American Underwriters, Inc. - Page 30

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          Estate v. Commissioner, 59 T.C. 195, 200 (1972).  Consideration             
          must be given to the debtor's potential for improving its                   
          financial position.  Dustin v.  Commissioner, 53 T.C. 491, 502              
          (1969), affd. 467 F.2d 47 (9th Cir. 1972).                                  
               Based on our review of the record, we hold that at least               
          $5 million of the advances was worthless as of the close of                 
          petitioner's 1987 taxable year.  See American Processing & Sales            
          Co. v. United States, 178 Ct. Cl. 353, 371 F.2d 842 (1967); see             
          also Baldwin v. Commissioner, T.C. Memo. 1993-433; Moffat v.                
          Commissioner, T.C. Memo. 1965-183, affd. 373 F.2d 844 (3d Cir.              
          1967).  The record leads us to conclude that Kenilworth was                 
          insolvent at the end of petitioner's 1987 taxable year, and that            
          the cause of Kenilworth's insolvency was the Crash, which was               
          sudden and unexpected.  It was reasonable for the Board (on                 
          behalf of petitioner) to conclude that Kenilworth was unable to             
          pay any of this $5 million in the future.  The Board arrived at             
          its conclusion of worthlessness through the exercise of sound               
          business judgment.  The Board considered all of the pertinent               
          information that was reasonably obtainable at the time, including           
          Kenilworth's potential for improving its financial position, and            
          it consulted petitioner's advisers including petitioner's                   
          independent certified public account.                                       
               We hold for petitioner on this issue.                                  
          3.  Additions to Tax                                                        






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