26 U.S.C. § 1244

Losses on small business stock

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(a) General rule

In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.

(b) Maximum amount for any taxable yearFor any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—(1) $50,000, or(2) $100,000, in the case of a husband and wife filing a joint return for such year under section 6013.(c) Section 1244 stock defined(1) In generalFor purposes of this section, the term “section 1244 stock” means stock in a domestic corporation if—(A) at the time such stock is issued, such corporation was a small business corporation,(B) such stock was issued by such corporation for money or other property (other than stock and securities), and(C) such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.(2) Rules for application of paragraph (1)(C)(A) Period taken into account with respect to new corporationsFor purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5-year period—(i) the period of the corporation’s taxable years ending before such date, or(ii) if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date.(B) Gross receipts from sales of securities

For purposes of paragraph (1)(C), gross receipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom.

Paragraph (1)(C) shall not apply with respect to any corporation if, for the period taken into account for purposes of paragraph (1)(C), the amount of the deductions allowed by this chapter (other than by sections 172, 243, and 245) exceeds the amount of gross income.

(3) Small business corporation defined(A) In general

For purposes of this section, a corporation shall be treated as a small business corporation if 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 $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued.

(B) Amount taken into account with respect to property

For purposes of subparagraph (A), the amount taken into account with respect to any property other than money shall be the amount equal to the adjusted basis to the corporation of such property for determining gain, reduced by any liability to which the property was subject or which was assumed by the corporation. The determination under the preceding sentence shall be made as of the time the property was received by the corporation.

(d) Special rules(1) Limitations on amount of ordinary loss(A) Contributions of property having basis in excess of valueIf—(i) section 1244 stock was issued in exchange for property,(ii) the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and(iii) the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time,then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii).(B) Increases in basis

In computing the amount of the loss on stock for purposes of this section, any increase in the basis of such stock (through contributions to the capital of the corporation, or otherwise) shall be treated as allocable to stock which is not section 1244 stock.

(2) Recapitalizations, changes in name, etc.

To the extent provided in regulations prescribed by the Secretary, stock in a corporation, the basis of which (in the hands of a taxpayer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the requirements of subsection (c)(1) (other than subparagraph (C) thereof), or which is received in a reorganization described in section 368(a)(1)(F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. For purposes of paragraphs (1)(C) and (3)(A) of subsection (c), a successor corporation in a reorganization described in section 368(a)(1)(F) shall be treated as the same corporation as its predecessor.

(3) Relationship to net operating loss deduction

For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer.

(4) Individual defined

For purposes of this section, the term “individual” does not include a trust or estate.

(e) Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

(Added Pub. L. 85–866, title II, § 202(b), Sept. 2, 1958, 72 Stat. 1676; amended Pub. L. 94–455, title XIX, §§ 1901(b)(1)(W), (3)(G), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1792, 1793, 1834; Pub. L. 95–600, title III, § 345(a)–(d), Nov. 6, 1978, 92 Stat. 2844, 2845; Pub. L. 98–369, div. A, title IV, § 481(a), July 18, 1984, 98 Stat. 847; Pub. L. 113–295, div. A, title II, § 221(a)(41)(H), Dec. 19, 2014, 128 Stat. 4044.)Editorial NotesAmendments

2014—Subsec. (c)(2)(C). Pub. L. 113–295 struck out “244,” after “243,”.

1984—Subsecs. (c)(1), (d)(2). Pub. L. 98–369 substituted “stock in a” for “common stock in a”.

1978—Subsec. (b). Pub. L. 95–600, § 345(b), substituted in par. (1) “$50,000” for “$25,000” and in par. (2) “$100,000” for “$50,000”.

Subsec. (c). Pub. L. 95–600, § 345(a), (c), among other changes, substituted provisions permitting a corporation to issue common stock under the provisions of this section without a written plan for provisions requiring that a written plan to issue section 1244 stock must be adopted by the issuing corporation and increased the amount of section 1244 stock that a qualified small business corporation may issue from $500,000 to $1,000,000.

Subsec. (d)(2). Pub. L. 95–600, § 345(d), substituted “subparagraph (C)” for “subparagraph (E)” and “paragraphs (1)(C) and (3)(A)” for “paragraphs (1)(E) and (2)(A)”.

1976—Subsecs. (a), (b). Pub. L. 94–455, § 1901(b)(3)(G), substituted “an ordinary loss” for “a loss from the sale or exchange of an asset which is not a capital asset”.

Subsec. (c)(1)(E). Pub. L. 94–455, § 1901(b)(1)(W), struck out reference to section 242 of this title.

Subsec. (d)(2). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

Subsec. (d)(3). Pub. L. 94–455, § 1901(b)(3)(G), substituted “an ordinary loss” for “a loss from the sale or exchange of an asset which is not a capital asset”.

Statutory Notes and Related SubsidiariesEffective Date of 2014 Amendment

Amendment by Pub. L. 113–295 not applicable to preferred stock issued before Oct. 1, 1942 (determined in the same manner as under section 247 of this title as in effect before its repeal by Pub. L. 113–295), see section 221(a)(41)(K) of Pub. L. 113–295, set out as a note under section 172 of this title.

