- 45 -
stock of an affiliated domestic or foreign corporation29 to claim
an ordinary loss with respect to the affiliated corporation’s
stock that becomes wholly worthless during the taxable year.
Sec. 165(g)(3); sec. 1.165-5(d)(1), Income Tax Regs. A
corporation claiming a worthless stock loss under section
165(g)(3) must prove that the stock in question had value at some
point during the taxable year in which worthlessness is claimed
but ceased to have both "liquidating value" and "potential value"
by the end of that year. Sec. 165(g)(1); Austin Co. v.
Commissioner, 71 T.C. 955, 970 (1979); Steadman v. Commissioner,
50 T.C. 369, 376 (1968), affd. 424 F.2d 1 (6th Cir. 1970); Morton
v. Commissioner, 38 B.T.A. 1270, 1278 (1938), affd. 112 F.2d 320
(7th Cir. 1940). The standard we apply is whether a prudent
businessperson would have considered the stock of the affiliated
corporation to be worthless by the end of the taxable year for
which a worthless stock loss under section 165 is claimed.
Steadman v. Commissioner, supra.
28(...continued)
(except interest received on deferred
purchase price of operating assets sold),
annuities, and gains from sales or exchanges
of stocks and securities.
29For purposes of sec. 165, an affiliated corporation is one
in which the taxpayer owns directly stock possessing at least 80
percent of the voting power of all classes of such corporation’s
stock and at least 80 percent of each class of such corporation’s
nonvoting stock. Sec. 1.165-5(d)(2)(i)(a), Income Tax Regs.
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