In 2012, ABC Corp raised $20 million in funding with an investor leading the round with a $5 million investment. The newly issued stock qualified as QSBS. Three years later the ABC Corp was acquired under a Section 351(a) tax-free stock exchange transaction. The acquirer exchanged newly issued non-QSBS for 100% of the stock in ABC Corp with a value of 2x the value the investors paid for their stock in ABC Corp. Therefore the lead investor received $10 million worth of non-QSBS from the acquirer. After the lead investor held onto the stock for two more years to meet the five year holding period, he sold the stock for $15 million. Since the stock received was non-QSBS, the total QSBS tax exclusion would equal the built-in gain at the time of the exchange of $5 million ($5 million x 2) and the taxable gains would be the $5 million earned over the two years post Section 351 transaction.
Although the investor still has to pay taxes on the $5 million he saved $1.19 million ($5 million x 23.8%) in taxes from the Section 351 transaction.
More on the QSBS holding period
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