Except as otherwise provided in section 221(a) of Pub. L. 113–295, amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title IV, § 481(b), July 18, 1984, 98 Stat. 847, provided that: “The amendment made by subsection (a) [amending this section] shall apply to stock issued after the date of the enactment of this Act [July 18, 1984] in taxable years ending after such date.”

Effective Date of 1978 Amendment

Pub. L. 95–600, title III, § 345(e), Nov. 6, 1978, 92 Stat. 2845, as amended by Pub. L. 96–222, title I, § 103(a)(9), Apr. 1, 1980, 94 Stat. 212, provided that:“(1)In general.—Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to stock issued after November 6, 1978.“(2)Subsection (b).—The amendments made by subsection (b) [amending this section] shall apply to taxable years beginning after December 31, 1978.“(3)Transitional rule for subsection (b).—In the case of a taxable year which includes November 6, 1978, the amendments made by subsection (b) [amending this section] shall apply with respect to stock issued after such date.”

Effective Date of 1976 Amendment

Amendment by section 1901(b)(1)(W), (3)(G) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

Notes of Decisions

Cited in 21 cases, 1929–2001 · leading case: Alfred O. & Margaret A. Bates v. The United States of Am., 581 F.2d 575 (6th Cir. 1978).

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Alfred O. & Margaret A. Bates v. The United States of Am., 581 F.2d 575 (6th Cir. 1978). · cites it 2× “This case concerns the requirements which must be met for a taxpayer to be entitled to the favorable tax treatment extended by Section 1244 of the Internal Revenue Code of 1954, 26 U.S.C. § 1244 (1970). 1 Ordinarily when an investment in a corporation becomes worthless, the…”

John H. Rickey & Lorraine C. Rickey v. Comm'r of Internal Revenue, 502 F.2d 748 (9th Cir. 1974). · cites it 4× “The second is whether a loss suffered by Taxpayer on the liquidation of a corporation qualifies under the provisions of 26 U.S.C. § 1244 for treatment as an ordinary loss.”

Leroy Frantz, Jr. & Sheila Frantz v. Comm'r of Internal Revenue, 784 F.2d 119 (2d Cir. 1986). · cites it 2× “§ 1244, 26 U.S.C. § 1244 , 2 for allowance of an ordinary loss of $50,000 on sale of a small business stock.”

Starnes v. United States (In Re Starnes), 231 B.R. 903 (N.D. Tex. 1998). · cites it 4× “26 U.S.C.A. § 1244 (a). 5 “When a loss is suffered on stock which qualifies under § 1244 .”

Wynn v. Est. of Holmes, 815 P.2d 1231 (Okla. Civ. App. 1991). “It is undisputed that under 26 U.S.C. § 1244 (1978), the maximum allowable claim for such loss is $100,000.”

Webb v. United States, 560 F. Supp. 150 (S.D. Miss. 1982). · cites it 2× ““Section 1244 stock” is defined in Section 1244(c) to mean, as applicable herein, common stock of a domestic small business corporation if (1) such corporation adopted a plan to offer such stock for a limited period when no part of a prior offering was outstanding, (2) such…”

Edwin C. Hollenbeck & Kathryn J. Hollenbeck, Wade G. Ellis & Anita l.ellis v. Comm'r of Internal Revenue, 422 F.2d 2 (9th Cir. 1970). · cites it 2× “26 U.S.C. § 1244 . Appellee, Commissioner of Internal Revenue, urges the correctness of the Tax Court decision to the effect that the stock in question did not qualify under Section 1244 for reasons stated in that opinion.”

Michel v. Gard, 536 N.E.2d 1375 (Ill. App. Ct. 1989). “” It is further alleged that defendants negligently deviated from recognized standards for the practice of law relevant to formation of corporations, as practiced in Peoria, Illinois, and similar localities, by failing to qualify the corporate shares as section 1244 stock within…”

Brownson v. United States, 32 F.2d 844 (8th Cir. 1929). “(26 USCA § 1244), it is provided: “All administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act.”

Backus v. United States, 59 F.2d 242 (Ct. Cl. 1932). “Those provisions were not designed to confer authority to com *257 promise already existing, bat made possible the accomplishment of that which was not authorized by the compromise section of the Revised Statutes and, therefore, covered a different field.”

Elmer W. Anderson & Margaret P. Anderson v. United States, 436 F.2d 356 (10th Cir. 1971). “The case was submitted to the trial court on stipulated facts presenting the sole question of whether a loss incurred from the sale of corporate stock belonging to the taxpayers should be treated as a loss from the sale of a capital asset, or as an ordinary loss under the…”

Homer L. Bruce Et Ux. v. United States, 409 F.2d 1317 (5th Cir. 1969). “26 U.S.C. § 1244 (c) (1) (A). The taxpayers strenuously argue that the inclusion of specified termination dates in the “plans” would have been “useless surplusage” under the facts of this case.”

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— 26 U.S.C. § 1244(c)(3) — 1 case

Starnes v. United States (In Re Starnes), 231 B.R. 903 (N.D. Tex. 1998). “26 U.S.C.A. § 1244 (a). 5 “When a loss is suffered on stock which qualifies under § 1244 .”

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