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This article is one of a series of blog posts addressing planning issues relating to qualified small business stock (QSBS) and the workings of Sections 1202 and 1045 of the Code.

Planning for an investment home run – increasing the standard Section 1202 $10 million gain exclusion

With the corporate tax rate reduced from 35% to 21%, we have experienced a heightened awareness among business founders and investors, along with private equity groups and hedge funds, that Section 1202 potentially allows taxpayers to exclude millions of dollars of gain when QSBS is sold.[1]

High on the list of problems that are good ones to have and better ones to solve is the Section 1202’s per-issuer gain exclusion cap.  For many taxpayers, Section 1202’s standard $10 million gain exclusion cap will be more than sufficient.  But there are taxpayers whose QSBS gain far will far exceed $10 million.  For these fortunate taxpayers, advanced planning to expand the potential gain exclusion cap reaps obvious rewards when QSBS is sold.

Navigating through Section 1202’s gain exclusion rules

IRC § 1202(b) places a per-issuer limitation on a taxpayer’s eligible Section 1202 gain exclusion amount.  A taxpayer’s aggregate per-issuer gain exclusion for a given taxable year is generally limited to the greater of (a) $10 million (the “$10 Million Cap”), minus the aggregate prior Section 1202 gain excluded with respect to such issuer, or (b) 10 times the taxpayer’s original adjusted tax basis in the issuer’s QSBS sold during such taxable year (the “10X Basis Cap”).[2]

IRC § 1202(b) is a per-taxpayer, per-issuer limitation on gain exclusion.  Each taxpayer holding XYZ Corp.’s QSBS is entitled to separately take advantage of the Section 1202 gain exclusion up to the per-issuer maximum gain exclusion cap.  If XYZ Corp. has issued QSBS to 100 taxpayers, each of the 100 taxpayers has a separate Section 1202 gain exclusion cap (e.g., each has a standard $10 Million Cap).  If John Smith holds QSBS of 10 different issuers, he has a separate standard $10 Million Cap and separate 10X Basis Cap for each of the 10 QSBS issuers.  Each partner in a partnership holding XYZ Corp’s QSBS and each shareholder of an S corporation holding XYZ Corp.’s QSBS will be treated as a separate taxpayer, with each partner or shareholder entitled to take advantage of a separate per-issuer standard $10 Million Cap and the 10X Basis Cap.

For purposes of the 10X Basis Cap, a taxpayer’s capital contribution is the amount of cash initially paid for QSBS, the fair market value of property exchanged for QSBS, or if the QSBS is issued in exchange for services, the value of the QSBS for Section 83 purposes (when issued if not subject to vesting or if a Section 83(b) election is made, or when it vests if it is subject to vesting).  Since capital contributions with respect to already issued QSBS are ignored for purposes of calculating the 10X Basis Cap, additional shares of QSBS should be issued in exchange for each cash contribution, assuming the issuer is still eligible to issue QSBS.

If all of John Smith’s QSBS is sold during one taxable year, the critical factor will be whether his aggregate adjusted tax basis in the QSBS exceeds $1 million.  If so, then the gain exclusion based on the 10X Basis Cap will exceed the $10 million gain exclusion resulting from applying the standard $10 Million Cap.

IRC § 1202(b) determines gain exclusion for a specific taxable year.  The aggregate Section 1202 gain excluded in prior years with respect to XYZ Corp. QSBS reduces the $10 Million Cap exclusion amount for this year’s XYZ Corp. gain exclusion.  Once a taxpayer has excluded $10 million of XYZ Corp. gain, there will be no additional gain exclusion amount available based on the $10 Million Cap.  But gain exclusion in prior taxable years does not reduce the gain exclusion available in the current year applying the 10X Basis Cap, as the exclusion amount is determined based solely on the adjusted tax basis of the QSBS being sold in the current taxable year.   So if John Smith excludes $10 million of XYZ Corp. Section 1202 gain in 2019, and he sells for $1 million additional shares of XYZ Corp. QSBS in 2020 with an aggregate tax basis of $1,000, he will be entitled to a Section 1202 gain exclusion of $10,000 (10 X $1,000 basis), as he will have used his entire $10 Million Cap for such issuer in 2019.  The balance of John Smith’s gain will be taxed at the 20% long-term capital gains rate.[3]

Calculating the gain exclusion cap under IRC § 1202(b)

