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Congress intended section 1244 to encourage taxpayers to
invest new funds in small businesses, rather than provide
favorable tax treatment for losses suffered by investment and
holding companies. H. Rept. 2198, 85th Cong., 1st Sess. (1958),
1959-2 C.B. 709, 711; Bates v. United States, 581 F.2d 575, 580
(6th Cir. 1978); Davenport v. Commissioner, 70 T.C. 922, 926
(1978).
The Secretary is authorized to prescribe regulations needed
to carry out the purposes of section 1244. Sec. 1244(e).
Pursuant to that authority, the Secretary issued regulations
which provide that the taxpayer must show that the corporation
was “largely an operating company”3 during the 5-year period
described above even if the gross receipts requirement does not
3 Congress intended to limit application of sec. 1244 to
companies which are largely operating companies. The legislative
history states in pertinent part:
III. GENERAL EXPLANATION
* * * * * * *
Section 2. Losses on Small-Business Stock
* * * * * * *
Your committee also has imposed a restriction designed
to limit this tax benefit to companies which are
largely operating companies. Thus, the corporation, in
the 5 years before the taxpayer incurs the loss on the
stock, must have derived more than half of its gross
receipts from sources other than royalties, rents,
dividends, interest, annuities, and the sale of stock
or securities. [H. Rept. 2198, 85th Cong., 1st Sess.
(1958), 1959-2 C.B. 709, 711; emphasis added.]
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