(b) The total amount of obligations purchased and outstanding at any one time by the Administration under this section from any one State development company shall not exceed the total amount borrowed by it from all other sources. Funds advanced to a State development company under this section shall be treated on an equal basis with those funds borrowed by such company after the date of the enactment of this Act, regardless of source, which have the highest priority, except when this requirement is waived by the Adminis trator. SEC. 502. The Administration may, in addition to its authority under 15 U.S.C. 696. section 501, make loans for plant construction, conversion or expansion, including the acquisition of land, to State and local development companies, and such loans may be made or effected either directly or in cooperation with banks or other lending institutions through agreements to participate on an immediate or deferred basis: Provided, however, That the foregoing powers shall be subject to the following restrictions and limitations: (1) All loans made shall be so secured as reasonably to assure repayment. In agreements to participate in loans on a deferred basis under this subsection, such participation by the Administration shall not be in excess of 90 per centum of the balance of the loan outstanding at the time of disbursement. (2) The proceeds of any such loan shall be used solely by such borrower to assist an identifiable small-business concern and for a sound business purpose approved by the Administration. (3) Loans made by the Administration under this section shall be limited to $350,000 45 for each such identifiable small-business concern. (4) Any development company assisted under this section must meet criteria established by the Administration, including the extent of participation to be required or amount of paid-in capital to be used in each instance as is determined to be reasonable by the Administration. (5) No loans, including extensions or renewals thereof, shall be made by the Administration for a period or periods exceeding twentyfive years 46 plus such additional period as is estimated may be required to complete construction, conversion, or expansion, but the Administration may extend the maturity of or renew any loan made pursuant to this section beyond the period stated for additional periods, not to exceed ten years, if such extension or renewal will aid in the orderly liquidation of such loan. Any such loan shall bear interest at a rate fixed by the Administration.47 TITLE VI-CHANGES IN FEDERAL RESERVE AUTHORITY [Omitted as no longer current.] TITLE VII-CRIMINAL PENALTIES [This title amends the U.S. Code to include certain actions by persons affiliated with or dealing with SBIC's as Federal crimes. See 18 U.S.C. 212, 213, 216, 657, 1006, and 1014.] 45 This limitation was raised from $250,000 to $350,000 by sec. 10(1) of Public Law 87-341. 46 This limitation was raised from 10 years to 25 years by sec. 10(2) of Public Law 87-341. 47 Previous limitation on the life of sec. 502 (June 30, 1961) was repealed by sec. 26 of Public Law 87-27 (the Area Redevelopment Act). 72 Stat. 1606. 72 Stat. 1645. 26 U.S.C. 1242. 26 U.S.C. 1243. 26 U.S.C. 243 TEXT OF TAX PROVISIONS LOSSES ON SBIC STOCK AND LOSSES OF SBIC's Public Law 85-866 85th Congress, H.R. 8381 TECHNICAL AMENDMENTS ACT OF 1958 * SEC. 57. SMALL BUSINESS INVESTMENT COMPANIES. (a) LOSSES ON SMALL BUSINESS INVESTMENT COMPANY STOCK AND LOSSES OF SMALL BUSINESS INVESTMENT COMPANIES.-Part IV of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) is amended by adding at the end thereof the following new sections: "SEC. 1242. LOSSES ON SMALL BUSINESS INVESTMENT COMPANY STOCK. "If "(1) a loss is on stock in a small business investment company operating under the Small Business Investment Act of 1958, and "(2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset, then such loss shall be treated as a loss from the sale or exchange of property which is not a capital asset. 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 property which is not a capital asset shall be treated as attributable to a trade or business of the taxpayer.48 "SEC. 1243. LOSS OF SMALL BUSINESS INVESTMENT COMPANY. "In the case of a small business investment company operating under the Small Business Investment Act of 1958, if— "(1) a loss is on convertible debentures (including stock received pursuant to the conversion privilege) acquired pursuant to section 304 of the Small Business Investment Act of 1958, and "(2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset, then such loss shall be treated as a loss from the sale or exchange of property which is not a capital asset." 49 (b) DIVIDENDS RECEIVED BY SMALL BUSINESS INVESTMENT COMPANIES.Section 243 (relating to dividends received by corporations) is amended 50 (1) by striking out in subsection (a) "In the case of a corporation" and inserting in lieu thereof "In the case of a corporation (other than a small business investment company operating under the Small Business Investment Act of 1958)"; (2) by redesignating subsection (b) as (c), and by inserting after subsection (a) the following new subsection: Under Internal Revenue Service Income Tax Regulation § 1.1242-1(a) sec. 1242 ordinary loss deductions are made clearly available to subsequent purchasers as well as to original investors in SBIC stock. 