Skip to main content

Can an investment in an S-Corp qualify as IRC 1244 stock if it is otherwise small business stock?

Long Beach, CA |

See above. Thank you.

Attorney Answers 3

Posted

Yes, I always do it that way when I form a corp. Being an S corp is no hindrance. You must be sure the stock qualifies as Section 1244 stock. Some of the requirements include adopting a plan:
(a) The amount of stock proposed to be issued under this plan plus the aggregate of money and other property received by the corporation for its stock as a contribution to capital and as a paid-in surplus, does not exceed $1,000,000;
(b) Since its inception, the corporation has received, and contemplates that in the future it will receive, more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interest, annuities and sales or exchanges of stock or securities; and
(c) This plan is adopted before or contemporaneously with the investment of funds and attainment of Shareholder's status by the Investors in this offering.
(d) Stock shall be issued only pursuant to this plan and shall be issued for the same price per share and only for money or cancellation of indebtedness or other property (other than stock or securities) as provided in Internal Revenue Code Section 1244.

Consult a business attorney to be sure you get it right.

DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It is not intended as specific legal advice regarding your question. The answer could be different if all the facts were known. This answer does not establish an attorney client relationship. I am admitted only in California. (Bryant) Keith Martin sbbizlaw.com

Mark as helpful

1 lawyer agrees

Posted

Yes it can. Attorney Martin gives a good summary of the rule here. When you are doing a technical formation of a corporation you should have an attorney review your filing to make sure you have done everything correctly. This is not something that you want to find out down the road was done incorrectly.

Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

Mark as helpful

Posted

Mr Martin completely nails this issue. One additional point is that when the stock is issued we always place a legend on the stock certificates such as "Section 1244 stock" to support this tax advantage and to make it even clearer as to your intent.

Hope this helps. Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is sjfpc@comcast.net . For further tax advice visit his website at www.sjfpc.com . and blog at >

LEGAL DISCLAIMER Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery Counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is sjfpc@comcast.net , his website is www.sjfpc.com. and his blog is <http://frommtaxes.wordpress.com/> Mr. Fromm is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. Also, there are no recognized legal specialties under Pennsylvania law. Any references to a trust, estate or tax lawyer refer only to the fact that Mr. Fromm limits his practice to these areas of the law. These responses are only in the form of legal education and are intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received. By using this site you understand and agree that there is no attorney client relationship or confidentiality between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your jurisdiction, who is familiar with your specific facts and all of the circumstances and with whom you have an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question or omitted from the question. Circular 230 Disclaimer - Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.

Mark as helpful

Business topics

Top tips from attorneys

What others are asking

Can't find what you're looking for?

Post a free question on our public forum.

Ask a Question

- or -

Search for lawyers by reviews and ratings.

Find a Lawyer

Browse all legal topics