Question

In order to qualify as Section 1244 stock, the ____________.

A. corporation must have been fully engaged in active trade or business at the time of the sale.
B. issuing corporation must have issued no more than $1 million of stock.
C. shareholder must be the original recipient.
D. shares must have been purchased no more than two years after original issuance.
E. corporation must have been primarily engaged in an active trade or business for the five years preceding the sale of the stock.

Answer 1

To qualify as Section 1244 stock, the shareholder must be the original recipient. This type of stock allows losses to be treated as ordinary losses for tax purposes, benefiting the taxpayer.

There are specific criteria related to the issuance and capitalization of the corporation and the use of proceeds, emphasizing the shareholder's original ownership.

Step-by-step explanation:

In order to qualify as Section 1244 stock, the shareholder must be the original recipient.

Section 1244 of the Internal Revenue Code allows taxpayers to treat a loss from the sale, exchange, or worthlessness of qualifying small business stock as an ordinary loss rather than a capital loss.

This qualification provides a tax advantage since ordinary losses can fully offset income. There are several criteria a corporation must meet for the stock to be considered Section 1244 stock:

• The stock must be issued by a domestic corporation that at the time of issuance was a small business corporation with total capitalization not exceeding $1 million.
• The corporation must use the proceeds from the stock sale for business operations and not merely to raise funds for investment purposes.
• The shareholder claiming the loss must have received the stock as an original issue in exchange for money or property (not including stock).

Therefore, the correct answer is that the shareholder must be the original recipient of the Section 1244 stock to potentially qualify for the loss treatment.