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Webinar Transcript: “Qualifying as Qualified Small Business Stock (Section 1202)”

May 30, 2024

Webinar Transcript (5/30/2024): “Qualifying as Qualified Small Business Stock (Section 1202)”


Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact:


Presenter: Andrew S. Katzenberg, Partner, ArentFox Schiff LLP (Contact:



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Jonathan Shenkman: Good morning and welcome to the Park Bridge Wealth Management Spring Webinar Series. This program is entitled Qualifying as qualified Small Business Stock, section 12 0. 2.



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Jonathan Shenkman: As always. My name is Jonathan Shankman. I'm the president and chief investment officer of Park Bridge wealth management. In that role I serve in a fiduciary capacity to help my clients achieve their financial objectives.



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Jonathan Shenkman: The goal of my programs is to bring professionals together to help them better serve their clients. This is done by educating attendees on the latest topics and wealth planning and by encouraging collaboration between a client's attorney, Cpa. And Financial Advisor, where appropriate my practice folks. I'm working with high net, with families, businesses, and not for profits. I manage individual investment portfolios, trust accounts, corporate retirement plans and endowment, sell my clients achieve their financial goals.



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Jonathan Shenkman: In addition to the 20 or so events I run every year. I also do a fair amount of writing on the topics of investing and financial planning, and you created. Read my work in a variety periodicals, including Barron, Cnbc. Forbes, Kiplinger, the Wall Street Journal, and Trust in the States Magazine to name just a few.



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Jonathan Shenkman: You could see all my work on my website at Parkbridge, Wealthcom, forward slash articles, or by following me on social media at Jonathan on money. Additionally, you could check out my weekly, podcast which is also called Jonathan on money, and you could listen to that in apple spotify or wherever you get your podcast



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Jonathan Shenkman: today, we're privileged here from Andrew Katzenberg, who's a partner at Aaron's Fox shift based in Washington, DC. In New York city.



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Jonathan Shenkman: Andy focuses on wealth, transfer, planning and preservation. Multi-generational planning, estate and trust administration, nonprofit and tax exempt organizations and charitable giving among this high net worth clients are hedge fund and private equity managers, business owners, art dealers and athletes.



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Jonathan Shenkman: He also represents clients informing and managing nonprofit tax exempt organizations, including public charities, private foundations and private operating foundations, and acquiring and retaining their tax exempt status, and he has authored numerous articles related into his field, and is a nation recognized lecturer, and he also serves as an adjunct young professor at the University of Baltimore Law school graduate master's program



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Jonathan Shenkman: today. Andy will be speaking about qualifying as qualified small business stock. Section 1,202. And with that introduction I'll now turn the program over to Andy.



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Andrew S. Katzenberg: Thank you, Jonathan. I appreciate it very much, and thank you everyone for today for joining us this 8 30 am. So I'm gonna skip over. You all have my slides. But we're gonna skip over the the State.



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Andrew S. Katzenberg: you know, tax environment. I assume I only have, you know, 2530 min, and I'll I know everyone hopefully is aware that the exemption level is, you know, 13.6 1 million. You know, a couple. A person so roughly 27 million, a couple 18,000 is the annual exclusion currently



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Andrew S. Katzenberg: each State also may or may not have its own inheritance or estate tax. That was the Federal, you know. New York, for example. Has, you know, close to a 7 million dollar exemption with a cliff. New York doesn't have gift tax. Connecticut has a gift tax and a State tax as well. It's currently coupled with the Federal new Jersey has neither. At this point they got rid of theirs about 6 or 7 years ago, and it stayed that way. So



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Andrew S. Katzenberg: that's the general. You know, estate planning environment. When it comes to just estate tax. However, when we shift our gears over looking into something like qualified small business stock. This is an income tax play.



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Andrew S. Katzenberg: which I know. If you're a lawyer in the room or Cpa, where clients are looking for value for us to provide is well, great, the State tax on dead. But what can you do for me today? And that's what 12 0 2 stock is able to help with if you have it, and that's the question about do you meet this exception? Now? The history of it is, it was, why was it enacted? It was the Clinton Administration that enacted in 1993. It's to encourage growth, encourage growth and startups by giving them kind of this olive branch that if they



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Andrew S. Katzenberg: have a unicorn in some fashion, you know whether big or small, they're gonna get this benefit



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Andrew S. Katzenberg: and the main industry that originally been from this was the tech industry. However.



