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Jim Schneider
The Taxman86 Speaks...
12 August 2000
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The Home-Based Business Lives On; Some things take a long time.

1. Steven King shows us the way.

We suggest the following quote says it all "...he has two offices in Bangor: one in the house for writing, the other in a low-slung flesh-colored building near the airport. This is where he and two assistants manage the empire that has arisen in the wake of more than 40 books and nearly as many films based on the writing of Stephen King and Richard Bachman, King's pseudonymous counterpart..."This may be what his friends mean when they call him a genius. After all, who but the chairman of Stephen King Inc. would think to turn 15-year-old toilet paper into an Internet rage? King, as his longtime editor puts it, "is the rock star of writers"

Meanwhile back in the courtroom, the litigators are at it again. The Supreme Court better get ready for this one, fast.

There is a message here, times are changing and fast. Venture Capital continues to feed the New Economy says the SFGate with Northern California getting the lion share at $8B for the second quarter. If we read this correctly the VC market is running at close to $100B annual.

Meanwhile Congress is concerned that some areas are going to be left behind and is proposing a New Markets Venture Capital Program totally $5B over five years, offering tax credits and capital gain roll overs.

We suggest that it will be the 'free market' that will bring capital into the poorest areas of the country, with Zero Capital Gains a big incentive. If we see it correctly, IRC Section 1202 and 1045, the former is a 50% capital gains exclusion after a five year holding period, and the latter a capital gain roll over after six months, have made the VCs very happy with tax deferred gains being reinvested into other new ventures. That is one of the major sources of the $100B of Venture Capital infusion referred to above. How do these code sections effect the employees with their stock options? Not very well.

Incentive Stock Option [ISO] rules have been around for many many years, but the capital gain exclusion and roll over became available in the 90's. If you exercise an ISO you immediately recognize preference income for AMT purposes [this came in the 80's], but still must hold the optioned stock for one-year before you get capital gain treatment. IRC Section 1045 reguires that the deferred gain be a capital gain [long or short] not ordinary income. Thus the one-year holding period is a must before the roll over becomes available.

Lastly the ISO stock must be Qualified Small Business Stock, which means that the employer had $50M or less in gross assets when the stock was issued, not when the ISO was granted. This has wiped out many ISOs which are exercised after an IPO. However this does not affect the VCs or founders who get in at the beginning, when assets are generally $50M or less.

Is there a better way to get to the promised land? We suggest that the new proposed IRC Section 1397B, capital gains roll over for Enterprise Zone Businesses will be the answer since with creative planning most employees, along with the VCs and founders will now get the opportunity to defer the gains. Moreover, they will be given the opportunity to reinvest in other Enterprise Zone Businesses, which just may be a home-based business like Mr. King, along with being Chairman of Yourself-Inc.com.

2. Some things take a long time.

The Spring Street National Historic District [the 'District'] was created in the early 70's and the City of Los Angeles, the State of California and the federal government have invested over $750M on the District, with not much to show for it. Along comes Tom Gilmore with a vision and the financial support to make it happen. Congratulations to a real trooper for urban revitalization.

We also suggest that the Los Angeles Federal Empowerment Zone, which includes all of the Downtown Historic Core, could be a real boost to this effort come September 2000, but only as to investments made after that date; sorry Mr. Gilmore and your investors, we tried in 1996 to get the legislation passed, but it did not happen until now. Will the proposed tax changes have a dramatic effect? We think so and so do others; high tech and urban environments are in.

Jim Schneider, LL.M.

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