Basis calculations and reporting requirements for sec. 1244 stock.

• Author: Shanks, Thomas A.
• Position: Tax Court Memorandum opinions in Bledsoe and Schwartz

Two recent cases will affect how taxpayers with Sec. 1244 stock compute their tax bases in the shares. Only payments that require the taxpayer to make an economic outlay and are specifically designated as being made in exchange for Sec. l@,u shares qualify for ordinary loss treatment. Also, revised regulations eliminate the need to attach an information statement to the return of a taxpayer claiming a Sec. 1244 loss, now, the taxpayer must only maintain records sufficient to support the deduction.

While a loss on worthlessness of stock held as a capital asset is typically a capital loss (Sec. 165(g)), individuals and partnerships are allowed ordinary loss treatment on worthlessness of Sec. 1244 stock (up to $50,000 or $100,000 if married filing, jointly). Stock in a domestic corporation is Sec. 1244 stock if (1) the corporation was a "small business corporation" when the stock was issued, (2) the stock was issued by the corporation for money or other property (other than stock and securities) and (3) the corporation, during its five most recent tax years ending before the date the loss on the stock was sustained, derived more than 50% of its aggregate gross receipts from sources other than royalties, rents, dividends, interest, annuities and sales or exchanges of stocks or securities (Sec. 1244(c)). A small business corporation is an entity in which the aggregate amount of money and other property received by the corporation for stock as a contribution to capital and as paid-in surplus does not exceed $1 million. The limitation includes amounts paid for stock, up to and including the stock being issued at the time of determination, plus amounts paid to the corporation before the issuance in question as contributions to capital or as paid-in surplus (Sec. 1244(c)(3)(A)).

In computing a Sec. 1244 ordinary loss, a taxpayer must determine his basis in the Sec. 1244 stock. If a taxpayer owns Sec. 1244 stock in a corporation and makes an additional capital contribution without receiving additional shares, the basis in the taxpayers shares increases. However, this basis increase is allocable to stock that is not Sec. stock (Sec. 1244(d)(1)(B) and Regs. Sec. 1.1244(d)-2(a)). The Tax Court recently held in Bledsoe, TC Memo 1995-521, that a taxpayer's ordinary loss on Sec. 1244 stock was limited to the amount he initially paid for the shares. In Bledsoe, the corporate...