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Old 10-28-2016, 11:44 AM
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26 U.S. Code ? 1202 - Partial exclusion for gain from certain small business stock

Something of a specialized question here.

In 12/2010, I converted my LLC (originally formed 9/2009) into a C Corp while raising capital from outside investors. It was suggested to me that my founders shares in this newly formed C. Corp would be excluded from capital gains based upon the 2010 Small Jobs Act and it's impact to 26 U.S. Code ? 1202 - "Partial exclusion for gain from certain small business stock". (https://www.law.cornell.edu/uscode/text/26/1202)

I've read and re-read the code but am not confident in my interpretation. Can anyone offer any expert insight?



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Old 10-28-2016, 05:19 PM
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Originally Posted by jcentrepreneur View Post
Something of a specialized question here.

In 12/2010, I converted my LLC (originally formed 9/2009) into a C Corp while raising capital from outside investors. It was suggested to me that my founders shares in this newly formed C. Corp would be excluded from capital gains based upon the 2010 Small Jobs Act and it's impact to 26 U.S. Code ? 1202 - "Partial exclusion for gain from certain small business stock". (https://www.law.cornell.edu/uscode/text/26/1202)

I've read and re-read the code but am not confident in my interpretation. Can anyone offer any expert insight?
For taxpayers other than corps, Sec. 1202 excludes from gross income at least 50% of the gain recognized on the sale or exchange of qualified small business stock held more than 5 years;for qualifying stock acquired after Feb. 17, 2009, and on or before Sept. 27, 2010, the exclusion percentage is 75%, and for qualifying stock acquired after Sept. 27, 2010, and before Jan. 1, 2014, the exclusion percentage is 100%. The amount of the exclusion is 60% in the case of the sale or exchange of certain empowerment zone stock that is acquired after Dec. 21, 2000, and sold before 2015.

NOTE: Section 1202 of the TAX LAW provided a 50% exclusion from income of gains on the sale of stock of a qualifying small business held by an investor for more than 5 years. In recent years, this exclusion amount has been increased to 75% and then to 100%, but these higher exclusion rates have only been extended in short intervals. Now, thanks to the Protecting Americans from Tax Hikes Act, gains on qualifying small business stock obtained any time after Dec. 31, 2014 and onward are eligible for the 100% exclusion.



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Old 10-28-2016, 05:23 PM
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Thanks for your insight. Can you offer any guidance on what the whether the C-Corp founders stock issued in exchange for my LLC equity would be considered to have been acquired upon issuance of the C-Corp stock or upon filing of the original LLC?



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Old 10-28-2016, 06:50 PM
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Originally Posted by jcentrepreneur View Post
Thanks for your insight. Can you offer any guidance on what the whether the C-Corp founders stock issued in exchange for my LLC equity would be considered to have been acquired upon issuance of the C-Corp stock or upon filing of the original LLC?
I GUESS it depends; In assets over conversion, your LLC transfers its assets / liabilities "over" to the new C corp, then , the corp issues its stock to the LLC, the LLC transfers the stock to the LLC members in proportion to their LLC capital interests, then the LLC dissolves. In assets up conversion. Your LLC distributes its assets and transfers it liabilities down to its members in proportion to their capital interests, the LLC dissolves, and then the members transfer their individual share of received assets and liabilities up to the new C corp in return for a proportionate share of its stock. In interests over conversion, your LLC members transfer their LLC capital interests over to the new corp in return for a proportionate amount of corporate stock, and then the LLC dissolves.Each of these conversion methods can have a different effect on the C corp's tax basis and holding period in the assets it receives. Further, LLC owners can end up with a different tax basis in their corporate stock, and each can end up with a different immediate tax result depending on the conversion method used. For instance, an owner may have to pay taxes at the time of the conversion.



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