Venture Funding, Ltd. - Page 31

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          capital gain” in the same amount as the claimed deduction on                
          petitioner’s transfer of the Endotronics stock to petitioner’s              
          employees (see majority op. p. 4 note 2), instead determine that            
          petitioner had ordinary income in the same amount as the claimed            
          deduction upon its own receipt of those same shares as                      
          compensation?  As indicated by facts in the stipulated record               
          disclosed by the explanation of the next question, that                     
          determination would be without regard to whether the deduction              
          claimed by petitioner were allowed or disallowed.                           
               4.  More to the point, why didn’t respondent’s statutory               
          notice to petitioner include in petitioner’s gross income the               
          full stipulated value--$5,976,563--of the total number of                   
          7,650,000 Endotronics shares that petitioner received as                    
          compensation?3  Included in the stipulated record is the plan of            
          reorganization4 under which the bankruptcy court approved the               

               3 The only clue on petitioner’s return to its receipt of the           
          7,650,000 Endotronics shares is that line 22 of the yearend                 
          consolidated balance sheet Schedule L shows paid-in or capital              
          surplus of $5,976,563, which did not appear on the corresponding            
          balance sheet for the beginning of the year.  This is the exact             
          fair market value of the 7,650,000 shares that petitioner                   
          received on Apr. 4, 1988 (at the stipulated value of $.78125 per            
          share).                                                                     
               4 The plan of bankruptcy reorganization to which petitioner            
          and Endotronics were parties in the transactional sense did not             
          immunize petitioner’s receipt of the Endotronics shares from the            
          recognition of taxable income.  The transaction in which                    
          petitioner received the Endotronics shares did not satisfy the              
          definition of a recapitalization reorganization under sec.                  
          368(a)(1)(E) or of an insolvency reorganization defined by sec.             
                                                             (continued...)           





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