7520 / Prior to 2018, under what circumstances could a taxpayer roll over and, thus, defer gain from the sale of publicly traded securities?

Prior to 2018, individual taxpayers and C corporations could elect to roll over certain capital gain from the sale of publicly traded securities if the individual or corporation used the amount realized from the sale to purchase common stock or a partnership interest in a specialized small business investment company within 60 days of the sale.² A specialized small business investment company (SSBIC) is any corporation or partnership that is licensed by the Small Business Administration under Section 301(d) of the Small Business Investment Act of 1958.³ “Publicly traded securities” are securities traded on an established securities market.⁴

If the election was made, gain from the sale of the publicly traded securities was currently taxable only to the extent that the amount realized from the sale exceeded the cost of the SSBIC stock or interest.⁵ IRC Section 1044(a)(2) stated that the cost of the SSBIC stock or interest was to be reduced by any portion of such cost previously taken into account under IRC Section 1044.

The amount of gain that could be rolled over by an individual in a taxable year was generally limited to $50,000. But the aggregate amount of gain that could be rolled over during a taxpayer’s lifetime was $500,000.⁶ Thus, a taxpayer who had previously rolled over a total of $475,000 in gain in prior tax years, but who had $50,000 in gain in the current year, would have been limited in the current year rollover to $25,000 of otherwise eligible gain. The $50,000 and $500,000 limits were reduced to $25,000 and $250,000, respectively, for married taxpayers filing separately. In the case of a C corporation, the gain that could be deferred in a taxable year could not exceed $250,000; the total amount of gain that could be rolled over during the corporation’s existence was $1,000,000.⁷

A taxpayer’s basis in the SSBIC stock or partnership interest was generally reduced by the amount of gain that was rolled over into the stock or interest. But the basis of any SSBIC common stock was not reduced for purposes of calculating the gain eligible for the 50 percent (or 75 percent or 100 percent) exclusion for qualified small business stock provided by IRC Section 1202 (see Q 7522).⁸

The election under IRC Section 1044 had to be made on or before the due date (including extensions) for the income tax return for the year in which the publicly traded securities were sold.⁹

Estates, trusts, partnerships, and S corporations were ineligible to roll over gain under this section.¹⁰