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Andrew S. Katzenberg: we haven't seen any taxpayers take as much advantage of this section in the past as we are starting to see now, partially because one of the requirements we'll talk about, you know. It's a simple one. It has to be a secret.



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Andrew S. Katzenberg: And in the past see corps had a barrier of their tax structure that they are at the highest tax rate. They were a 35% tax rate plus the dividend rate of 23.8% when the money came out. So between those 2 taxes for talking, you know, close to 60 of a tax on your money. First, st you were in Llc. That's a pass through being taxed at 35 or 37 was a much better, you know, value, especially if you weren't sure if you were gonna qualify or depending how much income you were generating.



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Andrew S. Katzenberg: So because of that, there was actually a discouragement at the time to really have a lot of industries use utilizing this and setting on themselves up as C corps, because we often see



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Andrew S. Katzenberg: a lot of our clients start off. Is Llc pass throughs?



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Andrew S. Katzenberg: It's also escorp to also do. Do not qualify for this in that same way. However, but in 2,017, when the Tax New tax act came into effect and lower the corporate tax rate to 21%.



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Andrew S. Katzenberg: Then that barrier for entry became that much more attainable, because now that you had those 2 combined. It was a little lower. We're around the 40% tax rate, that's call it by comparison. And yes, it's a little more expensive, but for the gain you might get on the other side, it's starting to become worth it, and more clients are willing to either start a C corps or convert over from an Llc structure to a C Corp structure. Knowing that they think that you know their company is going to start to



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Andrew S. Katzenberg: turn into a qualified small business sale event, and that'd be much greater in value than maybe the little bit of tax that you might give up on the front end.



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Andrew S. Katzenberg: So we've seen more of it. And because we see more, we're getting a little more of an understanding of what we can and can't do. And that's what's interesting. This has been around on the books for 30 years yet. There's very little case, law or regulation or guidance



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Andrew S. Katzenberg: around qualified small business stock. We've only seen a a littering of plrs that have started to come out specifically in the area of you know. Do you meet, you know. Are you a qualified business or not? You know it, depending on the exceptions which we'll get to later on. But



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Andrew S. Katzenberg: otherwise, you know it's really the code that you have 12 0 2, that you just have to read it word for word, and whatever it says is the law. Don't forget. This is a legislative grace that they, you know they're giving you that they're allowing you to take this deduction.



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Andrew S. Katzenberg: So you have to be aware, and I apologize if my head or face was in the screen the whole time I was talking with the slide in the background. But you have to realize that.



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Andrew S. Katzenberg: you know pigs get that hogs get slaughtered. If the word says, direct or indirect, in the code, zoom direct is indirect, is all encompassing if the exception to the rule you know we talk about is we're talking about gifting or redemptions. 3 0 4. If that those are the exclusions.



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Andrew S. Katzenberg: They're exclusive.



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Andrew S. Katzenberg: Don't think there is more there that well, it didn't tell me I couldn't do this. It didn't say I could. It didn't say I couldn't take the position. You that can't.



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Andrew S. Katzenberg: If you're not covered, then it's not a good place to be for you or your client.



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Andrew S. Katzenberg: never going to tell a client that they can't do something and not be sure that I'm right or wrong, especially when it comes to a 10 million dollar, you know tax burden that's covered with penalties and interest, you know, lagging, and 2 years later, you know, they lose their entire 10 million savings. They thought they had.



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Andrew S. Katzenberg: So with that.



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Andrew S. Katzenberg: what is the requirements, or what is this qualified small business stock?



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Andrew S. Katzenberg: What it is is that it excludes between 50 and a hundred percent of the capital gains on either the 1st 10 million of gains or 10 times the base of the stock. Now usually



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Andrew S. Katzenberg: you would end up with the 10 million being the most common place to be most startups. The the founders they're putting in $10,000 something minuscule. It's really their their sweat equity is what they have. Their brain power is what's creating it. So they they're gonna be the 10 million exemption limit is what they're going for.



