8685 / Under what circumstances may a noncorporate taxpayer roll over gain from the sale or exchange of qualified small business stock that is held for six months or more?
If the taxpayer elects to roll over gain on the sale of qualified small business stock, gain will be recognized only to the extent that the amount realized on the 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 the sale, reduced by (2) any portion of such cost previously taken into account under this rollover provision. The rollover provisions of IRC Section 1045 will not apply to any gain that is treated as ordinary income.2
Rules similar to those applicable to rollovers of gain by an individual from certain small business stock3 will apply to the rollover of such gain by a partnership or S corporation.4 Thus, for example, the benefit of a tax-free rollover with respect to the sale of small business stock by a partnership will flow through to an “eligible partner”—meaning a partner who is not a corporation and who held his partnership interest at all times during which the partnership held the small business stock.5 (A similar rule applies to S corporations and their shareholders.)6
For the rules regarding (1) the deferral of gain on a partnership’s sale of qualified small business stock followed by an eligible partner’s acquisition of qualified replacement stock, and (2) the deferral of gain on a partner’s sale of qualified small business stock distributed by a partnership, see Treasury Regulation Section 1.1045-1.7