Wally Findlay Galleries International, Inc. and Subsidiaries - Page 26

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          a sale of the group or of the French subsidiary alone.4   In the            
          circumstances, we do not give dispositive effect to the officers'           
          conclusion that the debt should be written off as worthless.                
          Petitioners have failed to make the showing required in order to            
          qualify for the deduction under section 166.                                
               2. Worthless Stock                                                     
               Section 165(g) provides for a deduction of the loss that               
          results when stock becomes worthless during the taxable year.               
          To establish worthlessness, the taxpayer must show not only                 
          current balance sheet insolvency, but also the absence of any               
          reasonable expectation that the assets of the corporation will              
          exceed its liabilities in the future.  Both liquidating value and           
          potential value are relevant in this context.  Steadman v.                  
          Commissioner, 50 T.C. 369, 376-377 (1968), affd. 424 F.2d 1 (6th            
          Cir. 1970); Morton v. Commissioner, 38 B.T.A. 1270, 1278-1279               
          (1938), affd. 112 F.2d 320 (7th Cir. 1940).                                 
               Respondent disallowed the deduction under section 165(g) on            
          the ground that petitioners had not shown that the stock of the             
          French subsidiary became worthless in FY 1984.  We agree.  So               
          long as intercompany indebtedness of more than $1 million                   
          remained on the subsidiary's balance sheet, the extent of balance           


               4 When WFGI sold the stock of its Beverly Hills and New York           
          galleries in 1980, it capitalized the subsidiaries' intercompany            
          account debts.                                                              





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