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Andrew S. Katzenberg: Sometimes a secondary buyer, you know, in a private equity company investor that's putting seed money as this thing's growing, who buys in for 2 million dollars and gets, you know, new issuance of stock from the company.



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Andrew S. Katzenberg: They, on the other hand, who also may have qualified small business stock.



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Andrew S. Katzenberg: they might have, you know, stock that has a basis like, I said, of 2 million dollars. So they have a 20 million dollar qualified small business stock exemption rather than 10. That's the category that falls there. Then the last piece is okay.



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Andrew S. Katzenberg: You mentioned it was between 50 and 100% of the capital gains on that That's again used for all my examples will be that 1st 10 million there is a range there.



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Andrew S. Katzenberg: Anything that is Pre, August 11,993 is not qualified. Small business stock period doesn't qualify, and that's it. There's no more analysis that needs to be done.



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Andrew S. Katzenberg: If it's post that 1,993. Date is 50. If it was incorporated. Post August 11, th 1993, if it was incorporated post February 18, th 2,009, it moved up to 75 via the Obama Administration, and then they also did it again in September 28, 2,010



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Andrew S. Katzenberg: to 100% of that capital gain. Anything incorporated after that. September 2,010 date gets that full exemption. Now, one of the things you might be need to be aware is that for those companies that are from 1,993, and be before 2,010 to 1993, where there is some of the 10 million that isn't covered.



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Andrew S. Katzenberg: based on how the codes written. The piece that is subject to tax isn't subject to tax at the current capital gain rates. It's actually subject to tax at the old capital gain rates of, you know, special and special stock that it's



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Andrew S. Katzenberg: 20 a 28% rate a anything under that 10, not at the 23.3% that you would normally save when you get to the newer stock of after 2,010. Everything above the 10 million is gonna be at that rate. But everything that's below that that's taxable will be at that higher 28 rate. So be aware, when doing a calculation that you take that into account.



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Andrew S. Katzenberg: Also, you need to consider that state implications. Some States have mirroring statutes for qualified small business stock which allows the the seller to not only get a Federal exemption on that 10 million, but also a State exemption on the 10 million. Some States have no income tax, Nevada, Florida. So again, doesn't matter if they have it or not, it's still, it's a 0. Some States don't.



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Andrew S. Katzenberg: Some States don't have it so, as you might not be paying a Federal tax on your sale. But you're still paying actually the state tax of 6 to 10, whatever it may be. So be aware of that. And and lastly.



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Andrew S. Katzenberg: now this is reported all in schedule d of the the clients. 10 40



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Andrew S. Katzenberg: So that's where it shows up. You'll it gets reported that there was a sale of, you know 15 million dollars, and then you get to say this 10 million is excluded



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Andrew S. Katzenberg: under 1,202 stock exception, and then it wipes it out, and you're left with the 5. And that's when you get taxed on. So that's what it does. Now.



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Andrew S. Katzenberg: what are the requirements that we're looking at here that are most important. So the seller must be, you know, a non-corporate taxpayer.



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Andrew S. Katzenberg: The stock must be held for more than 5 years.



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Andrew S. Katzenberg: There's no disqualifying redemptions. And it's actually a qualified small business. And so we're gonna break down each of those a little more in depth. And I think that's the the real focus of today's topic, because again, those all from 1st bloss look pretty simple, but they're not quite as they seem.



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Andrew S. Katzenberg: So first, st when it comes to non-corporate seller. This one's a half easy half. Not for 1st part.



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Andrew S. Katzenberg: This can't be a C. Corporation that can't be the selling entity. It has to be something else than a C. Corp. All right. So the seller, it can be an individual. It can be a trust.



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Andrew S. Katzenberg: it can be a partnership can be an Llc. It can be an Escorp. All those are fine. Okay? So that that's the simple piece of the equation. The harder part is that people aren't aware of



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Andrew S. Katzenberg: is that a pass through that you have? You have to help hold that for more than 5 years.



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Andrew S. Katzenberg: So the pastor has to hold for 5 years, and the taxpayer has to hold that interest in that pass through for that entire period. Okay, you can't be one of the things we don't want to see is like a batical company where? Oh, I have an insurance product, and I sell it to them. They give me money. Then they go get the profits later, when the time comes. This isn't a play, you know, to kind of enrich everyone out there. It's really a play for the original person who did the deal, who helped with the investment to help grow the business.



