[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1202-2]

[Page 241-242]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1202-2  Qualified small business stock; effect of redemptions.

    (a) Redemptions from taxpayer or related person--(1) In general. 
Stock acquired by a taxpayer is not qualified small business stock if, 
in one or more purchases during the 4-year period beginning on the date 
2 years before the issuance of the stock, the issuing corporation 
purchases (directly or indirectly) more than a de minimis amount of its 
stock from the taxpayer or from a person related (within the meaning of 
section 267(b) or 707(b)) to the taxpayer.
    (2) De minimis amount. For purposes of this paragraph (a), stock 
acquired from the taxpayer or a related person exceeds a de minimis 
amount only if the aggregate amount paid for the stock

[[Page 242]]

exceeds $10,000 and more than 2 percent of the stock held by the 
taxpayer and related persons is acquired. The following rules apply for 
purposes of determining whether the 2-percent limit is exceeded. The 
percentage of stock acquired in any single purchase is determined by 
dividing the stock's value (as of the time of purchase) by the value (as 
of the time of purchase) of all stock held (directly or indirectly) by 
the taxpayer and related persons immediately before the purchase. The 
percentage of stock acquired in multiple purchases is the sum of the 
percentages determined for each separate purchase.
    (b) Significant redemptions--(1) In general. Stock is not qualified 
small business stock if, in one or more purchases during the 2-year 
period beginning on the date 1 year before the issuance of the stock, 
the issuing corporation purchases more than a de minimis amount of its 
stock and the purchased stock has an aggregate value (as of the time of 
the respective purchases) exceeding 5 percent of the aggregate value of 
all of the issuing corporation's stock as of the beginning of such 2-
year period.
    (2) De minimis amount. For purposes of this paragraph (b), stock 
exceeds a de minimis amount only if the aggregate amount paid for the 
stock exceeds $10,000 and more than 2 percent of all outstanding stock 
is purchased. The following rules apply for purposes of determining 
whether the 2-percent limit is exceeded. The percentage of the stock 
acquired in any single purchase is determined by dividing the stock's 
value (as of the time of purchase) by the value (as of the time of 
purchase) of all stock outstanding immediately before the purchase. The 
percentage of stock acquired in multiple purchases is the sum of the 
percentages determined for each separate purchase.
    (c) Transfers by shareholders in connection with the performance of 
services not treated as purchases. A transfer of stock by a shareholder 
to an employee or independent contractor (or to a beneficiary of an 
employee or independent contractor) is not treated as a purchase of the 
stock by the issuing corporation for purposes of this section even if 
the stock is treated as having first been transferred to the corporation 
under Sec. 1.83-6(d)(1) (relating to transfers by shareholders to 
employees or independent contractors).
    (d) Exceptions for termination of services, death, disability or 
mental incompetency, or divorce. A stock purchase is disregarded if the 
stock is acquired in the following circumstances:
    (1) Termination of services--(i) Employees and directors. The stock 
was acquired by the seller in connection with the performance of 
services as an employee or director and the stock is purchased from the 
seller incident to the seller's retirement or other bona fide 
termination of such services;
    (ii) Independent contractors. [Reserved]
    (2) Death. Prior to a decedent's death, the stock (or an option to 
acquire the stock) was held by the decedent or the decedent's spouse (or 
by both), by the decedent and joint tenant, or by a trust revocable by 
the decedent or the decedent's spouse (or by both), and--
    (i) The stock is purchased from the decedent's estate, beneficiary 
(whether by bequest or lifetime gift), heir, surviving joint tenant, or 
surviving spouse, or from a trust established by the decedent or 
decedent's spouse; and
    (ii) The stock is purchased within 3 years and 9 months from the 
date of the decedent's death;
    (3) Disability or mental incompetency. The stock is purchased 
incident to the disability or mental incompetency of the selling 
shareholder; or
    (4) Divorce. The stock is purchased incident to the divorce (within 
the meaning of section 1041(c)) of the selling shareholder.
    (e) Effective date. This section applies to stock issued after 
August 10, 1993.

[T.D. 8749, 62 FR 68166, Dec. 31, 1997]

                       Treatment of Capital Losses