49 Sec. 304 of the Small Business Investment Act of 1958 was amended in 1960 to permit SBIC's, under SBA regulations, to accept securities other than convertible debentures in exchange for equity capital supplied to small concerns. However, only convertible debentures and stock acquired by exercise of the conversion privilege are specifically covered by sec. 1243 of the Internal Revenue Code. 50 Sec. 243 was subsequently amended by sec. 214 of Public Law 88-272, the Revenue Act of 1964, but it did not affect the treatment given to dividends of SBIC's in this section. "(b) SMALL BUSINESS INVESTMENT COMPANIES.-In the case of a small business investment company operating under the Small Business Investment Act of 1958, there shall be allowed as a deduction an amount equal to 100 percent of the amount received as dividends (other than dividends described in paragraph (1) of section 244, relating to dividends on preferred stock of a public utility) from a domestic corporation which is subject to taxation under this chapter."; and (3) by striking out in subsection (c) (as redesignated by paragraph (2)) "subsection (a)" and inserting in lieu thereof "subsections (a) and (b)". (c) TECHNICAL AMENDMENTS. (1) Section 165 (h) 51 (relating to deduction for losses) is amended by adding at the end thereof the following new paragraphs: "(3) For special rule for losses on stock in a small business "(4) For special rule for losses of a small business investment (2) Section 246 (b) (1) (relating to limitation on aggregate amount (3) The table of sections for part IV of subchapter P of chapter 1 is amended by adding at the end thereof "Sec. 1242. Losses on small business investment company stock. "Sec. 1243. Loss of small business investment company." (d) EFFECTIVE DATE.-The amendments made by this section shall apply with respect to taxable years beginning after the date of the enactment of this Act. SBIC EXCEPTION FROM PERSONAL HOLDING COMPANY DEFINITION Public Law 86-376 86th Congress, H.R. 47 September 23, 1959 SECTION 3 OF PUBLIC LAW 86-376 73 Stat. 699. 73 Stat. 700. SEC. 3. (a) Section 542(c) of the Internal Revenue Code of 1954 (relating 26 U.S.C. 542(c). to exceptions from definition of a personal holding company) is amended (a) by inserting "," in lieu of "." at the end thereof and (b) by adding at the end thereof the following new paragraph (11): 52 "(11)52 A small business investment company which is licensed by the Small Business Administration and operating under the Small Business Investment Act of 1958 and which is actively engaged in the business of providing funds to small business concerns under that Act. This paragraph shall not apply if any shareholder of the small business investment company owns at any time during the taxable 51 Sec. 165(h) redesignated as sec. 165(i) by sec. 2 of Public Law 87-426 and redesignated sec. 165(j) from former sec. 165(i) by sec. 238 of Public Law 88-272. 52 Renumbered as par. (8) by sec. 225(c) (2) of Public Law 88-272. year directly or indirectly (including, in the case of an individual, ownership by the members of his family as defined in section 544 (a) (2)) a 5 per centum or more proprietary interest in a small business concern to which funds are provided by the investment company or 5 per centum or more in value of the outstanding stock of such concern.' (b) The amendment made by this section shall apply to taxable years beginning after December 31, 1958. ACCUMULATED EARNINGS SURTAX EXEMPTION Treasury Decision 6652, published May 13, 1963, added the following language to Income Tax Regulation § 1.533-1: "(d) Small business investment companies. A corporation which is licensed to operate as a small business investment company under the Small Business Investment Act of 1958 (15 U.S.C. ch. 14B) and the regulations thereunder (13 CFR Part 107) will generally be considered to be a "mere holding or investment company" within the meaning of section 533(b). However, the presumption of the existence of the purpose to avoid income tax with respect to shareholders which result from the fact that such a company is a "mere holding or investment company" will be considered overcome so long as such company: "(1) Complies with all the provisions of the Small Business Investment Act of 1958 and the regulations thereunder; and "(2) Actively engages in the business of providing funds to small business concerns through investment in the equity capital of, or through the disbursement of long-term loans to, such concerns in such manner and under such terms as the company may fix in accordance with regulations promulgated by the Small Business Administration (see secs. 304 and 305 of the Small Business Investment Act of 1958, as amended (15 U.S.C. 684, 685)). On the other hand, if such a company violates or fails to comply with any of the provisions of the Small Business Investment Act of 1958, as amended, or the regulations thereunder, or ceases to be actively engaged in the business of providing funds to small business concerns in the manner provided in subparagraph (2) of this paragraph, it will not be considered to have overcome the presumption by reason of any rules provided in this paragraph." 