"Just want to give you a little tip. Just keep an eye out for that." With those words on May 20, Kenneth Kies, Treasury's assistant secretary for tax policy and acting IRS chief counsel, put the tax planning community on notice at a BakerHostetler seminar that administrative action on qualified small business stock (QSBS) stacking is forthcoming. "Let me just warn you: We don't like stacking, OK?" Kies added. His comments echoed similar remarks made by Treasury attorney-adviser Evan Adams on May 9.
How Stacking Works
I.R.C. Section 1202 allows noncorporate taxpayers who hold QSBS (stock in a domestic C corporation with gross assets not exceeding $75 million, as expanded by the One Big Beautiful Bill Act (OBBBA) for stock issued post-enactment) to exclude gain equal to the greater of (i) $15 million or (ii) 10 times the aggregate adjusted basis of the QSBS realized upon its sale. The exclusion applies on a per-taxpayer, per-issuer basis.
Section 1202(h) provides that when QSBS is transferred "by gift," the transferee is treated as having acquired the stock "in the same manner as the transferor" and tacks the donor's holding period. "Stacking" leverages these two features: a founder whose anticipated gain exceeds the exclusion cap transfer portions of QSBS by gift to irrevocable nongrantor trusts established for family members. Because each nongrantor trust is a separate taxpayer, each qualifies for its own full exclusion. A founder with three children who establishes a separate trust for each, and claims her own exclusion, could shelter up to $60 million (four taxpayers x $15 million) rather than $15 million. Commonly called "Stacking" or "Stacking and Packing."
What Treasury Has Telegraphed
Assistant Secretary Kies indicated that Treasury is concerned about arrangements that go beyond one trust per family member. He described a pattern where taxpayers with three children (A, B, and C) create not only a separate trust for each child, but additional trusts for combinations of beneficiaries: an "AB trust," a "BC trust," "and so on, and so on." An entire ecosystem of advisors has emerged marketing these strategies.
Treasury's forthcoming guidance may invoke Section 643(f), which authorizes the IRS to treat two or more trusts as one if they have substantially the same grantor or primary beneficiary and a principal purpose is tax avoidance. The IRS proposed regulations in 2018 with a rebuttable presumption of avoidance where multiple trusts produced a "significant income tax benefit" not achievable without their creation, but that presumption did not survive into final regulations.
Any attempt to issue guidance based on Section 643(f) to collapse trusts specifically for QSBS purposes could face a textual challenge. Section 643(f) expressly applies only "[f]or purposes of this subchapter" (Subchapter J), while the QSBS exclusion under Section 1202 is in Subchapter P.
If Treasury moves forward with anti-stacking guidance, Section 1202(k) may provide a more natural regulatory foundation. It expressly authorizes regulations "to carry out" Section 1202 and "to prevent the avoidance of the purposes of this section."
Whether Treasury has the regulatory authority to limit stacking is itself contested, and absent a statutory fix, it is not yet clear what the IRS has in mind. Some suggest existing doctrines like assignment of income may already address the most aggressive arrangements.
Our View
Gifting is expressly contemplated. Section 1202(h)(2)(A) provides that transfers "by gift" preserve QSBS status. Congress has left this rule intact through multiple amendments over three decades, including in the OBBBA, despite multiple opportunities to limit it. The per-taxpayer structure of the exclusion, combined with an express gift-transfer rule, supports the conclusion that gifting stock to a trust for a family member is planning the statute contemplates.
Extreme implementations may be another matter. The text of Section 1202 may be consistent with broad stacking, but that does not mean every implementation is consistent with the policy objectives Congress had in mind. Treasury may not be targeting garden-variety trust stacking. The concern seems directed at arrangements involving multiple trusts with overlapping beneficiaries designed to manufacture additional "taxpayers" and multiply the statutory exclusion cap rather than serving independent estate planning goals.
We believe that what is not aggressive or abusive should not be appropriately subject to regulatory curtailment. The statute contains no numerical limit on trusts, and it would be problematic for Treasury to impose one without clear statutory authority. At the same time, arrangements with substantially overlapping beneficiaries and no purpose apart from generating exclusions may be targeted.
Recommended Steps
- Evaluate existing trust structures for distinct beneficiaries, independent trustees, meaningful variations in terms, and documented non-tax purposes.
- Exercise caution when creating additional trusts with overlapping beneficiaries until Treasury issues its guidance.
- Ensure gifts of QSBS are made well in advance of any anticipated sale to minimize assignment-of-income risk.
- Monitor Treasury's guidance. Please contact your Venable tax advisor if you have questions or would like to discuss how these developments may affect your planning.
* * *
If you have any questions regarding this alert, please contact the authors, and we would be happy to discuss it with you.