Section 1202 provides for a substantial exclusion of gain from
federal income taxes when stockholders sell qualified small
business stock (QSBS).1 But a number of requirements,
including avoidance of Section 1202(c)(3)'s anti-churning
rules, must be satisfied in order to be eligible to claim Section
1202's gain exclusion. This article focuses on the potential
forfeiture of QSBS status that can be triggered by poorly-timed
issuances and redemptions of stock.
If Section 1202's anti-churning rules are triggered, the
affected stock will forfeit its QSBS status. Presumably, Section
1202(c)(3) was enacted as an effort to block the strategy of
exchanging non-QSBS for QSBS. The potential application of these
rules should be considered before stock is redeemed or QSBS issued.
Also, understanding how these rules work is important when vetting
whether stock is QSBS.
