Page 5

an LLC or partnership interest in a partnership - provided those entities are not publicly traded - is eligible for the exclusion .. (C) Examples: (1) Taxpayer sells IBM stock and realizes adjusted net capital gain. This gain is not eligible for the 40 percent exclusion. (2) Taxpayer sells his stock in a closely-held S-corporation that owns real property, machinery and equipr11ent and good will. The stock is not traded on a public exchange. The adjusted net capital gain realized on the sale is eligible for the 40 percent exclusion even though the ,machin~ry a'nd equipment would not be eligible if sold separately as assets. Reg. §1,5811(21)(B)(ii) - 6 Business Asset Sales (A) If the sale of a business is structured as an asset sale rather than sale of an ownership interest in the entity, the availability of the exclusion will depend upon the nature of the asset. This is also the case where the membership or ownership interest in a single-member pass-through entity (e.g., limited liability company) is sold, because these entities are disregarded for federal income tax purposes and the assets are treated as assets of the owner.3 The sale is treated as the sale of the assets under federal law. Vermont follows the federal tax treatment of income in these cases. 32 V.SA § 5820. (B) Examples: (1) Taxpayer is selling the membership interest in single member LLC. For federal tax purposes, and therefore for Vermont income tax purposes, this is treated as the sale of assets. All of . the assets that are used in the LLC's trade or business, consisting of real estate, tangible personal property, intangible rights and licenses, and goodwill, are being sold. The business real estate and intangibles, including good will, are eligible for the 40 percent exclusion. To the extent that the tangible personal property is depreciable, it is not eligible for the exclusion. Taxpayer must be able to produce a reasonable allocatic;rn schedule. (2) Taxpayer owns a convenience market that is going out of business. He sells the coolers and remaining inventory to another market and sells his leasehold interest in the real estate to a third party for a clothing store. Gain related to the coolers, which have, been depreciated over several years, and gain from the sale of the inventory is not eligible for the 40 percent exclusion; gain from the sale of the leasehold interest is eligible. Reg. §1.5811(21)(B)(ii)- 7 Pass-through Entities 3 Proc.&. Admin. Regs. §301.7701-3. Other di~regarded entities under federal law are "qualified subchapter S subsidiaries" and "qualified REIT subsidiaries" • 5