Final answer:
The statement is false; taxpayers do not need to sell or exchange section 1244 stock to recognize an ordinary loss. Losses can be claimed when section 1244 stock becomes worthless if the stock meets certain requirements. option (B)
Step-by-step explanation:
The statement that taxpayers must sell or exchange their section 1244 stock in order to recognize an ordinary loss is false. Section 1244 of the Internal Revenue Code allows taxpayers to treat a loss from the sale, exchange, or worthlessness of qualifying small business stock as an ordinary loss rather than a capital loss. This is significant because ordinary losses can offset ordinary income in full, which may result in a more favorable tax treatment than a capital loss, which is subject to certain limitations.
To qualify, the stock must be issued by a domestic corporation that was a small business at the time the stock was issued, with total capital of not more than $1 million. Additionally, the stock must have been acquired by the taxpayer at original issue, not from another shareholder. If these conditions are met, upon the stock becoming worthless or its disposal, the taxpayer does not necessarily have to sell or exchange the stock to claim a loss. They can claim the loss in the tax year that the stock becomes worthless, which is a different process than selling or exchanging.