[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1244(c)-1]

[Page 337-341]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1244(c)-1  Section 1244 stock defined.

    (a) In general. For purposes of Sec. Sec. 1.1244(a)-1 to 1.1244(e)-
1, inclusive:
    (1) The term pre-November 1978 stock means stock issued after June 
30, 1958, and on or before November 6, 1978.
    (2) The term post-November 1978 stock means stock issued after 
November 6, 1978.

    In order that stock may qualify as section 1244 stock, the 
requirements described in paragraphs (b) through (e) of this section 
must be satisfied. In addition, the requirements of paragraph (f) of 
this section must be satisfied in the case of pre-November 1978 stock. 
Whether these requirements have been met is determined at the time the 
stock is issued, except for the requirement in paragraph (e) of this 
section. Whether the requirement in paragraph (e) of this section, 
relating to gross receipts of the corporation, has been satisfied is 
determined at the time a loss is sustained. Therefore, at the time of 
issuance it cannot be said with certainty that stock will qualify for 
the benefits of section 1244.

    (b) Common stock. Only common stock, either voting or nonvoting, in 
a domestic corporation may qualify as section 1244 stock. For purposes 
of section 1244, neither securities of the corporation convertible into 
common stock nor common stock convertible into other securities of the 
corporation are treated as common stock. An increase in the basis of 
outstanding stock as a result of a contribution to capital is not 
treated as an issuance of stock under section 1244. For definition of 
domestic corporation, see section 7701(a)(4) and the regulations under 
that section.
    (c) Small business corporation. At the time the stock is issued (or, 
in the case of pre-November 1978 stock, at the time of adoption of the 
plan described in paragraph (f)(1) of this section) the corporation must 
be a small business corporation. See Sec. 1.1244(c)-2 for the 
definition of a small business corporation.
    (d) Issued for money or other property. (1) The stock must be issued 
to the taxpayer for money or other property transferred by the taxpayer 
to the corporation. However, stock issued in exchange for stock or 
securities, including stock or securities of the issuing corporation, 
cannot qualify as section 1244 stock, except as provided in

[[Page 338]]

Sec. 1.1244(d)-3, relating to certain cases where stock is issued in 
exchange for section 1244 stock. Stock issued for services rendered or 
to be rendered to, or for the benefit of, the issuing corporation does 
not qualify as section 1244 stock. Stock issued in consideration for 
cancellation of indebtedness of the corporation shall be considered 
issued in exchange for money or other property unless such indebtedness 
is evidenced by a security, or arises out of the performance of personal 
services.
    (2) The following examples illustrate situations where stock fails 
to qualify as section 1244 stock as a result of the rules in 
subparagraph (1) of this paragraph:

    Example 1. A taxpayer owns stock of Corporation X issued to him 
prior to July 1, 1958. Under a plan adopted in 1977, he exchanges his 
stock for a new issuance of stock of Corporation X. The stock received 
by the taxpayer in the exchange may not qualify as section 1244 stock 
even if the corporation has adopted a valid plan and is a small business 
corporation.
    Example 2. A taxpayer owns stock in Corporation X. Corporation X 
merges into Corporation Y. In exchange for his stock, Corporation Y 
issues shares of its stock to the taxpayer. The stock in Corporation Y 
does not qualify as section 1244 stock even if the stock exchanged by 
the taxpayer did qualify.
    Example 3. Corporation X transfers part of its business assets to 
Corporation Y, a new corporation, and all of the stock of Corporation Y 
is issued directly to the shareholders of Corporation X. Since the 
Corporation Y stock was not issued to the shareholders for a transfer by 
them of money or other property, none of the Corporation Y stock in the 
hands of the shareholders can qualify.

