than its basis, it can be taxed at a capital gains rate, which is lower than an ordinary income rate. However, if the 1231 property results in a loss then the taxpayer can treat it as an ordinary loss and such a loss may reduce the taxpayer's taxable income. This provision is said to give a taxpayer the "best of both worlds" as it allows the favorable capital gains tax rate on section 1231 property while avoiding the negative implications of capital loss treatment. Ordinary losses are 100% deductible, while capital losses are subject to an annual deduction limitation of $3,000 against ordinary income. Within this framework, if capital losses exceed capital gains by more than $3,000 in any given tax year, the portion of the deduction that may be used to offset ordinary income is limited to $3,000; the excess loss over $3,000 must be carried over to the following year. C Corporations are not allowed to deduct capital losses against ordinary income, and must instead deduct capital losses only against capital gains. If capital losses exceed capital gains in any given tax year, the excess loss may be carried back three years and carried forward five years where it is offset against capital gains of those years. When carrying a C corporation's capital loss back or forward, the loss does not retain its character as short-term or long-term. In other words, the loss is treated as a short-term capital loss even if it was originally a long-term capital loss. Section 1231 does not reclassify property as a capital asset. Instead, it allows the taxpayer to treat net gains on 1231 property as capital gains, but to treat net losses on such property as ordinary losses. Congress has decided not to let this "best of both worlds" treatment give taxpayers undesired benefits beyond its purpose. This treatment would compel a taxpayer to sell a Section 1231 loss asset at the end of a year to get an ordinary loss and hold a Section 1231 gain until the next taxable year to receive capital gains treatment. To limit the impact of this undesired result, Congress included 1231(c). This is a controversial topic in U.S. taxation. Under 1231(c), the 1231 gain that was deferred until the second year in the example above will be recharacterized as ordinary income. This is done because the taxpayer has already received the benefit of having