rinselberg

I'm talking about the Qualified Small Business Stock or Q.S.B.S. Exemption.

These New York Times reporters are calling it a "Lavish Tax Dodge for the Ultrawealthy."

quote The tax break is known as the Qualified Small Business Stock, or Q.S.B.S., exemption. It allows early investors in companies in many industries to avoid taxes on at least $10 million in profits. The goal, when it was established in the early 1990s, was to coax people to put money into small companies. But over the next three decades, it would be contorted into the latest tax dodge in Silicon Valley, where new billionaires seem to sprout each week. Thanks to the ingenuity of the tax-avoidance industry, investors in hot tech companies are exponentially enlarging the tax break. The trick is to give shares in those companies to friends or relatives. Even though these recipients didn’t put their money into the companies, they nonetheless inherit the tax break, and a further $10 million or more in profits becomes tax-free. The savings for the richest American families — who would otherwise face a 23.8 percent capital gains tax — can quickly swell into the tens of millions. The maneuver, which is legal, is known as “stacking,” because the tax breaks are piled on top of one another.

Farther down in the same article, there's a description of "packing", which can be used by investors, in conjunction with "stacking", to further increase the amount of tax-exempt income that they can garner when they sell the stock shares that represent their investments.

Here's what some of the subject matter experts that were consulted by the New York Times reporters had to say about this:

quote “Q.S.B.S. is an example of a provision that is on its face already outrageous,” said Daniel Hemel, a tax law professor at the University of Chicago. “But when you get smart tax lawyers in the room, the provision becomes, in practice, preposterous.” Manoj Viswanathan, who is a director of the Center on Tax Law at the University of California, Hastings, estimates the tax break will cost the government at least $60 billion over the coming decade. But that doesn’t include taxes avoided by stacking, and so the true cost of the tax break is probably many times higher. The Biden administration has proposed shrinking the benefit by more than half. But the plan wouldn’t restrict wealthy investors from multiplying the tax break. The likely result, said Paul Lee, the chief tax strategist at Northern Trust Wealth Management, would be even more tax avoidance. “You’ll end up having more people doing more planning to multiply the exclusion,” he said.

"The Peanut Butter Secret: A Lavish Tax Dodge for the Ultrawealthy"
Jesse Drucker and Maureen Farrell for the New York Times; December 28, 2021.
https://www.nytimes.com/202...-business-stock.html

But this Forbes contributor seems to like it:

quote Most start-ups don’t last 10 years, let alone five, but changes to section 1202 in the House version of the Build Back Better Act make it less likely that some start-ups will even get the chance to try. Start-ups act as kindling to fire up the economy after a recession. We think QSBS burns hot and that Biden understands this. Congress is trying to make generational changes with the Build Back Better Act, so why go halfway with QSBS? The government should use this opportunity to build back American start-ups to their full potential through QSBS.

In other words, he wants the Q.S.B.S. tax exemption on these kinds of investments to remain in effect, and does not particularly like the "chipping away" at this exemption that is portended by the Build Back Better bill. There's a section in the Build Back Better bill to reduce the amount of tax-exempt income that can be garnered by investors if they set themselves up to take advantage of the Q.S.B.S.

"Building Back Biden’s American Start-Up Through Tax Incentives"
Benjamin Willis for Forbes; November 29, 2021.
https://www.forbes.com/site...ves/?sh=1c1bf5785469

I turned to the National Law Review for clarity, but found only a straightforward description of the relevant section of the Build Back Better bill, without the illuminating judgement of whether it would be good or bad if the Q.S.B.S. tax exemption for investors were to be reduced, or even eliminated altogether.

quote The Build Back Better Bill would have limited the exemption of eligible gain for disposition of “qualified small business stock” (“QSBS”) to 50% for taxpayers with adjusted gross income of $400,000 or more, as well as all trusts and estates, and would have subjected the gain to the alternative minimum tax. Very generally, under current law, non-corporate taxpayers are entitled to exclude from tax up to 100% of gain from the disposition of QSBS that has been held for more than 5 years.[3] In addition, gain from the sale of QSBS can potentially be deferred if proceeds are reinvested in other QSBS. The same proposal was included in the House Bill and the Prior House Bill. The Prior House Bill contained a proposal to increase corporate tax rates, which together with the proposed changes to the QSBS rules, would have further limited desirability of investing in QSBS. The Build Back Better Bill, the House Bill and the Prior House Bill only addressed the rules applicable to exclusion of gain from the sale of QSBS, and did not alter the rules allowing for deferral of gains for proceeds invested in other QSBS. Although the benefits associated with ownership of QSBS would have remained significant, had the Build Back Better Bill passed, in light of the reduction in potential gain that would have been excluded, the Build Back Better Bill would have required a reevaluation of choice-of-entity decisions based on QSBS benefits. The proposal would have been effective retroactively and apply to sales or exchanges of stock on or after September 13, 2021, which is the date that the Prior House Bill was released.

"Senator Manchin Announces That He Will Not Support the Build Back Better Act – Where Things Stand Now"
David S MIller et al, for the National Law Review; December 20, 2021.
https://www.natlawreview.co...ter-act-where-things

These are all long articles.

My interest was piqued by the New York Times report. I have no (direct) "skin" in this game. I'm not a Q.S.B.S. kind of a guy. Never taken advantage of this tax exemption, and almost certainly never will. I've just been pondering the politics of it, and how it meshes (or does not mesh) with the U.S. Constitution's Article 1, Section 8:

quote "The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States."