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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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