IRC § 1202(b) determines the available gain exclusion for a taxable year during which QSBS is sold.   If John Smith sells all of his XYZ Corp. QSBS in a single taxable year, the gain exclusion is the greater of (A) $10 million, or (B) the 10X Basis Cap.   If John Smith sells all of his XYZ Corp. QSBS in single taxable year, the standard $10 Million Cap will apply unless he has an adjusted tax basis in his QSBS greater than $1 million.  If John Smith’s aggregate tax basis exceeds $1 million, then the Section 1202 gain exclusion cap will be 10 times the aggregate tax basis of his QSBS.  For example, if John Smith’s basis in XYZ Corp. QSBS is $2 million, then his Section 1202 gain exclusion cap will be $20 million.

If John Smith holds some shares of an issuer’s QSBS that have an adjusted tax basis and some shares that have little or no tax basis, he may be able to maximize his aggregate Section 1202 gain exclusion by selling the low basis QSBS in year one and the high basis QSBS in year two.  The plan would be for John Smith to take maximum advantage of the 10X Basis Cap in year two.  For example, assuming John Smith holds 250,000 shares of common QSBS with a tax basis of zero and a market value of $10 million, and 50,000 shares of convertible preferred QSBS with a tax basis of $500,000 and a market value of $2 million, he can exclude both the $10 million in gain triggered by a sale during 2020 of the 250,000 shares of common QSBS and the $2 million in gain triggered by the sale during 2021 of the 50,000 shares of convertible preferred QSBS.  The available exclusion cap for the 50,000 shares of convertible preferred QSBS would be $5 million (10 x $500,000 = $5,000,000).

If John Smith pays cash for QSBS, his tax basis for purposes of the 10X Basis Cap will be the amount paid.  If John Smith contributes appreciated property in exchange for QSBS, his tax basis for purposes of the 10X Basis Cap will be the fair market value of the property at the time of contribution.  If John Smith exchanges services for QSBS, his tax basis for purposes of the 10X Basis Cap will be any amount he paid for the QSBS, plus the amount of any taxable income triggered under Section 83 with respect to the QSBS.  John Smith can have a different tax basis in different blocks of an issuer’s QSBS.  If John Smith was initially issued penny stock and later acquired preferred stock during a capital raise, he would have a different tax basis in his two blocks of QSBS.

IRC § 1202(b)(1)(B) provides that for purposes of the 10X Basis Cap, “the adjusted basis of any stock shall be determined without regard to any addition to basis after the date on which such stock was originally issued.”   IRC § 1202(i)(2) provides, however, that “[i]f the adjusted basis of any qualified small business stock is adjusted by reason of any contribution to capital after the date on which such stock was originally issued, in determining the amount of the adjustment by reason of such contribution, the basis of the contributed property shall in no event be treated as less than its fair market value on the date of the contribution.”  It is unclear how to reconcile these two provisions.  What is the point of the second rule if contributions to capital don’t affect the 10X Basis Cap computation?  The main takeaway from these two provisions should nevertheless be that you should never make capital contributions with respect to QSBS, instead, you should always acquire additional shares of QSBS in exchange for additional capital.  IRC § 1202(b)(1)(B) clearly establishes the rule for purposes of the functioning of the 10X Basis Cap., and the rule doesn’t work favorably for those who make additional capital contributions.

How the Section 1202 gain exclusion cap functions for married couples

The plain language of Section 1202 supports the position that each spouse has a separate $10 Million Cap and a separate 10X Basis Cap since (a) each spouse is generally treated as being a separate taxpayers under the Internal Revenue Code,[4] and (b) Section 1202 speaks in terms of the gain exclusion amount of “a taxpayer” without further stating that spouses are treated as being a single taxpayer for purposes of the gain exclusion cap.

Weighing against the position that each spouse has a separate standard $10 Million Cap is the language of IRC § 1202(b)(1)(A), which provides that the $10 Million Cap is a $5 million gain exclusion cap per spouse for a married couple filing separately.  The pertinent question is whether it is reasonable to infer from this language that the aggregate Section 1202 gain exclusion cap for spouses filing jointly is limited to one $10 Million Cap.  Some commentators argue that Congress may have intended to limit the aggregate Section 1202 gain exclusion cap for spouses filing jointly to a single $10 Million Cap but failed to address that intention in the language of Section 1202.   The IRS might argue that a reading of Section 1202 to provide for each spouse having a separate $10 Million Cap would be a windfall for the taxpayers.  But taxpayers could counter this argument by pointing out that the US Supreme Court has concluded that when Congress passes a statute whose plain text gives a taxpayer the benefit of a “double windfall”, the statute should nevertheless be given effect, in spite of the IRS’s arguments to the contrary.[5]  If the IRS prevailed and married couples were limited to a single $10 Million Cap, it would certainly constitute one of the biggest marriage penalties in the Internal Revenue Code.

