IRC § 1054 Capital Gains Rollover Amendment
IRS Reform Act of 1998 (HR 2676)

Title: Internal Revenue Service Reform and Restructuring Act.

Summary of HR 2676.  This is a mammoth bill that would reform the IRS structure, increase taxpayers' protection from IRS abuse, and provide for future electronic filings.  However, one very small provision would greatly benefit venture capital firms which invest in high tech startups, and their investors.  This is a change in Internal Revenue Code §1054, regarding capital gains tax rollover.

Summary of Amendment to IRC § 1054.  This measure would allow anyone who invests via a venture capital fund, to roll over tax free a gain from the sale of a "qualified small business stock" when the proceeds are reinvested in another small business stock.  Section 1045 currently provides that individual taxpayers may rollover tax-free any gain realized on a sale of "qualified small business stock" when the sale proceeds are reinvested in other qualified small business stock.  The rationale for this provision is to encourage individuals to invest in emerging growth companies, and also to encourage them to reinvest any profits once the original investments mature.  However, the "rollover" benefits of §1054 currently is limited to individuals.  What the new bill would do is extend the benefits of §1054 to noncorporate investors in venture capital partnerships.  It would likely encourage people to invest in venture capital funds, which are a major source of seed money for high-tech computer and Internet industry companies.

Status.  HR 2676 conference report was passed by the House on June 25, 1998, and by the Senate on July 9.  President Clinton signed the bill on July 22.  It is Public Law 105-206.