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Limitation#1: The loss is limited to $50,000

  • Exception: Married taxpayers who file a joint return can receive a $100,000 ordinary loss.

  • Limitation #2: Normally, the loss is limited to the taxpayer's basis.

    • Exception: If the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value, then the basis for the write off is reduced by the excess.

    • Exception: Increases in the taxpayer's basis are not taken into account, including additional contributions to capital, if no new stock was issued.

  • Limitation #3: Only individuals can take the ordinary loss. Corporations, trusts and estates cannot take the loss.

  • Limitation #4: The qualified stock must be owned by an individual or a partnership. Stock owned by an S corporation, trust or estate does not qualify.

  • Limitation #5: The stock must have been originally issued by the corporation to the individual sustaining the loss or to a partnership as noted below. An individual who acquires stock from a shareholder by purchase, gift, devise, or in any other manner is not entitled to an ordinary loss. Therefore, the shareholder's estate is not entitled to the loss.

  • Limitation #6: If a partnership owned the stock, then the individual partner taking the loss must have been a partner when the stock was issued to the partnership.

  • Limitation #7: The ordinary loss deduction of a partner is limited to the lesser of the partner's distributive share at the time of the issuance of the stock or the partner's distributive share at the time the loss is sustained.

  • Limitation #8: Ordinary loss treatment is not available to a partner to whom the stock is distributed by a partnership.

  • Limitation #9: The corporation creating the loss must be a domestic corporation.

  • Limitation #10: The corporation creating the loss must be a "small business corporation" when the stock was issued, having no more than $1.0 million in capital at the time of stock issuance. Even if it is now a "small business corporation" it will not qualify for the loss. Investments in LLCs and partnerships do not qualify.

    • Exception: In making the $1.0 million determination, prior contributions to capital are taken into account, even if those capital contributions have been eliminated by businesses losses.

    • Exception: The determination of the $1.0 million uses the corporation's adjusted basis in the contributed property, not its fair market value.

    • Note: The definition of a "small business corporation" is not the same definition as used for S corporations, which may not always qualify for 1244 treatment.

  • Limitation #11: The stock must have been issued for money or other property. Stock issued for services does not qualify, even if the recipient paid taxes on the receipt of the stock.

    • Exception: "Property" excludes stock and securities, apparently even non-publicly traded stocks and securities.

      • Limit to the Exception: Stock issued as a non-taxable stock dividend or in an "E" or "F" reorganization may be treated as qualified property.

  • Limitation #12: No more than 50% of its gross receipts for the five most recent taxable years before the loss was taken can have come from rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.
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