The Revenue Reconciliation Act of 1993 created Sec. 1202, which allows noncorporate investors in certain C corporation stock a 50% capital gains exclusion on sale or exchange. The investor must hold the stock for more than five years to qualify for Sec. 1202 treatment; the stock must have been acquired on or after Aug. 12, 1993. Therefore, the earliest point in time at which this tax benefit would be available to taxpayers is on or after Aug. 12, 1998. Practitioners now need to consider if Sec. 1202 applies to their clients’ transactions.
Sec. 1202 contains many obstacles in qualifying for the exclusion; more importantly, because it is not an elective exclusion, practitioners need to help clients understand when this provision applies. Much has been written over the last five years on the tax benefits derived from the ownership of Sec. 1202 stock. However, practitioners have begun to see how complicated it is to qualify for Sec. 1202 treatment. Additionally, the alternative minimum tax (AMT) has significantly affected the benefits that taxpayers derive from the Sec.1202 stock gain exclusion.
Sec. 1202 was enacted to encourage investment in small businesses and small-cap companies, and to increase the after-tax returns for investors. However, it appears the benefits of Sec. 1202 are diminishing, as capital gains rates have been reduced and more taxpayers are subject to the AMT.>>> READ MORE at: