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In A.J. Indus., Inc. v. United States, 503 F.2d 660, 670
(9th Cir. 1974), the court concluded that "the subjective
judgment of the taxpayer * * * as to whether the business assets
[of the taxpayer] will in the future have value is entitled to
great weight and a court is not justified in substituting its
business judgment for a reasonable, well-founded judgment of the
taxpayer."
The first prong of the worthlessness test requires that the
Court determine whether the taxpayer made a subjective
determination that the asset in question was worthless in the tax
year in question. Id.
The 1993 addition of the Mexican Spotted Owl to the
endangered species list created circumstances which made the
continuation of logging in northern Arizona economically
unfeasible. When the district court issued its 1995 injunction,
petitioner determined that no additional timber sales contracts
would be issued. Consequently, petitioner concluded that the
injunction had effectively eliminated competition in the Arizona
logging industry. Once the injunction took effect, Arizona's
timber supply was essentially cut off. Without an adequate
supply of timber, the Arizona logging industry collapsed.
Once petitioner concluded that competition and supply had
been judicially eliminated, it determined that its covenants not
to compete were worthless. It is the practical worthlessness of
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