- 27 -
sheet insolvency was so great that there may well have been no
reasonable expectation that a continuation of the business would
provide the parent with a return of its investment. Cf.
Morton v. Commissioner, supra at 1279. Yet once the intercompany
debt was forgiven, the balance sheet for FY 1984 showed a deficit
in shareholder's equity of only $26,228, and the same
considerations that would have supported a reasonable expectation
of recovering part of the intercompany debt preclude a
determination that the stock was worthless.
As internal corporate documents of WFGI reflect, the primary
purpose of canceling the intercompany debt was “to get the
capital structure back into compliance with French law” and avert
the threat of involuntary insolvency proceedings. WFGI's
officers would not have forgiven the subsidiary's debt if they
did not believe that this would provide meaningful support to its
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