[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Rules and Regulations]
[Pages 68165-68167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33987]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8749]
RIN 1545-AU34
Qualified Small Business Stock
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the 50-
percent exclusion for gain from certain small business stock. The final
regulations reflect changes to the law made by the Omnibus Budget
Reconciliation Act of 1993 and provide guidance to the issuers and
owners of the stock of certain small businesses.
DATES: This regulation is effective December 31, 1997. For dates of
applicability of these regulations, see Sec. 1.1202-2(e).
FOR FURTHER INFORMATION CONTACT: Catherine A. Prohofsky of the Office
of the Assistant Chief Counsel (Income Tax and Accounting) at 202-622-
4930 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
Section 1202 of the Internal Revenue Code allows a taxpayer (other
than a corporation) to exclude 50 percent of certain gain from the sale
or exchange of qualified small business stock held for more than 5
years. This document contains amendments to the Income Tax Regulations
(26 CFR part 1) that provide guidance relating to the effect of
redemptions on the availability of this exclusion.
On June 6, 1996, the Federal Register published a notice of
proposed rulemaking (IA-26-94), 61 FR 28821, relating to the effect of
certain redemptions on the 50-percent exclusion of gain from the sale
or exchange of qualified small business stock under section 1202. The
proposed regulations provide that these redemptions are disregarded in
determining whether the anti-churning rules of section 1202(c) are
violated.
Four comments responding to this notice were received. A public
hearing was held on October 3, 1996. After consideration of the
comments, the proposed regulations under section 1202 are adopted as
modified by this Treasury decision.
[[Page 68166]]
Summary of Comments and Modifications
The notice of proposed rulemaking requested comments on how to
determine when an independent contractor has terminated services. One
commentator suggested that the determination of whether services of an
independent contractor were terminated should be based on all the facts
and circumstances, with termination conclusively presumed if no further
services were provided for six months. The IRS and Treasury Department
have not adopted this suggestion, but are continuing to study this
issue and request additional comments.
Commentators suggested an additional exception for all redemptions
occurring in the ordinary course of business or for legitimate business
reasons. The final regulations do not incorporate this suggestion. The
exceptions in the final regulations relate to redemptions that are
incident to certain events affecting a shareholder. Because of the
extraordinary nature of these events and the fact that they are
generally not within the control of the issuing corporation, the
exceptions are unlikely to lead to avoidance of the requirement that
qualified small business stock be purchased at original issue. The IRS
and Treasury are concerned, however, that a much broader exception for
redemptions that arise out of the ordinary business needs and purposes
of the issuing corporation, and are not incident to extraordinary
events affecting its shareholders, would be much more likely to
undermine the original issue requirement.
Two commentators requested that the final regulations be effective
for stock purchases by an issuing corporation at any time after August
10, 1993. The effective date has been modified in response to this
suggestion. The final regulations will apply to stock issued after
August 10, 1993. Thus, regardless of the date on which a redemption
occurs (or on which the redeemed stock was issued) the redemption is
treated as provided in the final regulations for purposes of
determining whether stock issued after August 10, 1993, is qualified
small business stock.
The Chief Counsel for Advocacy of the Small Business Administration
recommended the inclusion of an exception for redemptions occurring in
connection with the divorce of a shareholder. This suggestion has been
adopted. The final regulations provide that redemptions of stock
occurring incident to the divorce of a shareholder are disregarded in
determining whether redemptions exceed de minimis amounts.
The Chief Counsel for Advocacy also requested that the IRS and
Treasury Department analyze the current use of section 1202. No
exclusion under section 1202 can be claimed until 1998 because stock
must be issued after August 10, 1993, to be qualified small business
stock, and must be held for more than 5 years to qualify for the
exclusion. Thus, the available tax return data do not provide the
information necessary to analyze the current use of section 1202.
Minor clarifying changes in the regulatory language have also been
made.
Special Analyses
It has been determined that this Treasury Decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C chapter 5)
does not apply to these regulations, and because these regulations do
not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of
proposed rulemaking preceding these final regulations was submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Catherine A.
Prohofsky, Office of the Assistant Chief Counsel (Income Tax and
Accounting). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.1202-2 is also issued
under 26 U.S.C. 1202(k). * * *
Par. 2. Sections 1.1202-0 and 1.1202-2 are added to read as
follows:
Sec. 1.1202-0 Table of contents.
This section lists the major captions that appear in the
regulations under Sec. 1.1202-2.
