Recent IRS Ruling on QSBS Highlights the Importance of Engaging a Qualified Tax Professional

Published: Jun 11, 2024
By: Benjamin Aspir; Sarah E. Adkisson
Topics: Tax
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The IRS issued Private Letter Ruling (“PLR”) 202419010 on May 10, 2024, granting relief to taxpayers who failed to make a timely IRC Sec. 1045 election for their qualified small business stock (“QSBS”). The IRS granted the taxpayers an extension of time to make the IRC Sec. 1045 election based on the determination that the taxpayers acted reasonably and in good faith.

IRC Sec. 1045 Explained

The Internal Revenue Code contains a taxpayer-favorable provision under IRC Sec. 1202 that allows taxpayers to exclude the greater of $10 million or ten times their adjusted basis in QSBS when it is sold. The taxpayer must meet certain requirements to take advantage of this exclusion, including a 5-year holding period. However, taxpayers who do not hold their QSBS for this period may still be able to exclude their gain.

Under IRC Sec. 1045, taxpayers may elect to rollover the gain on the sale of QSBS if they held the stock for at least six months before the sale and purchased different QSBS within 60 days of the sale of the original QSBS. Any gain from the sale of the original QSBS in excess of the cost of the replacement QSBS will still be taxable. An IRC Sec. 1045 election must be made on a timely filed return, including extensions.

Late Filed Election

The taxpayers in the PLR sold their QSBS approximately a year after the original issuance. Within 60 days of the sale, they used the proceeds to fund a second Qualified Small Business. The taxpayers informed their tax preparer of the transactions and their intent to make an IRC Sec. 1045 election. The tax preparer failed to advise the taxpayers that such an election must be made on a timely filed return.

Unfortunately, the tax preparer did not file the taxpayers’ federal income tax return for the year of the sale until after the extended due date. Subsequently, the tax preparer advised the taxpayers that they would only be subject to penalties and possibly interest related to the late filing. The tax preparer eventually realized their mistake and filed the return requesting permission to make a late IRC Sec. 1045 election.

Late IRC Sec. 1045 Election Relief

Taxpayers may be granted relief provided they show evidence that they acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. One element taxpayers may show is that they “reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election.”

Under these facts, the IRS determined that the taxpayers acted reasonably and in good faith and granted relief to make a late IRC Sec. 1045 election within 60 days of the ruling date. PLRs such as this cannot be cited as precedent or relied on by other taxpayers. However, they can be informative for tax professionals and taxpayers alike to understand how the IRS may apply the law to specific facts similar to their own.

While the taxpayers in this case were ultimately granted relief, PLR requests are still costly. For 2024, the base fee for requesting a PLR is $38,000. Taxpayers who wish to take advantage of the IRC Sec. 1202 exclusion or the IRC Sec. 1045 election should consult a qualified tax advisor to ensure they do not miss a critical election or requirement.