The Fact and the Fantasy of I.R.C. [Section] 1202: an Illustrative Overview and Analysis‪.‬

ABSTRACT Graduate and undergraduate tax courses spend a considerable amount of classroom and research time exploring the capital structure of corporations. Often included in this discussion are topics that relate specifically to small businesses. This is particularly relevant in that Congress has frequently sought to provide incentives to encourage the investment in small businesses. The formation of the Small Business Administration to provide loans and business expertise is one example. Other instances of Congressional incentives to small business investors are manifested in provisions enacted into the Internal Revenue Code (I.R.C.). For example, the creation of the Subchapter S election allows small business owners to obtain the benefits of incorporation without the impact of double taxation on profits. The enactment of I.R.C. [section] 1244 in 1958, designed to partially eliminate the inequities caused by the limitations on capital loss deductions, provides another instance of legislative encouragement to invest in small businesses. A purported major small business investment incentive contained in the current tax law is I.R.C [section] 1202. This provision was intended to provide noncorporate taxpayers with a significant investment incentive by allowing the exclusion of up to 50 percent of the gain on the sale of qualified small business stock (QSBS) if certain requirements are met.