Wally Findlay Galleries International, Inc. and Subsidiaries - Page 12

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          to treat both the intercompany debt and the stock of the French             
          subsidiary as wholly worthless as of the close of FY 1984.                  
               On their consolidated U.S. Corporation Income Tax Return for           
          FY 1984, filed June 20, 1985, petitioners claimed a deduction in            
          the amount of $1,663,237, consisting of the balance of the                  
          intercompany account ($1,061,425) and the basis in the French               
          subsidiary's stock ($601,812) on September 30, 1984.  The amount            
          written off as a bad debt had been accrued as receipts by WFGI              
          and included in consolidated income in prior years.  The French             
          subsidiary reported income from discharge of indebtedness on its            
          French income tax return.  This income was fully offset by prior            
          net operating losses and created no tax liability.                          
               Notwithstanding their determination that the French                    
          subsidiary was hopelessly insolvent, its stock worthless and the            
          intercompany account uncollectible, the officers of WFGI adhered            
          to their decision to keep the subsidiary operating after FY 1984.           
          For the most part, intercompany business continued as usual.  The           
          subsidiary continued to sell paintings on consignment from WFGI,            
          and the intercompany account, once again, showed an increasing              
          balance owed to the parent.  The officers of WFGI considered ways           
          to reduce the subsidiary's expenses and hoped that the new                  
          intercompany debt would be repaid out of higher sales.  There is            
          evidence that WFGI did not expect this relationship would                   
          continue indefinitely and intended to limit its support.  In                

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