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Andrew S. Katzenberg: So if you can't go buy something that's good about to mature at year 4, or you're the founder. And you're like, I don't have time to wait. So I'm gonna sell it to this company and this company's gonna take it from me, and I'm gonna get pay, you know, 75 cents on the dollar. So I need the money now, and they'll get the balance, you know, in a year and a half, when they actually sell the company when it's 5 years matured.



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Andrew S. Katzenberg: That doesn't work. We're not allowed to do that again. It's not designed we don't want to be. This isn't to be abused. So you just gotta be aware of that. Another thing with the pass through is that.



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Andrew S. Katzenberg: And this goes just to transfers, because you really can't transfer this stuff if you drop if you take qualified small business stock and you drop it into a a partnership, or you know, an Llc.



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Andrew S. Katzenberg: That that terminates its Q Sbs treatment.



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Andrew S. Katzenberg: So you can't do that if you think you can it just it doesn't work. It's not allowed. It's not okay. So you know, once whoever's holding it from the start is the person who needs to be the one that holds it after that 5 year period to be the seller.



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Andrew S. Katzenberg: Now, next up



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Andrew S. Katzenberg: you have. And I switch the order. I apologize would is qualifying, disqualifying redemptions now with disqualfer redemption. Remember the goal here. And someone actually asked me a question which I will email back. I promise you. I think it was a Howard. I'll email back to you. Someone asked me about redemptions, and you know the difference between indirect and and kind of the wording of it. The reality is



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Andrew S. Katzenberg: The goal is to encourage investment into this company and the use. When you look at what the qualified business is that the money has to stay in the business to be used for the business.



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Andrew S. Katzenberg: The goal is not to see money come out, so when money starts coming out. That's going the wrong way. And that's, you know, saying you're not following the rules of Qsp. Rules that we will, that you're trying to keep this investment. Keep this product creating something you're taking money out. That means you're helping yourself and not the product.



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Andrew S. Katzenberg: So there are 3 places where redemption there are prompts. 1st is a related party redemption.



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Andrew S. Katzenberg: It has a 4 year window 2 years before, the issuance, and 2 years after the issuance is is where we're looking again. This is a redemption, directly or indirectly, indirectly. Think of it as expanses of the expansive as you want to think it, anyway. This is, you know, to don't. If you think oh, maybe even touches it, it's indirect. It's whether it's through another layer of Llc's or corporations or family members. However, it is



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Andrew S. Katzenberg: all that counts. If there's redemptions related part redemption, it's a problem there's a there is a diminished de minimis exception to that. If it's



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Andrew S. Katzenberg: over, it has to be over 10 k. Value and more than 2% of the stock has to come back. So if it's below that number you fall, the diminished hit de minimis exception applies, and it wouldn't just be disqualified for the related party redemption. Same applies for significant redemptions. So again, but this is a 2 year window looking one year before, one year after again. This is nothing to do with, you know, family members or related entities. This is 3rd party that you're



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Andrew S. Katzenberg: selling out to some 3rd party the stock that you have



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Andrew S. Katzenberg: And so this redemption is a 5% of the aggregate value of all stock at the beginning of the period. That's what's using. But when you're looking at this you're for the purchase value is the date used against the start value.



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Andrew S. Katzenberg: So again, if the start value of the stock at the very inception, you know, was a hundred dollars, and the purchase value, you know, is is, you know.



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Andrew S. Katzenberg: attend a thousand dollars again. It's going to make it very easy, quickly, based on that growth to go over that 5% hybrid value. So again, it's discouraging. You know, the redemption. And last is a 3 0, 4, a redemption



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Andrew S. Katzenberg: this is a merger of 2 companies controlled by the same people. It's deemed to stop redemption when you do this merger. They're not. Essentially they're not gonna kind of let you play around with the rules to kind of do this. So you gotta be careful there. If there is any kind of change in the structure of the entity. That's when an analysis needs to be looked at. You know we do get clients who come in and ask us all the time.