How the Section 1202 gain exclusion cap functions for a partnership or S corporation holding QSBS

From a planning standpoint, holding QSBS through a fund taxed as a limited partnership or limited liability company (“LLC“) presents an opportunity to dramatically increase the aggregate Section 1202 gain exclusion amount.  If a partnership or S corporation holds an issuer’s QSBS, each partner or shareholder is treated as a separate taxpayer with his own standard $10 Million Cap and separate 10X Basis Cap.  There are specific rules governing how Section 1202 gain flowing through the pass-thru entities are allocated among partners and S corporation shareholders.  There are potential limitations on the amount of Section 1202 gain and corresponding sale proceeds that can be allocated to partners holding carried interests that are beyond the scope of this article.

How the Section 1202 gain exclusion cap applies to QSBS issued in connection with a partnership’s incorporation[6]

In most cases, the aggregate consideration paid by a taxpayer for an issuer’s QSBS won’t exceed $1 million, so the 10X Basis Cap won’t effectively increase the taxpayer’s aggregate exclusion amount beyond the $10 Million Cap.  But the enterprise value (which includes goodwill value) of start-ups can increase dramatically during the early years of operation.  This creates a potential planning opportunity involving operating a start-up as a partnership for several years and then incorporating the partnership and in the process, issuing QSBS to the partners in exchange for their partnership interests.  Both a partnership’s assets and partnership interests qualify as a property that can be contributed by a partnership or LLC to a C corporation (generally in a Section 351 exchange) in exchange for QSBS.

The planning opportunity afforded through the incorporation of a partnership arises out of the fact that for Section 1202 gain exclusion purposes, the tax basis of property contributed in exchange for QSBS is deemed to be the fair market value of the property at the time of contribution.  If a partnership is incorporated, the enterprise value of the partnership’s business would generally be treated as the fair market value of the contributed property.  So, if the owners of a business decide to operate a start-up through an LLC or limited partnership and incorporate the business only after the enterprise value has increased substantially, the 10X Basis Cap could substantially increase the owners’ aggregate gain exclusion.

Section 1202 also provides that when appreciated property is contributed in exchange for QSBS, the difference between the tax basis of the property and its fair market value for Section 1202 purposes does not qualify for the gain exclusion when the QSBS is eventually sold.

Here is an example of how the 10X Basis Cap works when a partnership is converted to a C corporation and QSBS is issued to the partners.  If John Smith and Susan Jones operate their business as equal owners in the early years through XYZ LLC, and incorporate the business when the fair market value of XYZ LLC’s business is $25 million, each of them will have a $112.5 million (10 x $12.5 million – $12.5 million) gain exclusion under Section 1202 when they sell their XYZ Corp. QSBS after five years.  Contrast this result with an example where John Smith and Susan Jones each initially capitalize XYZ Corp. with $50,000 and sell their QSBS for $250 million after seven years.  In this second example, each of John Smith and Susan Jones gain exclusion would be limited to the standard $10 Million Cap.

In addition to the increased gain exclusion cap, there may be additional benefits associated with operating a business in partnership form during its start-up years that are not addressed in this article, including tax loss pass-through to the business’ owners.[7]   One downside of waiting to incorporate a business after its enterprise value has increased while operated through a partnership is that the five year holding period for Section 1202 purposes doesn’t start until the QSBS is issued in connection with the incorporation of the business.

Planning techniques for increasing the Section 1202 gain exclusion amount.

Taking advantage of the 10X Basis Cap.  As discussed above, the 10X Basis Cap can apply if a taxpayer has tax basis in any QSBS.  If a taxpayer has some QSBS with no tax basis and some with a tax basis, a taxpayer who sells the shares without a tax basis in year one and those with the tax basis in year two will increase his overall gain exclusion above the standard $10 Million Cap.

If it makes sense to operate a business in the early start-up years as a partnership, incorporating the business when the enterprise value attributable to the taxpayer’s shares exceeds $1 million but before the aggregate enterprise value of the business exceeds $50 million will also increase a taxpayer’s overall potential gain exclusion amount above the standard $10 Million Cap.