1964: RESERVE FOR BAD DEBTS Following is the text of Revenue Ruling 64-48, published February 10, "Reserve for bad debts: Small business investment companies: Bad debt reserve ceilings. Small business investment companies (SBIC) are allowed to establish bad debt reserve ceilings equal to ten percent of their outstanding loans as reasonable reserves under section 166 (c) of the Internal Revenue Code of 1954. The ten-percent ceiling applies for a period of ten years beginning with 1959. When the ten-year period expires an SBIC's own loss experience will be used to determine the reasonableness of further additions to its reserve. After 1968 a new SBIC, or one that has not been in existence a sufficient number of years to provide adequate loss experience data for establishing reasonable bad debt reserves, will be permitted to use an average loss experience factor computed on an industry-wide basis until it has sufficient loss experience of its own. "In allowing a flat percentage as a reasonable reserve ceiling, consideration has been given to the fact that the SBIC industry has been in existence only since 1959 and has no available bad debt loss experience of its own which would afford an adequate basis for determining reasonable bad debt reserves. There is no similar industry which could provide the SBIC industry with comparable bad-debt experience data. "The ten-percent ceiling was arrived at after a thorough study of the nature of the SBIC industry and the inherent risks involved in the type of loans made. The increasing amount of charge-offs under current business trends and a comparison of the principal features of the SBIC industry with those of other types of lending institutions were other factors considered. "The determination of the period of ten years as an appropriate length of time for the application of the ten-percent ceiling factor resulted from an analysis of the loan portfolio turnover of the SBIC industry." Following is the text of Revenue Ruling 65-88, published April 5, 1965 "Revenue Ruling 64-48, C. B. 1964-1 (Part 1), 104, which provides that for a limited period small business investment companies (SBIC) are allowed bad debt reserve ceilings equal to 10 percent of their outstanding loans as reasonable reserves under section 166 (c) of the Internal Revenue Code of 1954, was not intended to place a 10-percent ceiling on the amount of bad debt reserves which will be allowed as a deduction for Federal income tax purposes. "Revenue Ruling 64-48 is, therefore, clarified to indicate that an SBIC may establish reserves for bad debts in excess of 10 percent of its outstanding loans, where the additional amount is reasonable in light of all the facts and circumstances existing at the close of the taxable year of the proposed additions taking into account existing reserves." EFFECT OF TAX PROVISIONS Taxpayers investing in the stock of small business investment companies will be allowed an ordinary-loss deduction rather than a capital-loss deduction on losses arising from worthlessness or sale of such stock. Small business investment companies will also be allowed an ordinary-loss deduction, rather than a capital-loss deduction, on losses sustained on convertible debentures, including stock received pursuant to the conversion privilege.53 The loss deduction will include losses due to worthlessness as well as those arising from sale or exchange of the security. Such companies will also be allowed a deduction of 100 percent of dividends received from a taxable domestic corporation rather than the 85-percent deduction allowed corporate taxpayers generally. Section 542 (c) (8) of the Internal Revenue Code of 1954 qualifiedly exempts small business investment companies from the personal holding company surtax. Acting under its administrative authority, the Internal Revenue Service has given SBIC's a qualified exemption from the surtax on accumulated earnings (Treasury Decision 6652, published May 13, 1963), has authorized a bad-debt reserve equal to 10 percent of outstanding loans (Revenue Ruling 64-48, published February 10, 1964), and has made it clear that Revenue Ruling 64-48 was not intended to place a 10-percent ceiling on the amount of such bad debt reserves (Revenue Ruling 65-88, published April 5, 1965). 53 Sec. 304 of the Small Business Investment Act of 1958 was amended in 1960 to permit SBIC's, under SBA regulations, to accept securities other than convertible debentures in exchange for equity capital supplied to small concerns. However, only convertible debentures and stock acquired by exercise of the conversion privilege are specifically covered by sec. 1243 of the Internal Revenue Code. |