    (e) Gross receipts. (1)(i)(a) Except as provided in subparagraph (2) 
of this paragraph, stock will not qualify under section 1244, if 50 
percent or more of the gross receipts of the corporation, for the period 
consisting of the five most recent taxable years of the corporation 
ending before the date the loss on such stock is sustained by the 
shareholders, is derived from royalties, rents, dividends, interest, 
annuities, and sales or exchanges of stock or securities. If the 
corporation has not been in existence for five taxable years ending 
before such date, the percentage test referred to in the preceding 
sentence applies to the period of the taxable years ending before such 
date during which the corporation has been in existence; and if the loss 
is sustained during the first taxable year of the corporation such test 
applies to the period beginning with the first day of such taxable year 
and ending on the day before the loss is sustained. The test under this 
paragraph shall be made on the basis of total gross receipts, except 
that gross receipts from the sales or exchanges of stock or securities 
shall be taken into account only to the extent of gains therefrom. The 
term gross receipts as used in section 1244(c)(1)(C) is not synonymous 
with gross income. Gross receipts means the total amount received or 
accrued under the method of accounting used by the corporation in 
computing its taxable income. Thus, the total amount of receipts is not 
reduced by returns and allowances, cost, or deductions. For example, 
gross receipts will include the total amount received or accrued during 
the corporation's taxable year from the sale or exchange (including a 
sale or exchange to which section 337 applies) of any kind of property, 
from investments, and for services rendered by the corporation. However, 
gross receipts does not include amounts received in nontaxable sales or 
exchanges (other than those to which section 337 applies), except to the 
extent that gain is recognized by the corporation, nor does that term 
include amounts received as a loan, as a repayment of a loan, as a 
contribution to capital, or on the issuance by the corporation of its 
own stock.
    (b) The meaning of the term gross receipts as used in section 
1244(c)(1)(C) may be further illustrated by the following examples:

    Example 1. A corporation on the accrual method sells property (other 
than stock or securities) and receives payment partly in money and 
partly in the form of a note payable at a future time. The amount of the 
money and the face amount of the note would be considered gross receipts 
in the taxable year of the sale and would not be reduced by the adjusted 
basis of the property, the costs of sale, or any other amount.
    Example 2. A corporation has a long-term contract as defined in 
paragraph (a) of Sec. 1.451-3 with respect to which it reports income 
according to the percentage-of-completion method as described in 
paragraph (b)(1) of Sec. 1.451-3. The portion of the gross contract 
price which corresponds to the percentage of

[[Page 339]]

the entire contract which has been completed during the taxable year 
shall be included in gross receipts for such year.
    Example 3. A corporation which regularly sells personal property on 
the installment plan elects to report its taxable income from the sale 
of property (other than stock or securities) on the installment method 
in accordance with section 453. The installment payments actually 
received in a given taxable year of the corporation shall be included in 
gross receipts for such year.

    (ii) The term royalties as used in subdivision (i) of this 
subparagraph means all royalties, including mineral, oil, and gas 
royalties (whether or not the aggregate amount of such royalties 
constitutes 50 percent or more of the gross income of the corporation 
for the taxable year), and amounts received for the privilege of using 
patents, copyrights, secret processes and formulas, good will, 
trademarks, trade brands, franchises, and other like property. The term 
royalties does not include amounts received upon the disposal of timber, 
coal, or domestic iron ore with a retained economic interest to which 
the special rules of section 631 (b) and (c) apply or amounts received 
from the transfer of patent rights to which section 1235 applies. For 
the definition of mineral, oil, or gas royalties, see paragraph (b)(11) 
(ii) and (iii) of Sec. 1.543-1. For purposes of this subdivision, the 
gross amount of royalties shall not be reduced by any part of the cost 
of the rights under which they are received or by any amount allowable 
as a deduction in computing taxable income.
    (iii) The term rents as used in subdivision (i) of this subparagraph 
means amounts received for the use of, or right to use, property 
(whether real or personal) of the corporation, whether or not such 
amounts constitute 50 percent or more of the gross income of the 
corporation for the taxable year. The term rents does not include 
payments for the use or occupancy of rooms or other space where 
significant services are also rendered to the occupant, such as for the 
use or occupancy of rooms or other quarters in hotels, boarding houses, 
or apartment houses furnishing hotel services, or in tourist homes, 
motor courts, or motels. Generally, services are considered rendered to 
the occupant if they are primarily for his convenience and are other 
than those usually or customarily rendered in connection with the rental 
of rooms or other space for occupancy only. The supplying of maid 
service, for example, constitutes such services; whereas the furnishing 
of heat and light, the cleaning of public entrances, exits, stairways, 
and lobbies, the collection of trash, etc., are not considered as 
services rendered to the occupant. Payments for the use or occupancy of 
entire private residences or living quarters in duplex or multiple 
housing units, of offices in an office building, etc., are generally 
rents under section 1244(c)(1)(C). Payments for the parking of 
automobiles ordinarily do not constitute rents. Payments for the 
warehousing of goods or for the use of personal property do not 
constitute rents if significant services are rendered in connection with 
such payments.
    (iv) The term dividends as used in subdivision (i) of this 
subparagraph includes dividends as defined in section 316, amounts 
required to be included in gross income under section 551 (relating to 
foreign personal holding company income taxed to United States 
shareholders), and consent dividends determined as provided in section 
565.
    (v) The term interest as used in subdivision (i) of this 
subparagraph means any amounts received for the use of money (including 
tax-exempt interest).
    (vi) The term annuities as used in subdivision (i) of this 
subparagraph means the entire amount received as an annuity under an 
annuity, endowment, or life insurance contract, regardless of whether 
only part of such amount would be includible in gross income under 
section 72.
    (vii) For purposes of subdivision (i) of this subparagraph, gross 
receipts from the sales or exchanges of stock or securities are taken 
into account only to the extent of gains therefrom. Thus, the gross 
receipts from the sale of a particular share of stock will be the excess 
of the amount realized over the adjusted basis of such share. If the 
adjusted basis should equal or exceed the amount realized on the sale or 
exchange of a certain share of stock, bond, etc., there would be no 
gross receipts resulting from the sale of such security. Losses on sales 
or exchanges

