Internal Revenue Code Summary

Student Name
Acc 352 – Fall 2015
Assignment Name
Day/Night Class

Code Summaries
Section 2012 of The Internal Revenue Code encourages investment in new ventures, specialized small business investment companies, and small businesses by granting relief to investors who risk their funds by investing in such businesses. Up to 50 percent of gain realized by non-corporate investors may be excluded if the gain is realized on the disposition of qualified small business stock (“QSBS”), as defined in 1202(c), issued after August 10, 1993 and maintained more than five years. However, the exclusion is raised to 60% for qualified small business stock acquired after the enactment of this Act.
For individuals, Section 1244 provides that losses on the sale …show more content…
There is also a qualified small business requirement under subsection (d) which states the corporation must use a minimum of 80% by value of its active conduct of a qualified business or trade for most of the taxpayer’s holding period. Before and immediately following the date of issue, the aggregate gross asset of a qualified small business corporation cannot exceed $50 million. Therefore, if John’s corporation holds assets of $51 million, the stock it issues cannot fall under Section 1202 exemption. The taxpayer first needs to determine when the stock was acquired. The Section 1202 exclusion was raised from 50% to 75% for QSBS acquired after February 17, 2009 and before September 28, 2010. Section 1202 now excludes 100% of gain from disposition of QSBS acquired after September 27, 2010 and before January 1, 2015. The amount of this eligible gain is subject to per issuer limitation set in 1202b. The taxpayer also needs to determine the status of the business that issued the stock. A corporation, in order for gain on its stock to qualify for the exclusion, must be a C corporation, and the taxpayer must calculate how the questioned stock was purchased. Between two years before the issue date and the two years following issue date, stock purchased (directly or indirectly) from the taxpayer or persons related to the taxpayer by the corporation owning the stock cannot qualify …show more content…
C.I.R. in the United States Tax Court, 2012. Here, the petitioner sought a redetermination of income-tax deficiencies arising from taxpayer's sale of stock. The petitioner failed to introduce evidence that he operated a qualified small business on the days he purchased the stock in question because he did not introduce financial documents, such as a balance sheet to prove that his corporation’s gross assets did not exceed $50 million. The Court also held that the petitioner failed to prove the active business requirement of Section 1202e because he once again failed to provide financial evidence that the corporation had no investment assets; this shows that taxpayers who seek to qualify for this exemption need to provide financial evidence to support their exemption.
Furthermore, a case that addressed Section 1244 was Crigler v. Commissioner of Internal Revenue, Crigler v. C.I.R., 85 T.C.M. (CCH) 1091 (T.C. 2003) aff'd, 85 F. App'x 328 (4th Cir. 2004), taxpayers petitioned for redetermination of deficiencies arising from disallowed loss deduction for small business stock and penalty. Congress intended provision allowing ordinary loss deduction for worthless small business stock to encourage taxpayers to invest new funds in small businesses, rather than provide favorable tax treatment for losses suffered by investment and holding companies. 26 U.S.C §

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