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asset becomes worthless during the taxable year, the resulting
loss is treated as a loss from the sale or exchange of the
capital asset on the last day of that year even though a sale or
exchange has not actually taken place. Under section 165(g)(2),
the term "security" is defined as:
(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive, a share of
stock in a corporation; or
(C) a bond, debenture, note, or certificate, or other
evidence of indebtedness, issued by a corporation or by
a government or political subdivision thereof, with
interest coupons or in registered form.
To be entitled to a deduction under section 165(g), the
taxpayer has the burden of showing that (1) the stock had a
basis; (2) the stock was not worthless prior to the year in which
worthlessness is claimed; and (3) the stock became worthless in
the year claimed.
Contrary to IRA's assertion, the record does not establish
that the IFI shares became wholly worthless during 1987. IRA's
1988 ledger shows that the IFI shares were sold by it to
Gallenberger for $1 in 1988. Although Gallenberger, in her
testimony, could not recall details about this purchase, she did
acknowledge purchasing the shares for $1 from IRA on September
28, 1988. IRA offered no explanation for the apparent
inconsistency in first recording on its books a sale of the stock
during 1988 and then later reversing such entry on its records
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