The term “substantially all” is used several times in the QSBS criteria per Section 1202, but how long is “substantially all”, could it be a simple majority of the time held, or does it need to be longer?
While “substantially all” is not defined in terms of a specified time period, past interpretations by the US tax court may help demystify what “substantially all” refers to. There have been numerous legal proceedings where the term “substantially all” has been used with the conclusions ranging from as low as 51% to as high as 90%, for example:
- Real Estate Opportunity Zone regulations refer to “substantially all” of an eligible entity’s holding period for owned or leased tangible property as 90% of the holding period.1
- For certain research expenditures to qualify for tax purposes, “substantially all” of the activities must constitute elements of a process of experimentation that relates to a qualified purpose. Here, substantially all is defined as 80% of the activities.2
- Sale of “substantially all” of the assets of a business requires majority (i.e. 51%) approval from shareholders.3
While Section 1202 does not define “substantially all”, in the context of QSBS these cases demonstrate how the term, “substantially all” has been used and interpreted in different ways. Given the current ambiguity in how “substantially all” relates to elements of QSBS, it is imperative to maintain documentation to substantiate your rationale for concluding that your stock and gains qualify for QSBS tax treatment.
More on the Active Business Requirement
2 Treasury Regulation Section 1.41-4(a)(6)
3 Katz v. Bregman, 431 A.2d 1274 (Del. Ch. 1981)
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.
