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II. Worthless Stock Deductions
A. Deduction Claimed on FYE May 31, 1992, Return
We now consider whether petitioner’s shares of G�nther’s
stock were worthless as of May 31, 1992. Petitioner claimed a
worthless stock deduction for FYE May 31, 1992, in an amount
equal to its basis27 in its G�nther shares as of May 31, 1992.
Petitioner asserts that it is entitled to the deduction under
section 165 because the shares became worthless during FYE May
31, 1992. Respondent asserts that petitioner has failed to prove
its shares of G�nther’s stock became worthless.
27In both its opening and reply briefs, petitioner asserted
it was entitled to claim an increased worthless stock deduction
in the event we held that items constituting the intercompany
account balance were capital contributions. Respondent did not
dispute that such capital contributions increased petitioner’s
basis; respondent contended only that G�nther was not worthless.
Petitioner’s adjusted basis in its G�nther stock as of May
31, 1992, was $7,374,438 before any adjustment attributable to
the bad debt issue. Our conclusion that amounts constituting the
intercompany account balance as of FYE May 31, 1992, 1993, and
1994 were contributions to G�nther’s capital when made means that
petitioner’s adjusted basis in G�nther’s stock as of May 31,
1992, must be increased by the intercompany account balance as of
that date. Petitioner’s adjusted basis in G�nther’s stock as of
May 31, 1992, recomputed in accordance with this opinion, was
$13,938,562. Our analysis of whether G�nther’s stock was
worthless must take into account the increased equity and
decreased liability resulting from our decision on the bad debt
issue. See Datamation Servs., Inc. v. Commissioner, T.C. Memo.
1976-252.
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