it's stated that 2500 share were issued for $1 each. what was the orher $97,500+?
only stock can qualify for 1244 treatment. the thread raises the issue that maybe only $2,500 qualifies for 1244 treatment the rest would be a capital loss
from reg
§ 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
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For stock to qualify for §1244 treatment, the following must apply:
The stock must be in a domestic Corporation and it cannot be an LLC that elected corporate tax status.
The corporation must be a small business corporation (at time of issuance). For the purposes of §1244, a corporation is considered a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as either contribution to capital or as paid-in surplus, does not exceed $1,000,000. The determination is made when the stock is issued and if property is received, additional rules apply.
The corporation must be an operating company, not a holding or investment company — the corporation must derive more than 50% of its aggregate gross receipts from sources other than the following: royalties, rents, dividends, interests, annuities, and the sale or exchanges of stocks or securities. This test is measured during the five most recent taxable years ending before the date of the loss on the stock. If the corporation has not been in existence for at least five years, other rules apply. Additionally, this test does not apply if gross deductions exceed gross income during the five-year period.
The stock must have been issued for money or other property (excluding stock and securities). If stock was issued in exchange for property, limitations on the amount of ordinary loss available would apply if the property had basis in excess of its fair market value. Stock issued in exchange for services does not qualify.
The stock must be acquired at original issuance and ownership must be uninterrupted until the sale or exchange.
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one other potential issue is the fact no revenue was ever raised. Did he have an activity (business) entered into for profit? This is one of the many cases where facts, circumstances and documentation are crucial in determining whether deductions should be allowed if challenged by the IRS.
