
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1244]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                 Subchapter P--Capital Gains and Losses
 
     PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
 
Sec. 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 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 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 section 6013.

(c) Section 1244 stock defined

                           (1) In general

        For 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 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 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.

        (C) Nonapplication where deductions exceed gross income

            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, 244, 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 value

            If--
                (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, Sec. 202(b), Sept. 2, 1958, 72 Stat. 
1676; amended Pub. L. 94-455, title XIX, Secs. 1901(b)(1)(W), (3)(G), 
1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1792, 1793, 1834; Pub. L. 95-600, 
title III, Sec. 345(a)-(d), Nov. 6, 1978, 92 Stat. 2844, 2845; Pub. L. 
98-369, div. A, title IV, Sec. 481(a), July 18, 1984, 98 Stat. 847.)


                               Amendments

    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, Sec. 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, Sec. 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, Sec. 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, Sec. 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, Sec. 1901(b)(1)(W), struck out 
reference to section 242 of this title.
    Subsec. (d)(2). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ``or 
his delegate'' after ``Secretary''.
    Subsec. (d)(3). Pub. L. 94-455, Sec. 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''.


                    Effective Date of 1984 Amendment

    Section 481(b) of Pub. L. 98-369 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

    Section 345(e) of Pub. L. 95-600, as amended by Pub. L. 96-222, 
title I, Sec. 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.

                  Section Referred to in Other Sections

    This section is referred to in sections 1202, 1274 of this title.
