I AM DECIDEDLY NOT A TAX ATTORNEY, BUT THIS IS SOMETHING I CAME ACROSS. YOU SHOULD CONSIDER IT WITH A QUALIFIED TAX PROFESSIONAL.
Qualified Small Business Stock
Noncorporate taxpayers can exclude 100% of any gain realized on the sale or exchange of “qualified small business stock” (“QSBS”) held for more than five years, if the QSBS is acquired after September 27, 2010 and before January 1, 2011. In addition, the treatment of a percentage of the excluded gain with respect to QSBS as a preference item for purposes of the alternative minimum tax (“AMT”) does not apply to QSBS acquired September 27, 2010 and before January 1, 2011. Stock is “qualified small business stock” only if all of the following requirements are met: (i) the taxpayer acquired the stock at original issue in exchange for money or property other than stock, (ii) the stock was issued after August 10, 1993, (iii) the issuer of the stock was a “qualified small business” when the stock was issued, (iv) the corporation meets an active business requirement “during substantially all of the taxpayer’s holding period” for the stock, and (v) the corporation is a C corporation when the stock is sold and during substantially all of the taxpayer’s holding period for the stock. Stock should be deemed to be acquired at original issuance if the Holders exchange their LLC interests for stock of the Company. A “qualified small business” is a domestic C corporation that has not more than $50 million in assets.
A corporation will meet the active business requirement if at least 80 percent of its assets, by value, are used in the active conduct of one or more “qualified” trades or businesses and the corporation is an “eligible corporation.” The term “qualified trade or business” includes all trades or businesses other than the following categories of disqualified activities such as various professional and business services; banking, insurance, financing, leasing, investing, and similar businesses, and “the ownership of, dealing in, or renting of real property.” Based on the activities of the Company, principally all of its assets are used on generating electricity using solar technology. Although we would need to explore the Company’s activities in more detail, based on our preliminary understanding of its activities, it would appear that the Company should be considered to be engaged in the active conduct of a qualified trade or business.
Since it would appear based on an initial analysis that the Company’s stock could be eligible to be treated as QSBS, it may be prudent to undertake the exchange of LLC interests for Company stock prior to December 31, 2010 in order to allow noncorporate taxpayers to take advantage of the exclusion from capital gains taxation and treatment as an item of AMT preference. However, we will need to analyze the Company’s activities further to determine whether the company would be a qualified small business. We note that undertaking the contribution prior to December 31, 2010 would not require that the Series A financing close prior December 31, 2010. Thus, the Series A Financing can occur in 2011 without any adverse U.S. tax consequences.
 For QSBS acquired by a noncorporate taxpayer after December 31, 2010 and held for more than five years, the exclusion is 50% of the realized gain (60% for QSBS in a qualified business entity) and such gain is subject to the AMT.