A corporation, owned by one owner, decides to go out of business due to excessiv

Question

A corporation, owned by one owner, decides to go out of business due to excessive losses. When the stock was originally issued, the owner did not specify that the stock purchased (at a price of $1000) would be considered §1244 stock. Now that the company is being dissolved, the owner realizes that the loss on the stock would be limited to $3,000 per year. Consequently, because the loss would equate to approximately $200,000, the owner desires to change the stock to §1244 stock, thus allowing greater deductions. Can the owner change the type of stock after the fact? If the owner could change the stock (I’m not saying it is or it isn’t.), would this be ethical?

Explanation / Answer

But if the taxpayer is an individual, and the worthless stock is Internal Revenue Code Section 1244 stock, then the taxpayer may treat up to $50,000 of the loss as ordinary (up to $100,000 of the loss in the case of a husband and wife filing a joint tax return). “Section 1244 stock” is stock in a domestic corporation if—

(A) at the time such stock was 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 its five most recent taxable years, derived more than 50% of its aggregate gross receipts from sources other than royalties, rents, dividends, interest, annuities, and sales or exchanges of securities.

A corporation is a small business corporation if the aggregate amount received by the corporation for its stock, or as a contribution to its capital, does not exceed $1,000,000.

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