Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 62-58

1962-1 C.B. 158

IRS Headnote

The benefits of sections 1242 and 1243 of the Internal Revenue Code of 1954, relating to losses on small business investment companies securities, may not be claimed by a small business investment company or its stockholders during a period in which the company's license to operate under the Small Business Investment Act of 1958, as amended, has been suspended by the Small Business Administration.

Full Text

Rev. Rul. 62-58 /1/

Advice has been requested whether a small business investment company or its stockholders may claim the benefits of sections 1242 and 1243 of the Internal Revenue Code of 1954 during a period in which the company's license to operate under the provisions of the Small Business Investment Act of 1958, Public Law 85-699, August 21, 1958, as amended by the Small Business Investment Amendments Act of 1961, Public Law 87-341, October 3, 1961, 75 Stat. 752-757, has been supsended by the Small Business Administration.

Section 1242 of the Code provides, in effect, that any loss sustained as the result of the worthlessness or sale or exchange of stock in a small business investment company operating under the Small Business Investment Act of 1958 shall, under certain circumstances, be treated as a loss from the sale or exchange of property which is not a capital asset.

Under the provisions of section 1243 of the Code, it is provided that, in the case of a small business investment company operating under the Small Business Investment Act of 1958, a loss on convertible debentures (including stock received pursuant to the conversion privilege) acquired pursuant to section 304 of the Small Business Investment Act of 1958 shall, under certain circumstances, be treated as a loss from the sale or exchange of property which is not a capital asset.

Under section 309 of the Small Business Investment Act of 1958, as amended, the Small Business Administration is authorized to suspend the license of a company operating under the Act, under certain specific circumstances, involving violations of the provisions and intent of the Act. The seriousness of the circumstances under which such action may be taken points to the conclusion that a suspension is intended to serve as a denial of all the privileges and advantages which would otherwise accrue to a licensee and that, during the period of suspension, a license is rendered inoperative.

In conformity with this view, the Income Tax Regulations promulgated under sections 1242 and 1243 of the Code permit a loss sustained by an investor in the stock of a small business investment company, or a loss sustained by a small business investment company on the stock and debentures of a small business concern, to be treated as a loss from the sale or exchange of property which is not a capital asset only if, at the time of such loss, the company was licensed to operate as a small business investment company pursuant to regulations of the Small Business Administration. See sections 1.1242-1(a) and 1.1243-1(a) of the regulations.

Therefore, where the license of a company, previously licensed to operate under the provisions of the Small Business Investment Act of 1958, as amended, has been suspended, such company is not considered as `operating' under the Act within the meaning of sections 1242 and 1243 of the Code during the period of suspension.

Accordingly, it is held that the benefits provided by sections 1242 and 1243 of the Code are not available to a small business investment company or its stockholders during the period in which the company's license to operate under the Small Business Investment Act of 1958, as amended, has been suspended by the Small Business Administration.

/1/ Released as Technical Information Release 378, dated April 10, 1962.