[Federal Register Volume 59, Number 219 (Tuesday, November 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28083]
[[Page Unknown]]
[Federal Register: November 15, 1994]
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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