The text of the Senate tax bill is now available, and it is attached.
Section 760 of the bill would extend the 100% exclusion for investments in QSB stock until the end of next year.
Senate Tax Bill December 9
This bill was introduced by Senator Reid yesterday as Senate Amendment 4753. The first page of the Congressional Record where it appears can be found here.
See also this press release summarizing the bill from the Senate Finance Committee.
From the summary regarding Section 1202 qualified small business stock:
Exclusion of small business capital gains. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years.
Guest Post By Lew McMurran of the WTIA
Higher education is at a major crossroad in Washington. The state’s colleges and universities are being squeezed financially in the state budget, have few good options to fund themselves, are overenrolled, are turning away qualified students, and cannot offer the same level of financial aid as in the past.
Yet the need for people to obtain higher education is greater than it has ever been in order to have a decent shot at career and job opportunities. The facts about the value of higher education are well known: higher average salaries for bachelor’s degree holders or higher, lower unemployment rates for college graduates, less use of public services, such as criminal justice, public health and social service programs. Continue reading
The SEC has proposed rules that would define “venture capital fund” for purposes of the new exemption for investment advisers that advise solely venture capital funds. From the proposed rules:
As described in more detail below, we propose to define a venture capital fund as a private fund that: (i) invests in equity securities of private companies in order to provide operating and business expansion capital (i.e., “qualifying portfolio companies,” which are discussed below) and at least 80 percent of each company’s securities owned by the fund were acquired directly from the qualifying portfolio company; (ii) directly, or through its investment advisers, offers or provides significant managerial assistance to, or controls, the qualifying portfolio company; (iii) does not borrow or otherwise incur leverage (other than limited short-term borrowing); (iv) does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; (v) represents itself as a venture capital fund to investors; and (vi) is not registered under the Investment Company Act and has not elected to be treated as a BDC.
In addition, the SEC has determined it was necessary to define “qualifying portfolio companies.”
We propose to define a venture capital fund for the purposes of the exemption as a fund that invests in equity securities issued by “qualifying portfolio companies,” which we define generally as any company that: (i) is not publicly traded; (ii) does not incur leverage in connection with the investment by the private fund; (iii) uses the capital provided by the fund for operating or business expansion purposes rather than to buy out other investors; and (iv) is not itself a fund (i.e., is an operating company). In addition to equity securities, the venture capital fund may also hold cash (and cash equivalents) and U.S. Treasuries with a remaining maturity of 60 days or less.
I haven’t completely finished reading all 135 pages of the regulations, but my initial reaction is that the rules are too complex, too narrow, and are going to otherwise crimp the behavior of an industry that contributed in no way to the financial crisis. It is unfortunate that long, complex, burdensome rules have to be layered on private industry for no legitimate and good reason.
More specifically, these requirements are too narrow:
- the requirement that a venture capital fund own “solely” equity securities issued by one or more “qualifying portfolio companies” and at least 80 percent of the equity securities of each qualifying portfolio company owned by the fund was acquired directly from the qualifying portfolio company; and (ii) cash and cash equivalents, as defined in § 270.2a51-1(b)(7)(i), and U.S. Treasuries with a remaining maturity of 60 days or less.
This would disallow non-registered funds from investing in early stage companies in exchange for certain types of debt instruments. Why would we want to crimp the flexibility venture funds currently have in this regard? Were any of these types of transactions identified as abusive or inappropriate or a threat to financial stability?
Similarly, why disallow venture funds from acquiring equity securities from other equity security holders? Why require them to acquire them directly from qualifying portfolio companies? There doesn’t, in my opinion, exist a valid and legitimate reason to crimp the behavior of non-registered funds in this way.
Actual Proposed Definition From The Proposed Rules:
(a) Venture capital fund defined. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)), a venture capital fund is any private fund that:(1) Represents to investors and potential investors that it is a venture capital fund;
(2) Owns solely:
(i) Equity securities issued by one or more qualifying portfolio companies, and at least 80 percent of the equity securities of each qualifying portfolio company owned by the fund was acquired directly from the qualifying portfolio company; and
(ii) Cash and cash equivalents, as defined in § 270.2a51-1(b)(7)(i), and U.S. Treasuries with a remaining maturity of 60 days or less;
(3) With respect to each qualifying portfolio company, either directly or indirectly through each investment adviser not registered under the Act in reliance on section 203(l) thereof:
(i) Has an arrangement whereby the fund or the investment adviser offers to provide, and if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of the qualifying portfolio company; or
(ii) Controls the qualifying portfolio company;
(4) Does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days;
(5) Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and
(6) Is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).
The text of Senator Baucus’s proposed repeal of the new Form 1099 rules is short and sweet:
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Small Business Paperwork Relief Act’’.
SEC. 2. REPEAL OF EXPANSION OF INFORMATION REPORTING REQUIREMENTS.
Section 9006 of the Patient Protection and Affordable Care Act, and the amendments made thereby, are hereby repealed; and the Internal Revenue Code of 1986 shall be applied as if such section, and amendments, had never been enacted.
Update: When the bill becomes available, you will be able to find it at this web address.
Senator Baucus, the Chair of the Senate Finance Committee, issued a press release on Friday announcing that he would introduce legislation to repeal the new Form 1099 requirements.
If you are unfamiliar with these new rules, effective January 1, 2012, persons in business will have to issue Forms 1099 to businesses they pay more than $600 for goods or services during the year. So, for example, if you are in business as a writer and buy a new computer from Apple, you would have to issue Apple a Form 1099.
These new rules are absurd, and it is great news that Senator Baucus has announced that he will introduce legislation repealing these new rules. As soon as the draft legislation becomes available, we will post it here.