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Andrew S. Katzenberg: Am I qualified? Small business stock? And when we look back and say, Well, what's your corporate history? What were you? Well, I was. Maybe I did a merger. That could screw this up, or I did. I was a an S. Corp. Then it became a CI was a C. Corp. Then I became an S. Corp. Then I became back to a C. Corp. And now I want to sell, and maybe that also messed up some time periods specifically the holding period maybe come into come into jeopardy.



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Andrew S. Katzenberg: Now, the next we want thing we want to talk about is the holding period. We talked about the basic. It's gotta have it for 5 years. Okay, that. That's the minimum line. Everyone starts with, everyone knows about now, if you convert from a C Corp into a C Corp from like an Llc. The data is the beginning of that holding period. So if you had the company



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Andrew S. Katzenberg: on day one, and then 3 years later, you convert it to a C. Corp, and then you get to Year 5. You're only 2 years in to your holding period, you know, doesn't count for that 1st 3 years doesn't work. Then, secondarily, again, the stock must be received for money or other property except stock, or as compensation. So you can't again swap it stock



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Andrew S. Katzenberg: then, then there's a tax free exchanges. This is where, when someone says, Okay, I have the this for 5 years. Am I able to move it in any way? And these are except exceptionally like



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Andrew S. Katzenberg: these are the exceptions to that ability to kind of transfer to some other party than the original issuing party.



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Andrew S. Katzenberg: So the 1st one is going to be, you know, a gift or request and in all these the transfer E is treated just like the transfer, or and takes the property in the same way that they had it. So if you had it for 4 years, and you give it to this person, they will also be at that 4 year window that they will take all the characteristics that you had when you gave it to them. So gift and the quests



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Andrew S. Katzenberg: they tack the holding period for the beneficiary. This is in a lot of other areas of the code makes sense. It's logical, especially in the sense. If you die. You have no control over. That is nothing to do with you. The fact that it had to go to the next party. That's okay. So that that's 1, those 2 or one exceptions which obviously makes sense. That's how you're able to do.



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Andrew S. Katzenberg: You know, later planning, I'll talk about for maybe a minute on stacking where you get to trust. Then there's distributions from a partnership. So if you're a partner of a partnership that's held the Qsp. You know, for 4 years, and as I talked about, you can't drop it down to the partnership.



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Andrew S. Katzenberg: and the person who owns the partnership has to hold that interest in 5 years since the inception that the partnership has been holding it.



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Andrew S. Katzenberg: If the partnership is going to dissolve, say year 4 and pushes up



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Andrew S. Katzenberg: doesn't even have to dissolve, but pushes up everything to the partners or a partner that person will take the continuing holding period, the transfer or transfer kind of basis



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Andrew S. Katzenberg: in the distribution. So that's okay. And then you have a section 3, 51 tax free merger, or section 3, 68 tax free merger. However, when you do those, the gain is limited to the tax free event



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Andrew S. Katzenberg: not the later date and value. So if you do, the merger on date one, and the value of this merger for your interest was 8 million dollars. So you have 2 million kind of left over that. You wish you maybe could have had. And then there's a sale of the further company 5 years later and you went netting 15 million. We are still gonna get the same 8 million dollar. Qsp, you know.



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Andrew S. Katzenberg: Exclusion. You're not gonna move it up to the 1st 10, because now the thing you sold is worth 15. So remember that. And like I, I pointed out, this does not include contributions to partnerships. Section 7, 2, one. So normally, that's not not. That isn't a realization event. When you contribute to a partnership and you get back and return a partnership interest. That's an exclusion, you know, from the tax code perspective. But from this



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Andrew S. Katzenberg: it is not an exception to a tax free exchange. Another place I want to point out of



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Andrew S. Katzenberg: uncertainty again. These are the specific, statutorily blessed tax free exchanges that continue Qsp. Treatment. If it doesn't fall within this, it doesn't count.



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Andrew S. Katzenberg: I would not do it so, for instance, if you have a trust



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Andrew S. Katzenberg: that owns an interest in a Qsp. Entity



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Andrew S. Katzenberg: is a distribution from the trust



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Andrew S. Katzenberg: to the beneficiary, continue that transfer or's, you know, continued based to the transfer.



