Section 1202

Section 1202 of the Internal Revenue Code (“IRC”) provides a federal income tax exclusion for non-corporate taxpayers’ capital gains from certain small business stock. The carveout excludes up to the greater of $10 million or 10 times the taxpayer’s adjusted basis in the stock. The taxpayer must hold the stock for more than 5 years and the business underlying the stock must be a domestic corporation with at least 80% of its asset value used in the active conduct of a “qualified trade or business.” The IRC defines a qualified trade or business in the negative, listing trades and businesses that do not qualify. Moreover, the underlying business must be deemed “small,” that is, it must have no more than $50 million of gross adjusted tax bases in assets.

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