The warning from Treasury was unusually direct. Kenneth Kies, Treasury assistant secretary for tax policy and acting IRS chief counsel, left little doubt about the government’s posture when he said,
“Let me just warn you: We don’t like stacking,” adding, “Just keep an eye out for that.”
At the center of the issue is Section 1202, one of the tax code’s most valuable benefits for founders and early investors. In the right circumstances, it allows substantial capital gains from qualifying small business stock to be excluded from federal income tax. Because the exclusion applies on a per-taxpayer basis, taxpayers and their advisers have long looked for ways to multiply the benefit by dividing ownership across trusts or family members.
That strategy, commonly known as “stacking,” can allow a single economic investment to produce multiple QSBS exclusions. In practical terms, instead of one taxpayer claiming one exclusion, shares may be spread across several trusts or related individuals so that each can claim a separate benefit.
Why Critics Say Stacking Crosses the Line
Critics argue that this moves well beyond the spirit of the provision. David Mitchell of the Washington Center for Equitable Growth framed the issue in plain terms, saying the amount of capital gains a founder or venture investor can shield from tax should not depend on “how many cousins you have or how sophisticated your accountants are.”
That concern aligns with Equitable Growth’s broader critique that the QSBS exclusion overwhelmingly benefits wealthy founders and investors and should be reformed. Their proposed changes include limiting the size of the exclusion, tightening eligibility, and preventing the multiplication of benefits through planning techniques such as trust stacking. Some practitioners agree that IRS scrutiny is justified. “The IRS’s concern about it is probably warranted,” said Lauren Winter Routhier of Stinson LLP. Mitchell went further, arguing that “stacking is clearly contrary to the spirit of the provision.”
That focus was reinforced in a recent article by Edward Beeby, who reported in TaxNotes that Treasury is examining transactions in which trusts may be used to multiply the Section 1202(b) limitation beyond what Congress intended. Beeby also noted that Treasury is aware of questions surrounding whether the new $75 million asset threshold will be indexed for inflation, an issue some practitioners believe was left unclear by a drafting error in the OBBBA.
The Legal Question May Be Harder Than the Policy Case
Even so, the legal issue is more complicated than the policy critique. Some tax practitioners argue that the statute itself appears to accommodate transfers of QSBS and that Congress had the chance to restrict stacking when it amended Section 1202, but chose not to do so. Myra Sutanto Shen of Wilson Sonsini put it directly: if stacking was something Congress wanted to target,
“they had an opportunity to do so.”
That is what makes the next phase of the debate so important. Treasury may want to limit stacking through regulation, but whether it can do so as a matter of legal authority is far less certain. Adam Chodorow of Brooks Pierce questioned whether the IRS can solve the issue through regulations alone, saying, “I’m not sure that they actually have the authority to do so.” Another practitioner went further, observing that the words of the statute appear consistent with essentially unlimited stacking, even if the policy outcome makes some regulators uneasy.
This leaves Treasury with a difficult line-drawing exercise. Trust planning is not inherently abusive. It is a routine part of estate planning and family wealth transfers. The harder question is when ordinary trust planning becomes aggressive QSBS multiplication.
A trust created for legitimate estate planning reasons may look very different from a structure created primarily to multiply Section 1202 exclusions shortly before a liquidity event. But in practice, separating those cases may not be easy. Any regulation aimed at stacking will likely have to distinguish between normal wealth-transfer planning and structures the government believes were designed chiefly to amplify tax benefits.
Where else might regulations focus?
David Mitchell of Equitable Growth also indicated that the IRS may target certain practices involving QSBS rollovers via Section 1045, in particular situations where a gain is reinvested into a new company:
“We’ve seen private actors catering to investors to continue to shelter their gains by rolling over into what are effectively shell companies”, Mitchell is quoted as saying in Beeby’s article.
For founders, investors, family offices, and tax advisers, the government’s message is becoming clearer. QSBS remains an exceptionally valuable tax benefit, but trust stacking and some other strategies now appear to be firmly in Treasury’s sights.
What comes next may shape the future of Section 1202 planning. The debate is no longer just whether stacking works technically under the current statute. It is whether Treasury and the IRS can curb it through regulation, or whether Congress will ultimately need to step in and rewrite the rules itself.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.