Dividing an issuer’s QSBS among multiple “taxpayers.”   The potential aggregate Section 1202 gain exclusion can be substantially increased if an issuer’s QSBS is spread over a two or more “taxpayers,” each with a separate standard $10 Million Cap and $10X Basis Cap.  Since the Internal Revenue Code defines a “taxpayer” as “any person subject to any internal revenue tax,” this fact opens the door for several planning steps focused on increasing the aggregate Section 1202 exemption cap

Founders can structure the ownership of QSBS to include a spouse, adult children and other family members.  Likewise, investors purchasing preferred stock can make their investment individually, through spouses, adult children, non-grantor trusts, limited partnerships, LLCs and S corporations.  Aggressive planning to increase the exclusion cap can also be undertaken by employing non-grantor trusts and family entities.[8]  These entities may also have the benefit of helping to deal with transfer restrictions, governance and asset protection planning issues.

In many instances, an investor or business owner doesn’t plan at the outset to deal with the Section 1202 exclusion cap because of the odds against an investment in QSBS outstripping the standard $10 Million Cap.  In those cases where it turns out that an investment in QSBS is a home run and is likely to exceed the $10 Million Cap[9], there are several tools available for increasing a taxpayer’s aggregate Section 1202 exclusion cap.  Gifting QSBS is permissible under Section 1202 as an exception to the general rule that the original holder must sell the QSBS in order to take advantage of the Section 1202 gain exclusion.  QSBS may be gifted to an unlimited number of separate taxpayers, each of whom will have the taxpayer’s own $10 Million Cap and 10X Basis Cap.

Gifting QSBS to non-grantor trusts has increased in popularity in recent years as more founders and investor look for ways to use Section 1202 planning in their start-up and venture financing planning.  The intent, purpose and terms of a trust agreement and the timing of gifts to trusts must be carefully considered.  Founders and investors utilize non-grantor trusts for a variety of mixed tax, business and personal reasons.  Trusts can be a useful vehicle through which to engage in asset protection planning, shielding assets from beneficiaries or protecting assets from poor investment decisions through the use of professional asset management.  Trusts are also a useful tool for advanced estate and gift tax and non-tax planning (for example, trust planning often centers around taking advantage of more favorable state laws for the administration of trusts).  At least in theory, if a taxpayer creates multiple non-grantor trusts, each non-grantor trust will be treated as a separate taxpayer with its own standard $10 Million Cap and 10X Basis Cap, regardless of whether there are multiple irrevocable trusts with overlapping or identical beneficiaries.[10]

To the extent possible, QSBS should be gifted when the value of the gifted shares is as low as possible and hopefully well before the QSBS is sold.  Completed gifts of QSBS will be subject to the gift tax rules and gift tax return reporting requirements.  Holders of QSBS can take advantage of annual gifting and the lifetime unified gift and estate tax exemption ($11.4 million for 2019), or structure the terms of the trust so that it is a non-grantor trust for income tax purposes but not a completed gift for gift and estate tax purposes.  A taxpayer engaged in Section 1202 planning need to carefully consider not only federal gift and estate tax consequences in the context of the taxpayer’s estate plan, but also how the planning steps will be treated for state tax purposes.

If a taxpayer is gifting QSBS to an irrevocable trust, consideration should be given to reserving a special limited power to appoint the trust principal to beneficiaries other than the grantor.  This transfer of assets to a trust would be structured as a gift of QSBS for Section 1202 purposes but would be treated as an incomplete gift for gift tax purposes.  The taxpayer would not pay gift taxes or file or a gift tax return, but here again, the assets of the trust would be included in the taxpayer’s estate.[11]

Another way to potentially expand the exclusion cap is to leave QSBS to two or more beneficiaries, as transfers at death are also permitted under Section 1202.

Taxpayers should take into consideration how their state of residence treats these various planning ideas for state income, gift and estate tax purposes.  Not all states follow the federal treatment of QSBS and certainly not all states track the federal gift and estate tax rules and exclusion limits.

As discussed below, there are sound arguments based on applicable tax authorities that married couples filing jointly each have a separate $10 Million Cap and 10X Basis Cap, based on the conclusion that each spouse is a separate taxpayer for Section 1202 purposes.  But the potential exists for the IRS to take a contrary position.

