[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(d)-2]

[Page 346-347]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1244(d)-2  Increases in basis of section 1244 stock.

    (a) In general. If subsequent to the time of its issuance there is 
for any reason, including the operation of section 1376(a), an increase 
in the basis of section 1244 stock, such increase shall be treated as 
allocable to stock which is not section 1244 stock. Therefore, a loss on 
stock, the basis of which has been increased subsequent to its issuance, 
must be apportioned between the part that qualifies as section 1244 
stock and the part that does not so qualify. Only the loss apportioned 
to the part that so qualifies may be treated as an ordinary loss 
pursuant to section 1244. The amount of loss apportioned to the part 
that qualifies is the amount which bears the same ratio to the total 
loss as the basis of the stock which is treated as allocated to section 
1244 stock bears to the total basis of the stock.
    (b) Example. The provisions of paragraph (a) of this section may be 
illustrated by the following example:

    Example: For $10,000 a corporation issues 100 shares of section 1244 
stock to X. X later contributes $2,000 to the capital of the corporation 
and this increases the total basis of his 100 shares to $12,000. 
Subsequently, he sells the 100 shares for $9,000. Of the $3,000 loss, 
$2,500 is allocated to the portion of the stock that qualifies as 
section 1244 stock ($10,000/$12,000 of $3,000), and the remaining $500 
is allocated to the portion of the stock that does not so qualify. 
Therefore, to the extent of $2,500, the loss may be treated as an 
ordinary loss assuming the various requirements of section 1244 stock 
are satisfied.

[[Page 347]]

However, the remaining $500 loss must be treated as a capital loss.

[T.D. 6495, 25 FR 9680, Oct. 8, 1960]