Qualified Small Business Stock Tax Free Transfer – Paul Gaulkin CPA

Small business front of storeThere are many ways that qualified small business stock can be acquired that is not through original issuance. These include, gifts, transfers at death, transfers from a partnership, corporate reorganizations, stock conversions, options, warrants, or as convertible debt. There are certain transfers that warrant tax free treatment from the IRS. These include transfers by gift, death, and reorganization.

Transfer by Gift or Death

In the event of a transfer of qualified small business stock by gift or at death, the transferee is treated as having acquired that stock in the same manner as the transferor and is viewed as having held the stock during the period it was held by the transferor.

This rule is also applied where a partnership transfers stock to a partner provided the partner could have excluded gains allocated to the individual were the partnership to have sold instead of distributed the stock. This is determined without regard for the five year holding period requirement.

This means that this type of transfer will not be taxed to the beneficiary of the qualified small business stock after the gift or death has occurred.

Transfer by Reorganization

In the event of a Section 351 exchange or a tax free reorganization, where qualified small business stock is exchanged for other stock, the stock received will be treated as qualified small business stock, as of the date the exchanged stock was acquired.

This applies for a Section 351 exchange if immediately following the exchange the corporation to which the stock is transferred is in control. Control is generally measured by evaluating whether the corporation to which the stock was transferred passes an 80% stock ownership test.

Upon selling the newly acquired stock, gain eligible for the exclusion would be limited to the amount of gain that would have been recognized at the time of the exchange of the original qualified small business stock had that exchange been taxable. This limitation does not apply if the newly acquired stock issued by a corporation is a qualified small business at the time of issuance.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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