Corporate Finance Law Blog : Corporate Finance Lawyer & Attorney : Davis Wright Tremaine Law Firm

The IRS has issued final regulations relating to the deferral of gain under Section 1045 of the Internal Revenue Code on a partnership's sale of qualified small business ("QSB") stock and a partner's sale of QSB stock distributed by a partnership.  The regulations also provide rules for a taxpayer (other than a C corporation) who sells QSB stock and purchases the replacement QSB stock through a partnership.  Shortly after issuing these final regulations, the IRS issued corrections.

In general, Section 1045 allows a taxpayer to roll over gain on the sale of QSB stock, and does so under fairly liberal rules.  With the reduction in long term capital gains taxes to 15%, the QSB stock rollover benefit under Section 1045 has been the predominent benefit of QSB stock.  (From a choice of entity standpoint, this favors C corporations.)  This will change if capital gains rates are raised in the future.

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This week the IRS issued:

• final regulations on partnerships and qualified small business stock; and
• final regulations on the treatment of qualified subchapter S subsidiaries and single-owner eligible entities that are disregarded from their owners for employment tax and certain excise tax reporting puproses.  These regulations generally treat disregarded entities as separate entities for employment tax reporting purposes.

 "The final regulations clarify that the separate entity is treated as a corporation for purposes of employment taxes and related reporting requirements. As provided in the proposed regulations, a disregarded entity continues to be disregarded for other Federal tax purposes. The final regulations clarify that an owner of a disregarded entity treated as a sole proprietorship is subject to taxes under the Self-Employment Contributions Act (SECA)...."

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