Q.S.B.S. Stacking: Is The Clock Ticking?

At a Washington tax conference on May 20, Treasury Assistant Secretary for Tax Policy Kenneth Kies reportedly signaled that anti-stacking regulations targeting Code §1202 qualified small business stock (“Q.S.B.S.”) are likely forthcoming.

For years, when advisors discussed Q.S.B.S. stacking with clients, there tended to be two reactions. One was that the Code quite clearly permits it and that, as long as trusts are sufficiently separated so that no two trusts can be viewed as one, tax- payers should be able to create as many separate taxpayers as possible. The other was that the result feels too good to be true, and when something feels too good to be true, one should worry.

The statutory argument is real. Code §1202(h) expressly contemplates that Q.S.B.S. may be transferred by gift without losing its character. And yet, when planning be- comes highly mechanical and highly marketed, one starts to wonder when Treasury and the I.R.S. will decide that enough is enough. The author’s view is closer to the second camp, particularly after reading “Silicon Valley’s Ultimate Tax Break,” the December 2021 New York Times article that brought Q.S.B.S. stacking into the pub- lic eye. At that time, the government’s response was viewed to be imminent. It took several years, but the response may now be here.

BACKGROUND

Code §1202 was originally designed to incentivize long-term, risky investments in emerging businesses by allowing non-corporate taxpayers to exclude a significant portion of their capital gain on exit. Historically, the exclusion was capped at the greater of $10,000,000 or 10 times the taxpayer’s basis in the Q.S.B.S.

THE RISE OF STACKING

High-net-worth technology founders and venture investors discovered a way to mul- tiply the exclusion. Rather than accepting a single baseline exclusion on a company exit, more aggressive planning used two principal mechanisms:

• Family Member Gifting: Shares are transferred to adult children, siblings, or other family members, with each separate taxpayer potentially claiming a separate Q.S.B.S. exclusion.
• Irrevocable Non-Grantor Trusts: Founders carve up pre-exit shares and gift them to multiple trusts. If each trust is respected as a separate taxpayer, each trust may claim its own separate exclusion amount.

Code §1202(h) is what made the technique attractive. It provides, in substance, that where Q.S.B.S. is transferred by gift, the transferee is treated as having acquired the stock in the same manner as the transferor and as having held the stock during the transferor’s holding period.

Then came the One Big Beautiful Bill Act (“O.B.B.B.”). Congress revisited Code

• 1202, made the benefit more generous for stock acquired after July 4, 2025, in- creased the dollar cap, introduced partial exclusions for shorter holding periods, and increased the gross-asset threshold. But Congress did not change the gift rule. For those of us who were uneasy blessing stacking too strongly, that omission mattered. Congress had a chance to say no. It did not.

THE END?

Now the conversation appears to be shifting again. Tax Notes reported that Kies warned that Treasury does not like stacking and that forthcoming Q.S.B.S. guidance is expected to limit taxpayers’ ability to multiply the benefit. Similar comments re- portedly were made earlier in May by another Treasury attorney-adviser.

The government is not starting with an empty toolbox. In trust-based stacking cases, Code §643(f) may do some of the work. That provision allows the I.R.S. to treat multiple trusts as one trust where the trusts have substantially the same grantor and substantially the same primary beneficiaries, and a principal purpose of the ar- rangement is income tax avoidance. Thus, if a founder creates multiple non-grantor trusts for substantially the same family class, funds each trust with Q.S.B.S., and each trust claims a separate Code §1202 exclusion, the I.R.S. may argue that the trusts should be collapsed into one taxpayer for this purpose. But Code §643(f) also illustrates the limits of the government’s position. It is a trust aggregation rule, not a general anti-stacking rule. It does not reach a simple gift to a child or other individual donee. Nor does it easily reach trusts with separate beneficiaries, different dispos- itive terms, and meaningful estate planning purposes. As a result, it may be useful in the most aggressive cases, but it does not eliminate stacking if that is Treasury’s objective.

That sets up the interesting question: can Treasury do by regulation what Congress did not do by statute? Treasury may try to target extreme cases through trust ag- gregation, assignment-of-income, substance-over-form, anti-abuse, or similar prin- ciples. A broad rule that simply denies separate exclusions following gifts, however, would have to contend with the text of Code §1202(h).

It also does not appear, at least for now, that “basis loading” is the target. Very brief- ly, some founders seek to maximize the exclusion not by multiplying taxpayers, but by using the 10-times-basis limitation instead of the now-$15,000,000 baseline cap. In some cases, this planning is pursued by starting in L.L.C. form incorporating the business early enough for the resulting C corporation stock to satisfy the applicable

Q.S.B.S. holding-period requirements. This is not an exit-eve technique, and valu- ation at the time of incorporation may be critical. If done properly, that can produce a much larger exclusion than the baseline cap and, in some cases, a larger result than trust stacking. If Treasury limits stacking, basis-focused planning may become the next frontier.

TAKEAWAY

For now, stacking is not dead. But it has moved from a planning technique with obvi- ous textual support to one under visible regulatory scrutiny. Existing plans should be reviewed for purpose, timing, donee independence, economics, and documentation. New plans should be designed with the expectation that forthcoming guidance may try to separate routine gift and succession planning from transactions that appear to exist only to multiply the Q.S.B.S. exclusion.

The lesson is familiar. Sometimes the Code appears to provide a clean answer, but policy pressure builds later. With Q.S.B.S. stacking, the 2025 legislation seemed to validate the statutory reading by silence. Treasury now appears ready to test how much silence is enough.

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