Taking advantage of each spouse’s separate Section 1202 $10 Million Cap.   The Section 1202 gain exclusion cap for spouses is discussed in detail above.  Taxpayers could take the position that each spouse is treated as a separate taxpayer with his or her own separate standard $10 Million Cap with respect to an issuer’s QSBS.

The usual Section 1202 rule that the original holder of QSBS must sell the QSBS in order to take advantage of Section 1202’s gain exclusion includes exceptions for gifts of QSBS and transfers of QSBS at death.  From a federal income tax and gift tax standpoint, a taxpayer can gift QSBS to his or her spouse without adversely affecting the QSBS’ Section 1202 status and without the filing of a gift tax return or using of any of the taxpayer’s unified gift and estate tax credit.  If QSBS is gifted between spouses, the QSBS’s holding period carries over from spouse to spouse.

From a planning standpoint, the best time to split an issuer’s QSBS between spouses would be at the time of QSBS’s original issuance rather than after one spouse has held the QSBS for years. Although there is no requirement in Section 1202 that a gift be made well in advance of the sale of QSBS, transferring QSBS well into its eventual holding period or in the shadow of an imminent sale transaction opens the door for the IRS to argue that the gift is for tax avoidance purposes and/or that the step transaction doctrine should be invoked to ignore any Section 1202 income tax benefits arising out of the gift.  Nevertheless, there may be non-tax business and personal reasons to gift QSBS between spouses and to other taxpayers prior to or in connection with undertaking a sale of a business.

Using multiple corporations for Section 1202 planning; Engaging in separate business activities through separate corporations.  A taxpayer’s gain exclusion cap is determined separately for each issuer of QSBS.  There is no provision in Section 1202 that aggregates the QSBS of brother-sister corporations for purposes of limiting gain exclusion.  These facts suggest that there is an opportunity to operate businesses through multiple C corporations, which should work so long as each of the corporations is engaged in a stand-alone qualified small business. Operating a unified business through several corporations most likely won’t work to increase the gain exclusion because each of the corporations independently won’t function as a stand-alone qualified small business.[12]

It does make sense for several reasons to separate discrete businesses into separate C corporations from an overall Section 1202 planning standpoint.  An important planning goal should be to make it easy from a transaction structuring standpoint to sell QSBS after the five-year holding period requirement is satisfied.  Owning two businesses in one C corporation might complicate the owners’ ability to sell the holding company’s QSBS and take advantage of the Section 1202 gain exclusion.   Also, as discussed above, multiple corporate issuers function to increase the potential aggregate Section 1202 gain exclusion.

Reinvesting Section 1202 gain in multiple issuers.  Section 1045 allows holders of QSBS who have not reached the required five-year holding period to sell their QSBS and reinvest the proceeds in other QSBS.  One issue that doesn’t appear to have a clear answer is whether proceeds of the sale of QSBS rolled over into other QSBS investments under Section 1045 retains its original “identity” for the gain exclusion cap purposes, or whether it is possible to expand the gain exclusion cap by reinvesting the proceeds of one issuer’s QSBS into multiple QSBS investments.  Given that Section 1045 refers to a taxpayer reinvesting Section 1202 proceeds in QSBS, a reasonable conclusion is that, except for Section 1202 holding period purposes and Section 1045’s gain deferral, Section 1045 treats the transaction as a new investment in QSBS.  If that is correct, then there seems to be no reason why a taxpayer can’t reinvest Section 1202 proceeds in multiple QSBS issuers, each with a separate $10 Million Cap and 10X Basis Cap.  There certainly is nothing in the language of Section 1202 or Section 1045 that expressly prohibits the taking of this position or suggesting that a contrary interpretation of the functioning of the Section 1045 rollover should be adopted.

Closing remarks

Engaging in one or more of the planning ideas outlined above to increase a taxpayer’s potential Section 1202 gain exclusion can have the collateral consequence of significantly affecting the ownership and governance structure of business start-ups and a founder’s or investor’s estate planning.   Transferring QSBS to family members and utilizing non-grantor trusts and other family wealth transfer vehicles often has a significant impact on the taxpayer and family social and economic relationships.  Taxpayers and advisors should not lose sight of these issues when considering the potentially significant tax benefits generated by Section 1202 planning.   Finally, Section 1202 planning may also significantly affect a taxpayer’s overall federal and state income, gift and estate taxes, and all of these consequences should be taken into account as part of the planning process.  States are not uniform in adopting Section 1202 and how a taxpayer’s state of residence handles gift and estate taxes will impact the planning process to expand the Section 1202 exclusion amount through gifts and other techniques discussed in this article.

