T.C. Memo. 1996-548
UNITED STATES TAX COURT
AMERICAN UNDERWRITERS, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14263-95. Filed December 18, 1996.
P and K are related corporations that bought and
sold securities for their own accounts. P and K
invested primarily in an innovative and risky type of
option, and P and K guaranteed each other's investment
in the options. P transferred money to K, or to
brokerage firms on K's behalf. P recorded these
transfers as "loans". On Oct. 19, 1987, stock prices
dropped 50 percent, and P and K suffered extraordinary
losses on that day. For its 1987 taxable year, P
deducted $5 million of the advances to K as a bad debt.
Held: The advances were debt. Held, further: The
$5 million debt became worthless in the year of the
deduction. Held, further: P is not liable for the
additions to tax determined by R.
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