564 MODULE 36 TAXES: CORPORATE

2. Section 1244-Small Business Corporation (SBC) Stock

3. Sec. 1244 stock permits shareholders to deduct an ordinary loss on sale or worthlessness of stock.
4. Shareholder must be the original holder of stock, and an individual or partnership.
5. Stock can be common or preferred, voting or nonvoting, and must have been issued for money or
property (other than stock or securities)
6. Ordinary loss limited to $50,000 ($100,000 on joint return); any excess is treated as a capital loss.
7. The corporation during the five-year period before the year of loss, received less than 50% of its
total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or ex-
changes of stock or securities.
EXAMPLE: Jim (married and filing a joint return) incurred a loss of $120,000 from the sale of Sec. 1244 stock
during 2009. $100,000 of Jim's loss is deductible as an ordinary loss, with the remaining $20,000 treated as a
capital loss. .
8. If Sec. 1244 stock is received in exchange for property whose FMV is less than its adjusted basis,
the
stock's basis is reduced to the FMV of the property to determine the amount of ordinary loss.
EXAMPLE: foe made a Sec. 351 transfer of property with an adjusted basis of $20,000 and a FMV of $16,000 in ex-
change for Sec. 1244 stock. The basis of foe's stock is $20,000, but solely for purposes of Sec. 1244 the stock's basis is
reduced to $16,000. If foe subsequently sold hisstock for $15,000, $1,000 of his loss would be treated as an ordinary
loss under Sec. 1244, with the remaining $4,000 treated as a capital loss.
9. For purposes of determining the amount of ordinary loss, increases in basis through capital
contribu-
tions or otherwise are treated as allocable to stock which is not Sec. 1244 stock.
EXAMPLE: fill acquired 100 shares of Sec. 1244 stock for $10,000. fill later made a $2,000 contribution to the capi-
tal of the corporation, increasing her stock basis to $12,000. fill subsequently sold the 100 sharesfor $9,000. Of fill's
$3,000 loss, ($10,0007 $12,000) x $3,000 = $2,500 qualifies as an ordinary loss under Sec. 1244, with the remaining
($2,0007 $12,000) x $3,000 = $500 treated as a capital loss.
10. SBC is any domestic corporation whose aggregate amount of money and adjusted basis of other
prop-
erty received for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000.
If more than $1 million of stock is issued, up to $1 million of qualifying stock can be designated as
Sec. 1244 stock.
11. Variations from Individual Taxation
12. Filing and payment of tax
13. A corporation generally must file a Form 1120 every year even though it has no taxable income.
A short-form Form 1120-A may be filed if gross receipts, total income, and total assets are each
less than $500,000. .
14. The return must be filed by the fifteenth 'day of the third month following the close of its taxable
year (e.g., March 15 for calendar-year corporation).
(1) An automatic six-month extension may be obtained by filing Form 7004.
(2) Any balance due on the corporation's tax liability must be paid with the request for extension.
15. Estimated tax payments must. be made by every corporation whose estimated tax is expected to be

$500 or more. A corporation's estimated tax is its expected tax liability (including alternative
minimum tax) less its allowable tax credits. .
(1) Quarterly payments are due on the fifteenth day of the fourth, sixth, ninth, and twelfth months
of its taxable year (April 15, June 15, September 15, and December 15 for a
calendar-year
corporation). Any balance due must be paid by the due date of the return.
(2) No penalty for underpayment of estimated tax will be imposed if payments at least equal the
lesser of
(a) 100% of the current year's tax (determined on the basis of actual income or annualized in-
come),ot
(b) 100% of the preceding year's tax (if the preceding year was a full twelve months and
showed a tax liability).
(3) A corporation ~ith $1 million or more of taxable income in any of its three preceding tax
years (i.e., large corporation) can use its preceding year's tax only for its first
installment and
must base its estimated payments on 100% of its current year's tax to avoid penalty.