Losses on Small Business Stock

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[CO-46-94]

RIN 1545-AS97

Losses on Small Business Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes amendments to regulations under section

1244 relating to losses on small business stock. In particular, the

amendment concerns the records to be kept and information to be filed

with the return.

Section 1244(a) permits an individual to treat a limited amount of

loss on certain small business corporation stock as ordinary loss. The

existing regulation requires that a taxpayer claiming an ordinary loss

on small business stock shall maintain certain information and file an

information statement with the taxpayer's return for the year in which

the loss occurs. The proposed amendment would remove the requirement

that a taxpayer claiming a section 1244 ordinary loss file an

information statement with the taxpayer's income tax return.

DATES: Written comments and requests for a public hearing must be

received by January 17, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (CO-46-94), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8:00 a.m. and 5:00 p.m. to: CC:DOM:CORP:T:R (CO-46-94),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Kirsten L. Simpson, (202) 622-7790

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act (44 U.S.C.

3504(h)). Comments on the collection of information should be sent to

the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC

20224.

The collection of information is in Sec. 1.1244(e)-1(b). This

information is required by the IRS to determine whether a taxpayer is

entitled to a section 1244 loss. This information will be used by IRS

examiners to verify that the stock qualifies as section 1244 stock. The

likely recordkeepers are individuals and corporations.

Estimated total annual recordkeeping burden: 2,000 hours. The

estimated annual burden per recordkeeper varies from .10 hours to .30

hours, depending on individual circumstances, with an estimated average

of .20 hours. Estimated number of recordkeepers: 10,000.

Background

This document proposes amendments to the Income Tax Regulations (26

CFR part 1) under section 1244 of the Internal Revenue Code of 1986.

Section 1244 was enacted as part of the Small Business Tax Revision Act

of 1958, with the goal of encouraging the flow of new funds into small

business. The purpose of the section was to reduce the risk of a loss

of new investment by permitting a taxpayer to take an ordinary loss,

rather than a capital loss, on qualifying small business stock. H.R.

Rep. No. 2198, 85th Cong., 2d Sess. 4 (1958); 104 Cong. Rec. 17,090

(1958) (Senate).

Section 1244(a) permits an individual to treat a limited amount of

loss on section 1244 stock as ordinary loss. Section 1244(c) defines

``section 1244 stock'' as stock in a domestic corporation if, at the

time the stock is issued: (1) the corporation was a small business

corporation (as defined in section 1244(c)(3)); (2) the stock was

issued by the corporation for money or other property (other than stock

and securities); and (3) the corporation, during the period of its five

most recent taxable years ending before the date the loss on the stock

was sustained, derived more than 50 percent of its aggregate gross

receipts from sources other than royalties, rents, dividends, interest,

annuities, and sales or exchanges of stocks or securities.

Section 1.1244(e)-1(b) of the Income Tax Regulations provides that

any taxpayer who claims an ordinary loss deduction under section 1244

shall file with the taxpayer's income tax return for the loss year an

information statement setting forth: (1) the address of the corporation

that issued the stock; (2) the manner in which the stock was acquired

by the taxpayer and the nature and amount of the consideration paid;

and (3) if the stock was acquired in a nontaxable transaction in

exchange for property other than money--the type of property, its fair

market value on the date of transfer to the corporation, and its

adjusted basis on such date.

The IRS has taken the position that taxpayers are not entitled to

section 1244 ordinary loss treatment if they have failed to file the

information statement described in Sec. 1.1244(e)-1(b) with the income

tax return for the year in which the deduction for the loss is claimed.

The Tax Court has upheld this position. See Magee v. Commissioner, T.C.

Memo. 1993-305, 66 T.C.M. (CCH) 105 (1993); Cournan v. Commissioner,

T.C. Memo. 1989-520, 58 T.C.M. (CCH) 219 (1989); and Cosgrove v.

Commissioner, T.C. Memo. 1987-401, 54 T.C.M. (CCH) 136 (1987).

Explanation of Provision

The IRS and Treasury Department have determined that denying

ordinary loss treatment under section 1244 solely because a taxpayer

fails to file the Sec. 1.1244(e)-1(b) information statement with the

taxpayer's income tax return is not necessary to achieve the purposes

of section 1244. Notice 94-89, 1994-38 I.R.B. 54. Therefore, taxpayers

will not be required to file the Sec. 1.1244(e)-1(b) information

statement to qualify for section 1244 treatment. Section 1.1244(e)-1(b)

is proposed to be revised to eliminate the requirement that a taxpayer

file an information statement with the taxpayer's income tax return.

However, because a taxpayer who claims an ordinary loss under section

1244 still bears the burden of establishing that the deduction is

proper, Sec. 1.1244(e)-1(b) is also proposed to be revised to state

that a person who claims an ordinary loss with respect to stock under

section 1244 must have records sufficient to establish that the

taxpayer is entitled to the loss and satisfies the requirements of

section 1244.

Proposed Effective Date

These regulations are proposed to be effective for open taxable

years beginning after December 31, 1953, the effective date of Treasury

Decision 6495, which prescribed regulations under section 1244.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It has also been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying. A public

hearing may be scheduled if requested in writing by a person that

timely submits written comments. If a public hearing is scheduled,

notice of the date, time, and place for the hearing will be published

in the Federal Register.

Drafting Information

The principal author of these regulations is Kirsten L. Simpson,

Office of Assistant Chief Counsel (Corporate), IRS. However, other

personnel from the IRS and Treasury Department participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1244(e)-1 also issued under 26 U.S.C. 1244(e).

* * * * *

Par. 2. Section 1.1244(e)-1 is amended as follows:

1. The section heading is revised.

2. In paragraph (a)(1), the reference in the second sentence

``paragraph (c)(2) of Sec. 1.1244(c)-2'' is removed and Sec. 1.1244(c)-

2(b)(2)'' is added in its place.

3. Paragraph (b) is revised.

The revisions read as follows:

Sec. 1.1244(e)-1 Records to be kept.

* * * * *

(b) By the taxpayer. A person who claims an ordinary loss with

respect to stock under section 1244 must have records sufficient to

establish that the taxpayer is entitled to the loss and satisfies the

requirements of section 1244. See also section 6001, requiring records

to be maintained.

Margaret Milner Richardson,

Commissioner of the Internal Revenue.

[FR Doc. 94-28083 Filed 11-14-94; 8:45 am]

BILLING CODE 4830-01-P