[mad max]

NINJA Question –

I came across a question ( NINJA REG # 944 ) that reads as below.

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

I would select ‘A’ on exam day. This assumes the only reference to a date of purchase is “six years” earlier. The realized gain is $14M, which is less than $20M (the greater of $10M or $2M*10) therefore the whole gain should be excluded from net income.
If this was a situation where $0 was not an answer choice, I could assume that it was purchased in a year that required 50 or 75% exclusion (assuming ONLY one of those was given.) If there was a choice between 50% (old), 75% (old), and 100% (new) I would assume new rule unless question clearly dictated otherwise.
Sources:
IRS: Exclusion on Gain on QSB Stock (1202)
IRC 26 US Code 1202
According to Ninja, the answer is C:

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.

I think the 50% should be changed to 100%, as this conflicts with information directly on IRC 1202-4-A :

Exclusion of Gain on Qualified Small Business (QSB) Stock
(4) 100 percent exclusion for stock acquired during certain periods in 2010 and thereafterIn the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010—
(A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”

How would you approach this question on exam day, or is this question just incorrect/not updated to reflect new laws? Am I understanding the concept correctly? Appreciate any and all assistance, thank you.

AUD - 82
BEC - 90
FAR - 90
REG - 86

Four for four. Licensed in NJ as of 10/18/17

[mad max]

Bump it to the top, still looking for help on this!

Also, if it is wrong on Ninja MCQ, I need to notify Jeff/Ninja team for our fellow candidates 🙂

AUD - 82
BEC - 90
FAR - 90
REG - 86

Four for four. Licensed in NJ as of 10/18/17

[mad max]

Bump, still looking for solution.

AUD - 82
BEC - 90
FAR - 90
REG - 86

Four for four. Licensed in NJ as of 10/18/17

[jeff]

Hi Max – you are correct, unfortunately. Questions like this are hard to keep track of because there isn't a new tax law to prompt an edit of the question, but rather the passage of time when a year range is involved. Thank you for the heads-up.

AUD - 79
BEC - 80
FAR - 76
REG - 92

Jeff Elliott, CPA (KS)
NINJA CPA | NINJA CMA | NINJA CPE | Another71

[mad max]

Thanks Jeff!

AUD - 82
BEC - 90
FAR - 90
REG - 86

Four for four. Licensed in NJ as of 10/18/17

[Author]

Replies