What are the issues?

What are the conclusions?

To support conclusions, apply and analyze the applicable Tax Laws I.R.C. 1244 and Treas. Reg. 1.1244.

our firm G\&S, LLP (GS," "Firm"). AAA has an issue regarding Alice, one of the members (of the LLC) that they would like us to research. As you may recall from our discussions, A limited liability company (LLC) combines the best features of a partnership and corporation even though it is neither. It is taxed like a partnership while providing the limited liability of a corporation. We prepare the LLC's Form 1065 and each member's individual 1040 and K-1. Alice, Adam, and Alfredo are equal members in AAA, a professional services company. AAA mainly deals in technology consulting services and often conducts in the trading of technology commodities, which it is familiar with. In 2021, Alice, in an attempt to maximize the firm's return on its investment portfolio, encourages her fellow members to acquire $90,000 of stock in a local Internet provider. The stock was acquired by the LLC from the issuing corporation and the corporation that issued the stock meets all the tests for the stock to be treated as "small business stock". In 2022, when the stock is worth $20,000, Adam and Alfredo, who are upset with Alice's investment choice, distribute all of the shares of the small business stock to Alice, as part of her partnership distribution. The following year, Alice sells the stock for just $15,000. (C) 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. (2) Rules for application of paragraph (1)(C) . (A) Period taken into account with respect to new corporations. For purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5 -year period- (i) the period of the corporation's taxable years ending before such date, or (ii) 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. (B) Gross receipts from sales of securities. 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. (C) Nonapplication where deductions exceed gross income. 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. (3) Small business corporation defined. (A) In general. 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. (B) Amount taken into account with respect to property. 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 (d) Special rules. (1) Limitations on amount of ordinary loss. (A) Contributions of property having basis in excess of value. If- (i) section 1244 stock was issued in exchange for property, (ii) 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 (iii) the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time, then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii). (B) Increases in basis. 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. (2) Recapitalizations, changes in name, etc. 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. (3) Relationship to net operating loss deduction. 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. (4) Individual defined. For purposes of this section , the term "individual" does not include a trust or estate. (e) Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section . (6) 2023 Thomson Reuters/Tax \& Accounting. All Rights Reserved. (Reg Caution) Reg 1.1244(a)-1 Loss on small business stock treated as ordinary loss. Income (USTR) Federal Regulations Reg 1.1244(a)-1. Loss on small business stock treated as ordinary loss. Caution: The Treasury has not yet amended Reg 1.1244(a)1 to reflect changes made by P.L. 98-369 Effective: The amendments to the regulations are effective with respect to stock issued before and after November 6, 1978, and apply, in general, to taxable years beginning after December 31, 1978. The amendments to the regulations also apply, in certain cases, to taxable years including November 6, 1978. (a) In general. Subject to certain conditions and limitations, section 1244 provides that a loss on the sale or exchange (including a transaction treated as a sale or exchange, such as worthlessness) of "section 1244 stock" which would otherwise be treated as a loss from the sale or exchange of a capital asset shall be treated as a loss from the sale or exchange of an asset which is not a capital asset (referred to in this section and $1.1244(b)1 to 1.1244(e)1, inclusive, as an "ordinary loss"). Such a loss shall be allowed as a deduction from gross income in arriving at adjusted gross income. The requirements that must be satisfied in order that stock may be considered section 1244 stock are described in $1.1244(c)1 and 1.1244(c)-2. These requirements relate to the stock itself and the corporation issuing such stock. In addition, the taxpayer who claims an ordinary loss deduction pursuant to section 1244 must satisfy the requirements of paragraph (b) of this section. (b) Taxpayers entitled to ordinary loss. The allowance of an ordinary loss deduction for a loss of section 1244 stock is permitted only to the following two classes of taxpayers: (1) An individual sustaining the loss to whom the stock was issued by a small business corporation, or (2) An individual who is a partner in a partnership at the time the partnership acquired the stock in an issuance from a small business corporation and whose distributive share of partnership items reflects the loss sustained by the partnership. The ordinary loss deduction is limited to the lesser of the partner's distributive share at the time of the issuance of the stock or the partner's distributive share at the time the loss is sustained. In order to claim a deduction under section 1244 the individual, or the partnership, sustaining the loss must have continuously held the stock from the date of issuance. A corporation, trust, or estate is not entitled to ordinary loss treatment under section 1244 regardless of how the stock was acquired. An individual who acquires stock from a shareholder by purchase, gift, devise, or in any other manner is not entitled to an ordinary loss under section 1244 with respect to this stock. Thus, ordinary loss treatment is not available to a partner to whom the stock is distributed by the partnership. Stock acquired through an investment banking firm, or other person, participating in the sale of an issue may qualify for ordinary loss treatment only if the stock is not first issued to the firm or person. Thus, for example, if the firm acts as a selling agent for the issuing corporation the stock may qualify. On the other hand, stock purchased by an investment firm and subsequently resold does not qualify as section 1244 stock in the hands of the person acquiring the stock from the firm. (c) Examples. The provisions of paragraph (b) of this section may be illustrated by the following examples: Example (1). A and B, both individuals, and C, a trust, are equal partners in a partnership