The benefits of sec. 1244 stock.

• Author: Odzer, Joseph A.

Sec. 1244 permits a limited ordinary loss deduction on the sale, exchange or worthlessness o stock in a small business corporation. The deduction is available to the individual to whom the stock was originally issued, or to an individual who at the time of issuance was a partner in a partnership to which Sec. 1244 stock was originally issued, to the extent of his distributive share of the loss in question. The aggregate amount of loss an individual can claim on Sec. 1244 stock in any tax year is limited to $50,000 (or $100,000 for individuals filing joint tax returns). Any loss in excess of this amount is treated as a capital loss, subject to the $3,000 annual capital loss limitation of Sec. 121 1.

Corporate characteristics

To qualify as Sec. 1244 stock (for stock issued after Nov. 6, 1978), the stock must be issued by a domestic corporation and meet the following requirements.

1. The corporation must have been a small business corporation when the stock was issued.

2. The stock must have been issued by the corporation for money or other property (other than stock and securities).

3. During the corporation's five most recent tax years ending before the date of the loss in question, more than-50% of its gross receipts were from- sources other than royalties, rents, dividends, interest, annuities, and sales or exchanges of stocks and securities (there is an exception to this provision if the issuing corporation's deductions exceed income).

   Regs. Sec. 1.1244(c)-2(b)(2) provides that stock issued by a corporation after Nov. 6, 1978 automatically qualifies as Sec. 1244 stock without any affirmative designation by the corporation, if the amount of,money and other property received by the corporation for its stock as a contribution to capital and as paid-in capital, does not exceed $1 million. The $1 million limitation is determined at the time the stock is issued; therefore, only the first $1 million invested in a domestic corporation qualifies as Sec. 1244 stock. If the amount of stock issued exceeds the $1 million limitation, the corporation must designate which of its shares issued in the year the limitation is exceeded (the "transitional year") qualifies under Sec. 1244. This designation must be made by the fifteenth day of the third month following the close of the corporation's tax year. Stock issued after the transitional year does not qualify as Sec. 1244 stock.

   Regs. Secs. 1.1244(c)-1(f) and -2(c) discuss the requirements of Sec. 1244 for...