26 U.S.C. § 1244 — Losses on small business stock

(a) An individual’s loss on “section 1244 stock” issued to that individual or to a partnership is treated as an ordinary loss, to the extent this section allows, if it otherwise would be a capital-asset loss. This section does not define “individual” until subsection (d)(4). (b) For one tax year, the total loss treated as ordinary under this section cannot exceed $50,000, or $100,000 for a husband and wife filing a joint return under section 6013. (c)(1) “Section 1244 stock” means stock in a domestic corporation if, when issued, the corporation was a “small business corporation”; the corporation issued the stock for money or property other than stock or securities; and during its five most recent tax years ending before the loss, more than half its total gross receipts came from sources other than royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities. This section does not define “domestic corporation,” “gross receipts,” or the quoted source terms. (2)(A) If the corporation had fewer than five such tax years, use all of its tax years ending before the loss; if it had none, use the period it existed before the loss. (B) Count receipts from selling or exchanging stock or securities only to the extent of gains. (C) The gross-receipts test does not apply if, during the period counted, deductions allowed by this chapter other than sections 172, 243, and 245 exceeded gross income. (3)(A) A corporation is a small business corporation if the money and property it received for stock, as capital contributions, and as paid-in surplus did not exceed $1,000,000. Measure this when the stock was issued, counting that stock and all stock issued earlier. (B) For property other than money, count the corporation’s adjusted basis for figuring gain, reduced by liabilities on the property or assumed by the corporation, measured when the corporation received it. (d)(1)(A) If stock was issued for property, its basis comes from the taxpayer’s basis in that property, and the property’s loss basis exceeded its fair market value immediately before the exchange, reduce the stock basis used to compute the section 1244 loss by that excess. (B) Treat any basis increase from capital contributions or otherwise as belonging to stock that is not section 1244 stock. (2) Regulations may treat replacement stock as meeting subsection (c)(1)’s requirements, except its source-receipts requirement, when its basis comes partly or wholly from qualifying stock, or when it is received in a section 368(a)(1)(F) reorganization for qualifying stock. For the subsection (c)(1)(A) and (3)(A) tests, that reorganization’s successor corporation is treated as the predecessor. (3) For section 172, a loss treated as ordinary under this section is treated as attributable to the taxpayer’s trade or business. (4) “Individual” does not include a trust or estate. (e) The Secretary must issue regulations needed to carry out this section. This section does not define “taxable year,” “capital asset,” “adjusted basis,” “fair market value,” “trade or business,” or other quoted terms.