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Qualified Small Business Stock

Set forth below is the text of a June 15, 2001 letter from Mark Weinberger, Assistant Secretary of the Treasury for Tax Policy, to Senator Susan M. Collins (Republican-Maine) concerning the difficulties Treasury is encountering in trying to provide guidance on the qualified small business stock rollover rules of Internal Revenue Code section 1045.

For more information on section 1045 or on the qualified small business stock rules generally, please contact Brian Wainwright, a tax partner in the Palo Alto office of Pillsbury Winthrop Shaw Pittman LLP.

              June 15, 2001

The Honorable Susan M. Collins
United States Senate
Washington, D.C. 20510

Dear Senator Collins:

Thank you for your letter to Secretary O'Neill regarding the capital gains rollover for qualified small business stock (QSBS). He has asked me to respond to you. Taxpayers have also raised with us concerns on how this provision applies to partnership transactions, as well as to transactions involving other flow-through entities. We agree that guidance in this area is needed and are seriously considering adding this project to next year's list of guidance priorities.

Based on our initial consideration of the statute, we believe that any guidance in this area will have to address a number of difficult technical issues. For example, there does not currently exist any rule that adequately describes how a partner's share of the value of a particular partnership asset is determined. Also, it is not clear what adjustments should be made to a partner's basis in his or her partnership interest when the partnership sells QSBS and the partner reinvests his or her "share" of the proceeds in another partnership that owns QSBS. We may need to work with Congress to resolve some of these issues.

Please feel free to have your staff contact Deborah Harrington of the Treasury's Office of Tax Legislative Counsel (202/622-1788) if they would like to discuss these issues further. We took forward to working with your office as we move forward.


              Mark Weinberger
              Assistant Secretary of the Treasury (Tax Policy)
              Department of the Treasury
              Washington, D.C.

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