Wally Findlay Galleries International, Inc. and Subsidiaries - Page 15

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          appointed in October 1987, and liquidation procedures were                  
          completed by 1990.  WFGI continued to use the premises for a                
          purchasing office until 1995.  At the time of trial, it still               
          retained the lease.                                                         
               1. Bad Debt                                                            
               A deduction is allowed for a debt that becomes worthless               
          during the taxable year.  Sec. 166(a)(1).2  A debt is worthless             
          when there is no longer any reasonable expectation of recovery.             
          Dallmeyer v. Commissioner, 14 T.C. 1282, 1292 (1950); Tejon Ranch           
          Co. v. Commissioner, T.C. Memo. 1985-207; Ruane v. Commissioner,            
          T.C. Memo. 1958-175.  Because the determination of worthlessness            
          calls for the exercise of business judgment, courts have tested             
          the taxpayer's determination for the elements of sound business             
          judgment: consistency, the use of all available information, and            
          the reasonableness of the inferences drawn from the information.            
          See, e.g., Riss v. Commissioner, 478 F.2d 1160, 1166 (8th Cir.              
          1973), affg. in part 56 T.C. 388 (1971); Minneapolis, St. Paul &            
          Sault Ste. Marie R.R. Co. v. United States, 164 Ct. Cl. 226                 
          (1964); Production Steel Inc. v. Commissioner, T.C. Memo. 1979-             
          361.  Only bona fide indebtedness can give rise to a deduction              

               2 The authority of the Secretary to allow a deduction for              
          debts that are only recoverable in part is not at issue in this             
          case.  See sec. 166(a)(2).                                                  

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