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

Page 2344 TITLE 26—INTERNAL REVENUE CODE § 1243 Editorial Notes REFERENCES IN TEXT The Small Business Investment Act of 1958, referred to in cl. (1), is Pub. L. 85–699, Aug. 21, 1958, 72 Stat. 689, which is classified principally to chapter 14B (§ 661 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see Short Title note set out under section 661 of Title 15 and Tables. AMENDMENTS 1976—Pub. L. 94–455 substituted ‘‘an ordinary loss’’ for ‘‘a loss from the sale or exchange of property which is not a capital asset’’, each time appearing. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Sept. 2, 1958, see section 57(d) of Pub. L. 85–866, set out as an Effective Date of 1958 Amendment note under section 243 of this title. § 1243. Loss of small business investment com- pany In the case of a small business investment company operating under the Small Business In- vestment Act of 1958, if— (1) a loss is on stock received pursuant to the conversion privilege of convertible deben- tures acquired pursuant to section 304 of the Small Business Investment Act of 1958, and (2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset, then such loss shall be treated as an ordinary loss. (Added Pub. L. 85–866, title I, § 57(a), Sept. 2, 1958, 72 Stat. 1645; amended Pub. L. 91–172, title IV, § 433(b), Dec. 30, 1969, 83 Stat. 624; Pub. L. 94–455, title XIX, § 1901(b)(3)(F), Oct. 4, 1976, 90 Stat. 1793.) Editorial Notes REFERENCES IN TEXT The Small Business Investment Act of 1958, referred to in text, is Pub. L. 85–699, Aug. 21, 1958, 72 Stat. 689, which is classified principally to chapter 14B (§ 661 et seq.) of Title 15, Commerce and Trade. Section 304 of the Small Business Investment Act of 1958, is classified to section 684 of Title 15. For complete classification of this Act to the Code, see Short Title note set out under section 661 of Title 15 and Tables. AMENDMENTS 1976—Pub. L. 94–455 substituted ‘‘an ordinary loss’’ for ‘‘a loss from the sale or exchange of property which is not a capital asset’’. 1969—Par. (1). Pub. L. 91–172 substituted ‘‘stock re- ceived pursuant to the conversion privilege of convert- ible debentures’’ for ‘‘convertible debentures (including stock received pursuant to the conversion privilege)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91–172 applicable to taxable years beginning after July 11, 1969, see section 433(d) of Pub. L. 91–172, set out as a note under section 582 of this title. EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Sept. 2, 1958, see section 57(d) of Pub. L. 85–866, set out as an Effective Date of 1958 Amendment note under section 243 of this title. § 1244. Losses on small business stock (a) General rule In the case of an individual, a loss on section 1244 stock issued to such individual or to a part- nership 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 year For 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 sec- tion 6013. (c) Section 1244 stock defined (1) In general For purposes of this section, the term ‘‘sec- tion 1244 stock’’ means stock in a domestic corporation if— (A) at the time such stock is issued, such corporation was a small business corpora- tion, (B) such stock was issued by such corpora- tion 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 sus- tained, 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 corporations For 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 tax- able years ending before such date, or (ii) if the corporation has not been in ex- istence 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 re- ceipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom. Page 2345 TITLE 26—INTERNAL REVENUE CODE § 1244 (C) Nonapplication where deductions exceed gross income Paragraph (1)(C) shall not apply with re- spect 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 in- come. (3) Small business corporation defined (A) In general For purposes of this section, a corporation shall be treated as a small business corpora- tion 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 sen- tence 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 value If— (i) section 1244 stock was issued in ex- change 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 in- crease in the basis of such stock (through contributions to the capital of the corpora- tion, or otherwise) shall be treated as allo- cable to stock which is not section 1244 stock. (2) Recapitalizations, changes in name, etc. To the extent provided in regulations pre- scribed by the Secretary, stock in a corpora- tion, the basis of which (in the hands of a tax- payer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the require- ments of subsection (c)(1) (other than subpara- graph (C) thereof), or which is received in a re- organization described in section 368(a)(1)(F) in exchange for stock which meets such re- quirements, 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 deduc- tion For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as an or- dinary loss shall be treated as attributable to a trade or business of the taxpayer. (4) Individual defined For purposes of this section, the term ‘‘indi- vidual’’ 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 Notes AMENDMENTS 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 corpora- tion 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 ‘‘para- graphs (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), sub- stituted ‘‘an ordinary loss’’ for ‘‘a loss from the sale or exchange of an asset which is not a capital asset’’. Page 2346 TITLE 26—INTERNAL REVENUE CODE § 1245 1 So in original. Probably should be followed by a comma. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 not applicable to pre- ferred 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 sub- section (b) [amending this section] shall apply to tax- able 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. § 1245. Gain from dispositions of certain depre- ciable property (a) General rule (1) Ordinary income Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of— (A) the recomputed basis of the property, or (B)(i) in the case of a sale, exchange, or in- voluntary conversion, the amount realized, or (ii) in the case of any other disposition, the fair market value of such property, exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. (2) Recomputed basis For purposes of this section— (A) In general The term ‘‘recomputed basis’’ means, with respect to any property, its adjusted basis recomputed by adding thereto all adjust- ments reflected in such adjusted basis on ac- count of deductions (whether in respect of the same or other property) allowed or al- lowable to the taxpayer or to any other per- son for depreciation or amortization. (B) Taxpayer may establish amount allowed For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allow- able, the amount added for such period shall be the amount allowed. (C) Certain deductions treated as amortiza- tion Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction al- lowable for amortization. (3) Section 1245 property For purposes of this section, the term ‘‘sec- tion 1245 property’’ means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either— (A) personal property, (B) other property (not including a build- ing or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other prop- erty)— (i) was used as an integral part of manu- facturing, production, or extraction or of furnishing transportation, communica- tions, electrical energy, gas, water, or sew- age disposal services, (ii) constituted a research facility used in connection with any of the activities re- ferred to in clause (i), or (iii) constituted a facility used in con- nection with any of the activities referred to in clause (i) for the bulk storage of fun- gible commodities (including commodities in a liquid or gaseous state), (C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amorti- zation under section 169, 179, 179B, 179C, 179D, 179E, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194 1 (D) a single purpose agricultural or horti- cultural structure (as defined in section 168(i)(13)), (E) a storage facility (not including a building or its structural components) used in connection with the distribution of petro- leum or any primary product of petroleum, or (F) any railroad grading or tunnel bore (as defined in section 168(e)(4)). (b) Exceptions and limitations (1) Gifts Subsection (a) shall not apply to a disposi- tion by gift.