Working Checklist · §1202 / QSBS

The QSBS Defensibility Checklist.

Every element the IRS tests on a §1202 claim — issuer qualification, original issuance, holding period, the gift and its timing, trust structure under §643(f), and the contemporaneous record — laid out in the order an examiner runs it. Items flagged GIFT are the points where a gifting or stacking situation most often comes apart. Educational only — not advice. Your progress is saved in this browser. New to QSBS? Start with the front-door primer: Does Your Company Qualify for QSBS?

Before anything else — is the window still open? If a letter of intent is signed or a sale is substantively certain, advance gifting is off the table. A transfer made after that point invites assignment-of-income treatment (Estate of Hoensheid v. Comm'r, T.C. Memo. 2023-34) rather than creating a new exclusion. If you are past that line, stop here and ask counsel about §1045 rollover and post-sale strategies instead.

Issuer qualification — the company level

§1202(c), (d), (e)

The issuer is a domestic C corporation, and was a C corporation at issuance and through substantially all of the holding period.

S corporations and most LLCs do not qualify at issuance. A later conversion does not cure stock issued while the company was ineligible.

Aggregate gross assets were at or under the threshold at — and immediately after — every qualifying issuance.GIFT

$75M post-7/4/2025, $50M pre. The taxpayer carries the burden of proving this — see Ju v. United States. The test applies at each issuance moment, not just the first.

The active-business test is met — at least 80% of assets used in a qualified trade or business.

Portfolio-heavy balance sheets and large cash holdings can fail this even for an operating company.

The business is not an excluded type.

Excluded: health, law, engineering, architecture, accounting, actuarial, performing arts, consulting, athletics, financial/brokerage services; banking/insurance/financing; farming; mining/extraction; hospitality (hotels, restaurants).

Redemption history is clear — no significant redemptions in the prohibited windows.

Related-party redemptions within the windows around issuance, and significant general redemptions, can disqualify the stock under §1202(c)(3).

A written issuer attestation of §1202 status is on file.

The cleanest way to carry the issuer-side burden. Date it, and re-confirm before a sale.

Original issuance & character

§1202(c)(1)

The stock was acquired at original issue, in exchange for money, property (other than stock), or services.

Secondary-market purchases of existing shares are not original-issue and do not qualify.

Conversion history has been analyzed under the original-issuance lens.

Leto v. United States denied the exclusion where C-corp shares came from converting an entity treated as holding "stock." SAFE/note conversions, S/LLC-to-C conversions, and F-reorganizations each need their own analysis.

Every share lot is traced to a specific qualifying issuance moment.

Mixed lots are common; each lot stands or falls on its own facts.

Holding period, regime & cap

§1202(a), (b); §1202(h)

The issuance date of every lot is documented — fixing which regime applies.

Pre-7/4/2025: $10M cap, flat 5-year hold, $50M asset test. Post-7/4/2025: $15M cap, tiered 50/75/100% at 3/4/5 years, $75M asset test. Mixed issuance means two regimes run in parallel.

The holding period clears the bar for the exclusion claimed (more than 5 years for 100%).

Under the post-OBBBA tiers, gain not excluded at a 3- or 4-year hold is taxed at 28%, not 15/20% — model this before choosing a sale date.

For any gifted lot, the tacked holding period under §1202(h) is calculated correctly.GIFT

The donee inherits the donor's acquisition date, character, and carryover basis. Confirm the donor's clock, not the gift date, drives the 5-year test.

The per-taxpayer cap is computed — greater of the dollar cap or 10× basis — for each holder.

Low basis means the dollar cap controls. The 10× basis ceiling can be the larger number for well-capitalized positions.

The gift itself — timing & substance

assignment of income · step transaction

The gift is of the actual stock and was completed before any binding sale or LOI.GIFT

Transfer after the deal binds and you are gifting cash proceeds — no new QSBS holder, no new exclusion.

There is meaningful separation in time between the gift and any liquidity conversation.GIFT

Months, ideally a year or more. The closer to the sale, the stronger the assignment-of-income attack (Hoensheid).

The sale was not "practically fixed" at the moment of transfer.GIFT

Hoensheid asks whether the right to proceeds had effectively ripened — not whether the deal had legally closed.

