Tax Tips
| Jurisdiction | United States,Federal |
| Citation | Vol. 8 No. 12 Pg. 2408 |
| Pages | 2408 |
| Publication year | 1979 |
1979, December, Pg. 2408. Tax Tips
With the issuance of proposed regulations on September 19, 1979, regarding § 1244 of the Internal Revenue Code ("IRC"), and the fast-approaching year end when all medical expense reimbursement plans will be subject to the nondiscrimination rules imposed by the Revenue Act of 1978, all practitioners should be reviewing their standard office procedures regarding these frequently encountered tax considerations.
The Tax Reform Act of 1978 liberalized the conditions required to be met in order to qualify for ordinary loss treatment on investments in "§ 1244 stock. "The new rules generally apply to all stock issued after November 6, 1978.
Under the old pre-November 6, 1978, rules, an individual could treat losses on § 1244 stock issued to such individual or a partnership, which would otherwise have been capital in nature, as ordinary losses, in an amount up to $25,000 in any taxable year. In order to qualify as § 1244 stock, various requirements had to be met, including the following:
1. The stock had to be common stock, issued by a domestic corporation to an individual or partnership;
2. The issuing corporation had to adopt a written plan to offer only such stock during the period of the offering, which was not exceed two years from the date the plan was adopted;
3. The total amount to be received for the § 1244 stock plus other amounts received by the corporation after June 30, 1958, for stock, as a contribution to capital, or as paid in surplus, could not exceed $500,000;
4. The total prior equity capital of the issuing corporation [as defined in § 1244(c)(2)(B)], plus the aggregate amount to be offered under the plan, could not exceed $1,000,000;
5. No prior stock offering or portion thereof could be outstanding, and no subsequent offering could be begun during the period of the § 1244 offering.
The Tax Reform Act of 1978 made the denial of ordinary loss treatment because of the technical requirements of § 1244 less likely. Specifically, the requirements set forth above were eliminated or substantially modified as follows:
1. The total amount of money and property allowed to be received for, or with respect to, an issuing corporations' stock was increased from $500,000 to $1,000,000;
2. Even if an issuing corporation might receive more than $1,000,000 for, or with respect to, its shares, such event will no longer result in the denial of § 1244 treatment for all shares of the company, and the company may designate which shares are to be treated as § 1244 shares;
3. The "equity capital" limitation of $1,000,000 formerly contained in § 1244(c)(2)(B), was eliminated;
4. The maximum amount an individual may treat as an ordinary loss on § 1244 stock for any taxable year was increased to $50,000 ($100,000 in the case of a husband and wife filing a joint return for such year);
5. The requirement that no prior offering or portion thereof may be outstanding when the § 1244 plan is adopted was eliminated; and
6. The requirement of a written plan was eliminated.
As a practical matter, and aside from the more technical changes, the amendments to § 1244 will affect all practitioners in the following areas:
1. Necessity for preparation of a written § 1244 plan;
2. Necessity for designation of which shares are intended to qualify for § 1244 treatment.
Under the proposed regulations, all stock (otherwise qualifying) issued, after November 6, 1978, by a corporation which has not received since June 30, 1958, over $1,000,000 for, or with respect to, its stock, and which does not exceed such amount during such taxable year, will qualify under §...
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