Sec. 1.1202-2 Qualified small business stock; effect of
redemptions.
(a) Redemptions from taxpayer or related person.
(1) In general.
(2) De minimis amount.
(b) Significant redemptions.
(1) In general.
(2) De minimis amount.
(c) Transfers by shareholders in connection with the performance of
services not treated as purchases.
(d) Exceptions for termination of services, death, disability or
mental incompetency, or divorce.
(1) Termination of services.
(2) Death.
(3) Disability or mental incompetency.
(4) Divorce.
(e) Effective date.
Sec. 1.1202-2 Qualified small business stock; effect of redemptions.
(a) Redemptions from taxpayer or related person--(1) In general.
Stock acquired by a taxpayer is not qualified small business stock if,
in one or more purchases during the 4-year period beginning on the date
2 years before the issuance of the stock, the issuing corporation
purchases (directly or indirectly) more than a de minimis amount of its
stock from the taxpayer or from a person related (within the meaning of
section 267(b) or 707(b)) to the taxpayer.
(2) De minimis amount. For purposes of this paragraph (a), stock
acquired from the taxpayer or a related person exceeds a de minimis
amount only if the aggregate amount paid for the stock exceeds $10,000
and more than 2 percent of the stock held by the taxpayer and related
persons is acquired. The following rules apply for purposes of
determining whether the 2-percent limit is exceeded. The percentage of
stock acquired in any single purchase is determined by dividing the
stock's value (as of the time of purchase) by the value (as of the time
of purchase) of all stock held (directly or indirectly) by the taxpayer
and related persons immediately before the purchase. The percentage of
stock acquired in multiple purchases is the sum of the percentages
determined for each separate purchase.
(b) Significant redemptions--(1) In general. Stock is not qualified
small business stock if, in one or more purchases during the 2-year
period beginning on the date 1 year before the issuance of the stock,
the issuing corporation purchases more than a de minimis amount of its
stock and the purchased stock has an aggregate value
[[Page 68167]]
(as of the time of the respective purchases) exceeding 5 percent of the
aggregate value of all of the issuing corporation's stock as of the
beginning of such 2-year period.
(2) De minimis amount. For purposes of this paragraph (b), stock
exceeds a de minimis amount only if the aggregate amount paid for the
stock exceeds $10,000 and more than 2 percent of all outstanding stock
is purchased. The following rules apply for purposes of determining
whether the 2-percent limit is exceeded. The percentage of the stock
acquired in any single purchase is determined by dividing the stock's
value (as of the time of purchase) by the value (as of the time of
purchase) of all stock outstanding immediately before the purchase. The
percentage of stock acquired in multiple purchases is the sum of the
percentages determined for each separate purchase.
(c) Transfers by shareholders in connection with the performance of
services not treated as purchases. A transfer of stock by a shareholder
to an employee or independent contractor (or to a beneficiary of an
employee or independent contractor) is not treated as a purchase of the
stock by the issuing corporation for purposes of this section even if
the stock is treated as having first been transferred to the
corporation under Sec. 1.83-6(d)(1) (relating to transfers by
shareholders to employees or independent contractors).
(d) Exceptions for termination of services, death, disability or
mental incompetency, or divorce. A stock purchase is disregarded if the
stock is acquired in the following circumstances:
(1) Termination of services--(i) Employees and directors. The stock
was acquired by the seller in connection with the performance of
services as an employee or director and the stock is purchased from the
seller incident to the seller's retirement or other bona fide
termination of such services;
(ii) Independent contractors. [Reserved];
(2) Death. Prior to a decedent's death, the stock (or an option to
acquire the stock) was held by the decedent or the decedent's spouse
(or by both), by the decedent and joint tenant, or by a trust revocable
by the decedent or the decedent's spouse (or by both), and--
(i) The stock is purchased from the decedent's estate, beneficiary
(whether by bequest or lifetime gift), heir, surviving joint tenant, or
surviving spouse, or from a trust established by the decedent or
decedent's spouse; and
(ii) The stock is purchased within 3 years and 9 months from the
date of the decedent's death;
(3) Disability or mental incompetency. The stock is purchased
incident to the disability or mental incompetency of the selling
shareholder; or
(4) Divorce. The stock is purchased incident to the divorce (within
the meaning of section 1041(c)) of the selling shareholder.
(e) Effective date. This section applies to stock issued after
August 10, 1993.
Approved: December 22, 1997.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-33987 Filed 12-30-97; 8:45 am]
BILLING CODE 4830-01-U