Worthless company stock - Section 1244....and shares were withheld to pay taxes when

[DTNY07]

Client has about $350,000 of worthless stock from a company he used to work for.  The company went under because of the pandemic.  I've never had a client have worthless stock from a job before. My understanding is that even though this  is Section 1244 stock, none of this would be an ordinary loss.  Since the stock must be issued in exchange for cash or other property to get the ordinary loss.  The stock options were issued to him as part of his compensation.  He didn't receive cash and then buy the stock.

Is this correct?  That none of it is an ordinary loss and all of it is a long-term capital loss (he held the stock more than a year, so it is long-term).  

Second question.......the company withheld some of the stock to cover the taxes on his W-2.

Can he add that back now since the stock was worthless and he paid taxes on stock that became worthless?  I don't think he can, since he could have sold the stock at some point before it became worthless and chose not to.  That would be about 30% withheld.

Thanks in advance for any help.

[Ernie]

So, he paid $350,000 for the stock or was that what it was worth at the highest price? 

[sjrcpa]

"the stock must be issued in exchange for cash or other property to get the ordinary loss.  The stock options were issued to him as part of his compensation"

Why isn't this cash or other property?

[DTNY07]

It was what was recorded on his W-2 in the year it was earned.  It wasn't the highest value or the year end value before it went worthless

[DTNY07]

I am copying this from The tax advisor.  Line 2 is the reason why I don't think it qualifies.

Meeting the Sec. 1244 Requirements

Second, the stock must be issued in exchange for cash or other property (other than stock and securities) (Sec. 1244(c) (1)(B)). Thus, stock issued in exchange for services does not qualify (Regs. Sec. 1.1244(c)-1(d)(1)). (If possible, the corporation should pay shareholders in cash for services rendered and then permit them to buy the stock, if desired.) Stock issued in exchange for stock or securities, including stock of the issuing corporation, normally does not qualify for Sec. 1244 treatment. However, stock received in (1) certain stock dividend transactions, (2) an E reorganization (a recapitalization) under Sec. 368(a)(1)(E), or (3) an F reorganization (a change in identity, form, or place of organization) under Sec. 368(a) (1)(F) can qualify.