[[Page 340]]

of stock or securities do not offset gains on the sales or exchanges of 
other stock or securities for purposes of computing gross receipts from 
such sales or exchanges. Gross receipts from the sale or exchange of 
stocks and securities include gains received from such sales or 
exchanges by a corporation even though such corporation is a regular 
dealer in stocks and securities. For the meaning of the term stocks or 
securities, see paragraph (b)(5)(i) of Sec. 1.543-1.
    (2) The requirement of subparagraph (1) of this paragraph need not 
be satisfied if for the applicable period the aggregate amount of 
deductions allowed to the corporation exceeds the aggregate amount of 
its gross income. But for this purpose the deductions allowed by section 
172, relating to the net operating loss deduction, and by sections 242, 
243, 244, and 245, relating to certain special deductions for 
corporations, shall not be taken into account. Notwithstanding the 
provisions of this subparagraph and of subparagraph (1) of this 
paragraph, pursuant to the specific delegation of authority granted in 
section 1244(e) to prescribe such regulations as may be necessary to 
carry out the purposes of section 1244, ordinary loss treatment will not 
be available with respect to stock of a corporation which is not largely 
an operating company within the five most recent taxable years (or such 
lesser period as the corporation is in existence) ending before the date 
of the loss. Thus, for example, assume that a person who is not a dealer 
in real estate forms a corporation which issues stock to him which meets 
all the formal requirements of section 1244 stock. The corporation then 
acquires a piece of unimproved real estate which it holds as an 
investment. The property declines in value and the stockholder sells his 
stock at a loss. The loss does not qualify for ordinary loss treatment 
under section 1244 but must be treated as a capital loss.
    (3) In applying subparagraphs (1) and (2) of this paragraph to a 
successor corporation in a reorganization described in section 
368(a)(1)(F), such corporation shall be treated as the same corporation 
as its predecessor. See paragraph (d)(2) of Sec. 1.1244(d)-3.
    (f) Special rules applicable to pre-November 1978 stock. (1)(i) Pre-
November 1978 common stock must have been issued under a written plan 
adopted by the corporation after June 30, 1958, and on or before 
November 6, 1978, to offer only this stock during a period specified in 
the plan ending not later than 2 years after the date the plan is 
adopted. The 2-year requirement referred to in the preceding sentence is 
met if the period specified in the plan is based upon the date when, 
under the rules or regulations of a Government agency relating to the 
issuance of the stock, the stock may lawfully be sold, and it is clear 
that this period will end, and in fact does end, within 2 years after 
the plan is adopted. The plan must specifically state, in terms of 
dollars, the maximum amount to be received by the corporation in 
consideration for the stock to be issued under the plan. See Sec. 
1.1244(c)-2 for the limitation on the amount that may be received by the 
corporation under the plan.
    (ii) To qualify, the pre-November 1978 stock must be issued during 
the period of the offer, which period must end not later than two years 
after the date the plan is adopted. Pre-November 1978 stock which is 
subscribed for during the period of the plan but not issued during this 
period cannot qualify as section 1244 stock. Pre-November 1978 stock 
issued on the exercise of a stock right, stock warrant, or stock option 
(which right, warrant, or option was not outstanding at the time the 
plan was adopted) will be treated as issued under a plan only if the 
right, warrant, or option is applicable solely to unissued stock offered 
under the plan and is exercised during the period of the plan.
    (iii) Pre-November 1978 stock subscribed for prior to the adoption 
of the plan, including stock subscribed for prior to the date the 
corporation comes into existence, may be considered issued under a plan 
adopted by the corporation if the stock is not in fact issued prior to 
the adoption of the plan.
    (iv) Pre-November 1978 stock issued for a payment which, alone or 
together with prior payments, exceeds the maximum amount that may be 
received under the plan, is not considered issued

