Section 1045: Let’s Fix It

Amend Section 1045If Congress is on the hunt for ideas to make life better for startups and emerging growth companies, here is another:

“Amend Section 1045 of the Internal Revenue Code to extend the 60 day rollover period to 6 months.”

First Off, What Is Section 1045?

Section 1045 is a tax code section that allows non-corporate taxpayers to rollover their gain on qualified small business stock, into other nonqualified small business stock. I’ve quoted the first part of Section 1045 below.

Why is Section 1045 important? Section 1045 is to startups what Section 1031 is to real estate. It encourages investments into startups. A noble objective!

Here is the operative provision I am recommending be amended:

    (a) Nonrecognition of gain
In the case of any sale of qualified small business stock held by a taxpayer other than a corporation for more than 6 months and with respect to which such taxpayer elects the application of this section, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds—
(1) the cost of any qualified small business stock purchased by the taxpayer during the 60-day period beginning on the date of such sale, reduced by;
(2) any portion of such cost previously taken into account under this section.
    This section shall not apply to any gain which is treated as ordinary income for purposes of this title

Why Amend It?

60 days is a very short window in which to find a replacement investment. If you have ever done angel investing, you will know. To find and close an investment in 60 days is not an easy task. Usually investors hunt for months before they find an investment that they like. Then the paperwork to effectuate the investment can sometimes take weeks as well, if there is back and forth on various business points as the deal is negotiated.

In short, the Section 1045 statute exposes a lack of understanding on the part of the drafter as to how these transactions work. You can’t just call your broker and place an order. Most angel investments are not effectuated through a broker-dealer (which is one of the flaws of the crowdfunding bill–forcing companies who want to crowdfund to work through a broker-dealer).

Conclusion

We need is a Congressional representative to introduce a bill extending the 60 day window to 6 months. Very simple. Could someone please do this?

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • http://www.venturedocs.com Bo Sartain

    I couldn’t agree more. Angel investment best practices encourage patient investing–not jumping on the first deal that comes along.

    • http://startuplawblog.com/joewallin Joe Wallin

      Thanks Bo. Maybe someone in Congress will propose a bill to fix this!