A Critical Evaluation of the Qualified Small Business Stock Exclusion

49 Pages Posted: 13 May 2023 Last revised: 2 Aug 2023

See all articles by Gregg D. Polsky

Gregg D. Polsky

University of Georgia School of Law

Ethan Yale

University of Virginia School of Law

Date Written: May 11, 2023

Abstract

Section 1202 of the Internal Revenue Code grants a gain exclusion to certain shareholders who own "qualified small business stock." We describe the tortured history of this rule, explain how it works (and fails to work), and critically evaluate whether the rule serves any coherent policy objective. If Congress keeps the rule in place, significant revisions are necessary to align the rule with sound policy and tamp out the abusive manipulations arguably permitted by the law in its present form. We propose several improvements along these lines. We also make the case for eliminating the exclusion in its entirety.

Keywords: federal income tax, capital gains, qualified small business stock, venture capital, carried interest

Suggested Citation

Polsky, Gregg D. and Yale, Ethan, A Critical Evaluation of the Qualified Small Business Stock Exclusion (May 11, 2023). Vol. 42, No. 3 (2023) , University of Georgia School of Law Legal Studies Research Paper No. 2023-09, Available at SSRN: https://ssrn.com/abstract=4445584

Gregg D. Polsky (Contact Author)

University of Georgia School of Law ( email )

225 Herty Drive
Athens, GA 30602
United States

Ethan Yale

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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