[[Page 341]]

under the plan, and none of the stock can qualify as section 1244 stock. 
See Sec. 1.1244(c)-2(b) for a different rule with respect to post-
November 1978 stock.
    (2) Pre-November 1978 stock does not qualify as section 1244 stock 
if at the time of the adoption of the plan under which it is issued 
there remains unissued any portion of a prior offering of stock. Thus, 
if any portion of an outstanding offering of common or preferred stock 
is unissued at the time of the adoption of the plan, stock issued under 
the plan will not qualify as section 1244 stock. An offer is outstanding 
unless and until it is withdrawn by affirmative action before the plan 
is adopted. Stock rights, stock warrants, stock options, or securities 
convertible into stock, that are outstanding at the time the plan is 
adopted, are considered prior offerings. The authorization in the 
corporate charter to issue stock different from stock offered under the 
plan or in excess of stock offered under the plan is not of itself a 
prior offering.
    (3)(i) Even though the plan satisfies the requirements of 
subparagraph (1) of this paragraph (f), if another offering of pre-
November 1978 stock is made by the corporation subsequent to, or 
simultaneous with, the adoption of the plan, pre-November 1978 stock 
issued under the plan after the other offering does not qualify as 
section 1244 stock. The issuance of stock options, stock rights, or 
stock warrants at any time during the period of the plan, that are 
exercisable on stock other than stock offered under the plan, is 
considered a subsequent offering. Similarly, the issuance of pre-
November 1978 stock other than that offered under the plan is considered 
a subsequent offering. Because stock issued upon exercise of a converson 
privilege is stock issued for a security, and stock issued under a stock 
option granted in whole or in part for services is not issued for money 
or other property, the issuance of securities with a conversion 
privilege and the issuance of such a stock option are subsequent 
offerings, because the conversion privilege and the stock option are 
exercisable with respect to stock other than that which may properly be 
offered under the plan. Pre-November 1978 stock issued under the plan 
before a subsequent offering is not disqualified because of the 
subsequent offering. The rule of the subparagraph, together with the 
rule of subparagraph (2) of this paragraph (f), relating to offers prior 
to the adoption of the plan, limits pre-November 1978 section 1244 stock 
to stock issued by the corporation during a period when any stock issued 
by it must have been issued under the plan.
    (ii) Any modification of a plan that changes the offering to include 
preferred stock, or that increases the amount of pre-November 1978 stock 
that may be issued under the plan to such an extent that the 
requirements of paragraph (c) of this section would not have been 
satisfied if determined with reference to this amount as of the date the 
plan was initially adopted, or that extends the period of time during 
which stock may be issued under the plan to more than 2 years from the 
date the plan was initially adopted, is considered a subsequent 
offering, and no stock issued after this offering may qualify. However, 
a corporation may withdraw a plan and adopt a new plan to issue stock. 
To determine whether stock issued under this new plan may qualify, this 
paragraph (f) must be applied with respect to the new plan as of the 
date of its adoption. For example, amounts received for stock under the 
prior plan must be taken into account in determining whether the 
statutory requirements relating to definition of small business 
corporation are satisfied. In applying the requirements of paragraph (c) 
of this section, reference should be made to equity capital as of the 
date the new plan is adopted. The same principles apply if the period of 
the initial plan expires and the corporation adopts a new plan.

[T.D. 7779, 46 FR 29468, June 2, 1981]