Reducing the tax on QSBS sales.

• Position: Qualified small business stock

Tax professionals with clients who have or are about to sell their businesess should become familiar with Sec. 1202, which allows noncorporate investors to exclude up to 50% of the gain realized on the sale of qualified small business stock (QSBS) held for more than five years.

In order to be QSBS, such stock must be in a C corporation, originally issued after Aug. 10, 1993 and acquired by the taxpayer at original issue. In addition, the corporation must be a "qualified small business" as of the date of issuance and must meet "active business" requirements during the taxpayer's holding period of the stock.

The requirement that the stock be acquired at original issue is fulfilled by the taxpayer acquiring the stock directly from the corporation, through an underwriter in exchange for money or other property (not including stock) or as compensation for services provided to the corporation. Stock acquired by a partner from his partnership is also regarded as acquired at original issue if, at the time of the transfer to the partner, the stock was QSBS in the partnership's hands and the partner held his partnership interest at the time the partnership acquired the stock and at all times until the partnership disposed of the stock. This enables stock distributed by venture capital funds to potentially qualify as Sec. 1202 stock.

The corporation will be considered a qualified small business if it is a domestic C corporation whose aggregate gross assets at all times on or after Aug. 10,1993, before the stock issuance and immediately after the stock issuance, did not exceed $50 million. "Aggregate gross assets" include cash plus the adjusted bases of other property held by the corporation.

The active-business requirements for the corporation are generally two: (1) the corporation must use at least 80% of the value of its assets in the active conduct of at least one qualified trade or business and (2) the corporation must be an "eligible corporation." A "qualified trade or business" is any trade or business other than a trade or business involving the performance of services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services; any banking, insurance, financing, leasing, investing or similar business; any farming business; any business involving the production or extraction of oil, gas and other natural deposits; and any business of operating a...