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 stock, such increase shall be treated as allocable to stock which is not section 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 stock and the part that does not so qualify. Only the loss apportioned to the part that so qualifies may be treated as an ordinary loss pursuant to section . The amount of loss apportioned to the part that qualifies is the amount which bears the same ratio to the total loss as the basis of the stock which is treated as allocated to section stock bears to the total basis of the stock.
(b) Example The provisions of of this section may be illustrated by the following example:
Example: For $10,000 a corporation issues 100 shares of section stock to X. X later contributes $2,000 to the capital of the corporation and this increases the total basis of his 100 shares to $12,000. Subsequently, he sells the 100 shares for $9,000. Of the $3,000 loss, $2,500 is allocated to the portion of the stock that qualifies as section stock ($10,000/$12,000 of $3,000), and the remaining $500 is allocated to the portion of the stock that does not so qualify. Therefore, to the extent of $2,500, the loss may be treated as an ordinary loss assuming the various requirements of section stock are satisfied. However, the remaining $500 loss must be treated as a capital loss.
[T.D. 6495, 25 FR 9680, Oct. 8, 1960]