The details of advanced Section 1202 planning are not commonly understood.  Founders, investors, advisors, and return preparers engaging in advanced planning should consider seeking the advice of tax professionals who regularly handle QSBS issues.  In particular, taxpayers and other participants in the planning process should want to know whether there is substantial authority for tax return positions.  Finally, taxpayers and other participants in the planning process should also seek advice regarding potential penalties and the IRS’s disclosure rules.

Business owners, investors and professionals can learn more about IRC §§ 1202 and 1045 planning opportunities on the Frost Brown Todd website.  If you want to discuss Section 1202 or 1045 issues, contact Scott Dolson, Ben Hager or Nelson Rodes.


[1] This article addresses federal income taxes.  Many, but not all, states follow the federal Section 1202 gain exclusion.

[2] (b) Per-issuer limitation on taxpayer’s eligible gain.

  • (1) In general.  If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of—
    • (A) $10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or
    • (B) 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year. For purposes of subparagraph (B), the adjusted basis of any stock shall be determined without regard to any addition to basis after the date on which such stock was originally issued.
  • (2) Eligible gain.  For purposes of this subsection, the term “eligible gain” means any gain from the sale or exchange of qualified small business stock held for more than 5 years.
  • (3) Treatment of married individuals.
    • (A) Separate returns. In the case of a separate return by a married individual, paragraph (1)(A) shall be applied by substituting “$5,000,000” for “$10,000,000.”
    • (B) Allocation of exclusion.  In the case of any joint return, the amount of gain taken into account under subsection (a) shall be allocated equally between the spouses for purposes of applying this subsection to subsequent taxable years.
    • (C) Marital status.  For purposes of this subsection, marital status shall be determined under section 7703.

[3] Plus, potentially the 3.8% surtax and applicable state income taxes.

[4] Supporting this position is the fact that IRC § 7701(a)(14) defines a taxpayer to be “any person subject to any internal revenue tax” and that under IRC § 6013(d)(3), each spouse has joint and several liability for the tax shown on a joint return.  The obvious conclusion drawn from these provisions is that each spouse is generally treated as a separate “taxpayer” under the Internal Revenue Code.

[5] Gitlitz v. Commissioner, 531 U.S. 206 (2001).

[6] The discussion of partnership in this section generally would include a limited liability company taxed as a partnership, along with a limited partnership.

[7]See these articles on the Frost Brown Todd website:  [Revisiting the Choice of Entity Decision for the Closely Held Business] and [The Choice of Entity Decision for VC Financed Start-ups.]

[8] If the trust is a grantor trust, the “taxpayer” is the grantor and is treated as the owner of the QSBS for Section 1202 purposes.  If the trust is a non-grantor trust, the “taxpayer” is the trust and the trust is treated as the owner of the QSBS for Section 1202 purposes.

[9] The assumption here is that the 10X Basis Cap under IRC § 1202(b)(1)(B) isn’t helpful because of the modest initial amount paid for the QSBS.

[10] Referred to by some as “stacking” (multiplying) trusts for Federal income tax planning purposes.  There are no tax authorities addressing the use of non-grantor trusts in connection with Section 1202 tax planning, but see Treasury Regulation § 1.199A-6(d)(3)(vii) which provides that that a trust formed with a principal purpose of avoiding, or of using more than one, threshold amount for purposes of calculating the deduction under Section 199A will not be respected as a separate trust for purposes of determining the threshold amount for purposes of Section 199A and Treasury Regulation § 1.643(f)-1 which provides that “two or more trusts will be aggregated and treated as a single trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and if a principal purpose for establishing one or more of such trusts or for contributing additional cash or other property to such trusts is the avoidance of Federal income tax.  For purposes of this rule, spouses will be treated as one person.”

[11] This incomplete gift, non-grantor trust is referred to generally as an ING (a DING in Delaware).

[12] IRC § 1202(k) provides that the IRS may issue regulations to prevent “the avoidance of the purposes of [Section 1202] through split-ups, shell corporations, partnerships, or otherwise.”  To date, the IRS hasn’t addressed Section 1202 income tax avoidance schemes through regulations, but the potential focus on “shell corporations” is there.