In 1958, Congress added section 1244 to the Internal Revenue Code, which allows ordinary loss treatment for original owners of specified stock in "small business corporations" when such stock is sold, exchanged at a loss, or when the stock becomes worthless. The purpose of section 1244 is to reduce the discrepancy between the tax treatment of losses sustained by corporations and those sustained by proprietorships or partnerships, thereby diminishing the role which tax considerations play in determining whether a business should be conducted in corporate or in unincorporated form. When an unincorporated business sustains an operating loss, such loss is deductible in full against the ordinary income of the owners, with any excess not absorbed by the income of the current year available in other years as a net operating loss carryover or carryback. Prior to the enactment of section 1244, a loss sustained by a shareholder of a corporation on the sale or exchange of corporate stock or on the date the stock became worthless was treated as a capital loss, deductible only against capital gain and $1000 of ordinary income, with a right to carry over any excess to future years.
Section 1244 Small Business Stock - Professional Responsibility Demands Its Use,
U. Rich. L. Rev.
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