Could someone help me understand this MCQ?
Danielson invested $2 million in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16 million and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson's taxable gain after the exclusion?
A. $0
B. $6 million
C. $7 million
D. $9 million
C is correct. I thought 100% gain is excludable so thought A was correct.
Following is the answer explanation.. I could not get why a gain exclusion is only 50%, not 100%. Is this 50% limit rule really there?
IRC Section 1202 permits a taxpayer, other than a corporation, to exclude in general 50% of the gain realized on the sale of a qualified small business corporation if the taxpayer holds the stock for more than five years prior to sale. The amount of gain which may be excluded in this manner is limited, on a “per issuer” basis, to the greater of $10 million or 10 times the taxpayer's basis in the stock.
In this example, 50% of the gain is $7 million ($16,000,000 − $2,000,000 × 0.50). Compare that number to:
1. 10 times the taxpayer's basis, which would be $20 million ($2,000,000 × 10)
2. $10 million
The gain excluded is limited to the greater of either (1) or (2) above—in this case, $20 million. However, since the gain exclusion is calculated at $7 million, the limitation is not met and $7 million is excluded.
Thank you!
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