Small Business Corporation Stock

Small Business Corporation Stock means:
stock for which ordinary deduction treatment is available to certain individuals and partnerships on the sale of the stock or bankruptcy of the company. This ordinary deduction (rather than a capital loss) is available on disposition or worthlessness of Section 1244 stock as an ordinary loss, to the extent, in any one taxable year, of $50,000 for a single individual, or of $100,000 for a married couple filing a joint return. The loss is deductible from gross income in determining Adjusted Gross Income. If the loss for the year is more than the stated limits, such additional amount is a capital loss. There is no carryover of the ordinary loss. However, if a shareholder has a potential loss of more than the limit, he or she can sell the shares piecemeal over 2 or more years, if this is economically feasible, and thereby obtain full ordinary loss deductions.

Both common stock and preferred stock, either voting or non-voting, in a domestic corporation can qualify as Section 1244 stock, but only if (1) the corporation was a “small business corporation” at the time the plan was adopted, (2) the stock was issued by the corporation pursuant to this plan for money or property other than stock or securities, and (3) during the corporation's most recent 5 taxable years preceding the date the loss was sustained (or such shorter period of the corporation's life), the corporation derived more than 50% of its aggregate gross receipts from sources other than royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities. This limitation does not apply, however, if during this period the corporation incurs aggregate net losses.

See Dividend in the American Legal Encyclopedia and Dividend in the World Legal Encyclopedia.