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section 165(a) is limited to the taxpayer’s adjusted tax basis in
the asset lost. Sec. 165(b).
Petitioners contend that, pursuant to section 165, they are
entitled to deduct the losses attributable to their customer
relationships with Paramount, MGM/UA, and MCEG because the
relationships were irrevocably lost when Paramount and MGM/UA
executed film processing contracts with Deluxe and MCEG went
bankrupt. Respondent contends that petitioners have not
accurately established their adjusted tax bases in the
relationships.
Petitioners’ expert determined that immediately prior to the
Technicolor acquisition the total value of the Paramount, MGM/UA,
and MCEG relationships was $23,882,000.9 In determining the
value of the relationships, he assumed that each relationship
would continue in perpetuity. He asserted that his assumption
was based on Carlton’s expectation at the time of the acquisition
and stated that “it is reasonable and likely, that Carlton’s
management in reviewing the acquisition, would have assumed that
the historical patterns of long-term client relationships would
be expected to continue.” We disagree.
9 Petitioners, in accordance with their expert’s analysis,
reduced the value attributable to the Paramount, MGM/UA, and MCEG
customer relationships from $27,496,000, $2,698,000, and
$5,569,000 (i.e., the amounts calculated in the 1994 Valuation
and claimed on petitioners’ amended 1992 and 1993 returns) to
$18,328,000, $1,814,000, and $3,740,000, respectively.
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