 103-66, set out as an Effective Date of
1993 Amendment note under section 53 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 1, 45D, 57, 172, 642,
643, 691, 871, 1044, 1045, 1223, 1397B, 1400B, 1400F, 6652 of this
title.
