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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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