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Andrew S. Katzenberg: Maybe maybe not. I would not bet my life on it. I would not bet my clients 10 million dollar exemption on it or exclusion on it. Again, don't forget the code specifically acknowledges a distribution for a partnership, but it explicitly does not say a distribution from a trust when it could have.



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Andrew S. Katzenberg: But it didn't. So the legislation, you know, arguably, I would say, is clear that it doesn't qualify. But logically, you would think. Why, why shouldn't it? And shouldn't there be, you know, a a lot that you would hope? Maybe that's an amendment. Maybe that could be added, maybe by regulation. There again. There really are no regulations here.



00:22:11.877 --> 00:22:27.139

Andrew S. Katzenberg: That would be something that you would think should qualify logically. But there's nothing saying it does work, so I would not advise telling a client to do that, and thinking at the when he goes to sell it after the fact outside his trust, from a distribution that he's somehow so qualifying.



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Andrew S. Katzenberg: And then, lastly, there's a section 1045 exchange. Essentially, if you have a Qsp. That you sell, and it hasn't actually hit the 5 year period. You can reinvest it into a replacement usbs entity and we'll continue that further holding period. But you must do this within 60 days of the sale. So you have to have something lined up ready to go. In this context. For Qsp treatment.



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Andrew S. Katzenberg: But again, if you've only been at 3 years and you're like, Oh, the 10 million didn't qualify. I'm gonna go get a new company. I'm gonna stick it in there, and it'll get to the 5 year. 2 more years I'll get to the 5 it will sell, and then I'll get a full exemption great, but the same time, just like all the other kind of tax, free exchanges or other tax free kind of events like qualify qualified opportunity zones. you know that they're great if you can find a good one.



00:23:14.630 --> 00:23:25.909

Andrew S. Katzenberg: So you know, just because you can move it and save the money doesn't mean. The next thing you're investing in is a good investment. So you always to be a little wary, that that's going to work for you. Next we have is



00:23:26.350 --> 00:23:27.005

Andrew S. Katzenberg: the



00:23:27.880 --> 00:23:41.829

Andrew S. Katzenberg: qualify small business itself. What is that? Again, it must be a C Corp, that's it. It's not a C corp. Then we can stop the analysis the gross assets cannot exceed 50 million dollars through the data issuance of the stock.



00:23:42.115 --> 00:24:02.354

Andrew S. Katzenberg: This includes the amount you it received for that issue. So if you, you know, put in, if somebody, a buyer comes in and gives you a hundred 1 million dollars, well, they're they're not usbs, because they do 100 million, that whatever they give you, plus whatever the company ha! Is worth the time combined that has to be under the 50 million dollar threshold again, this focusing on the startup.



00:24:02.820 --> 00:24:04.150

Andrew S. Katzenberg: and then.



00:24:04.350 --> 00:24:25.179

Andrew S. Katzenberg: lastly, is the active business. This is the piece that has the most to it. So an active business. You must be active, for substantially all the holding period. There's no guidance on the test of what substantially all means. However, when you look to other code sections this normally is defined as 80 to 90



00:24:25.608 --> 00:24:37.170

Andrew S. Katzenberg: of the time. So again, if you are not falling in that category of 80 to 90. I would not believe your Qsp, 90 being the preferred number



00:24:37.610 --> 00:24:51.709

Andrew S. Katzenberg: 80, probably being fine too. The next is that 80% of the value must be used in the qualified business again. You can't. The point is everything you're that's being put into. This is being put towards this business. You can't have it sitting on the sideline being passive?



00:24:51.963 --> 00:25:18.279

Andrew S. Katzenberg: Again, there's no guidance on how you calculate this. Is it an average? Is it constant. How long does the average have to be? Is it over a 3 year window you look, or a 5? Or is it over the entire lifespan of the entity. No one's really sure again, you know, you gotta at least be above 80, no matter which calculation use. That's a minimum starting point. But the best case is, it's a constant. That's where you want to be, is it? Every year? 80? Because then there's no question that maybe you don't qualify, which is again, where you want to be.



