American Underwriters, Inc. - Page 1

                                 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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