Rollover of Gains on Certain Property Dispositions

A little-known provision of the Code is Sec. 1044, which allows certain taxpayers to defer recognition of gain on the sale of publicly traded securities that is reinvested into specialized small business investment companies (SSBICs). When taxpayers later dispose of interests in SSBICs, important tax implications can arise from the interrelationship of Sec. 1044 with Sec. 1202, which allows exclusion of gain from certain small business stock. An SSBIC is any partnership or corporation that is licensed by the Small Business Administration (SBA) under Section 301(d) of the Small Business Investment Act of 1958, EL. 85-699. SSBICs were created in 1970 to invest in small businesses owned by individuals who are socially or economically disadvantaged, especially minorities. Although Section 301(d) was repealed by the Omnibus Consolidated Appropriations Act of 1997, EL. 104-208, any SSBICs that were licensed before Oct. 1, 1996, were grandfathered. According to the SBA website directory of SSBICs and similar SBICs (small business investment companies) (available at tinyurl.com/l76loyz), as of this year, 10 SSBICs are still licensed. Despite their loss of prominence, SSBICs may still provide an attractive investment and tax strategy. DEFERRAL OF GAIN Under Sec. 1044(a), individuals and C corporations can elect to roll over any realized gain on the sale of publicly traded securities if the proceeds are reinvested into an SSBIC within 60 days from the date of the sale. Therefore, any portion of the realized gain that meets the nonrecognition requirements of Sec. 1044 will be deferred until the SSBIC shares or interests are later sold. LIMITATIONS Sec. 1044 applies to capital gain property held by an individual or C corporation. It does not apply to ordinary income property or capital gain property held by an S corporation, partnership, estate, or trust. Individuals can exclude the lesser of $50,000 per year or $500,000 during their lifetime (Sec. 1044(b)(1)). If a married couple file separate returns, the limitations are $25,000 and $250,000 each (Sec. 1044(b)(3)(A)). For a C corporation, the limitation amount is the lesser of $250,000 for any tax year or a lifetime cap (including for any predecessor corporation) of $1 million (Sec. 1044(b)(2)). A controlled group is considered one taxpayer for purposes of these limitations. TIMING OF ELECTION Taxpayers must make a timely election by the due date of their income tax return, including any extensions. The election must be a statement attached to Form 1040, US. Individual Income Tax Return, or 1120, US. Corporation Income Tax Return, containing information specified in Regs. Sec. 1.1044(a)-l. In addition, if the original return was filed on time, the taxpayer can make the choice on an amended return filed no later than six months after the due date of the return (excluding extensions). The taxpayer should write Filed pursuant to section 301.9100-2 at the top of the amended return and file it at the same address used for the original return. …