John S. and Christobel D. Rendall - Page 2

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               operating assets and mineral leases in order to                        
               generate cash to pay creditors, and faced with other                   
               difficulties (e.g., an SEC investigation, delinquent                   
               SEC mandatory filings, and class action lawsuits), SE                  
               Corp. emerged from bankruptcy in 1998 still owning its                 
               technology and various U.S.-based assets and personnel,                
               and with plans to commercialize its technology in the                  
               near future.  On Dec. 31, 1997, SE Corp.’s common stock                
               was trading at $3 a share.                                             
                    The issues for decision, all involving taxable                    
               year 1997, are:  (1) Whether Ps are taxable on ML’s                    
               sale of pledged shares; (2) if taxable on that sale,                   
               whether they may compute PH’s basis in the shares under                
               a LIFO (as opposed to a FIFO) method for computing                     
               basis; (3) whether they are entitled to a $2 million                   
               business (or, alternatively, nonbusiness) bad debt                     
               deduction for the worthlessness of PH’s $2 million loan                
               to SE Corp.; and (4) whether they are entitled to a                    
               worthless stock loss deduction for the worthlessness of                
               PH’s SE Corp. common stock.                                            
                    1.  Held:  Ps are taxable on ML’s sale of pledged                 
               shares.                                                                
                    2.  Held, further, PH’s bases in the pledged                      
               shares sold by ML must be computed on a FIFO basis.                    
                    3.  Held, further, Ps are not entitled to any bad                 
               debt deduction for the worthlessness of PH’s $2 million                
               loan to SE Corp.                                                       
                    4.  Held, further, Ps are not entitled to a                       
               worthless stock loss deduction for the worthlessness of                
               PH’s SE Corp. common stock.                                            


               Charles E. Anderson, for petitioners.                                  
               Vicki L. Miller, for respondent.                                       











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