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commercial applications utilizing advanced electron microprobing
techniques as an analytical tool. In August 1984, petitioners
incorporated HTC Industries, Inc. (HTC) in Connecticut, and, as
HTC's board of directors, adopted a resolution for the issuance
of "Section 1244 Stock", as defined in the Internal Revenue
Code.3 All stock issued by HTC qualifies as section 1244 stock.
Dr. and Mrs. Couch were HTC's president and secretary/
treasurer, respectively. In October 1984, they acquired for cash
60 percent and 40 percent, respectively, of HTC's issued and
outstanding common stock.4 At the same time they also loaned HTC
$49,500 from their personal savings to use as start-up capital.
The loan was evidenced by a promissory note bearing interest at
12 percent per annum.
On August 30, 1984, HTC had submitted a proposal to the
Department of the Army regarding a possible contract involving
Titanium Diboride research. During a pre-award qualification
audit in September 1984, the Defense Contracting Administrative
Services Management Agency informed HTC that it would have to
obtain a $20,000 line of credit as a condition of any contract
3 Pursuant to sec. 1244, "a loss on section 1244 stock"
which would otherwise be treated as a loss from the sale or
exchange of a capital asset is treated as an ordinary loss,
subject to various conditions apparently not applicable here,
except that in the case of a husband and wife filing a joint
return the amount allowable may not exceed $100,000.
4 HTC's address shown on 4 of its 5 returns in evidence,
from its first through its final return, appears to be the same
as petitioners' home address.
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