26 U.S.C. § 1244: Losses on small business stock

In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss. $50,000, or $100,000, in the case of a husband and wife filing a joint return for such year under section 6013. at the time such stock is issued, such corporation was a small business corporation, such stock was issued by such corporation for money or other property (other than stock and securities), and such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities. the period of the corporation’s taxable years ending before such date, or if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date. For purposes of paragraph (1)(C), gross receipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom. Paragraph (1)(C) shall not apply with respect to any corporation if, for the period taken into account for purposes of paragraph (1)(C), the amount of the deductions allowed by this chapter (other than by sections 172, 243, and 245) exceeds the amount of gross income. For purposes of this section, a corporation shall be treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued. For purposes of subparagraph (A), the amount taken into account with respect to any property other than money shall be the amount equal to the adjusted basis to the corporation of such property for determining gain, reduced by any liability to which the property was subject or which was assumed by the corporation. The determination under the preceding sentence shall be made as of the time the property was received by the corporation. section 1244 stock was issued in exchange for property, the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time, In computing the amount of the loss on stock for purposes of this section, any increase in the basis of such stock (through contributions to the capital of the corporation, or otherwise) shall be treated as allocable to stock which is not section 1244 stock. To the extent provided in regulations prescribed by the Secretary, stock in a corporation, the basis of which (in the hands of a taxpayer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the requirements of subsection (c)(1) (other than subparagraph (C) thereof), or which is received in a reorganization described in section 368(a)(1)(F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. For purposes of paragraphs (1)(C) and (3)(A) of subsection (c), a successor corporation in a reorganization described in section 368(a)(1)(F) shall be treated as the same corporation as its predecessor. For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer. For purposes of this section, the term “individual” does not include a trust or estate. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section. Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to stock issued after November 6, 1978 . The amendments made by subsection (b) [amending this section] shall apply to taxable years beginning after December 31, 1978 . In the case of a taxable year which includes November 6, 1978 , the amendments made by subsection (b) [amending this section] shall apply with respect to stock issued after such date.”