Kaps Warehouse, Inc. - Page 19

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                 (At the time NPC's original returns were filed for fiscal                            
            years 1991 and 1992, it was reported that KAW owned 75 percent of                         
            NPC.  Under these circumstances, KAW could not have filed a                               
            consolidated return with NPC, enabling some of NPC's losses to be                         
            used against KAW's income.  Secs. 1501, 1504.  Thus, NPC's losses                         
            could not have been used to reduce any other taxable liability of                         
            the group. Subsequently, during preparation for trial, petitioner                         
            discovered the error in the original filing of the NPC returns; KAW                       
            in fact owned 100 percent of NPC.)                                                        
                 D.  The Rebated Amounts Were Not Bad Debts                                           
                 Petitioner contends that the rebates were not an attempt to                          
            avoid income taxation; but rather, because the rebates were given                         
            on the basis of the lack of collectibility of the accounts                                
            receivable from the related entities, the rebated amounts should be                       
            treated as bad debts.                                                                     
                 Section 166(a) provides a deduction for any debt that becomes                        
            worthless during the taxable year.  The amount of the deduction for                       
            a bad debt is limited to the taxpayer's adjusted basis in the debt                        
            as provided in section 1011.  Sec. 166(b); Perry v. Commissioner,                         
            92 T.C. 470, 477-478 (1989), affd. without published opinion 912                          
            F.2d 1466 (5th Cir. 1990).  Whether, and when, a debt becomes                             
            worthless is determined by inspecting the facts and circumstances.                        
            Sec. 1.166-2(a), Income Tax Regs.  Assuming a debt is recoverable                         
            only in part, the amount of such a debt charged off within the                            

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