00:25:19.150 --> 00:25:30.729

Andrew S. Katzenberg: Generally active business. What is or what's qualifies in one follows the section 162 definition. So this is the starting point where we look. And the reality is



00:25:30.740 --> 00:25:43.940

Andrew S. Katzenberg: when you look at you know what meets the exception, what isn't an exception. What you want. There's a cross reference actually in 1 99 a for the the real estate, you know. Deduction that was from the 99, the 2,017 Tax Act



00:25:44.270 --> 00:26:03.739

Andrew S. Katzenberg: that cross references. What's considered, you know, it says, whatever is like qualified small business stock entity or active business for 12 0, 2 purposes is a 1 99, a active business for that code section, even though there's nothing in the active business code section for 12 2 that actually says what is or isn't.



00:26:03.740 --> 00:26:28.100

Andrew S. Katzenberg: So you can actually look. And there's been rulings on those of what's qualified under 1 99 a which logically would imply that it qualifies for 12 0 2. However, these appr, so they're not guarantees that they work, but they should work, and at least gives you a sense of. If you know, the likelihood of the iris would disagree with some position. It's probably small, even though plrs are not buying you on other taxpayers other than the taxpayer who's given that plr.



00:26:28.160 --> 00:26:43.159

Andrew S. Katzenberg: It's something to be aware of active subsidiary attributed to the parent parent owns at least 50 subsidiary. So that's okay. So again, if you, you know, have a holding company and drops down some other at the active business that makes it, you know. Okay, for the upper tier.



00:26:43.579 --> 00:27:02.709

Andrew S. Katzenberg: Less than 10% of the assets consist of real estate not using the active trade business less than 10% of the assets in stock and other corporations that are not subsidiaries. Again, the point of this is that we don't. We want active businesses, not things that are passive. Both of those are too passive to qualify. We don't want you to again be just a holding company.



00:27:03.025 --> 00:27:13.105

Andrew S. Katzenberg: Red. Proc, 20 2024. Dash 3. There are no letter rulings on active business requirements. So you're not going to be able to get more information than just



00:27:13.540 --> 00:27:28.658

Andrew S. Katzenberg: finding out on the fly with the irs. So that's kind of you know why you have to look to these other areas to determine what is or is not again active. Business exclusions. In eligible businesses, disks, regulated investment companies remix



00:27:29.010 --> 00:27:58.529

Andrew S. Katzenberg: reits cooperatives. They're just ineligible. They don't count. Doesn't matter if they hit all the other qualifications they're just excluded. And then there's ineligible trades of business performing professional services, banking investment, farming, hotel restaurants. So, and going to the 1st one performing professional services, law, health accounting, consulting. So you know, essentially something that you're still in reputation matters to. And it overlaps again talking about section 1, 99 A. What isn't in ineligible what is not? You can look to that for helpful guidance.



00:28:00.210 --> 00:28:01.210

Andrew S. Katzenberg: now.



00:28:01.550 --> 00:28:13.079

Andrew S. Katzenberg: as we wrap this up. There's been a lot of plrs on, you know. Well, do I qualify, or do I not? And there's, you know, if you're uncertain or there's a colorable colorable argument that you could be an active business.



00:28:13.120 --> 00:28:39.680

Andrew S. Katzenberg: It's worth getting a plr cause. It's all these listed here are a handful that you initially would say, well, that's an health, a pharmaceutical company, or medical devices, or maybe a broker services again, or doing consulting in some way. You know, you would think that these would not qualify, but they actually can pharmace. This one plr at a pharmaceutical company was in healthcare industry, but didn't fall with that because it's services were broader



00:28:39.970 --> 00:28:58.009

Andrew S. Katzenberg: than just the healthcare industry preparing reports didn't fall into healthcare exception, because they weren't relying on their skill and reputational met for the medical device. They were just do running the diagnostic and handing it over to a 3rd party, who, you know, doctors who are doing billing who are doing the diagnosis, who are talking to the client



00:28:58.010 --> 00:29:09.980

Andrew S. Katzenberg: company was not again, so he was providing a physical service. Again. All these, you know places that you would think that you wouldn't qualify, you might. So again, it's worth getting a plr if you think you can kind of maybe



00:29:10.450 --> 00:29:33.469

Andrew S. Katzenberg: fall within one of these exceptions. And then the last thing we'll touch on just for like 2 seconds. If now that we've determined where Qsp. Great, you get your 5 million, you get your 10 million dollars of exemption hopefully, all 10 million, you know, 5 to 10 million, whatever it may be. What can I do with this? How many do I have? Do? I have just one. The answer is, each tax payer is entitled to this exclusion.