to which a small business corporation issues section 1244 stock. The partnership sells the stock at a loss. A's and B's distributive share of the loss may be treated as an ordinary loss pursuant to section 1244, but C's distributive share of the loss may not be so treated. Example (2). The facts are the same as in example (1) except that the section 1244 stock is distributed by the partnership to partner A and he subsequently sells the stock at a loss. Section 1244 is not applicable to the loss since A did not acquire the stock by issuance from the small business corporation. T.D. 6495,10/7/60, amend T.D. 7779,6/1/81. (6) 2023 Thomson Reuters/Tax \& Accounting. All Rights Reserved. Caution: The Treasury has not yet amended Reg 1.1244(b)1 to reflect changes made by P.L. 98-369 Effective: The amendments to the regulations are effective with respect to stock issued before and after November 6, 1978, and apply, in general, to taxable years beginning after December 31, 1978. The amendments to the regulations also apply, in certain cases, to taxable years including November 6, 1978. (a) In general. Subsection (b) of section 1244 imposes a limitation on the aggregate amount of loss that for any taxable year may be treated as an ordinary loss by a taxpayer by reason of that section. In the case of a partnership, the limitation is determined separately as to each partner. Any amount of loss in excess of the applicable limitation is treated as loss from the sale or exchange of a capital asset. (b) Amount of loss. (1) Taxable years beginning after December 31, 1978. For any taxable year beginning after December 31,1978 , the maximum amount that may be treated as an ordinary loss under section 1244 is- (i) $50,000, or (ii) $100,000, if a husband and wife file a joint return under section 6013 . These limitations on the maximum amount of ordinary loss apply whether the loss or losses are sustained on pre-November 1978 stock (as defined in \$1.1244(c)-1(a)(1)), post-November 1978 stock (as defined in $1.1244(c)-1(a)(2)), or on any combination of pre-November 1978 stock and post-November 1978 stock. The limitation referred to in (ii) applies to a joint return whether the loss or losses are sustained by one or both spouses. (2) Taxable years ending before November 6, 1978. For any taxable year ending before November 6 , 1978 , the maximum amount that may be treated as an ordinary loss under section 1244 is- (i) $25,000 or (ii) $50,000, if a husband and wife file a joint return under section 6013 . The limitation referred to in (ii) applies to a joint return whether the loss or losses are sustained by one or both spouses. (3) Taxable years including November 6, 1978. For a taxable year including November 6, 1978, the maximum amount that may be treated as ordinary loss under section 1244 is the sum of - (i) The amount calculated by applying the limitations described in subparagraph (1) of this paragraph (b) to the amount of loss, if any, sustained during the taxable year on post-November 1978 stock, plus (ii) The amount calculated by applying the limitations described in subparagraph (2) of this paragraph (b) to the amount of loss, if any, sustained during the taxable year on pre-November 1978 stock, To the extent this sum does not exceed $50,000, or, if a husband and wife file a joint return under section 6013 for the taxable year, $100,000. (4) Examples. The provisions of this section may be illustrated by the following examples: Example (1). A, a married taxpayer who files a joint return for the taxable year ending December 31 , 1977 , sustains a $50,000 loss qualifying under section 1244 on pre-November 1978 stock in Corporation X and an equal amount of loss qualifying under section 1244 on pre-November 1978 stock in Corporation Y. A is limited to $50,000 of ordinary loss under paragraph (b)(2)(ii). The remaining $50,000 of loss is treated as loss from the sale or exchange of a capital asset. Example (2). For the taxable year ending December 31, 1979, B, a married taxpayer who files a joint return, sustains a $90,000 loss on post-November 1978 stock in Corporation X. In the same taxable year, C, B's spouse, sustains a $25,000 loss on post-November 1978 stock in Corporation Y. Both losses qualify under section 1244. B and C's ordinary loss is limited to $100,000 under paragraph (b)(1)(ii). The remaining $15,000 of loss is treated as loss from the sale or exchange of a capital asset. Example (3). D, a married taxpayer who files a joint return and reports income on a fiscal year basis for the taxable year ending November 30,1978 , sustains a $60,000 loss qualifying under section 1244 on pre-November 1978 stock and a $40,000 loss qualifying under section 1244 on post-November 1978 stock. D's ordinary loss on pre-November 1978 stock is limited to $50,000 under subparagraph (3)(ii) of this paragraph (b). D's $40,000 loss on post-November 1978 stock is within the limit of subparagraph (3)(i) of this paragraph (b). The total of these losses, $90,000, is the aggregate amount deductible by D as ordinary loss under section 1244. The remaining $10,000 of loss is treated as loss from the sale or exchange of a capital asset. Example (4). E, a married taxpayer who files a joint return for the taxable year ending December 31, 1980 , sustains a $75,000 loss qualifying under section 1244 on pre-November 1978 stock and a $10,000 loss qualifying under section 1244 on post-November 1978 stock. E may deduct the total of these losses, $85,000, as ordinary loss under paragraph (b)(1)(ii). Example (5). Assume the same facts as in the preceding example, except that the losses are sustained in the taxable year beginning January 1, 1978, and ending December 31, 1978. E is limited to $60,000 of ordinary loss ( $50,000 on pre-November 1978 stock plus $10,000 on post-November 1978 stock) under paragraph (b)(3). The remaining $25,000 of loss is treated as loss from the sale or exchange of a capital asset. Example (6). F, a married taxpayer who files a joint return for the taxable year beginning January 1 , 1978 , and ending December 31,1978 , sustains a $75,000 loss qualifying under section 1244 on pre-November 1978 stock and a $125,000 loss qualifying under section 1244 on post-November 1978 stock. F's loss on pre-November 1978 stock is limited to $50,000 of ordinary loss under subparagraph (3)(ii) of this paragraph (b). F's loss on post-November 1978 stock is limited to $100,000 of ordinary loss under subparagraph (3)(i) of this paragraph (b). The total of these losses, $150,000, is limited to $100,000 of ordinary loss under paragraph (b)(3). F's aggregate amount of ordinary loss under section 1244 is $100,000. The remaining $100,000 of loss is treated as loss from the sale or exchange of a capital asset