The transfer is real — certificate reissued, cap table updated, voting and economic rights actually passed.

A paper-only gift invites the IRS to disregard it under substance-over-form.

Each donee is a genuine separate taxpayer — adult child or non-grantor trust (separate status beyond dispute).GIFT

A grantor trust is taxed to you — it is not a new taxpayer and adds no exclusion. This is the most common stacking mistake.

If a spousal exclusion is being claimed, the unsettled joint-return question has been analyzed and the position sized to the client's risk tolerance.GIFT

§1202 is silent on whether spouses filing jointly get one cap or two; no regulation, ruling, or case resolves it. Treat it as upside, not foundation — and read it against the client's tolerance for a contestable position.

Trust structure — §643(f) & substance

§643(f) · sham-trust doctrine

Each stacking trust is a non-grantor trust that files and is taxed in its own right.GIFT

Only a separate taxpayer brings a separate cap.

The trusts have distinct primary beneficiaries.

Shared grantor + shared beneficiaries is half of the §643(f) consolidation test.

Independent trustees are in place; the grantor does not control distributions.

Grantor influence over trustee discretion can collapse the trust entirely.

The trusts use different distribution standards or triggers.

Each trust has a documented non-tax purpose.

Dynasty planning, asset protection, GST allocation, blended-family equalization. A principal purpose of tax avoidance is the other half of §643(f).

Trust domicile is decided and situs is maintained.

DE / NV / SD / WY non-grantor trusts can remove state-level tax — but founder relocation and situs failures can undo it. In plain language it is a "Delaware-law non-grantor irrevocable trust," not a "DST."

The trusts were not created on the same day with identical instruments and funded together.

Near-identical trusts formed and funded simultaneously are the classic §643(f) fact pattern.

Documentation & substantiation — the record is the case

Ju · Leto · §6501(c)(9)

A qualified appraisal was obtained as of the gift date.GIFT

Values the transfer and starts the gift-tax disclosure clock.

A gift-tax return (Form 709) was filed with adequate disclosure.GIFT

Adequate disclosure under §6501(c)(9) starts the statute of limitations on the gift's valuation.

The issuer's §1202 attestation is in the file.

Reissued stock certificates and an updated cap table reflect the new owners.

Trustee minutes and contemporaneous administration records exist for each trust.

Ju / Leto: the burden is on the taxpayer, and reconstruction under audit is not viable.

If §1045 rollovers are involved, the rollover documentation is tracked separately for each taxpayer.

Ongoing conduct — after the gift

substance over time

Distributions are actually made consistent with each trust's own terms.

A trust that never behaves differently from the others undermines the §643(f) defense after the fact.

Beneficiary distinctions are maintained over time, not just at formation.

Issuer qualification is re-confirmed where relevant before a sale.

The analysis is re-run if gain projections rise, new QSBS is acquired, or family-transfer goals change.

Use this alongside

The checklist tells you what. The white paper tells you why.

Read Gifting QSBS — How the Multiplier Works and How It Fails for the reasoning behind each element, including the Roblox example. Then run the QSBS Stacking Review to see which lane a specific situation falls into. All three are educational; none is advice.

Read the white paper Run the Stacking Review Talk it through

Important Disclaimers

Not advice. This checklist is published for general educational and informational purposes. It does not constitute legal, tax, accounting, financial, or investment advice for any specific person or situation. It is a starting point for discussion with qualified professionals, not a substitute for one. The strategies referenced involve complex rules, fact-specific application, and material residual risk.

Not a law firm. Socrates Crayon is an educational resource. It is not a law firm, registered investment adviser, broker-dealer, or accounting firm. No attorney-client, fiduciary, broker-dealer, or other professional relationship is created by use of this page, and no tax or legal opinion is rendered. Checking every box does not establish that any §1202 position will be sustained.

Consult qualified counsel. Implementation of any strategy referenced here requires written analysis by qualified tax and legal counsel applied to the specific facts of the matter. Tax and trust law are subject to change; cited authorities may be superseded. References to §1202, §1202(h), §643(f), §1045, §6501(c)(9), the OBBBA (Pub. L. No. 119-21), and case law including Hoensheid, Ju, and Leto reflect publicly-available information current as of June 2026.