LOSSES ON SMALL BUSINESS STOCK.

SEC. 202. LOSSES ON SMALL BUSINESS STOCK. (a) Cross Reference.— Section 165 of the Internal Revenue Code of 1954 (relating to deduction for losses) is amended by adding at the end of subsection (h) the following new paragraph— “(5) For special rule for losses on small business stock, see section 1244.” (b) Treatment as Ordinary Loss.—Part IV of subchapter P of chapter 1 of the Internal Revenue Code of 1954 (relating to special rules for determining capital gains and losses) is amended by adding after section 1243 (as added by section 57 of this Act) the following new section: “SEC. 1244. LOSSES ON SMALL BUSINESS STOCK. “(a) General Rule.—In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as a loss from the sale or exchange of an asset which is not a capital asset. “(b) Maximum Amount for Any Taxable Year.—For any taxable year the aggregate amount treated by the taxpayer by reason of this section as a loss from the sale or exchange of an asset which is not a capital asset shall not exceed— “(1) $25,000, or “(2) $50,000, in the case of a husband and wife filing a joint return for such year under section 6013. “(c) Section 1244 Stock Defined.— “(1) In general.— For purposes of this section, the term ‘section 1244 stock’ means common stock in a domestic corporation if— “(A) such corporation adopted a plan after June 30, 1958, to offer such stock for a period (ending not later than two years after the date such plan was adopted) specified in the plan, “(B) at the time such plan was adopted, such corporation was a small business corporation, “(C) at the time such plan was adopted, no portion of a prior offering was outstanding, “(D) such stock was issued by such corporation, pursuant to such plan, for money or other property (other than stock and securities), and “(E) such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock is sustained (or if such corporation has not been in existence for 5 taxable years ending before such date, during the period of its taxable years ending before such date, or if such corporation has not been in existence for one taxable year ending before such date, during the period such corporation has been in existence before such date), derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities (gross receipts from such sales or exchanges being taken into account for purposes of this subparagraph only to the extent 72 Stat. 1677 of gains therefrom); except that this subparagraph shall not apply with respect to any corporation if, for the period referred to, the amount of the deductions allowed by this chapter (other than by sections 172, 242, 243, 244, and 245) exceed the amount of gross income. Such term does not include stock if issued (pursuant to the plan referred to in subparagraph (A)) after a subsequent offering of stock has been made by the corporation. “(2) Small business corporation defined.— For purposes of this section, a corporation shall be treated as a small business corporation if at the time of the adoption of the plan— “(A) the sum of— “(i) the aggregate amount which may be offered under the plan, plus “(ii) the aggregate amount of money and other property (taken into account in an amount, as of the time received by the corporation, equal to the adjusted basis to the corporation of such property for determining gain, reduced by any liabilities to which the property was subject or which were assumed by the corporation at such time) received by the corporation after June 30, 1958, for stock, as a contribution to capital, and as paid-in surplus, does not exceed $500,000; and “(B) the sum of— “(i) the aggregate amount which may be offered under the plan, plus “(ii) the equity capital of the corporation (determined on the date of the adoption of the plan), does not exceed $1,000,000. For purposes of subparagraph (B), the equity capital of a corporation is the sum of its money and other property (in an amount equal to the adjusted basis of such property for determining gain), less the amount of its indebtedness (other than indebtedness to shareholders). “(d) Special Rules.— “(1) Limitations on amount of ordinary loss.— “(A) Contributions of property having basis in excess of value.— If— “(i) section 1244 stock was issued in exchange for property, “(ii) the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and “(iii) the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time, then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii). “(B) Increases in basis.—In computing the amount of the loss on stock for purposes of this section, any increase in the basis of such stock (through contributions to the capital of the corporation, or otherwise) shall be treated as allocable to stock which is not section 1244 stock. “(2) Recapitalizations, changes in name, etc.—To the extent provided in regulations prescribed by the Secretary or his delegate, common stock in a corporation, the basis of which (in the 72 Stat. 1678 hands of a taxpayer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the requirements of subsection (c) (1) (other than subparagraph (E) thereof), or which is received in a reorganization described in section 368 (a) (1) (F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. For purposes of paragraphs (1) (E) and (2) (A) of subsection (c), a successor corporation in a reorganization described in section 368 (a) (1) (F) shall be treated as the same corporation as its predecessor. “(3) Relationship to net operating loss deduction.—For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as a loss from the sale or exchange of an asset which is not a capital asset shall be treated as attributable to a trade or business of the taxpayer. “(4) Individual defined.—For purposes of this section, the term ‘individual’ does not include a trust or estate. “(e) Regulations.—The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section.” (c) Technical Amendment.—The table of sections for such part IV is amended by adding at the end thereof the following new item: “See. 1244. Losses on small business stock.”