00:29:33.722 --> 00:29:59.460

Andrew S. Katzenberg: Spouses are. You know I could go much along in depth in this, but spouses are considered the same taxpayer. So, husband and wife, they are one. Anyone who's like? Well, I've heard this argument that if I do, they, you know when I, if I separate them, they each get 5. But if I do a joint return, maybe. Can I take 20? The answer is, no, no, no, you can't. If you do, your clients, probably, and get clobbered, or maybe just Iris hasn't caught you, but you know we don't speed not to get caught. We just don't speed



00:29:59.791 --> 00:30:11.679

Andrew S. Katzenberg: separate tax pairs again include relatives and Non grant or trusts. So any of these people you could give to a you know, a sister or brother or parent, they, too, couldn't receive that 10 million exemption.



00:30:11.975 --> 00:30:35.059

Andrew S. Katzenberg: And then non grant or trust. This is where you hear about the term stacking where you're able to multiply your exemption by a part amount of X. Who knows? Depending on how many trust you can create. But they have to. They can't be identical. Trust. That's the big catch. All Si, 6 53 F. That's kind of the linchpin there you must have different primary beneficiaries, then they can't be substantially identical. These trusts.



00:30:35.460 --> 00:30:37.840

Andrew S. Katzenberg: in that sense, the grand tour on the beneficiaries.



00:30:38.240 --> 00:31:03.739

Andrew S. Katzenberg: So if you have multiple children, 3 kids, you could create 3 trusts, one for each of those kids. And they'd have obviously unique beneficiaries. You know, son, one son, 2 daughter, one, and each of those trusts in a Nongrant or trust fashion will be able to receive that additional 10 million dollar exemption. So in that case you get 10. You and your wife, your kids reach. Get 10. You have a 40 exemption for the 1st 40, or whatever the sale is.



00:31:03.870 --> 00:31:21.689

Andrew S. Katzenberg: you know, and you're doing great if hit a home run. Again, there's a little more to it than that. But that's kind of the basics. I I know I'm at time so I wanna thank you for that quick bliss Craig of qualified small business stock history and requirements and I'll turn it back over to Jonathan again. Thank you for everyone for joining me today.



00:31:22.210 --> 00:31:50.629

Jonathan Shenkman: Great. Thank you so much, Andy. If anyone has any specific questions new business opportunities or any other issues they'd like to discuss. Please feel free to reach out directly to Angie or myself where appropriate, and I'll be sure to include his contact information and the follow up email to this program. As I mentioned at the onset, the goal these programs is to stay up to date on timely wealth management related topics and to collaborate where appropriate. I think we can all agree that the clients were best prepared are the ones who are served by team of knowledgeable advisors.



00:31:50.630 --> 00:32:09.920

Jonathan Shenkman: 3 more quick items before I let you go My Spring Webinar series continues on June 11, th on the topic of merital miss, the importance of planning, preparing, and protecting for families before and after a loved one, marries, featuring Lisa presser and Brian Bell Doozy, both of the law firm figured drinker based in Philadelphia, Pennsylvania, and Princeton, New Jersey.



00:32:10.185 --> 00:32:26.390

Jonathan Shenkman: And I'll send out an invitation to this program in the coming days. In the meantime, if you have a friend, colleague, or client who like to be notified of my upcoming webinars. They can email me with the word webinar in the subject line, and I'll add them to my webinar distribution list. My email is Jonathan at Parkbridge, Wealthcom.



00:32:26.390 --> 00:32:51.369

Jonathan Shenkman: Second, you could follow all my work on X or on Instagram at Jonathan on money. You could also listen to my weekly Podcast called Jonathan on money which is available on apple spotify or wherever you get your podcast and you watch my new daily financial planning videos by following me on Youtube at Jonathan on money as well. And 3, rd please take 30 seconds to fill out my survey at the end of this program and helps me improve my webinars and provide timely and interesting content to attendees. And I think



00:32:51.370 --> 00:32:57.549

Jonathan Shenkman: thank you to advance for that. And with that this concludes today's session. Please stay safe and healthy and have a wonderful day. Everybody.