[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